Tax Principles and Remedies_Dimaampao_OCR

Chapter I GENERAL PRINCIPLES I.

TAXATION DEFINED Taxation is a mode of raising revenue for public purposes. 1

Taxes, on the other hand, are enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of the government and for all its public needs. ("Cooley's definition," 1 Cooley 62) They are not arbitrary exactions but contributions levied by authority of law, and by some rule of proportion which is intended to insure uniformity of contribution and a just apportionment of the burdens of government. 2

Thus: a.

Taxes are enforced contributions. Taxes are obligations created by law. (Vera v. Fernandez, L-31364, March 30, 1979) Taxes are never founded on contract or agreement, and are not dependent for their validity upon the individual consent of the persons taxed. (1 Cooley 68)

b.

Taxes are proportional in character, since taxes are based on one's ability to pay.

c.

Taxes are levied by authority of the law.

'1 Cooley Taxation, 4th Ed., p. 72. l Cooley 64; Question No. 1(A), 2004 Bar Examination.

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The power to impose taxes is a legislative power; it cannot be imposed by the executive department nor by the courts. 1

d.

Taxes are for the support of the government and all its public needs.

BASIS OF TAXATION A.

Taxation and the Lifeblood Doctrine

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Taxation has been defined as the power by which the sovereign raises revenue to defray the necessary expenses of government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy the benefits and must therefore bear its burdens. (51 Am. Jur. 34) The power of taxation is essential because the government can neither exist nor endure without taxation. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. (Bull v. United States, 295 U.S. 247,15 APTR 1069, 1073) The collection of taxes must be made without hindrance if the state is to maintain its orderly existence. Government projects and infrastructures are made possible through the availability of funds provided through taxation. The government's ability to serve and protect the people depends largely upon taxes. Taxes are what we pay for a civilized society. 5

CASES FOR STUDY CIR v. BPI 521 SCRA 373,387-388 x x x (T)he public will suffer if taxpayers will not be held liable for the proper taxes assessed against them: "Taxes are the lifeblood of the government, for without '1 Cooley 69. •Question No. 2,1991 Bar Examination. KZommissioner v. Algue, Inc., 158 SCRA 9.

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taxes, the government can neither exist nor endure." A principal attribute of sovereignty, t h e exercise of taxing power derives its source from t h e very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and wellbeing of the people. CIR v. PINEDA 21 SCRA 105* The Government resorted to the administrative remedy of enforcement of tax lien in trying to collect deficiency income tax of the estate of Atanasio Pineda. Manuel B. Pineda, the eldest son of the deceased, who was made to pay the full amount of the taxes assessed questioned the assessment on the ground that as an heir he is liable for unpaid income tax due the estate only up to the extent of and in proportion to any share he received. HELD: The Government can require Manuel B. Pineda to pay the full amount of the taxes assessed. Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir, he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount of the property in his possession. The reason is that the

'Question No. 4,1999 Bar Examination.

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Government has a lien on the P2,500 received by him from the estate as his share in the inheritance for unpaid taxes for which the estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code (now Section 219, NIRC). By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500 to satisfy the income tax assessment in the amount of P760.28. XXX

The second remedy (tax lien) is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above-quoted, because TAXES ARE THE LIFEBLOOD OF THE GOVERNMENT AND THEIR PROMPT AND CERTAIN AVAILABILITY IS AN IMPERIOUS NEED. MISAEL P. VERA, et al. v. HON. JOSE F. FERNANDEZ, et al. 89 SCRA 199 The Government of the Republic of the Philippines claimed deficiency income taxes against the Estate of the late Luis D. Tongoy. The Administrator argued that the claim was barred under Section 5, Rule 86 of the Rules of Court. Hence, the issue as to whether or not the Statute of Non-Claims — Sec. 5, Rule 86 of the New Rules of Court — barred the claim of the government for unpaid taxes, though it was filed within the period of limitation prescribed in Sections 331 and 332 of the NIRC. HELD: The Supreme Court ruled in the negative, citing the case of Pineda v. CFI ofTayabas which gave exception 7

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52 Phil. 803.

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to the claim for taxes from being filed as other claims. The reason for the more liberal treatment of claims for taxes against a decedent's estate is because (T)axes are the lifeblood of the Government and their prompt and certain availability are an imperious need."Upon taxation depends the Government's ability to serve the people for whose benefit taxes are collected." (Commissioner of Internal Revenue v. Pineda, G.R. No. L-22734, September 15,1967, 21 SCRA 105) Furthermore, as held in CIR v. Pineda, supra, payment of income tax shall be a lien in favor of the Government of the Philippines from the time the assessment was made by the Commissioner of Internal Revenue until paid with interests, penalties, etc. By virtue of such lien, the SC held that the property of the estate already in the hands of an heir or transferee may be subject to the payment of the tax due the estate. CIR v. CTA" 234 SCRA 348 A petition for review of the decision of the BIR denying the tax refund of Citytrust was filed with the CTA. It was submitted for decision based solely on the pleadings and evidence submitted by Citytrust. CIR could not present any evidence by reason of the repeated failure of the Tax Credit/Refund Division of the BIR to transmit the records of the case, as well as the investigation report thereon, to the Solicitor General. The CTA rendered its decision ordering BIR to grant a refund to Citytrust in the amount of PI3,314,506.14. The CA affirmed the judgment of the CTA. HELD: It is a long and firmly settled rule of law that the Government is not bound by the errors committed

"Question 1(d), 2005 Bar Examination.

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by its agents. In the performance of its government functions, the State cannot be estopped by the neglect of its agents and officers. Although the Government may generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public duties as exemplified in this case will not and should not produce that effect. Nowhere is the aforestated rule more true than in the field of taxation. It is axiomatic that the Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopardize the Government's financial position, especially in the case at bar where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy. Judgment of CA is SET ASIDE and the case is REMANDED to the CTA for further proceedings and appropriate action. COMMISSIONER v. ALGUE, INC. 158 SCRA 9 The Commissioner of Internal Revenue contends that the claimed deduction was properly disallowed because it was not an ordinary, reasonable or necessary business expense. The Court of Tax Appeals, however, agreed with Algue, Inc. in holding that the said amount had been legitimately paid by Algue, Inc. as promotional fees for their work in the formation of Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Corporation.

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HELD: Ruling in favor of Algue, Inc., the Supreme Court held that Algue, Inc. has proved that the payment of fees was necessary and reasonable in the light of efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is, therefore, necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (See also 'The Doctrine of Symbiotic Relationship') YMCA v. CIR' 298 SCRA 83 YMCA, a welfare, educational and charitable non-profit corporation, leased its facilities to small shop owners, restaurants and canteen operators, and collected parking fees. YMCA contends that its rental income is not subject to tax. The contention is not tenable. Since taxes are the lifeblood of the nation, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. The claimed exemption must expressly be granted in a statute stated in a language too clear to be mistaken.

'Question No. 6(A), 2002 Bar Examination.

TAX PRINCIPLES AND REMEDIES

DAVAO GULF LUMBER CORP. v. CIR 293 SCRA 77 Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. FERDINAND R. MARCOS II v. CA, et al 273 SCRA 47" Ferdinand R. Marcos II assailed the decision of the Court of Appeals declaring the deficiency income tax assessments and estate tax assessments upon the estate and properties of his late father final despite the pendency of the probate proceedings of the will of the late President. On the other hand, the BIR argued that the State's authority to collect internal revenue taxes is paramount. HELD: The approval of the court, sitting in probate or as a settlement tribunal over the deceased's estate, is not a mandatory requirement in the collection of estate taxes. The enforcement of tax laws and the collection of taxes are of paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is, therefore, necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real "•Question No. 1(c), 2005 Bar Examination; Question No. 9(A), 2004 Bar Examina-

CHAPTER I G E N E R A L PRINCIPLES

purpose of taxation, which is the promotion of common good, may be achieved. JOSE REYES v. PEDRO ALMANZOR 196 SCRA 322 Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (CIR v. Algue, Inc., 158 SCRA 9 [1988]) Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (R.A. No. 6359 and P.D. No. 20) under the same principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties. PHILIPPINE BANK OF COMMUNICATIONS v. CIR 302 SCRA 250 Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible.

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From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters. PHILIPPINE GUARANTY CO., INC. v. CIR 13 SCRA 775 The defense of reliance in good faith on rulings of the CIR requiring no withholding of the tax due on reinsurance premiums may free the taxpayer from the payment of surcharge or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents. PHILEX MINING CORPORATION v. CIR 294 SCRA 687 Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. NORTH CAMARINES LUMBER CO. v. CIR 109 Phil. 511 As the petitioner had consumed thirty-three days, its appeal was clearly filed out of time. It is argued, however, that in computing the 30-day period

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fixed in Section 11 of Republic Act No. 1125, the letter of the respondent Collector dated January 30, 1956, denying the second request for reconsideration, should be considered as the final decision contemplated in Section 7, and not the letter of demand dated August 30,1955. This contention is untenable. We cannot countenance the theory that would make the commencement of the statutory 30-day period solely dependent on the will of the taxpayer and place the latter in a position to put off indefinitely and at his convenience the finality of the tax assessment. Such an absurd procedure would be detrimental to the interest of the Government, for 'taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need.' (Bull v. U.S. 295, U.S. 247) B.

Theories on Taxation Taxation, as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner, is a power predicated upon necessity (Necessity Theory). It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State's territory and facilities and protection which a government is supposed to provide. 11

The Benefits-Protection Theory, on the other hand, bases the power of the State to demand and receive taxes on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society. Thus, the taxpayer cannot question the validity of the tax law " 1 3 S C R A 775.

TAX PRINCIPLES AND REMEDIES

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on the ground that payment of such tax will render him impoverished, or lessen his financial or social standing, because the obligation to pay taxes is involuntary and compulsory, in exchange for the protection and benefits one receives from the government. This theory spawned the DOCTRINE OF SYMBIOTIC RELATIONSHIP, a term culled from the ruling of the Supreme Court in the celebrated case of Commissioner of Internal Revenue v. Algue, Inc., supra," which stressed that: 'Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the burden of running the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values." C.

Liabilities Involved TAXES ARE PERSONAL TO THE TAXPAYER. A corporation's tax delinquency cannot, for instance, be enforced against its stockholders because not only would this run counter to the principle that taxes are personal, but it would also not be in accord with the rule that a corporation is vested by law with a personality that is separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 13

Nevertheless, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears

,3

Sunio v. NLRC, L-57767, January 31, 1984.

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CHAPTER I GENERAL PRINCIPLES

that the corporate assets have passed into their hands. (Doctrine of Piercing the Corporate Veil)'* A tax creates CIVIL LIABILITY on the part of the delinquent taxpayer although the non-payment thereof (due to failure or refusal to pay) creates a CRIMINAL LIABILITY which could be the subject of criminal prosecution under existing laws. To sum, in taxation, it is one's failure to comply with the civil liability to pay taxes which gives rise to the criminal liability. 15

III.

NATURE

A.

OF THE TAXING

POWER

Taxation as an Inherent Attribute of Sovereignty

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The power of taxation is an incident of sovereignty as it is inherent in the State, belonging as a matter of right to every independent government. It does not need of constitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power. No attribute of sovereignty is more pervading and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it. 17

Taxation being an attribute of sovereignty, its relinquishment is never presumed. 18

It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty.

14

Tan v. Commissioner, L-15778, April 23, 1962. "Republic v. Patanao, L-22356, July 2 1 , 1 9 6 7 . "Question No. 1(2), 1996 Bar Examination. "Churchill and Tail v. Concepcion, 34 Phil. 969. "Luzon Stevedoring Co. v. CTA, L-30232, July 2 9 , 1 9 8 8 .

TAX PRINCIPLES A N D REMEDIES

belonging as a matter of right to every independent State or government. No sovereign State can continue to exist without the means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax." B.

Taxation as Legislative in Character The power to tax is inherent in the State, and the State is free to select the object of taxation, such power being exclusively vested in the legislature, EXCEPT where the Constitution provides otherwise. (Art. VI, Sec. 28[2]; Art. X, Sec. 5) This is based upon the principle that "taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must remain and be exercised." 20

ASPECTS, PROCESSES, PHASES OF TAXATION" A.

Levy/Imposition The term "levy" or "imposition" refers to the enactment of tax laws or statutes. 22

In the case of Tolentino, et al. v. Secretary of Finance, the Supreme Court emphasized that:

Courts have no power to inquire into or interfere in the wisdom, objective, motive or expediency in the passage of a tax law, as this is purely legislative in character. To do so would be tantamount to a violation of both the letter and the spirit of the organic laws by which the Philippine Government was brought into existence to invade a coordinate and independent department of the Government, and to interfere with the legitimate powers and functions of the Legislature. "51 Am. Jur. 42; Question No. 1, 2003 Bar Examination. "1 Cooley Taxation, 3rd Ed., p. 43. "Question No. 1(1), 2006 Bar Examination. " 2 3 5 SCRA 630.

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Scope of the legislative power to tax (1)

Discretion as to purposes for which taxes shall be levied The sole arbiter of the purposes for which taxes shall be levied is the legislature, provided the purposes are public. The courts may review the levy of the tax to determine whether the purpose is a public one but once that is determined, the courts can make no other inquiry as to the purpose of the tax, as it affects the power to impose it. 23

CASES FOR STUDY WALTER LUTZ v. J. ANTONIO ARANETA 98 Phil. 148 Plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C.A. 567, which provided for an increase of the existing tax on the manufacture of sugar, alleging such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. As the protection and promotion of the sugar industry is a matter of public concern, the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power.

u

l Cooley Taxation, 4th Ed., 171.

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(2)

Discretion as to subjects of taxation The legislature has unlimited scope as to the persons, property or occupation to be taxed, where there are no constitutional restrictions, provided the property is within the territorial jurisdiction of the taxing state. 24

In the case of Walter Lutz v. J. Antonio Araneta, supra, ' plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C.A. No. 567 which provided for an increase of the existing tax on the manufacture of sugar. The Supreme Court ruled that: "It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.'" 1

BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner questions the constitutionality of the statute, claiming that R.A. No. 1635, otherwise known as the Anti-TB Stamp Law, is violative of the equal protection clause of the Constitution because it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even among postal patrons the statute discriminatorily grants exemptions. HELD: It is settled that the legislature has the inherent power to select the subject of taxation and to grant exemptions. The classification of mail users is based "1 Cooley Taxation, 4th Ed., 176-178. " 9 8 Phil. 148.

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on the ability to pay, the enjoyment of a privilege and on administrative convenience. Tax exemptions have never been thought of as raising issues under the equal protection clause. SILVESTRE PUNSALAN v. THE MUN. BOARD OF THE CITY OF MANILA 95 Phil. 46 Plaintiffs sought the annulment of Ordinance No. 3398 of the City of Manila which imposes a municipal occupation tax on persons exercising various professions in the city and penalizes non-payment of the tax, enacted pursuant to Sec. 18(1) of the Revised Charter of the City of Manila which empowers the Mun. Board of said city to impose a municipal occupation tax, not to exceed P50 per annum, on persons engaged in various professions. The burden of plaintiffs' complaint is not that the professions to which they respectively belong have been singled out for the imposition of this municipal occupation tax; and in any event, the Legislature may, in its discretion, select what occupations shall be taxed, and in the exercise of that discretion it may tax all. Or it may select for taxation certain classes and leave the others untaxed. (Cooley on Taxation, Vol. 4,4th Ed., pp. 3393-3395) Plaintiffs' complaint is that while the law has authorized the City of Manila to impose the said tax, it has withheld that authority from other chartered cities, not to mention municipalities. HELD: It is not for the courts to judge what particular cities or municipalities should be empowered to impose occupation taxes in addition to those imposed by the National Government. That matter is peculiarly within the domain of the political departments and the courts would do well not to encroach upon it.

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(3)

Discretion as to amount or rate of tax The legislature has the right to finally determine the amount or rate of a tax, in the absence of constitutional prohibitions. It may levy a tax of any amount it sees fit. Not only is the power to tax unlimited in its reach as to subjects, but in its very nature, it acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus becoming in its exercise a power to destroy.

(4)

Discretion as to the manner, means and agencies of collection of taxes The discretion of the legislature in imposing taxes extends to the mode, method or kind of tax. As to the kind of taxes which may be imposed, the legislature has power to levy one or more of the following: Property tax, excise, license or occupation tax, a poll or capitation tax, franchise tax, income tax, inheritance tax, stock transfer tax, etc. 16

Is the Power to Tax the Power to Destroy?

Justice Malcolm believed that the power to tax "is an attribute of sovereignty. It is the strongest of all the powers of government." This led Chief Justice Marshall of the U.S. Supreme Court, in the celebrated case of McCulloch v. Maryland, to declare: "The power to tax involves the power to destroy." This might well be construed to mean that the power to tax includes the power to regulate even to the extent of prohibition or destruction, (1 Cooley on Taxation, 4th Ed., p. 67) since the inherent power to tax vested in the legislature includes the power to determine who to tax, what to tax and how much tax is to be imposed. " 27

2

^W&l Bar Examination; Question No. 1, 2000 Bar Examination. U.S. 4 Wheat, 316, 4 I / E d . 579. ^Tolentino, et al. v. Secretary of Finance, 235 SCRA 630. 27

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However, instead of being regarded as a blanket authorization of the unrestrained use of the taxing power for any and all purposes, it is more reasonable to say that the maxim "the power to tax is the power to destroy" is to describe not the purposes for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue. (1 Cooley, 179-181) The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare, x x x But where the power to tax is used solely for the purpose of raising revenues, the modem view is that it cannot be allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully attacked as an inordinate and unconstitutional exercise of the discretion that is usually vested exclusively in the legislature in ascertaining the amount of the tax. (Cruz, Constitutional Law, 2000 Ed., p. 87) It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise. Taxpayer, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate business. As aptly held in Roxas, et al. v. CTA, et al.: "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the propriety rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the golden egg.'" Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counter-

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productive and ultimately subversive of the nation's thrust towards a better economy which will ultimately benefit the majority of our people. (Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, 600 SCRA 413, 442-444, [2009]) Judicial Review

of Taxation

While taxation is said to be the power to destroy, it is by no means unlimited. When a legislative body having the power to tax a certain subject matter actually imposes such a burdensome tax as effectually to destroy the right to perform the act or to use the property subject to the tax, the validity of the enactment depends upon the nature and character of the right destroyed. If so great an abuse is manifested as to destroy natural and fundamental rights which no free government could consistently violate, it is the duty of the judiciary to hold such an act unconstitutional. (Ibid.) Hence, the modification: "The power to tax is not the power to destroy while the Supreme Court sits." So it is in the Philippines. The Constitution as the fundamental law overrides any legislative or executive act that runs counter to it. In any case, therefore, where it can be demonstrated that the challenged statutory provision fails to abide by its command, then the court must so declare and adjudge it null. " 2

In the exercise of such a delicate power, however, the admonition of Cooley on inferior tribunals is wellworth remembering. Thus: "It must be evident to any one that the power to declare a legislative enactment void is one which the judge, conscious of the fallibility of the human judgment, will shrink from exercising in any case where he can conscientiously and with due regard to . duty and official oath decline the

"Antero Sison, Jr. v. Ancheta, et al., 130 SCRA 654.

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responsibility." (Cooley on Constitutional Limitations, Vol. 1,8th Ed., 332,11927]) While it remains undoubted that such a power to pass on the validity of the ordinance alleged to infringe certain constitutional rights of a litigant exists, still it should be exercised with due care and circumspection, considering not only the presumption of validity but also the relatively modest rank of a city court in the judicial hierarchy. 30

B.

Assessment and Collection The act of assessing and collecting taxes is administrative in character, and therefore can be delegated. Nonetheless, the legislative body has laid down certain rules governing the assessment and collection of taxes in order to prevent its abuse. First, the tax law must designate which agency will collect the taxes. Usually, the Bureau of Internal Revenue and/or the Secretary of Finance wield this power. Second, the circulars or regulations issued by the Secretary of Finance or the Commissioner of the Internal Revenue must be in accordance with the tax measures imposed by Congress. Note that the power of taxation should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." (Antonio Roxas, et al. v. Court of Tax Appeals, L-25043, April 26, 1968, 23 SCRA 276)

C.

Payment This signifies an act of compliance by the taxpayer.

" C i t y of Baguio v. De Leon, 25 S C R A 938.

TAX PRINCIPLES A N D REMEDIES

PURPOSES OF TAXATION A.

The primary purpose of taxation is to raise revenues. "For the support of government and for all public needs," is according to Judge Cooley, the purpose of taxes." And so it has been widely believed that the primary purpose of taxation is to raise funds or property to enable the State to promote the general welfare and protection of its citizens. (52 Am. Jur. 34) This was emphasized anew in the renowned case of Hon. Ramon Bagatsing, et al. v. Hon. Pedro Ramirez,* where the tax ordinance enacted by the Municipal Board of Manila was assailed as not being a "tax ordinance," because the imposition of rentals, permit fees, tolls and other fees is not strictly a taxing power but a revenue raising function. The Supreme Court observed that the pretense bore its own marks of fallacy. Precisely, the raising of revenues is the principal object of taxation.

B.

Secondary or non-revenue purposes

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But, must an imposition, in order to be a tax, be levied solely for the purposes of revenue? The answer is a resounding NO. Other than to answer the ever-present need for revenues, taxation also seeks to: (1) reduce social inequality, (2) encourage the growth of local industries, (3) protect our local industries against unfair competition, (4) implement the police power of the state (regulatory purpose). (1)

34

Reduction of Social Inequality

Our present tax system has adopted the progressive system of taxation, i.e., the tax rate increases as the tax base increases. This system "1 Cooley 66. " 7 4 SCRA 306. "Question No. 1,1991 Bar Examination. 1 9 7 6 Bar Examination. M

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23

aims at reducing the inequality in the distribution of wealth by preventing its undue concentration in the hands of a few individuals. To illustrate: An estate tax is imposed upon the property left by the decedent. The proceeds of that tax will be used to finance the projects of the government such as building low-cost houses for the less privileged. (2)

Encourage the Growth of Local Industries It is a settled rule that the power to tax carries with it the power to grant tax exemptions. Tax exemptions and tax reliefs serve as incentives to encourage investment in our local industry and thereby promote economic growth.

(3) Protect our Local Competition

Industry Against Unfair

The Tariff and Customs Code allows the imposition of certain taxes (countervailing and dumping duties) upon imported goods or articles to further protect our local industry. R.A. 8752 (Anti-Dumping Act) imposes stricter conditions. (4) As an Implement of the Police Power of the State (Regulatory Measure) The power of taxation may be used as an implement of the police rJbwer of the State through the imposition of taxes with the end in view of regulating a particular activity. In the case of Tio v. Videogram Regulatory Board* the Supreme Court maintained the validity of the challenged statute (P.D. 1987 entitled "An Act Creating the Videogram Regulatory Board"), seeing the need to impose taxes upon the video industry as a regulatory measure, " 1 5 1 S C R A 208.

24

TAX PRINCIPLES AND REMEDIES

considering "the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government due to the drop in theatrical attendance." Likewise, in the case of Manila Race Horse Trainers Association v. De La Fuente* the Court upheld the validity of an ordinance taxing boarding stables of race horses because "(R)ace horses are devoted to gambling, if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision." 37

Still, in the celebrated case of Lutz v. Araneta which challenges the constitutionality of Sees. 2 and 3, C.A. 567, providing for an increase in the existing tax on the manufacture of sugar in issue, it was held that: the tax is levied with a regulatory purpose — to provide means for the rehabilitation and stabilization of the threatened sugar industry. As the protection and promotion of the sugar industry is a matter of public concern, the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued

" 8 8 Phil. 60. "Supra.

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25

or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power. But it must be stressed that the power of taxation, sometimes also called the "power to destroy," should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." (Antonio Roxas, et al. v. Court of Tax Appeals, L-25043, April 26,1968, 23 SCRA 276) May the power of taxation be used as an implement of the power of eminent domain? YES. The Supreme Court in the case of CIR v. Central Luzon Drug Corp. [456 SCRA 414, 445] held: Tax measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose. In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. While it is declared commitment under Section 1 of R.A. No. 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [CJonstitution [is] not intended to take away rights from a person and give them to another who is not entitled thereto. For this reason, a just compensation for income that is taken away from respondent (Central Luzon Drug Corp.) becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter the fact."

TAX PRINCIPLES A N D REMEDIES

.

EXTENT OF THE TAXING POWER* The power of taxation reaches to every trade or occupation; to every object of industry, use, enjoyment; to every species of possession, and it imposes a burden which in case of failure to discharge the same may be followed by seizure, confiscation or forfeiture of the property. Taxation is said to be — —

COMPREHENSIVE, as it covers persons, businesses, activities, professions, rights and privileges.

—

UNLIMITED.

The taxing power's reign is illustrated in the case of Tio v. Videogram Regulatory Board, where the Supreme Court upheld the constitutionality of a law, ruling that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. 39

—

PLENARY, as it is complete. Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes. (This shall be discussed in a separate chapter on Remedies.)

—

SUPREME.

Taxation, although referred to as the strongest of all the powers of the government, cannot be interpreted to mean that it is superior to the other inherent powers of the government. It is supreme insofar as the selection of the subject of taxation is concerned. 40

"Question 1(a), 2005 Bar Examination; Question No. 1, 2000 Bar Examination. "Supra. "Supra.

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27

VII. PRINCIPLES OF A SOUND TAX SYSTEM" 1.

Fiscal Adequacy Sources of revenues must be adequate to meet government expenditures (Chavez v. Ongpin, 186 SCRA 331), and other public needs. This is in consonance with the doctrine that taxes are the lifeblood of the government.

2.

Theoretical Justice A sound tax system must take into consideration the taxpayers' ability to pay. Our laws mandate that taxes must be reasonable, just, fair, conscionable. Under Art. VI, Section 28(1) of the Constitution, the rule of taxation must be uniform and equitable. The State must evolve a progressive system of taxation. Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. 42

3.

Administrative Feasibility Tax laws must be capable of effective and efficient enforcement. They must not obstruct business growth and economic development. In Kapatiran Ng Mga Naglilingkod sa Pamahalaan v. Tan,° the Supreme Court, in upholding the validity of the VAT law, held that the law "is principally aimed to rationalize the system of taxes on goods and services; simplify tax administration, and make the system more equitable to enable the country to attain economic recovery." The principle requires that each tax should be clear and plain to the taxpayers, capable of enforcement by

4,

1 9 7 3 Bar Examination. ^Fernando, The Constitution of the Philippines, 2nd Ed., p. 2 2 1 . *»163 S C R A 371.

TAX PRINCIPLES AND REMEDIES

an adequate and well-trained staff of public officials, convenient as to time and manner of payment, and not duly burdensome upon or discouraging to business activity. (Report of the Tax Commission of the Philippines, February 1939, Vol. 1, pp. 23-31) Q.

Will a violation of these principles invalidate a tax law?

IT DEPENDS. A tax law will retain its validity even if it is not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so. These principles are only designed to make our tax system sound. However, if a tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. (Sec. 28[1], Art. VI, 1987 Constitution) VIII. TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS AND IMPOSITIONS A.

Taxation distinguished from Police Power (1) As to PURPOSE Taxation is levied for the purpose of raising revenues; Police power is exercised to promote public welfare through regulation. (2) As to AMOUNT OF EXACTION The amount gathered in the exercise of Taxation contemplates of no limits; in Police power, the exaction is limited to the cost of regulation, issuance of the license, or surveillance. (3)

As to the BENEFITS RECEIVED BY THE TAXPAYER In Taxation, no special or direct benefit is received by the taxpayer other than the fact that the government secures to the citizen that general

CHAPTER I GENERAL PRINCIPLES

29

benefit resulting from the protection of his person and property and the welfare of all. (51 Am. Jur. 42-43) Similarly, no direct benefits are received through the exercise of Police power, yet a healthy economic standard of society is maintained. (4) As to SUPERIORITY OF CONTRACTS Taxation recognizes the obligations imposed by contracts. (Art. Ill, Sec. 10, Constitution) This limitation does not apply to Police power. (5)

As to TRANSFER OF PROPERTY RIGHTS In Taxation, the taxes paid form part of the public funds, whereas Police power allows merely the restraint on the exercise of property rights.

B.

Taxation and the Power of Eminent Domain (1)

As to PURPOSE Taxation is exercised in order to raise public revenue; Eminent domain or expropriation is the taking of property for public use.

(2)

As to COMPENSATION Payment of taxes accrue to the general benefit of the citizens of the taxing state; in Eminent domain, just compensation is given the owner of the expropriated property.

(3)

As to PERSONS AFFECTED Taxation applies to all persons, property and excises that may be subject thereto; in Eminent domain, only particular property is comprehended.

C.

Taxes Distinguished from Other Impositions 1.

Tax and Special Assessment A special assessment is in the nature of a tax upon property levied according to benefits

TAX PRINCIPLES AND REMEDIES

conferred on the property. The whole theory of a special assessment is based on the doctrine that the property against which it is levied derives some special benefit from the improvement. The distinctions between a special assessment and a tax are: a)

a special assessment can be levied only on land;

b)

a special assessment cannot, as a rule, be made a personal liability of the persons assessed;

c)

a special assessment is based wholly on benefits; and

d)

a special assessment is exceptional both as to time and locality. The imposition of a charge on all property, real and personal, in a prescribed area, is a tax, not an assessment, although the purpose is to make a local improvement on a street or highway. A charge imposed only on property owners benefited is a special assessment rather than a tax. The power to levy such assessments is undoubtedly an exercise of the taxing power, but the exercise of the taxing power in imposing an assessment does not necessarily make the assessment a tax. (1 Cooley, 106107)

Tax and License a)

A Tax is levied in the exercise of the taxing power; License fees emanate from the police power of the state;

b)

The purpose of the tax is to generate revenues; License fees are imposed for regulatory purposes. (Victorias Milling Co. v. Municipality of Victorias, L-21183, September 27,1968)

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3.

31

c)

The amount of the exaction or charge if it is to be a license fee must only be of sufficient amount to include expenses of issuing a license; cost of necessary inspection or police surveillance. (Cu Unjeng v. Patstone, 42 Phil. 818; City oflloilo v. Villanueva, 105 Phil. 337)

d)

The imposition is a tax, if its primary purpose is to generate revenue, and regulation is merely incidental; but if regulation is the primary purpose, the fact that incidental revenue is also obtained does not make the imposition a tax. (PDC v. Quezon City, 172 SCRA 629)

e)

In Gerochi v. Department of Energy [527 SCRA 696, 715-717], the Supreme Court held that in exacting the Universal Charge through Section 34 of the Electric Power Industry Reform Act of 2001 (EPIRA), the State's police power, particularly its regulatory dimension is invoked. Such can be deduced from Section 34 which enumerates the purposes for which the Universal Charge is imposed and which can be amply discerned as regulatory in character. From the said purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power.

Tax and Toll Toll is a demand of proprietorship, an amount charged for the cost and maintenance of the property used; Tax is a demand of sovereignty for the purpose of raising public revenues.

4.

Tax and Penalty Tax is a civil liability. A person is criminally liable in taxation only when he fails to satisfy his civil obligation to pay taxes. (Republic v. Patanao, L-22356, July 21, 1967)

TAX PRINCIPLES AND REMEDIES

32

A Penalty is a punishment for the commission of a crime. 5.

Tax and Debt A tax is not a debt for the reason that a tax does not depend upon the consent of the taxpayer and there is no express or implied contract to pay taxes. Taxes: (1) are not contracts between the parties, either expressed or implied; but they are the positive acts of the government through its various agents, binding upon the inhabitants, and to the making and enforcing of which their personal consent individually is not required; (2) cannot be assigned as debts, or be proved in bankruptcy as such; nor, if uncollected, are the assets which can be seized by attachment or other judicial processes, and subjected to the payment of municipal indebtedness; (3) are not the subject of set-off either on behalf of the state or the municipality for which they are imposed, or of the collector, or on behalf of the person taxed, as against such state, municipality or collector; 44

(4) do not draw interest, as do sums of money owing upon a contract. 45

According to Judge Cooley, the proceedings to collect taxes are not barred by the ordinary statutes of limitation; the law abolishing imprisonment for debt has no application to taxes and the remedies for their collection may include an arrest if the legislature so provides.

"Question 1(b), 2005 Bar Examination. "1 Cooley 88-92.

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33

CASES FOR STUDY (On Tax and Debt) FRANCIA v. INTERMEDIATE APPELLATE COURT, et al 162 SCRA 753" Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15,1977. There is no legal basis for the contention. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that: "A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise «»t of the contract or transaction sued on ...(80 C.J.S. 73-74). '•Question 3(b), 1996 Bar Examination.

34

TAX PRINCIPLES AND REMEDIES

"The general rule based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required..."' This rule was reiterated in the case of Cordero v. Gonda (18 SCRA 331) where we stated that: "... internal revenue taxes can not be the subject of compensation." REASON: Government and taxpayer 'are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off." MELECIO R. DOMINGO v. LORENZO C. GARLITOS 8 SCRA 443 The court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law. (R.A. 2700) Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount.

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35

PHILEX MINING CORP. v. CIR 294 SCRA 687" There is a material distinction between a tax and a debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. xxx In the instant case, the claim of Philex for VAT refund is still pending litigation, and still has to be determined by the CTA. A fortiori, the liquidated debt of Philex to the government cannot, therefore, be set-off against the unliquidated claim which Philex conceived to exist in its favor. DC.

LIMITATIONS ON THE TAXING POWER As the areas which "used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than any private individual or group of individuals' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times," there arises a need for more revenues in order to meet the needs of an ever-widening scope of state activity. 48

And with this pervasive power comes the realization that taxation may mean the ruin or the prosperity of a nation, if no limitation for its use is exercised. Thus the power of taxation, for all its plenitude, is not without restrictions. These limitations are classified as Inherent Limitations and Constitutional Limitations.

"Question No. 1, 2001 Bar Examination. "Chief Justice Makalintal, quoted from the case of Antero M. Sison, jr. v. Ruben Ancheta, et al., supra, p. 660. 4

TAX PRINCIPLES A N D REMEDIES

36

A.

Inherent Limitations on the Power to Tax

These limitations proceed from the very nature of the taxing power itself. These are: public purpose, international comity, territoriality, non-delegation of the power to tax, and the various tax exemptions granted government agencies or instrumentalities. 1.

PUBLIC PURPOSE Taxes are exacted only for a public purpose An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old United States case bluntly put it: "To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation." The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. [Planters Products, Inc. v. Fertiphil Corporation, 548 SCRA 485 (2008)]

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37

A revenue measure must stand the first requisite of a lawful taxation — that the purpose for which it is laid be a public purpose. The legislature is bereft of power to appropriate revenues for anything other than a public purpose. Where an assailed tax measure is not for a public purpose, such an act is tantamount to confiscation of property, though done in the guise of law, and the taxpayer may rightly invoke the law for his protection. This appeal to the law for the protection of the individual's property would then place the issue within the ambit of the judiciary. Justice Isagani Cruz defines 'public purpose' as embracing not merely direct public benefit or advantage but also indirect public benefit. Who may determine 'public purpose' This is a legislative prerogative. The power to determine whether the purpose of taxation is public or private resides in Congress. The independence of die Legislature is an axiom in government; to be independent, it must act on its own good time, on its own judgment, influenced by its own reason, restrained only as the people may have seen fit to restrain the grant of legislative power in making it.*" However, this will not prevent the court from questioning the propriety of such a statute on the ground that the law enacted is not for a public purpose; but once it is settled that the law is for a public purpose, the court may no longer inquire into the wisdom, expediency or necessity of such tax measure. Purpose when deemed 'public' It is the purpose which determines the public character of the tax law, not the number of persons benefited. As long as the ultimate result favors the *1 Cooley Taxation, 395-398.

TAX PRINCIPLES A N D REMEDIES

38

welfare of the public in general, the appropriation of a public revenue is deemed done for a public purpose. Upon this point, the 20% discount privilege (mandated by R.A. 7432, as amended by R.A. 9257) to which senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. (CIR v. Central Luzon Drug Corporation, 456 SCRA 414, 444) Cases of "Public Purpose" a.

Public Improvement

b.

Unemployment relief

c.

Buildings and roads / Infrastructure

d.

Local police forces (subsidies) under R.A. 6141

e.

Industries classified as indispensable under P.D. 1987

f.

Construction of home sites

g.

Promotion of science and invention

h.

Upliftment of the underprivileged

i.

Rehabilitation of the sugar industry

j.

Pensions to deserving retirees

k.

Oil industry's protection

1.

Socialized housing

m.

Educational subsidy

CASES FOR STUDY BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner questions the constitutionality of R.A. 1635 mandating the bearing of Anti-TB stamps on

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39

envelopes, as well as its implementing administrative orders, contending that it is not for a public purpose. HELD: R.A. 1635 is valid. The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes. The money raised from the sale of the Anti-TB stamps is spent for the benefit of the Philippine Tuberculosis Society, a private organization, without appropriation by law. But as the Solicitor General points out, the society is not really the beneficiary but only the agency through which the State acts in carrying out what is essentially a public function. The money is treated as a special fund and as such need not be appropriated by law. WALTER LUTZ v. J. ANTONIO ARANETA 98 Phil. 148 Plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C.A. 567 which provided for an increase of the existing tax on the manufacture of sugar, alleging such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. HELD: The protection and promotion of the sugar industry is a matter of public concern the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion.

TAX PRINCIPLES AND REMEDIES

40

Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power. VALENTIN TIO v. VIDEOGRAM REGULATORY BOARD 151 SCRA 208 The Supreme Court held the levy of 30% tax under P.D. 1987 as for a public purpose, and therefore a valid imposition. The law, according to the Court, was imposed primarily for answering the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. Hence, while the direct beneficiaries of the said decree is the movie industry, the citizens are held to be its indirect beneficiaries. CITY OF BAGUIO v. FORTUNATO DE LEON 25 SCRA 938 Defendant-appellant De Leon, a real estate dealer, assailed the validity of an ordinance of the City of Baguio imposing a license fee on any person, firm, entity, or corporation doing business in the City of Baguio. HELD: Republic Act No. 329 was enacted amending Section 2553 of the Revised Administrative Code, empowering the City Council not only to impose a license fee but also to levy a tax for purposes of

CHAPTER I G E N E R A L PRINCIPLES

41

revenue. Thus, the City Council of Baguio now has the power to tax, to license, and to regulate all businesses, trades, and occupations therein. The ordinance under consideration, therefore, cannot be considered ultra vires. HON. RAMON BAGATSING, et al. v. HON. PEDRO RAMIREZ, et al. 74 SCRA 306 The delegation of the collection of market stall fees to a private corporation affect the public purpose of the imposition. In upholding the validity of the tax ordinance, the Supreme Court held that, "The fees collected do not go direct to the private coffers of the corporation. Ordinance No. 7522 was not made for the corporation but for the purpose of raising revenues for the city. That is the object that it serves. The entrusting of the collection of the fees does not destroy the public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through which the money is dispensed is public or private. The right to tax depends upon the ultimate use, purpose and object for which the fund is raised. It is not dependent on the nature or character of the person or corporation whose intermediate agency is to be used in applying it. The people may be taxed for a public purpose, although it be under the direction of an individual or private corporation." PASCUAL v. SECRETARY OF PUBLIC WORKS 110 Phil. 331 Nevertheless, in the case of Pascual v. Secretary of Public Works which challenges the law appropriating a certain amount for the construction of a feeder road on a land owned by a private individual, the Court held the law to be an invalid imposition since it results in the promotion of a private enterprise, it benefits the property of a particular individual. The provision that

TAX PRINCIPLES AND REMEDIES

42

the land shall thereafter be donated to the government does not cure this defect. The rule is that, if the public advantage or benefit is merely incidental in the promotion of a particular enterprise, such defect shall render the law invalid. On the other hand, if what is incidental is the promotion of a private enterprise, the tax law shall be deemed "for a public purpose." 2.

INTERNATIONAL COMITY Basis of this Rule Under Section 2, Article II of our Constitution, the Philippines "adopts the generally accepted principles of international law as part of the law of the land, and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations." One principle of international law which has attained wide recognition is the principle of Sovereign Equality Among States. According to this principle, "states are juridically equal, enjoy the same rights, and have equal capacity in their exercise. The rights of each one do not depend upon the power which it possesses to assure its exercise, but upon the simple fact of its existence as a person under international law." This principle, in turn, finds its roots in the rule of par in parem non habet imperium, where even the strongest state cannot assume jurisdiction over another state, no matter how weak, or question the validity of its acts in so far as they are made to take effect within its own territory. All states, including the smallest and least influential, are also entitled to their dignity and the protection of their honor and reputation. 50

To illustrate: If a tax law is passed imposing taxes on the income of foreign ambassadors or imposing real property tax upon foreign embassies, this is NOT

"A provision from the Montevideo Convention of 1933, as culled from the book of Justice Isagani Cruz, International Law, 1993 Edition (Quezon City; Central Lawbook Publishing Co., Inc.), p. 106.

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43

a valid law because the imposition is in violation of the universal principles of international law. Under international laws, foreign embassies are considered extensions of the territoriality of the foreign states; to impose taxes upon them would be tantamount to an exercise of jurisdiction over these foreign states. 3.

TERRITORIALITY Since laws cease to operate beyond a country's jurisdictional limits, the taxing power of a country is likewise limited to person and property within and subject to its jurisdiction. This same rule applies to the taxing power of a territory. Rules Observed in Fixing Tax Situs 1.

POLL/CAPITATION/COMMUNITY

TAX

Poll or capitation, or community taxes are based upon the residence of the taxpayer, regardless of the source of income or location of the property of the taxpayer. 2.

PROPERTY TAX Real Property, where taxable Real estate is subject to taxation in the state or country where it is located, regardless of whether the owner is a resident or a non-resident. (First National Bank v. Maine, 284 U.S. 312. 77 ALR 401) Personal property, where taxable On the other hand, the situs of personal property, wherever it was actually kept or located, was held to be at the domicile of its owner, following the age-old doctrine of mobilia sequuntur personam. Domicile The domicile of a person is the place which constitutes the principal seat of his residence,

TAX PRINCIPLES AND REMEDIES

44

his business, his pursuits, his connections, his attachments and his political relations. It embraces the fact of residence at a place with the intent to regard it and make it a home and live there for an indefinite time. To establish a domicile, the act and the intent must concur. There must be the fact of living in a place with the intent to make it one's home. (26 R.C.L., pp. 274-275) Mobilia

Sequuntur Personam"

Movables follow the person. Although a mere fiction of law, without any constitutional foundation, it is nevertheless applied when convenient, provided it is not inconsistent with express provisions of the law, or when its application would result in injustice, or unless such property has acquired an actual situs elsewhere. To acquire a situs in a state other than the domicile of the owner, tangible property must have a definite location there, accompanied by some degree of permanency; mere temporary or transient presence in the state is not sufficient. (26 R.C.L. pp. 278-279; 51 Am. Jur. 466-468; Union Trust v. Collector) Thus, in cases of shares of stock, its situs for the purposes of taxation is the state in which they are permanently kept regardless of the domicile of the owner or the state in which the corporation was organized. (51 Am. Jur. 502) This is best illustrated in the case of Wells Fargo Bank v. Collector- where the Supreme Court ruled that the shares of stock left by a non-resident alien decedent in an anonymous partnership in the Philippines are subject to Philippine inheritance tax notwithstanding the mobilia rule. According to the Court, the mobilia rule should yield to reason. The shares of stock are also taxable in the situs of their actual location, i.e., the Philippines. 1

"Question No. 2, 1994 Bar Examination. °70 Phil. 235.

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45

NOTE: Section 104, Republic Act 8424 enumerates certain properties which have acquired actual situs in the Philippines, viz.: a.

franchise exercised in the Philippines;

b.

shares of stock, obligations, bonds issued by domestic corporations organized and constituted in accordance with Philippine laws;

c.

shares, obligations, bonds issued by a foreign corporation where 85% of its business is located in the Philippines. It is subject to donor's tax and estate tax;

d.

Shares, obligations, bonds issued by foreign corporations which has acquired business situs, when such have been used in the furtherance of the business of the foreign corporation;

e.

Shares/rights in a partnership business or industry established in the Philippines.

These properties are considered as situated, thus taxed, in the Philippines; the residence of their owners is immaterial. Thus, the RULE: Irrespective of the owner, donor's tax or estate tax can be imposed upon these properties. EXCEPT where the foreign country grants exemption or does not impose taxes on intangible properties of Filipino citizens. TO ILLUSTRATE: As a general rule, donation of shares of stocks made by a foreign corporation are not subject to tax. However, if the transaction falls under paragraph c or d (see enumeration above), the donation shall be subject to tax." " Q u e s t i o n No. 5 , 1 9 % Bar Examination.

TAX PRINCIPLES AND REMEDIES

The income of intangible properties like royalties and dividends are subject to taxes. (Sees. 24[c], 25, 27, 28, Republic Act 8424) EXCISE TAX Excise taxes are taxes imposed on the exercise of a right or privilege. A.

Income Tax (Section 23, R.A. 8424) (CRITERIA: DENCE) •

— •

— •

—

PLACE,

NATIONALITY,

RESI-

Place — applied to a.

Non-resident alien

b.

Non-resident foreign corporations

c.

Non-resident citizen

taxed upon sources of income derived from within the Philippines. Nationality — applied to a.

Resident citizen

b.

Domestic corporation

taxed upon sources of income derived from within and without the Philippines Residence — applied to a.

Resident alien

b.

Resident Foreign Corporation

taxed upon income derived from sources within the Philippines COMMISSIONER v. BOAC 149 SCRA 395

"The source of an income is the property, activity or service that produces the income. For the source of income to be considered as coming from the Philip-

CHAPTER I G E N E R A L PRINCIPLES

47

pines, it is sufficient that the income is derived from activity within the Philippines, x x x" B.

Donor's Tax (Sections 98,104, RA.. 8424) (CRITERIA: DENCE) •

Non-resident alien — tax based upon properties situated within the Philippines Resident and non-resident citizen — tax based upon properties wherever situated

Residence a.

C.

Resident alien — tax based upon properties wherever situated

Estate tax (Sections 85,104, RA. 8424) (CRITERIA: DENCE) •

•

NATIONALITY,

RESI-

Non-resident aliens — are taxed on properties situated within the Philippines

Nationality a.

•

PLACE,

Place a.

Resident and non-resident citizen — are taxed upon their properties wherever situated

Residence a.

D.

RESI-

Nationality a.

•

NATIONALITY,

Place a.

•

PLACE,

Resident alien — taxes imposed upon properties wherever situated

Value Added Tax (Section 105, R J \ . 8424) Its tax situs is the place where the transaction is made. If the transaction is made (perfected and

TAX PRINCIPLES AND REMEDIES

consummated) outside of the Philippines, we can no longer tax such a transaction. CASE FOR STUDY ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE 524 SCRA 73,103 (2007) x x x According to the Destination Principle, goods and services are taxed only in the country where these are consumed. In connection with the said principle, the Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT while those destined for use or consumption within the Philippines shall be imposed with 10% VAT (Now 12% under R.A. No. 9337). Export processing zones are to be managed as a separate customs territory from the rest of the Philippines and, thus, for tax purposes, are effectively considered as foreign territory. For this reason, sales by persons from the Philippine customs territory to those inside the export processing zones are already taxed as exports. NON-DELEGATION OF THE POWER TO TAX The power to tax is exclusively vested in the legislative body. Exceptions A.

Article VI, Section 28(2) of the Constitution The Congress may, by law, authorize the President to impose tariff rates, import and export quotas, etc. [custom duties], subject to the limitations and guidelines as the Congress may

CHAPTER I G E N E R A L PRINCIPLES

49

impose, consistent with the national development program of the government. B.

Article X, Section 5 of the Constitution Each local government unit shall have the power to create its own sources of revenue, fees, charges, subject to such guidelines and limitations as the Congress may provide consistent with the basic policy of local autonomy. Such taxes, fees and other charges shall accrue exclusively to the local government. (See Sec. 133, R.A. 7160)

In Abakada Guro Party List v. Ermita [469 SCRA 1, 122,123-124], the Supreme Court sustained the constitutionality of R.A. 9337 authorizing the President to increase the VAT rate from 10% to 12% effective January 1, 2006 upon recommendation of the Secretary of Finance on the existence of either of the two conditions. It ruled that the law leaves the entire operation or nonoperation of the 12% rate upon factual matters outside of the control of the executive. No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion, x x x In making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them.

TAX PRINCIPLES AND REMEDIES

50

CASES FOR STUDY BOARD OF ASSESSMENT APPEALS OF LAGUNA v. CTA 8 SCRA 224 In the absence of constitutional provision, the power to tax may be delegated to local government units in accordance with the well-settled doctrine that the power to create local government units by implication confers upon it the power to tax. So even if no constitutional provision exists, local government units still possess the power to tax. PEPSI-COLA BOTTLING CO. OF THE PHILS, v. CITY OF BUTUAN 24 SCRA 789 Petitioners assail the constitutionality of Municipal Ordinance No. 110, as amended by Mun. Ord. No. 122, on the ground that Sec. 2 of R.A. 2264, upon the authority of which it is delegated, is an unconstitutional delegation of legislative powers. HELD: The general principle against delegation of legislative powers, in consequence of the theory of separation of powers (U.S. v. Bull, 15 Phil. 7,27; Kilbourn v. Thompson, 103 U.S. 168, 26 I. ed. 377) is subject to one well-established exception, namely: legislative powers may be delegated to local governments. PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. v. MUNICIPALITY OF TANAUAN, LEYTE 69 SCRA 460 Pepsi-Cola challenges the power of taxation delegated to municipalities under the Local Autonomy Act. HELD: The power of taxation granted to municipalities under the Local Autonomy Act is constitutional.

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51

The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. (Cooley, The Law of Taxation, Vol. I, 4th Ed.) It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial power of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. (Pepsi-Cola Bottling Co. of the Phils., Inc. v. City of Butuan, 24 SCRA 793) This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of self-government carries with it the power to confer on such local government agencies the power to tax. (Cooley, 190) x x x The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellanf s pretense, would not suffice to invalidate the said law as confiscatory and oppressive. 'In delegating the authority, the State is not limited to the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient.' Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes. JOHN H. OSMENA v. OSCAR ORBOS 220 SCRA 703 The Supreme Court finds that the provision conferring the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by which the authority must be exercised.

TAX PRINCIPLES AND REMEDIES

For a valid delegation of power, it is essential that the law delegating the power must be (1) complete in itself, that is, it must set forth the policy to be executed by the delegate and, (2) it must fix a standard — limits of which are sufficiently determinate or determinable — to which the delegate must conform. . . . As pointed out in Edu v. Ericta: To avoid the taint of unlawful delegation, there must be a standard, which implies at the very least that the legislature itself determines matters of principle and lays down fundamental policy. Otherwise, the charge of complete abdication may be hard to repel. A standard, thus, defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected. It is the criterion by which the legislative purpose may be carried out. Thereafter, the executive or administrative office designated may in pursuance of the above guidelines promulgate supplemental rules and regulations. The standard may either be express or implied. If the former, the non-delegation objection is easily met. The standard though does not have to be spelled out specifically. It could be implied from the policy and purpose of the act considered as a whole. Where the standards set up for the guidance of an administrative officer and the action taken are in fact recorded in the orders of such officer, so that Congress, the courts and the public are assured that the orders in the judgment of such officer conform to the legislative standard, there is no failure in the performance of the legislative functions. MAYOR ANTONIO J. VILLEGAS v. HIU CHIONG TSAl PAO HO and JUDGE ARCA 86 SCRA 270 (1978) Respondent Hui Chiong Tsai Pao Ho challenged the validity of Ordinance No. 6537 passed by the Mu-

CHAPTER I G E N E R A L PRINCIPLES

53

nicipal Board of Manila. The said ordinance prohibited aliens from being employed or to engage or participate in any position, occupation or business enumerated therein, whether permanent, temporary or casual, without first securing an employment permit from the Mayor of Manila and paying the permit fee. Respondent judge declared the ordinance null and void. HELD: Ordinance No. 6537 is VOID because it does not contain or suggest any standard or criterion to guide the mayor in the exercise of the power which has been granted to him in the ordinance. Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion. It has been held that where an ordinance of a municipality fails to state any policy or to set up any standard to guide or limit the mayor's action, expresses no purpose to be attained by requiring a permit, enumerates no conditions for its grant or refusal, and entirely lacks standard, thus conferring upon the Mayor arbitrary and unrestricted power to grant or deny the issuance of building permits, such ordinance is invalid, being an undefined and unlimited delegation of power to allow or prevent an activity per se lawful. BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner's letter was returned because it did not bear the special Anti-TB stamp required by R.A. 1635 as implemented by several administrative orders. Petitioner questions the constitutionality of the statute as well as the implementing administrative orders issued. The Supreme Court held that administrative orders are not undue delegation of legislative powers.

TAX PRINCIPLES AND REMEDIES

Although the law does not expressly authorize the collection of five centavos except through the sale of Anti-TB stamps, such authority may be implied in so far as may be necessary to prevent a failure of the undertaking. The authority given to the Postmaster General to raise funds through the mails must be liberally construed, consistent with the principle that where the end is required the appropriate means is given. HON. RAMON BAGATSING, et al v. HON. PEDRO RAMIREZ, et al 74 SCRA 306 Nor does the delegation of the collection of market stall fees to a private corporation affect the public purpose of the imposition. The entrusting of the collection of the fees does not destroy the public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through which the money is dispensed is public or private. The right to tax depends upon the ultimate use, purpose and object for which the fund is raised. It is not dependent on the nature or character of the person of corporation whose intermediate agency is to be used in applying it. The people may be taxed for a public purpose, although it be under the direction of an individual or private corporation. EXEMPTION FROM TAXATION OF GOVERNMENT AGENCIES/INSTRUMENTALITIES Properties of the national government as well as those of the local government units are not subject to tax, otherwise it will result in the absurd situation of the government "taking money from one pocket and putting it in another." (Cooley on Taxation, Sec. 621, 4th Ed., as cited in Board of Assessment Appeals ofhaguna v. Court of Tax Appeals, 8 Phil. 227)

CHAPTER I G E N E R A L PRINCIPLES

May the government tax itself? The Constitution is silent on whether Congress is prohibited from taxing the properties of the agencies of the government. However, Chief Justice Hilario G. Davide, Jr. has stated that "nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax."'* Agencies performing governmental functions and proprietary functions distinguished A distinction has been made between agencies performing governmental functions and those performing proprietary functions. As a rule, agencies performing governmental functions are tax-exempt unless expressly taxed. On the other hand, agencies performing proprietary functions are subject to tax unless expressly exempted. Government-owned and -controlled corporations perform proprietary functions; hence, they are subject to taxation. However, certain corporations have been granted exemption under Section 27(C) of R.A. 8424 as amended by R.A. 9337 which took effect on 1 July 2005, to wit: 1.

Government Service Insurance System (GSIS)

2.

Social Security System (SSS)

3.

Philippine Health Insurance Corporation (PHIC)

4.

Philippine Charity Sweepstakes Office (PCSO)

Instrumentality of the National Government is exempt from local taxation In Manila International Airport Authority v. Court of Appeals [495 SCRA 591, 615], the Supreme Court held

" M C I A A v. Marcos, 261 S C R A 667.

56

TAX PRINCIPLES AND REMEDIES

that the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which states — xxx, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx (o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local government units. This has been echoed in the recent case of Philippine Fisheries Development Authority v. The Municipality of Navotas [G.R. No. 150301, October 2, 2007, 534 SCRA 490] wherein the Supreme Court ruled that PFDA, being an instrumentality of the national government, is exempt from real property tax but the exemption does not extend to the portions of the Navotas Fishing Port Complex (NFPC) that were leased to taxable or private persons and entities for their beneficial use. The Pasay properties of MIAA are exempt from real property tax The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of the Adrninistrative Code of 1987 uses the phrase "includes x x x government-owned or controlled corporations" which means that a government "instrumentality" may or may not be a "government-owned or controlled corporation." Obviously, the term government "instrumentality" is broader than the term "government-owned or controlled corporation." Section 2(10) provides: SEC. 2. General Terms Defined. — x x x (10) Instrumentality refers to any agency of the national Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and

CHAPTER I G E N E R A L PRINCIPLES

57

enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned or controlled corporations. The term "government-owned or controlled corporation" has a separate definition under Section 2(13) of the Introductory Provisions of the Administrative Code of 1987: SEC. 2. General Terms Defined.- x x x (13) Government-owned orcontrolled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock: Provided, That government-owned or controlled corporations may further be categorized by the Department of Budget, the Civil Service Commission, and the Commission on Audit for the purpose of the exercise and discharge of their respective powers, functions and responsibilities with respect to such corporations. The fact that two terms have separate definitions means that while a government "instrumentality" may include a "government-owned or controlled corporation," there may be a government "instrumentality" that will not qualify as a "government-owned or controlled corporation." A close scrutiny of the definition of "governmentowned or controlled corporation" in Section 2(13) will show that MIAA would not fall under such definition. MIAA is a government "instrumentality" that does not qualify as a "government-owned or controlled corporation." (Manila International Airport Authority v. City ofPasay, Sangguniang Panglungsod ng Pasay, et al, 583 SCRA 234 [2009])

58

TAX PRINCIPLES AND REMEDIES

CASES FOR STUDY STANDARD OIL COMPANY OF NEW YORK v. JUAN POSADAS, JR. 55 Phil. 715 The Standard Oil Company of New York sold and delivered in the Philippines fuel oil and asphalt, to the Quartermaster Dept. of the US Army, for the use of the said Army. The CIR of the Philippine government imposed taxes of about 1 1/2% of the value of the merchandise. At the same time, the Standard Oil Company delivered fuel oil in the Philippines for the use of the US Navy, which was likewise taxed by the CIR. The Standard Oil Company paid the taxes assessed under protest and sued to recover the corresponding refunds. HELD: The assessment and collection by the Philippine Government of the tax on sales of merchandise made in the Philippines to the US Army and the US Navy is illegal. Sales made in the Philippines to the US Army and the US Navy are made to instrumentalities of the US Government, and therefore, are not subject to tax by the Philippine Government. BOARD OF ASSESSMENT APPEALS, PROVINCE OF LAGUNA v. COURT OF TAX APPEALS and NATIONAL WATERWORKS AND SEWERAGE AUTHORITY 8 Phil. 227 The question involved in this case is whether the water pipes, reservoir, intake and buildings used in the operation of its waterworks system in the province of Laguna are subject to real estate tax. It is submitted that the law — Sec. 3 of Republic Act 470 — exempting from taxation "property owned

CHAPTER I G E N E R A L PRINCIPLES

59

by the Republic of the Philippines, any province, city, municipality or municipal district . . ." makes no distinction between property held in a sovereign, government or political capacity and those possessed in a private, proprietary and patrimonial character. And where the law does not distinguish, neither may we. x x x Moreover, taxes are financial burdens imposed for the purpose of raising revenues with which to defray the cost of the operation of the Government, and a tax on the property of the government, whether national or local, would merely have the effect of taking money from one pocket to put it in another pocket. (Cooley on Taxation, Sec. 621,4th Ed.) Hence, it would not serve, in the final analysis, the main purpose of taxation. NATIONAL DEVELOPMENT COMPANY v. CEBU CITY and AUGUSTO PACIS 215 SCRA 382 Is a public land reserved by the President for warehousing purposes in favor of a governmentowned or -controlled corporation, as well as the warehouse subsequently erected thereon, exempt from real property tax? RE: The land The Supreme Court answered in the affirmative. The Republic, like any individual, may form a corporation with personality and existence distinct from its own. The separate personality allows a governmentowned and -controlled corporation to hold and possess properties in its own name and thus permit greater independence and flexibility in its operations. It may, therefore, be stated that tax exemption of "property owned by the Republic of the Philippines" refers to properties owned by the Government and by its agencies which do not have separate and distinct personalities (unincorporated entities).

60

TAX PRINCIPLES AND REMEDIES

In this case, what appears to have been ceded to NDC was merely the administration of the property while the government retains ownership of what has been declared for warehousing purposes. The land remains "absolute property of the government. The government does not part with its title by reserving them (lands), but simply gives notice to all the world that it desires them for a certain purpose." As its title remains with the Republic, the reserved land is clearly covered by tax exemption. RE: The warehouse As regards the warehouse constructed on a public reservation, a different rule should apply because "(t)he exemption of public property from taxation does not extend to improvements on the public land made by preemptioners, homesteaders and other claimants, or occupants, at their own expense, and these are taxable by the State x x x." Consequently, the warehouse constructed on the reserved land by NDC should properly be assessed real estate tax as such improvement does not appear to belong to the public. ESSO STANDARD EASTERN, INC. v. ACTING COMMISSIONER OF CUSTOMS 18 SCRA 488 Petitioner is engaged in the industry of processing gasoline, and manufacturing lubricating oil, grease and tin containers. Petitioner owns gasoline stations with pumps, which are leased to and operated by gasoline dealers. It sells gasoline to these dealers. The pump parts imported by petitioner in 1956 were intended, installed and actually used by gasoline dealers in pumping gasoline from underground tanks into customers' motor vehicles. These pump parts, in other words, are used in the sale at retail of gasoline — not by petitioner but by lessees of gasoline stations. In this factual environment, it is quite evident that the pump parts are not used in petitioner's industry of

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61

processing gasoline, or manufacturing lubricating oil, grease and tin containers, hence taxable. Since the law (R.A. 1394) states that, to be tax exempt, equipment and spare parts should be "for the use of industries," the coverage herein should not be enlarged to include equipment and spare parts for use in dispensing gasoline at retail. In comparable factual backdrop, this Court has held that tax exemption in connection with the manufacture of asbestos roof does not extend to the installation thereof. (Collector v. Eternit Corporations, 57 Off. Gaz., No. 6, pp. 1043,1045) Exemption from taxation is not favored and exemptions in tax statutes are never presumed. Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Where the State has granted in express terms certain exemptions, those are the exemptions to be considered, and no more. B.

Constitutional Limitations on the Power to Tax The Constitution provides for certain restrictions on the power of taxation, among them: (1) due process of law; (2) equal protection of laws; (3)

uniformity;

(4)

progressive system of taxation;

(5) non-impairment of contracts; (6)

non-imprisonment for non-payment of poll tax;

(7)

appropriation, revenue and tariff bills must originate exclusively in the House of Representatives;

(8)

presidential veto;

(9)

presidential power to fix tariff rates;

(10)

freedom of the press;

62

TAX PRINCIPLES AND REMEDIES

(11)

freedom of religion;

(12) exemption from property tax of properties of religious, educational, charitable institutions; (13) tax exemptions granted to non-stock, non-profit educational institutions; (14) no public money or property used for a particular sect, priest, religious minister, etc.; (15) grant of tax exemptions; (16) grant of power of taxation to local government units; (17) money collected for a special purpose shall be considered a special fund; (18) exclusive appellate jurisdiction of the Supreme Court over judgments of lower courts involving the legality of taxes, imports, assessment, fees, penalty. 1.

DUE PROCESS OF LAW "No person shall be deprived of life, liberty or property without due process of law . . . " (Art. Ill, Sec. 1) Due process mandates that no person shall be deprived of life, liberty, or property without due process. The implication is that one may be deprived of property as long as the requirement of due process — notice and hearing — have been complied with.

To illustrate, in the case of Mayor Antonio Villegas v. Hiu Chiong Tsai Pao Ho, the Court held: 55

Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may withhold or refuse it at will is tantamount to denying " 8 6 SCRA 270.

63

CHAPTER I G E N E R A L PRINCIPLES

him the basic right to engage in a means of livelihood. While it is true that the Philippines as a state is not obliged to admit aliens within its territory, once an alien is admitted, he cannot be deprived of life without due process of law. This guarantee includes the means of livelihood. The shelter of protection under the due process and equal protection clause is given to all persons, both aliens and citizens. Due process is usually violated where the tax imposed is for a private purpose as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extra-territorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in injury rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or the amount to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law. (Cooley, 334) * 1

The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown to amount to a confiscation of property. (Reyes v. Almanzor, 196 SCRA 322) However, to justify the nullification of a tax law, mere allegation is not enough. There must be a clear and unequivocal breach of the Constitution; there must be proof of arbitrariness. The law must be unreasonable and unjust, not merely hypothetical, argumentative or of doubtful implication.

*As cited in Pepsi-Cola Bottling Co. of the Philippines, Inc. v. Municipality of Tanauan. Leyte, 69 S C R A 460.

64

TAX PRINCIPLES AND REMEDIES

The following situations are illustrative of violations of the due process clause: a.

If the tax amounts to a confiscation of property;

b.

If the subject of confiscation is outside the jurisdiction of the taxing authority;

c.

If the law is imposed for a purpose other than a public purpose;

d.

If the law which is applied retroactively imposes unjust and oppressive taxes;

e.

Where the law is in violation of inherent limitations.

The Classification Freeze Provision under R.A. 9334 does not violate due process clause British American Tobacco (BAT) did not clearly demonstrate the exact extent of such impact. It has not been shown that the net retail prices of other older brands previously classified under this classification system have already pierced their tax brackets, and, if so, how this has affected the overall competition in the market. Further, it does not necessarily follow the newer brands cannot compete against older brands because price is not the only factor in the market as there are other factors like consumer preference, brand loyalty, etc. In other words, even if the newer brands are priced higher due to the differential tax treatment, it does not mean that they cannot compete in the market especially since cigarettes contain addictive ingredients so that a consumer may be willing to pay a higher price for a particular brand solely due to its unique formulation. It may also be noted that in 2003, the BIR surveyed 29 new brands that were introduced in the market after the effectivity of R.A. 8240 on January 1, 1997, thus negating the sweeping generalization of BAT that the classification freeze provision has become an insurmountable barrier to the entry of new brands. Verily, where there is a claim of breach of the due

CHAPTER I G E N E R A L PRINCIPLES

65

process and equal protection clauses, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. It is clear that Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations 9-2003, and Revenue Memorandum Order No. 6-2003 unjustifiably emasculate the operation of Section 145 of the NIRC because they authorize the Commissioner of Internal Revenue to update the tax classification of new brands every two years or earlier subject only to its issuance of the appropriate Revenue Regulations, when nowhere in Section 145 is such authority granted to the Bureau. Unless expressly granted to the BIR, the power to reclassify cigarette brands remains a prerogative of the legislature which cannot be usurped by the former. (British American Tobacco v. Camacho, 562 SCRA 511, 517-518 [2008]) MCIT Is Not Violative of Due Process CREBA contends that the MCIT under Section 27(E) of R.A. 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account. Thus, pegging the tax base of the MCIT to a corporation's gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain." The contention holds no water. Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure.

66

TAX PRINCIPLES AND REMEDIES

The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good. Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. It other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed. As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality. The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al., the Supreme Court held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, the SC also explained that it will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer. There must be a factual foundation to such an unconstitutional taint. This merely adheres to the authoritative

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doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, mere is a need for proof of such persuasive character. CREBA is correct in saying that income is distinct from capital. Income means all the wealth which flows into the taxpayer other than a mere return of capital. Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. Income is gain derived and severed from capital. For income to be taxable, the following requisites must exist: (1)

there must be gain;

(2)

the gain must be realized or received; and

(3)

the gain must not be excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation's gross income. Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible

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items and at the same time reducing the applicable tax rate. Statutes taxing the gross "receipts," earnings," or "income" or particular corporations are found in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirements as to uniformity of taxation. (CREBA v. Romulo, 614 SCRA 605 625-628) CASES FOR STUDY CARLOS SUPERDRUG CORP. v. DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT (DSWD) 526 SCRA 130,140,143-145 (2007) Petitioners assert that Section 4(a) of the Expanded Senior Citizens Act (R.A. 9257) is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because (1) drugstores impose mark up only 5% to 10% on branded medicines; and (2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. HELD: R.A. 9257 is constitutional. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable

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of powers, extending as it does to all the great public needs." It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the same." For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare. Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor. Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their business, because petitioners have not taken time to calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage. JOSE REYES v. PEDRO ALMANZOR 196 SCRA 322 Petitioner questions the method of tax assessment, citing violation of the due process clause. The Court ruled thus: The due process clause may be invoked where a taxing statute is so arbitrary that it finds

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no support in the Constitution, as where it can be shown to amount to a confiscation of property. The taxing power has the authority to make reasonable and natural classification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed. (Sison v. Ancheta, supra) COMMISSIONER OF INTERNAL REVENUE v. HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO CORPORATION 261 SCRA 236 Prior to the effectivity of R.A. 7654, cigarette brands Hope Luxury, Premium More and Champion were considered local brands subjected to an ad valorem tax at the rate of 20-45%. However, on 1 July 1993 or two (2) days before R.A. 7654 took effect, petitioner Commissioner of Internal Revenue issued RMC 3793 reclassifying "Hope, More and Champion being manufactured by Fortune Tobacco Corporation . . . (as) locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes." A copy of RMC 37-93 was sent to Fortune Tobacco via telefax, but it was addressed to no one in particular. On 15 July 1993, Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93. Respondent corporation sought a review, reconsideration and recall of RMC 37-93 but was forthwith denied by the Appellate Division of the Bureau of Internal Revenue. As a consequence, on

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30 July 1993, private respondent was assessed an ad valorem tax deficiency. Respondent corporation went to the Court of Tax Appeals (CTA) on a petition for review. The CTA held that petitioner Commissioner of Internal Revenue failed to observe due process of law in issuing RMC 37-93 as there was no prior notice and hearing. The Supreme Court upheld the CTA, holding that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, as in the case at bar, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. 2.

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57

" . . . nor shall any person be denied the equal protection of the law." (Art. Ill, Section 1) Our Constitution requires uniformity, not equality, in taxation. Equality of taxation is accomplished when the burden of the tax falls equally and impartially upon all persons and property subject to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon others similarly situated or of like character. Whereas, "Question No. 2, 2000 Bar Examination; Question Nos. 2 & 10, 2004 Bar Examination.

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uniformity requires that all taxable property subjected to the tax, shall be alike and this requirement is violated if particular kinds, species, or items of property are selected to bear the whole burden of the tax, while others, which should be equally subject to it, are left untaxed. Further, it is implied that each tax shall be uniform throughout the taxing district involved. A state tax must be apportioned uniformly throughout a state, a country tax throughout the country, and a city tax throughout the city. (Vol. 37, Encyclopedia of Law and Procedure, pp. 735-736) "EQUAL PROTECTION OF THE LAW" CLAUSE, as applied to Taxation. "Equal protection" does not require equal rates of taxation on different classes of property, nor prohibit unequal taxation so long as the inequality is not based upon arbitrary classification. Legislation which, in carrying out a public purpose, is limited in its application, does not violate the provisions if, within the sphere of its operation, it affects alike all persons similarly situated. It does not prohibit special legislation or legislation that is limited either in the objects to which it is directed, or by the territory within which it is to operate. It merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed* ABSOLUTE EQUALITY IMPOSSIBLE Inequality of taxes means substantial differences. Practical equality is constitutional equality. There is no imperative requirement that taxation shall be absolutely equal, only that tax laws be framed with a view to apportioning the burdens of government so that each person enjoying government protection shall be required to w

l Cooley Taxation, 534-535.

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contribute so much as is his reasonable proportion, and no more. "Perfect equality in taxation," it has been said, "will remain an unattainable goal as long as laws and government and man are imperfect." On the other hand, while perfect equality is impossible, yet there are cases where there are such glaring inequality, either intentional or otherwise, as to clearly violate the uniformity and equality rule. Let it reach all of a class, either of persons or things, it matters not whether those included in it be one or many, or whether they reside in any particular locality or are scattered all over the state. But when for any reason, it becomes discriminative between individuals of a class taxed, and selects some for an exceptional burden, the tax is deprived of the necessary element of legal equality, and becomes inadmissible. 59

UNIVERSAL APPLICATION IS NOT REQUIRED The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the grouping of persons or things similar to each other in certain particulars and different from all others in these same particulars. {Abakada Guro Party List v. Ermita, 469 SCRA 1,140) CLASSIFICATION, WHEN PROPER The power to select the subjects of taxation and apportion the public burden among them includes the power to make classifications. The inequalities which result from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. 60

"1 Cooley 558-562. •"Lutz v. Araneta, G.R. No. L-7859, December 2 2 , 1 9 5 5 , 98 Phil. 148.

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However, for classification to be valid, the following requisites must concur: a.

it must be based on substantial distinction;

b.

it must apply both to present and future conditions;

c.

it must be germane to the purposes of the law;

d.

it must apply equally to all members of the same class. (Ormoc Sugar Company, Inc. v. The Treasurer ofOrmoc City, et al., 22 SCRA 603)

The principle of equality admits of classification or distinction as long as they are based upon real and substantial differences between the persons, property, or privileges and those not taxed must bear some reasonable relation to the object of purpose of legislation, or to some permissible governmental policy or legitimate end of government. (Matic, Jr., Taxation in the Philippines, Vol. 1, pp. 79-80) Classification freeze provision under R.A. 9334 does not violate the equal protection and uniformity of taxation clauses under the Constitution A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws. The classification is considered valid and reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being equal, to both present and future conditions; and (4) it applies equally to all those belonging to the same class. The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in the law for reasons of practicality and expediency. That is, since a new brand was not yet in existence at the time of the passage of R.A. 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify the brands under Annex "D" as of October 1, 1996, was thus the logical and practical choice. Further, with the amendments introduced by R.A. 9334, the freezing of the tax classifications now

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expressly applies not just to Annex "D" brands but to newer brands introduced after the effectivity of R.A. 8240 on January 1, 1997 and any new brand that will be introduced in the future. xxx

xxx

The classification freeze provision uniformly applies to all newly introduced brands in the market, whether imported or locally manufactured. It does not purport to single out imported cigarettes in order to unduly favor locally produced ones. Further, BAT's evidence was anchored on the alleged unequal tax treatment between old and new brands which involves a different frame of reference vis-a-vis local and imported products. BAT has, therefore, failed to clearly prove its case, both factually and legally, within the parameters of the GATT. At any rate, even assuming arguendo that BAT was able to prove that the classification freeze provision violates the GATT, the outcome would still be the same. The GATT is a treaty duly ratified by the Philippine Senate and under Article VII, Section 21 of the Constitution, it merely acquired the status of a statute. Applying the basic principles of statutory construction in case of irreconcilable conflict between statutes, R.A. 8240, as amended by R.A. 9334, would prevail over the GATT either as a later enactment by Congress or as a special law dealing with the taxation of sin products. [British American Tobacco v. Camacho, 562 SCRA 511 (2008)] CASES FOR STUDY BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner questions the constitutionality of the statute as well as the implementing administrative orders issued implementing the special Anti-TB stamp required by R.A. 1635, contending that it violates the equal protection clause of the Constitution as well as the rule of uniformity and equality in taxation.

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HELD: R.A. 1635 is valid. It is claimed that R.A. 1635, otherwise known as the Anti-TB Stamp Law, is violative of the equal protection clause of the Constitution because it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even among postal patrons the statute discrirninatorily grants exemptions. HELD: It is settled that the legislature has the inherent power to select the subject of taxation and to grant exemptions. The classification of mail users is based on the ability to pay, the enjoyment of a privilege and on administrative convenience. Tax exemptions have never been thought of as raising issues under the equal protection clause. Moreover, the imposition of a flat rate rather than a graduated tax does not infringe the rule of uniformity and equality of taxation. A tax need not be measured by the weight of the mail or the extent of the service rendered. Considerations of administrative convenience and cost afford an adequate ground for classification. The same considerations may induce the legislature to impose a flat tax which in effect is a charge for the transaction, operating equally on all persons within the class regardless of the amount involved. EASTERN THEATRICAL CO. v. VICTOR ALFONSO 83 Phil. 852 Twelve corporations, engaged in the motion picture business, contest the validity of Ord. No. 2958 of the City of Manila, which reads as follows: "An ordi-

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nance imposing a fee on the price of every admission ticket sold by Cinematographers, etc." Appellants point out to the fact that the ordinance in question does not tax "many more kinds of amusements" than those therein specified, such as "race tracks, cockpits, cabarets, concert halls, circuses, and other places of amusement." HELD: The argument has absolutely no merit. The fact that some places of amusement are not taxed while others, such as cinematographs, theaters, etc. are taxed, is no argument at all against the equality and uniformity of tax imposition. Equality and uniformity means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation; and the appellants cannot point out what places of amusement taxed by the ordinance do not constitute a class by themselves and which can be confused with those not included in the ordinance. MANILA RACE HORSE TRAINERS ASSN., INC. v. DE LA FUENTE 88 Phil. 60 The Manila Race Horses Trainers Association, Inc., a non-stock corporation maintaining boarding stables for horses, challenges the validity of Ordinance No. 3065 of the City of Manila. Plaintiffs maintain that the ordinance under consideration is a tax on race horses as distinct from boarding stables. HELD: From the viewpoint of economics and public policy the taxing of boarding stables for race horses to

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the exclusion of boarding stables for horses dedicated to other purposes is not indefensible. The owners of boarding stables for race horses and, for that matter, the race horse owners themselves, who in the scheme of shifting may carry the taxation burden, are a class by themselves and appropriately taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in taxation is generally conceived in terms of ability to pay in relation to the benefits received by the taxpayer and by the public from the business or property taxed. Race horses are devoted to gambling if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision. Taking eveiything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution. SILVESTRE PUNSALAN v. THE MUN. BOARD OF THE CITY OF MANILA 95 Phil. 46 Plaintiffs sought the annulment of Ordinance No. 3398 of the City of Manila which imposes a municipal occupation tax on persons exercising various professions. In upholding the validity of the tax law, the Supreme Court held that there is no discrimination or class legislation if a statute authorizes the City of Manila to levy occupation taxes while that same authority is withheld from other cities and municipalities. It is not for the court to decide what cities or municipalities should be so authorized for such is a matter of judicial determination. There was a substantial distinction between them and other professionals as practitioners in Manila

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could expect a more lucrative income than those in other parts of the country. CITY OF BAGUIO v. FORTUNATO DE LEON 25 SCRA 938 (1968) Defendant-appellant De Leon, a real estate dealer, assailed the validity of an ordinance of the City of Baguio imposing a license fee on any person, firm, entity, or corporation doing business in the City of Baguio. The ordinance is valid. Equality and uniformity in taxation means that all taxable articles or kind of property of the same class be taxed at the same rate. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found. Where the statute or ordinance in question applies equally to all persons, firms and corporations placed in similar situation, there is no infringement of the rule on equality. Inequalities which result from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. ANTERO SISON v. ANCHETA 130 SCRA 654 The State has the inherent power to select the subjects of taxation, and inequalities which result from the singling out of one particular class for taxation or tax exemption infringe no constitutional limitation. Consequently, the Supreme Court ruled that the schedular income tax which imposes graduated taxes of 0% to 35% without deductions on compensation income of individuals and a rate scheme of 5% to 60% on business and other income with deductions does not violate the rule on equal protection since there is no infirmity if classifications are based on substantial distinctions.

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JUAN LUNA SUBDIVISION, INC. v. SARMIENTO, et al. 91 Phil. 371 Juan Luna Subdivision, Inc. brought a suit against the City Treasurer and the Philippine Trust Company as defendants in the alternative to determine which of the two defendants is liable for plaintiff's check. It appears that plaintiff issued to the City Treasurer of Manila a check to be applied to plaintiff's land tax for the second semester of 1941, the exact amount of which was yet undetermined. On February 20,1942, after the amount had been verified, which was P341.60, the balance of Pl,868.92, covered by voucher no. 1487 of the City Treasurer's Office, was noted in the ledger as a credit to the Juan Luna Subdivision, Inc. Thereafter, the books of the Philippine Trust Company revealed that plaintiff's check was deposited by the City Treasurer with the Philippine National Bank, and the latter was paid the cash equivalent thereof by the Philippine Trust Company which debited the amount against Juan Luna Subd., Inc. However, the City Treasurer refused after liberation to refund the plaintiff's deposit or apply it to such future taxes as might be found due. The plaintiff claims the whole amount of the check contending that taxes for the last semester of 1941 had been remitted by C.A. No. 703. HELD: The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes is a class by itself, and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike. They are not. As to the justification of the measure, the confinement of the condonation to delinquent taxes was not without good reason. The property owners

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who had paid their taxes before liberation and those who had not were not on the same footing on the need of material relief. It is true that the ravages and devastations brought by war operations had rendered the bulk of the people destitute or impoverished and that it was this situation which prompted the passage of C.A. 703. But it is also true that the taxpayers who had been in arrears in their obligation would have to satisfy their liability with genuine currency, while the taxes paid during the occupation had been satisfied in Japanese military notes, many of them at a time when those notes were well-nigh worthless. To refund those taxes with the restored currency, even if the government could afford to do so, would be to unduly enrich many of the payers at a greater expense of the people at large. What is more, the process of refunding would entail a tremendous amount of work and difficulties, what with the destruction of the tax records and the great number of claimants who would take advantage of such grace. It is said that the plaintiff's check was in the nature of a deposit, held in trust by the City Treasurer, and that, for this reason, plaintiff's taxes are to be regarded as still due and payable. The argument is well-taken, but only to the extent of Pl,868.92. The amount of P341.60 as early as February 20,1942, had been applied to the second half of plaintiff's 1941 tax and become part of the general fund of the city treasury. From that date that tax was legally and actually paid and settled. ASSOCIATION OF CUSTOM BROKERS, INC. v. MUN. BOARD, CITY OF MANILA, et al. 93 Phil. 107 Plaintiffs Association of Customs Brokers, Inc. challenge the validity of Ord. No. 3379 which confers upon the municipal board the power to tax motor and other vehicles operating within the City of Manila on

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the ground that said ordinance offends against the rule of uniformity of taxation. HELD: The ordinance infringes upon the rule of uniformity. The ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It does not distinguish between a motor vehicle for hire and one which is purely for private use. Neither does it distinguish between a motor vehicle registered in the City of Manila and one registered in another place but occasionally comes to Manila and uses its streets and public highways. There is no pretense that the ordinance equally applies to motor vehicles which come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public highways. As they are benefited by their use they should also be made to share the corresponding burden. This inequality renders the ordinance in question offensive to the Constitution. ORMOC SUGAR COMPANY, INC. v. THE TREASURER OF ORMOC CITY, et al. 22 SCRA 603 Ormoc Sugar Company alleged that Ordinance No. 4, Series of 1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar Co., Inc., in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the USA and other foreign countries" is unconstitutional for being violative of the equal protection clause (Sec. Ill], Art. Ill, Constitution) and the rule on uniformity of taxation. (Sec. 28111 Art. VI, Constitution) HELD: Ord. No. 4 is declared unconstitutional. The Bill of Rights in the Constitution provides: "x x x nor shall any person be denied the equal

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protection of the laws." (Sec. Art. Ill) In Felwa v. Salas, L-26511, October 29, 1966, the SC ruled that the equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of taxation, and a classification is reasonable where: (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purposes of the law; (3) the classification applies not only to present conditions but also to future conditions which are substantially identical to those of the present; (4) the classification applies only to those who belong to the same class. A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Co., Inc. and none other. At the time of the taxing Ordinance's enactment, Ormoc Sugar Company, it is true, was the only sugar central in the City of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any substantially established sugar central, of the same class as plaintiff, from the coverage of the tax. JOSE REYES v. PEDRO ALMANZOR 196 SCRA 322 Petitioners question the method used in the assessment of the properties. HELD: Under Art. VIII, Sec. 17(1) of the 1973 Constitution, then enforced, the Rule of Taxation must not only be uniform but must also be equitable and progressive. Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class shall be taxed at the same rate. (Churchill v. Conception. 34 Phil. 96911916])

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Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. (Fernando, "The Constitution of the Phils.," 2nd Ed., p. 221) VILLEGAS v. HSIU CHIONG CHAI PAO 86 SCRA 270 The imposition of license fee on all aliens desiring to seek employment in Manila, regardless of the nature of employment (whether casual, permanent, parttime or full-time, lowly paid employee or highly paid executive), was declared unconstitutional. The tax ordinance is discriminatory because it fails to consider valid substantial differences in situation among aliens required to pay it. Classification should be based on real and substantial differences having a reasonable relation to the subject of legislation. MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC. v. DEPARTMENT OF FINANCE SECRETARY, et al. 238 SCRA 63 Petitioner Misamis Oriental Association of Coco Traders, Inc., engaged in the buying and selling of copra in Misamis Oriental, questions the validity of Revenue Memorandum Circular 47-91 which classified copra as an agricultural non-food product and declared it "exempt from VAT only if the sale is made by the primary producer pursuant to Section 103(a) of the Tax Code, as amended." Petitioner claims that RMC No. 47-91 is discriminatory and violative of the equal protection clause of the Constitution because while coconut farmers and copra producers are exempt, traders and dealers are not, although both sell copra in its original state. HELD: The argument has no merit. There is a material or substantial difference between coconut farmers and

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copra producers, on the one hand, and copra traders and dealers, on the other. The former produce and sell copra, the latter merely sell copra. The Constitution does not forbid the differential treatment of persons so long as there is a reasonable basis for classifying them differently. TOLENTINO, et al. v. SECRETARY OF FINANCE 235 SCRA 630 The PPI contends that by withdrawing the exemption previously granted to print media transactions involving printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled out the press for discriminatory treatment and that within the class of mass media the law discriminates against print media by giving broadcast media favored treatment. HELD: We are unable to find a differential treatment of the press by the law, much less any censorial motivation for its enactment. If the press is now required to pay a valueadded tax on its transactions, it is not because it is being singled out, much less targeted, for special treatment but only because of the removal of the exemption previously granted to it by law. The withdrawal of exemption is all that is involved in these cases. The law would perhaps be open to the charge of discriminatory treatment if the only privilege withdrawn had been that granted to the press. But that is not the case. In Grosjean v. American Press Co., 297 U.S. at 250,80 L. Ed. at 669, the law imposed a license tax equivalent to 2% of the gross receipts derived from advertisements only on newspapers which had a circulation of more than 20,000 copies per week. Because the tax was not based on the volume of advertisement alone but was measured by the extent of its circulation as well, the law applied only to the thirteen large newspapers in

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Louisiana, leaving untaxed four papers with circulation of only slightly less than 20,000 copies a week and 120 weekly newspapers which were in serious competition with the thirteen newspapers in question. It was well known that the thirteen newspapers had been critical of Senator Huey Long, and the Long-dominated legislature of Louisiana responded by taxing what Long described as the "lying newspapers" by imposing on them "a tax on lying." The effect of the tax was to curtail both their revenue and their circulation. As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in virtue of the constitutional guaranties." The case is a classic illustration of the warning that the power to tax is the power to destroy. In Minneapolis Star v. Minnesota Commissioner of Revenue, 460 U.S. 575, 75 L. Ed. 2d 295 (1983), the press was also found to have been singled out because everything was exempt from the "use tax" on ink and paper, except the press. Minnesota imposed a tax on the sales of goods in that state. To protect the sales tax, it enacted a complementary tax on the privilege of "using, storing or consuming in that state tangible personal property" by eliminating the residents' incentive to get goods from outside states where the sales tax might be lower. The Minnesota Star Tribune was exempted from both taxes from 1967 to 1971. In 1971, however, the state legislature amended the tax scheme by imposing the "use tax" on the cost of paper and ink used for publication. The law was held to have singled out the press because (1) there was no reason for imposing the "use tax" since the press was exempt from the sales tax and (2) the "use tax" was laid on an "intermediate transaction rather than the ultimate retail sale." Minnesota had a heavy burden of justifying the differential treatment and it failed to do so. In addition, the U.S. Supreme Court found the law

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to be discriminatory because the legislature, by again amending the law so as to exempt the first $100,000 of paper and ink used, further narrowed the coverage of the tax so that "only a handful of publishers pay any tax at all and even fewer pay any significant amount of tax." The discriminatory purpose was thus very clear. In Arkansas Writers' Project, Inc. v. Ragland, it was held that a law which taxed general interest magazines but not newspapers and religious, professional, trade and sports journals was discriminatory because while the tax did not single out the press as a whole, it targeted a small group within the press. What is more, by differentiating on the basis of contents (i.e., between general interest and special interests such as religion or sports) the law became "entirely incompatible with the First Amendment's guarantee of freedom of the press." These cases come down to this: That unless justified, the differential treatment of the press creates risks of suppression of expression. In contrast, in the cases at bar, the statute applies to a wide range of goods and services. The argument that, by imposing the VAT only on print media whose gross sales exceeds P480,000 but not more than P750,000, the law discriminates it without merit since it has not been shown that as a result the class subject to tax has been unreasonably narrowed. The fact is that this limitation does not apply to the press alone but to all sales. Nor is impermissible motive shown by the fact that print media and broadcast media are treated differently. The press is taxed on its transactions involving printing and publication, which are different from the transactions of broadcast media. There is thus a reasonable basis for the classification. The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are immune from any forms of ordinary taxation." The license tax in the Grosjean case was declared invalid because it was "one single in kind, with a long history

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of hostile misuse against the freedom of the press." On the other hand, Minneapolis Star acknowledged that "The First Amendment does not prohibit all regulation of the press [and that] the States and the Federal Government can subject newspapers to generally applicable economic regulations without creating constitutional problems." 3. UNIFORMITY OF TAXATION" The rule of taxation shall be uniform and equitable. (Art. VI, Sec. 28[1] of the Constitution) Uniformity in taxation — says Black on Constitutional Law — means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. It does not mean that lands, chattels, securities, occupations, franchises, privileges, necessities and luxuries shall all be taxed or assessed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere, with all people and at all times. A tax is uniform when it operates with the same form and effect in every place where the subject of it is found. (State Railroad Tax Case, 92 U.S. 575; Patton v. Brady, 184 U.S. 608)" UNIFORMITY, NOT EQUALITY The Constitution requires uniformity, not equality in taxation. The reason is obvious. The imposition of a single tax upon all persons, properties or transactions would result in inequality. It is manifestly impractical. It was held that "a system which imposes the same taxation upon every species of property, irrespective of its nature or condition or class," is well said to be "destructive of the principle of uniformity and equality of taxation, and of a just adaptation "Question No. 1,1998 Bar Examination. "Churchill and Tait v. Concepcion, 34 Phil. 69.

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of property to its burdens." (Pacific Exp. Co. v. Seibert, 142 U.S. 339, 351; 35 L. Ed. 1035,12 Sup. Ct. 250; 1 Cooley 610) EQUALITY AND UNIFORMITY DISTINGUISHED Equality in taxation is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon others similarly situated or of like character. Uniformity requires that all taxable property shall be alike subjected to the tax, and this requirement is violated if particular kinds, species or items of property are selected to bear the whole burden of the tax, while others, which should be equally subject to it, are left untaxed. (Vol. 37, Encyclopedia of Law and Procedure, pp. 735-736) CASE FOR STUDY KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS v. TAN 163 SCRA 371 Petitioners seek to nullify E . 0 . 2 7 3 which adopted the Value Added Tax (VAT) for being unconstitutional, claiming that it is oppressive, discriminatory, unjust and regressive, in violation of the provisions of Art. VI, Sec. 28(1) of the 1987 Constitution: "Sec. 28(1). The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation." HELD: E.O. 273 satisfies all the requirements of a valid tax law. It is uniform. "A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." (Philippine Trust Company v. Yatco, 69 Phil. 420)

TAX PRINCIPLES AND REMEDIES

"Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation." (Eastern Theatrical Company v. Alfonso, 83 Phil. 852, 862) "Taking everything into account, the differentiation against which plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution." (Manila Race Horses Trainers Assn. v. De la Fuente, 88 Phil. 60, 65) "The statute or ordinance in question 'applies equally to all persons, firms and corporations placed in similar situation.'" (Uy Matias v. City ofCebu, 93 Phil. 300) "Inequalities which result from the singling out of one particular class for taxation or exemption infringe no constitutional limitation." (Carmichael v. Southern Coal and Coke Co., 301 U.S. 495) 4.

PROGRESSIVE TAXATION Congress shall evolve a progressive system of taxation. (Art. VI, Sec. 2811]) Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. (Fernando, "The Constitution of the Phils.," 2nd Ed., p. 221)

Is a tax law adopting a regressive system of taxation valid? The Constitution does not really prohibit the imposition of regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation. The constitutional provision should be construed to mean simply that "direct taxes are to be preferred and indirect taxes, as much as possible, should be minimized." (E. Fernando, Con-

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stitution of the Philippines, 221 [Second Ed., 1977]) Indeed, the mandate to Congress is not to prescribe, but to evolve progressive tax system. This is a mere directive upon Congress, not a justiciable right or a legally enforceable one. We cannot avoid regressive taxes but only minimize them. (EVAT En Banc Resolution, Tolentino, et al. v. Secretary of Finance, October 30,1995) [EJxrise tax on cigarettes which is a form of indirect tax, and thus, regressive in character. While there was an attempt to make the imposition of the excise tax more equitable by creating a four-tiered taxation system where higher priced cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor, of a cigarette brand within a specific tax bracket pays the same tax rate. To this extent, the tax does not take into account the person's ability to pay. Nevertheless, this does not mean that the assailed law may be declared unconstitutional for being regressive in character because the Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress shall evolve a progressive system of taxation. Tolentino v. Secretary of Finance instructs: "[Regressive is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities [Art. XIII, Section 1] or for the promotion of the right to "quality education" [Art. XIV, Section 1]. These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights." [British American Tobacco v. Camacho, 585 SCRA 36,51-52 (2009)] 5.

NON-IMPAIRMENT CLAUSE No law shall be passed impairing the obligations of contracts. (Art. Ill, Section 10, Constitution)

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A contract is the law between the contracting parties. The obligation of a contract is the law which binds the parties to perform their agreement. This law must govern and control the contract in every shape in which it is intended to bear upon it, whether it affects its validity, construction or discharge. Any law which enlarges, or in any manner changes the intention of the parties discoverable in it, necessarily impairs the contract itself. The manner or the degree in which this change is effected can in no respect influence this conclusion; for, whether the law affects the validity, the construction, the duration, the mode of discharge or the evidence of the agreement, it impairs the contract, though it may not do so to the same extent in all the supposed cases. There is no room for any stipulation, therefore, that when the state has stipulated by contract to give exemption from taxation, or has commuted the uncertain taxes for a definite and fixed sum or sums, and afterwards undertakes to tax, in the same manner as it taxes other subjects, the persons, corporations or property which were the subject of the exemption or commutation, the obligation of the contract is impaired. (2 Cooley 1494) The constitutional prohibition against the impairment of the obligation of contracts only applies, however, where it is claimed that the obligation of a contract is impaired by a law of the state — a statute or constitutional provision of the state. It does not apply to mere decisions of courts construing a contract. (2 Cooley 1496) IS A TAX EXEMPTION REVOCABLE?" IT DEPENDS. If the grant of an exemption does not constitute a contract, but is merely "a spontaneous concession by the "Question No. 3,1997 Bar Examination; Question No. 2(B), 2004 Bar Examination.

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legislature, not connected with any service or duty imposed" it is REVOCABLE by the power which made the grant. A state may, at its pleasure, withdraw an exemption which is a mere gratuity possessing no element of a contract, even though the corporation may have incurred expense on the faith thereof. Thus, a statute passed after a corporation has been created, and exempting it wholly or partially from taxation, without the payment of any consideration or the assumption of any new burden by the corporation, is a mere gratuity on the part of the state, and the exemption may be revoked at any time. An exemption from taxation does not confer a vested right, and hence, it may be modified or repealed by the legislature unless such modification or repeal would impair the obligation of a contract. (2 Cooley 1469-1473) Similarly, if the basis of the tax exemption is by virtue of a franchise granted by Congress, the exemption may be revoked. (Art. Xll, Sec. 11) On the other hand, if the tax exemption constitutes a binding contract and for valuable consideration, the government cannot unilaterally revoke the tax exemption. The charter of a private corporation is a contract between the corporation and the state, based on a consideration and accepted by a corporation. However, the grant of a franchise to a corporation does not imply a contract exempting the property from taxation or from increased taxation; and there is no contract created by a provision in a charter or franchise that the corporation shall pay annually a certain tax. When the government enters into a contract, it descends to the level of an ordinary individual. It cannot invoke state immunity. While the Court has too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far

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from being contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes of the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11 of the 1987 Constitution, like its precursor provisions in the 1935 and 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as when the common good so requires. 64

WITHDRAWAL OF TAX EXEMPTIONS UNDER THE LOCAL GOVERNMENT CODE; EXCEPTIONS In Mactan Cebu International Airport Authority v. Marcos, the Supreme Court held that Section 193 of the LGC prescribes the general rule, viz., the tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons are withdrawn upon the effectivity of the LGC except with respect to those entities expressly enumerated. In the same vein, the Court must hold that the express withdrawal upon effectivity of the LGC of all exemptions except only as provided therein, can no longer be invoked by MERALCO to disclaim liability for the local tax. 65

"Manila Electric Company v. City Government of San Pablo, Laguna, 306 SCRA 750. "City Government of San Pablo Laguna v. Reyes, 305 SCRA 353.

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CASES FOR STUDY CASANOVAS v. HORD 8 Phil. 125 In January 1897, the Spanish government, pursuant to the Royal Decree of May 14,1867, granted the plaintiff certain mining claims in Ambos, Camarines. The Royal Decree provided that plaintiff shall pay 40 escudos (about P40.00), on each mining claim referred to in the first paragraph of Art. 13 thereof, and 20 escudos (about P10.00) on claims described in the second paragraph thereof. The grantee shall also pay an ad valorem tax equal to 8 per centum of his gross earnings. Article 81 of said Royal Decree, however, provides that no other taxes shall be imposed on these mining claims. Thereafter, the Internal Revenue Act (Act No. 1189) was passed and Sec. 134 thereof provides an annual tax of PI 00 on each mining claim containing an area of 60,000 square meters, and at the same rate proportionally for claims in excess of, or less than, said area. The grantee shall further pay an ad valorem tax equal to 3 per centum of the actual market value of its gross output. Plaintiff paid the tax demanded by defendant CIR, pursuant to the Revenue Act, under protest and filed this suit for recovery. HELD: The grant by the Spanish Government to the plaintiff constituted a contract the obligation of which declares that no other taxes be imposed on those mining claims. TOLENTINO, et al. v. SECRETARY OF FINANCE 235 SCRA 630 CREBA contends that the imposition of the VAT on the sales and leases of real estate by virtue of con-

%

TAX PRINCIPLES AND REMEDIES

tracts entered into prior to the effectivity of the law would violate the constitutional provision that "No law impairing the obligation of contracts shall be passed." HELD: It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. The Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. EXCEPTION: CAGAYAN ELECTRIC POWER AND LIGHT CO., INC. v. COMMISSIONER G.R. No. 60126, September 25,1985 The non-impairment clause does not apply to public utility franchises. Art. XII, Sec. 11 of the 1987 Constitution mandates that no public utility franchise or right shall be granted "except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires." PHIL. POWER AND DEVELOPMENT CO. v. COMMISSIONER CTA Case No. 1152, October 31,1965 The Court of Tax Appeals held that the rule on non-impairment is not disregarded with the impo-

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sition of a higher tax rate on an existing franchise, it appearing that said franchise was granted with the express understanding and upon the condition that it shall be subject to amendment, alteration and repeal. 6.

NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX No person shall be imprisoned for non-payment of a debt or poll tax. (Art. Ill, Section 20, Constitution) While a person may not be imprisoned for nonpayment of a cedula or poll tax (People v. Linsangan, 62 Phil. 646), he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides.

7.

BILLS TO ORIGINATE FROM THE HOUSE OF REPRESENTATIVES All appropriation, revenue or tariff bills, bills authorizing the increase of the public debt, bills of local application and private bills, shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. (Art. Ill, Section 24, Constitution) Both Houses of Congress may initiate bills, but only the Lower House may propose tax measures. CASE FOR STUDY ARTURO M. TOLENTINO v. SECRETARY OF FINANCE, et al. 235 SCRA 630" Petitioners assail the constitutionality of R.A. 7716 imposing a value-added tax (VAT) on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to

"Question No. 2 , 1 9 9 7 Bar Examination.

TAX PRINCIPLES AND REMEDIES

10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. The contention of petitioners is that in enacting R.A. 7716, or the Expanded Valued-Added Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated in the House of Representatives, it was not passed by the Senate but was simply consolidated with the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the President signed into law. In support of this theory, petitioners cited: Art. VI, Sec. 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. Id., Sec. 26(2): No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal. It appears that on various dates between July 22, 1992 and August 31, 1993, several bills were introduced in the House of Representatives seeking to amend certain provisions of the National Internal

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Revenue Code relative to the value-added tax or VAT. These bills were referred to the House Ways and Means Committee which recommended for approval a substitute measure, H. No. 11197, entitled: AN ACT RESTRUCTURING THE VALUEADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF TITLE IV, 112,115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED. The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on November 17, 1993, it was approved by the House of Representatives after third and final reading. It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on Ways and Means. On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No. 1630, entitled: AN ACT RESTRUCTURING THE VALUEADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES. It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into consideration PS. Res. No. 734 and H.B. No. 11197."

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On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates on the bill and approved it on second reading on March 24, 1994. On the same day, it approved the bill on third reading by the affirmative votes of 13 of its members, with one abstention. House Bill No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee which, after meeting four times (April 13, 19, 21 and 25,1994), recommended that "House Bill No. 11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as reconciled and approved by the conferees." The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was thereafter approved by the House of Representatives on April 27, 1994 and by the Senate on May 2, 1994. The enrolled bill was then presented to the President of the Philippines who, on May 5, 1994, signed it. It became Republic Act No. 7716. Petitioners' contention is that R.A. 7716 did not "originate exclusively" in the House of Representatives as required by Art. VI, Sec. 24 of the Constitution, because it is in fact the result of the consolidation of two distinct bills, H. No. 11197 and S. No. 1630. HELD: This argument will not bear analysis. To begin with, it is not the law — but the revenue bill — which is required by the Constitution to "originate exclusively" in the House of Representatives. A bill originating in

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the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. To insist that a revenue statute — and not only the bill which initiated the legislative process culminating in the enactment of the law — must substantially be the same as the House bill would be to deny the Senate's power not only to "concur with amendments" but also to "propose amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate. Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House Bill. 8.

VETO POWER OF THE PRESIDENT The President shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill but the veto shall not affect the item or items to which he does not object. (Article VI, Section 27[2], Constitution) The item or items vetoed shall be returned to the Lower House of Congress together with the objections of the President. If after a reconsideration 2 / 3 of all the members of such House shall agree to pass the bill, it

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shall be sent, together with the objection, to the other House by which it shall likewise be reconsidered, and if approved by 2 / 3 of all the Members of that House, it shall become a law. 9.

PRESIDENT'S POWER TO TAX The Congress may, by law, authorize the President to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues and other duties or imposts within the framework of the national development program of the Government. (Article VIII, Section 2812], Constitution) The President is vested with authority by law to increase tariff rates, even for revenue purposes only. Article VI, Section 8(2) of the Constitution expressly grants permission to Congress to authorize the President "to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates xxx and other duties and imposts xxx." Custom duties which are assessed at the prescribed tariff rates are very much like taxes which are imposed for both revenue raising and regulatory purpose. (Garcia v. Executive Secretary, 211 SCRA 219) However, it bears stressing that the statutory power of the President to fix tariff rates, import or export quotas, and tonnage or wharfage dues must be subject to limitations and restrictions indicated within the law itself. Furthermore, such delegation must be in accord with the framework of the national development program of the government. 67

The term "flexible tariff clause" refers to the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the •'Question No. 18, 2000 Bar Examination.

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delegation of the taxing power to the President under the Constitution. TAXATION AND THE FREEDOM OF THE PRESS No law shall be passed abridging the freedom of speech, of expression, or of the press... (Article III, Section 4, Constitution) CASE FOR STUDY TOLENTINO, et al. v. SECRETARY OF FINANCE 235 SCRA 630 The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of newspaper publishers established for the improvement of journalism in the Philippines. On the other hand, petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is a nonprofit organization engaged in the printing and distribution of bibles and other religious articles. Both petitioners claim violations of their rights under Sections 4 and 5 of the Bill of Rights as a result of the enactment of the VAT Law. The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press under Section 103(f) of the NIRC. Although the exemption was subsequently restored by administrative regulation with respect to the circulation income of newspapers, the PPI presses its claim because of the possibility that the exemption may still be removed by mere revocation of the regulation of the Secretary of Finance. On the other hand, the PBS goes so far as to question the Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance has no power to grant tax exemption because this is vested in Congress and requires for its exercise the vote of a majority of all its members, and (2) the Secretary's duty is to execute the law.

Chapter I GENERAL PRINCIPLES I.

TAXATION DEFINED Taxation is a mode of raising revenue for public purposes. 1

Taxes, on the other hand, are enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of the government and for all its public needs. ("Cooky's definition," 1 Cooley 62) They are not arbitrary exactions but contributions levied by authority of law, and by some rule of proportion which is intended to insure uniformity of contribution and a just apportionment of the burdens of government. 2

Thus: a.

Taxes are enforced contributions. Taxes are obligations created by law. (Vera v. Fernandez, L-31364, March 30, 1979) Taxes are never founded on contract or agreement, and are not dependent for their validity upon the individual consent of the persons taxed. (1 Cooley 68)

b.

Taxes are proportional in character, since taxes are based on one's ability to pay.

c.

Taxes are levied by authority of the law.

'1 Cooley Taxation, 4th Ed., p. 72. l Cooley 64; Question No. 1(A), 2004 Bar Examination.

J

1

TAX PRINCIPLES AND REMEDIES

The power to impose taxes is a legislative power; it cannot be imposed by the executive department nor by the courts. 1

d.

Taxes are for the support of the government and all its public needs.

BASIS OF TAXATION A. Taxation and the Lifeblood Doctrine

4

Taxation has been defined as the power by which the sovereign raises revenue to defray the necessary expenses of government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy the benefits and must therefore bear its burdens. (51 Am. Jur. 34) The power of taxation is essential because the government can neither exist nor endure without taxation. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. (Bull v. United States, 295 U.S. 247,15 APTR 1069, 1073) The collection of taxes must be made without hindrance if the state is to maintain its orderly existence. Government projects and infrastructures are made possible through the availability of funds provided through taxation. The government's ability to serve and protect the people depends largely upon taxes. Taxes are what we pay for a civilized society. 5

CASES FOR STUDY CIR v. BPI 521 SCRA 373,387-388 x x x (T)he public will suffer if taxpayers will not be held liable for the proper taxes assessed against them: "Taxes are the lifeblood of the government, for without '1 Cooley 69. •Question No. 2,1991 Bar Examination. HZommissioner v. Algue, Inc., 158 SCRA 9.

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3

taxes, the government can neither exist nor endure." A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and wellbeing of the people. CIR v. PINEDA 21 SCRA105* The Government resorted to the administrative remedy of enforcement of tax lien in trying to collect deficiency income tax of the estate of Atanasio Pineda. Manuel B. Pineda, the eldest son of the deceased, who was made to pay the full amount of the taxes assessed questioned the assessment on the ground that as an heir he is liable for unpaid income tax due the estate only up to the extent of and in proportion to any share he received. HELD: The Government can require Manuel B. Pineda to pay the full amount of the taxes assessed. Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir, he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount of the property in his possession. The reason is that the

'Question No. 4 , 1 9 9 9 Bar Examination.

TAX PRINCIPLES AND REMEDIES

4

Government has a lien on the P2,500 received by him from the estate as his share in the inheritance for unpaid taxes for which the estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code (now Section 219, NIRC). By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500 to satisfy the income tax assessment in the amount of P760.28. XXX

The second remedy (tax lien) is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above-quoted, because TAXES ARE THE LIFEBLOOD OF THE GOVERNMENT AND THEIR PROMPT AND CERTAIN AVAILABILITY IS AN IMPERIOUS NEED. MISAEL P. VERA, et al. v. HON. JOSE F. FERNANDEZ, et al. 89 SCRA 199 The Government of the Republic of the Philippines claimed deficiency income taxes against the Estate of the late Luis D. Tongoy. The Administrator argued that the claim was barred under Section 5, Rule 86 of the Rules of Court. Hence, the issue as to whether or not the Statute of Non-Claims — Sec. 5, Rule 86 of the New Rules of Court — barred the claim of the government for unpaid taxes, though it was filed within the period of limitation prescribed in Sections 331 and 332 of the NIRC. HELD: The Supreme Court ruled in the negative, citing the case of Pineda v. CFI ofTayabas which gave exception 7

7

5 2 Phil. 803.

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5

to the claim for taxes from being filed as other claims. The reason for the more liberal treatment of claims for taxes against a decedent's estate is because (T)axes are the lifeblood of the Government and their prompt and certain availability are an imperious need."Upon taxation depends the Government's ability to serve the people for whose benefit taxes are collected." (Commissioner of Internal Revenue v. Pineda, G.R. No. L-22734, September 15,1967, 21 SCRA 105) Furthermore, as held in CIR v. Pineda, supra, payment of income tax shall be a lien in favor of the Government of the Philippines from the time the assessment was made by the Commissioner of Internal Revenue until paid with interests, penalties, etc. By virtue of such lien, the SC held that the property of the estate already in the hands of an heir or transferee may be subject to the payment of the tax due the estate. CIR v. CTA" 234 SCRA 348 A petition for review of the decision of the BIR denying the tax refund of Citytrust was filed with the CTA. It was submitted for decision based solely on the pleadings and evidence submitted by Citytrust. CIR could not present any evidence by reason of the repeated failure of the Tax Credit/Refund Division of the BIR to transmit the records of the case, as well as the investigation report thereon, to the Solicitor General. The CTA rendered its decision ordering BIR to grant a refund to Citytrust in the amount of PI3,314,506.14. The CA affirmed the judgment of the CTA. HELD: It is a long and firmly settled rule of law that the Government is not bound by the errors committed

"Question 1(d), 2005 Bar Examination.

6

TAX PRINCIPLES AND REMEDIES

by its agents. In the performance of its government functions, the State cannot be estopped by the neglect of its agents and officers. Although the Government may generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public duties as exemplified in this case will not and should not produce that effect. Nowhere is the aforestated rule more true than in the field of taxation. It is axiomatic that the Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopardize the Government's financial position, especially in the case at bar where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy. Judgment of CA is SET ASIDE and the case is REMANDED to the CTA for further proceedings and appropriate action. COMMISSIONER v. ALGUE, INC. 158 SCRA 9 The Commissioner of Internal Revenue contends that the claimed deduction was properly disallowed because it was not an ordinary, reasonable or necessary business expense. The Court of Tax Appeals, however, agreed with Algue, Inc. in holding that the said amount had been legitimately paid by Algue, Inc. as promotional fees for their work in the formation of Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Corporation.

CHAPTER I G E N E R A L PRINCIPLES

7

HELD: Ruling in favor of Algue, Inc., the Supreme Court held that Algue, Inc. has proved that the payment of fees was necessary and reasonable in the light of efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. Taxes are the lif eblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is, therefore, necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (See also 'The Doctrine of Symbiotic Relationship') YMCA v. CIR' 298 SCRA 83 YMCA, a welfare, educational and charitable non-profit corporation, leased its facilities to small shop owners, restaurants and canteen operators, and collected parking fees. YMCA contends that its rental income is not subject to tax. The contention is not tenable. Since taxes are the lif eblood of the nation, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. The claimed exemption must expressly be granted in a statute stated in a language too clear to be mistaken.

'Question No. 6(A), 2002 Bar Examination.

TAX PRINCIPLES AND REMEDIES

DAVAO GULF LUMBER CORP. v. CIR 293 SCRA 77 Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. FERDINAND R. MARCOS II v. CA, et al 273 SCRA 47" Ferdinand R. Marcos II assailed the decision of the Court of Appeals declaring the deficiency income tax assessments and estate tax assessments upon the estate and properties of his late father final despite the pendency of the probate proceedings of the will of the late President. On the other hand, the BIR argued that the State's authority to collect internal revenue taxes is paramount. HELD: The approval of the court, sitting in probate or as a settlement tribunal over the deceased's estate, is not a mandatory requirement in the collection of estate taxes. The enforcement of tax laws and the collection of taxes are of paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is, therefore, necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real "•Question No. 1(c), 2005 Bar Examination; Question No. 9(A), 2004 Bar Examina-

CHAPTER I G E N E R A L PRINCIPLES

purpose of taxation, which is the promotion of common good, may be achieved. JOSE REYES v. PEDRO ALMANZOR 196 SCRA 322 Verily, taxes are the lif eblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (CIR v. Algue, Inc., 158 SCRA 9 [1988]) Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (R.A. No. 6359 and P.D. No. 20) under the same principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties. PHILIPPINE BANK OF COMMUNICATIONS v. CIR 302 SCRA 250 Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible.

10

TAX PRINCIPLES AND REMEDIES

From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters. PHILIPPINE GUARANTY CO., INC. v. CIR 13 SCRA 775 The defense of reliance in good faith on rulings of the CIR requiring no withholding of the tax due on reinsurance premiums may free the taxpayer from the payment of surcharge or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents. PHILEX MINING CORPORATION v. CIR 294 SCRA 687 Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. NORTH CAMARINES LUMBER CO. v. CIR 109 Phil. 511 As the petitioner had consumed thirty-three days, its appeal was clearly filed out of time. It is argued, however, that in computing the 30-day period

CHAPTER I G E N E R A L PRINCIPLES

11

fixed in Section 11 of Republic Act No. 1125, the letter of the respondent Collector dated January 30, 1956, denying the second request for reconsideration, should be considered as the final decision contemplated in Section 7, and not the letter of demand dated August 30,1955. This contention is untenable. We cannot countenance the theory that would make the commencement of the statutory 30-day period solely dependent on the will of the taxpayer and place the latter in a position to put off indefinitely and at his convenience the finality of the tax assessment. Such an absurd procedure would be detrimental to the interest of the Government, for 'taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need.' (Bull v. U.S. 295, U.S. 247) B.

Theories on Taxation Taxation, as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner, is a power predicated upon necessity (Necessity Theory). It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State's territory and facilities and protection which a government is supposed to provide. 11

The Benefits-Protection Theory, on the other hand, bases the power of the State to demand and receive taxes on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society. Thus, the taxpayer cannot question the validity of the tax law " 1 3 S C R A 775.

TAX PRINCIPLES AND REMEDIES

12

on the ground that payment of such tax will render him impoverished, or lessen his financial or social standing, because the obligation to pay taxes is involuntary and compulsory, in exchange for the protection and benefits one receives from the government. This theory spawned the DOCTRINE OF SYMBIOTIC RELATIONSHIP, a term culled from the ruling of the Supreme Court in the celebrated case of Commissioner of Internal Revenue v. Algue, Inc., supra," which stressed that: 'Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the burden of running the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values." C.

Liabilities Involved TAXES ARE PERSONAL TO THE TAXPAYER. A corporation's tax delinquency cannot, for instance, be enforced against its stockholders because not only would this run counter to the principle that taxes are personal, but it would also not be in accord with the rule that a corporation is vested by law with a personality that is separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 13

Nevertheless, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears

,3

Sunio v. NLRC, L-57767, January 31, 1984.

13

CHAPTER I G E N E R A L PRINCIPLES

that the corporate assets have passed into their hands. (Doctrine of Piercing the Corporate Veil)'* A tax creates CIVIL LIABILITY on the part of the delinquent taxpayer although the non-payment thereof (due to failure or refusal to pay) creates a CRIMINAL LIABILITY which could be the subject of criminal prosecution under existing laws. To sum, in taxation, it is one's failure to comply with the civil liability to pay taxes which gives rise to the criminal liability. 15

III.

NATURE OF THE TAXING POWER A. Taxation as an Inherent Attribute of Sovereignty" The power of taxation is an incident of sovereignty as it is inherent in the State, belonging as a matter of right to every independent government. It does not need of constitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power. No attribute of sovereignty is more pervading and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it. 17

Taxation being an attribute of sovereignty, its relinquishment is never presumed. 18

It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty.

"Tan v. Commissioner, L-15778, April 23, 1962. " R e p u b l i c v. Patanao, L-22356, July 2 1 , 1 9 6 7 . "Question No. 1(2), 1996 Bar Examination. "Churchill and Tail v. Concepcion, 34 Phil. 9 6 9 . " L u z o n Stevedoring Co. v. CTA, L-30232, July 2 9 , 1 9 8 8 .

TAX PRINCIPLES AND REMEDIES

belonging as a matter of right to every independent State or government. No sovereign State can continue to exist without the means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax." B.

Taxation as Legislative in Character The power to tax is inherent in the State, and the State is free to select the object of taxation, such power being exclusively vested in the legislature, EXCEPT where the Constitution provides otherwise. (Art. VI, Sec. 28[2]; Art. X, Sec. 5) This is based upon the principle that "taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must remain and be exercised." 20

ASPECTS, PROCESSES, PHASES OF TAXATION" A. Levy/Imposition The term "levy" or "imposition" refers to the enactment of tax laws or statutes. In the case of Tolentino, et al. v. Secretary of Finance, the Supreme Court emphasized that:

12

Courts have no power to inquire into or interfere in the wisdom, objective, motive or expediency in the passage of a tax law, as this is purely legislative in character. To do so would be tantamount to a violation of both the letter and the spirit of the organic laws by which the Philippine Government was brought into existence to invade a coordinate and independent department of the Government, and to interfere with the legitimate powers and functions of the Legislature. "51 Am. Jur. 42; Question No. 1, 2003 Bar Examination. "1 Cooley Taxation, 3rd Ed., p. 43. "Question No. 1(1), 2006 Bar Examination. " 2 3 5 SCRA 630.

15

CHAPTER I G E N E R A L PRINCIPLES

Scope of the legislative power to tax (1)

Discretion as to purposes for which taxes shall be levied The sole arbiter of the purposes for which taxes shall be levied is the legislature, provided the purposes are public. The courts may review the levy of the tax to determine whether the purpose is a public one but once that is determined, the courts can make no other inquiry as to the purpose of the tax, as it affects the power to impose it. 23

CASES FOR STUDY WALTER LUTZ v. J. ANTONIO ARANETA 98 Phil. 148 Plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C.A. 567, which provided for an increase of the existing tax on the manufacture of sugar, alleging such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. As the protection and promotion of the sugar industry is a matter of public concern, the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power.

u

l Cooley Taxation, 4th Ed., 171.

TAX PRINCIPLES AND REMEDIES

16

(2)

Discretion as to subjects of taxation The legislature has unlimited scope as to the persons, property or occupation to be taxed, where there are no constitutional restrictions, provided the property is within the territorial jurisdiction of the taxing state. 24

In the case of Walter Lutz v. J. Antonio Araneta, supra, ' plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C. A. No. 567 which provided for an increase of the existing tax on the manufacture of sugar. The Supreme Court ruled that: "It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.'" 1

BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner questions the constitutionality of the statute, claiming that R.A. No. 1635, otherwise known as the Anti-TB Stamp Law, is violative of the equal protection clause of the Constitution because it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even among postal patrons the statute discriminatorily grants exemptions. HELD: It is settled that the legislature has the inherent power to select the subject of taxation and to grant exemptions. The classification of mail users is based "1 Cooley Taxation, 4th Ed., 176-178. " 9 8 Phil. 148.

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17

on the ability to pay, the enjoyment of a privilege and on administrative convenience. Tax exemptions have never been thought of as raising issues under the equal protection clause. SILVESTRE PUNSALAN v. THE MUN. BOARD OF THE CITY OF MANILA 95 Phil. 46 Plaintiffs sought the annulment of Ordinance No. 3398 of the City of Manila which imposes a municipal occupation tax on persons exercising various professions in the city and penalizes non-payment of the tax, enacted pursuant to Sec. 18(1) of the Revised Charter of the City of Manila which empowers the Mun. Board of said city to impose a municipal occupation tax, not to exceed P50 per annum, on persons engaged in various professions. The burden of plaintiffs' complaint is not that the professions to which they respectively belong have been singled out for the imposition of this municipal occupation tax; and in any event, the Legislature may, in its discretion, select what occupations shall be taxed, and in the exercise of that discretion it may tax all. Or it may select for taxation certain classes and leave the others untaxed. (Cooley on Taxation, Vol. 4,4th Ed., pp. 3393-3395) Plaintiffs' complaint is that while the law has authorized the City of Manila to impose the said tax, it has withheld that authority from other chartered cities, not to mention municipalities. HELD: It is not for the courts to judge what particular cities or municipalities should be empowered to impose occupation taxes in addition to those imposed by the National Government. That matter is peculiarly within the domain of the political departments and the courts would do well not to encroach upon it.

TAX PRINCIPLES AND REMEDIES

18

(3)

Discretion as to amount or rate of tax The legislature has the right to finally determine the amount or rate of a tax, in the absence of constitutional prohibitions. It may levy a tax of any amount it sees fit. Not only is the power to tax unlimited in its reach as to subjects, but in its very nature, it acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus becoming in its exercise a power to destroy.

(4)

Discretion as to the manner, means and agencies of collection of taxes The discretion of the legislature in imposing taxes extends to the mode, method or kind of tax. As to the kind of taxes which may be imposed, the legislature has power to levy one or more of the following: Property tax, excise, license or occupation tax, a poll or capitation tax, franchise tax, income tax, inheritance tax, stock transfer tax, etc. 16

Is the Power to Tax the Power to Destroy?

Justice Malcolm believed that the power to tax "is an attribute of sovereignty. It is the strongest of all the powers of government." This led Chief Justice Marshall of the U.S. Supreme Court, in the celebrated case of McCulloch v. Maryland, to declare: "The power to tax involves the power to destroy." This might well be construed to mean that the power to tax includes the power to regulate even to the extent of prohibition or destruction, (1 Cooley on Taxation, 4th Ed., p. 67) since the inherent power to tax vested in the legislature includes the power to determine who to tax, what to tax and how much tax is to be imposed. " 27

2

"•MSI Bar Examination; Question No. 1, 2000 Bar Examination. U.S. 4 Wheat, 316, 4 I/Ed. 579. ^Tolentino, et al. v. Secretary of Finance, 235 SCRA 630. 27

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19

However, instead of being regarded as a blanket authorization of the unrestrained use of the taxing power for any and all purposes, it is more reasonable to say that the maxim "the power to tax is the power to destroy" is to describe not the purposes for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue. (1 Cooley, 179-181) The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare, x x x But where the power to tax is used solely for the purpose of raising revenues, the modem view is that it cannot be allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully attacked as an inordinate and unconstitutional exercise of the discretion that is usually vested exclusively in the legislature in ascertaining the amount of the tax. (Cruz, Constitutional Law, 2000 Ed., p. 87) It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise. Taxpayer, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate business. As aptly held in Roxas, et al. v. CTA, et ai: "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the propriety rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the golden egg.'" Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counter-

20

TAX PRINCIPLES AND REMEDIES

productive and ultimately subversive of the nation's thrust towards a better economy which will ultimately benefit the majority of our people. (Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, 600 SCRA 413, 442-444, [2009]) Judicial Review of Taxation While taxation is said to be the power to destroy, it is by no means unlimited. When a legislative body having the power to tax a certain subject matter actually imposes such a burdensome tax as effectually to destroy the right to perform the act or to use the property subject to the tax, the validity of the enactment depends upon the nature and character of the right destroyed. If so great an abuse is manifested as to destroy natural and fundamental rights which no free government could consistently violate, it is the duty of the judiciary to hold such an act unconstitutional. (Ibid.) Hence, the modification: "The power to tax is not the power to destroy while the Supreme Court sits." So it is in the Philippines. The Constitution as the fundamental law overrides any legislative or executive act that runs counter to it. In any case, therefore, where it can be demonstrated that the challenged statutory provision fails to abide by its command, then the court must so declare and adjudge it null. " 2

In the exercise of such a delicate power, however, the admonition of Cooley on inferior tribunals is wellworth remembering. Thus: "It must be evident to any one that the power to declare a legislative enactment void is one which the judge, conscious of the fallibility of the human judgment, will shrink from exercising in any case where he can conscientiously and with due regard to . duty and official oath decline the

"Antero Sison, Jr. v. Ancheta, et al., 130 SCRA 654.

21

CHAPTER I G E N E R A L PRINCIPLES

responsibility." (Cooley on Constitutional Limitations, Vol. 1,8th Ed., 332,11927]) While it remains undoubted that such a power to pass on the validity of the ordinance alleged to infringe certain constitutional rights of a litigant exists, still it should be exercised with due care and circumspection, considering not only the presumption of validity but also the relatively modest rank of a city court in the judicial hierarchy. 30

B.

Assessment and Collection The act of assessing and collecting taxes is administrative in character, and therefore can be delegated. Nonetheless, the legislative body has laid down certain rules governing the assessment and collection of taxes in order to prevent its abuse. Firs*, the tax law must designate which agency will collect the taxes. Usually, the Bureau of Internal Revenue and/or the Secretary of Finance wield this power. Second, the circulars or regulations issued by the Secretary of Finance or the Commissioner of the Internal Revenue must be in accordance with the tax measures imposed by Congress. Note that the power of taxation should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen mat lays the golden egg." (Antonio Roxas, et al. v. Court of Tax Appeals, L-25043, April 26, 1968, 23 SCRA 276)

C.

Payment This signifies an act of compliance by the taxpayer.

" C i t y of Baguio v. De Leon, 25 S C R A 938.

TAX PRINCIPLES AND REMEDIES

PURPOSES OF TAXATION A.

The primary purpose of taxation is to raise revenues. "For the support of government and for all public needs," is according to Judge Cooley, the purpose of taxes." And so it has been widely believed that the primary purpose of taxation is to raise funds or property to enable the State to promote the general welfare and protection of its citizens. (52 Am. Jur. 34) This was emphasized anew in the renowned case of Hon. Ramon Bagatsing, et al. v. Hon. Pedro Ramirez,* where the tax ordinance enacted by the Municipal Board of Manila was assailed as not being a "tax ordinance," because the imposition of rentals, permit fees, tolls and other fees is not strictly a taxing power but a revenue raising function. The Supreme Court observed that the pretense bore its own marks of fallacy. Precisely, the raising of revenues is the principal object of taxation.

B.

Secondary or non-revenue purposes" But, must an imposition, in order to be a tax, be levied solely for the purposes of revenue? The answer is a resounding NO. Other than to answer the ever-present need for revenues, taxation also seeks to: (1) reduce social inequality, (2) encourage the growth of local industries, (3) protect our local industries against unfair competition, (4) implement the police power of the state (regulatory purpose). (1) Reduction of Social Inequality

34

Our present tax system has adopted the progressive system of taxation, i.e., the tax rate increases as the tax base increases. This system 3,

1 Cooley 66. " 7 4 SCRA 306. "Question No. 1,1991 Bar Examination. 1 9 7 6 Bar Examination. M

23

CHAPTER I G E N E R A L PRINCIPLES

aims at reducing the inequality in the distribution of wealth by preventing its undue concentration in the hands of a few individuals. To illustrate: An estate tax is imposed upon the property left by the decedent. The proceeds of that tax will be used to finance the projects of the government such as building low-cost houses for the less privileged. (2) Encourage the Growth of Local Industries It is a settled rule that the power to tax carries with it the power to grant tax exemptions. Tax exemptions and tax reliefs serve as incentives to encourage investment in our local industry and thereby promote economic growth. (3) Protect our Competition

Local

Industry

Against

Unfair

The Tariff and Customs Code allows the imposition of certain taxes (countervailing and dumping duties) upon imported goods or articles to further protect our local industry. R.A. 8752 (Anti-Dumping Act) imposes stricter conditions. (4) As an Implement of the Police Power of the State (Regulatory Measure) The power of taxation may be used as an implement of the police rJbwer of the State through the imposition of taxes with the end in view of regulating a particular activity. In the case of Tio v. Videogram Regulatory Board* the Supreme Court maintained the validity of the challenged statute (P.D. 1987 entitled "An Act Creating the Videogram Regulatory Board"), seeing the need to impose taxes upon the video industry as a regulatory measure, " 1 5 1 S C R A 208.

24

TAX PRINCIPLES AND REMEDIES

considering "the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government due to the drop in theatrical attendance." Likewise, in the case of Manila Race Horse Trainers Association v. De La Fuente* the Court upheld the validity of an ordinance taxing boarding stables of race horses because "(R)ace horses are devoted to gambling, if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision." 37

Still, in the celebrated case of Lutz v. Araneta which challenges the constitutionality of Sees. 2 and 3, C.A. 567, providing for an increase in the existing tax on the manufacture of sugar in issue, it was held that: the tax is levied with a regulatory purpose — to provide means for the rehabilitation and stabilization of the threatened sugar industry. As the protection and promotion of the sugar industry is a matter of public concern, the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued

" 8 8 Phil. 60. "Supra.

CHAPTER I G E N E R A L PRINCIPLES

25

or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power. But it must be stressed that the power of taxation, sometimes also called the "power to destroy," should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." (Antonio Roxas, et al. v. Court of Tax Appeals, L-25043, April 26,1968, 23 SCRA 276) May the power of taxation be used as an implement of the power of eminent domain? YES. The Supreme Court in the case of CIR v. Central Luzon Drug Corp. [456 SCRA 414, 445] held: Tax measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose. In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. While it is declared commitment under Section 1 of R.A. No. 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [CJonstitution [is] not intended to take away rights from a person and give them to another who is not entitled thereto. For this reason, a just compensation for income that is taken away from respondent (Central Luzon Drug Corp.) becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter the fact."

TAX PRINCIPLES AND REMEDIES

. EXTENT OF THE TAXING POWER* The power of taxation reaches to every trade or occupation; to every object of industry, use, enjoyment; to every species of possession, and it imposes a burden which in case of failure to discharge the same may be followed by seizure, confiscation or forfeiture of the property. Taxation is said to be — —

COMPREHENSIVE, as it covers persons, businesses, activities, professions, rights and privileges.

—

UNLIMITED.

The taxing power's reign is illustrated in the case of Tio v. Videogram Regulatory Board, where the Supreme Court upheld the constitutionality of a law, ruling that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. 39

—

PLENARY, as it is complete. Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes. (This shall be discussed in a separate chapter on Remedies.)

—

SUPREME.

Taxation, although referred to as the strongest of all the powers of the government, cannot be interpreted to mean that it is superior to the other inherent powers of the government. It is supreme insofar as the selection of the subject of taxation is concerned. 40

"Question 1(a), 2005 Bar Examination; Question No. 1, 2000 Bar Examination. "Supra. "Supra.

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27

VII. PRINCIPLES OF A SOUND TAX SYSTEM" 1.

Fiscal Adequacy Sources of revenues must be adequate to meet government expenditures (Chavez v. Ongpin, 186 SCRA 331), and other public needs. This is in consonance with the doctrine that taxes are the lifeblood of the government.

2.

Theoretical Justice A sound tax system must take into consideration the taxpayers' ability to pay. Our laws mandate that taxes must be reasonable, just, fair, conscionable. Under Art. VI, Section 28(1) of the Constitution, the rule of taxation must be uniform and equitable. The State must evolve a progressive system of taxation. Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. 42

3.

Administrative Feasibility Tax laws must be capable of effective and efficient enforcement. They must not obstruct business growth and economic development. In Kapatiran Ng Mga Naglilingkod sa Pamahalaan v. Tan,° the Supreme Court, in upholding the validity of the VAT law, held that the law "is principally aimed to rationalize the system of taxes on goods and services; simplify tax administration, and make the system more equitable to enable the country to attain economic recovery." The principle requires that each tax should be clear and plain to the taxpayers, capable of enforcement by

" 1 9 7 3 Bar Examination. ^Fernando, The Constitution of the Philippines, 2nd Ed., p. 2 2 1 .