TAXREV - Transcribed Lecture - Justice Dimaapao (First Half)

TAXATION LAW REVIEW NOTES Justice Japar B. Dimaampao SBCA-SOL 4S 2017-2018

House Rules: 1. Do not come to class unprepared. 2. Class recitations will include probable bar questions and recent jurisprudence. 3. Do not pull a sleep in class, or else, you will be asked to step out of the room. 4. Do not talk to your seatmate or classmate. Listen to your classmate’s recitation  instead. 5. Observe proper court decorum in class as if you are already a lawyer. 6. Raise your hand if you want to go to the r estroom. 7. Answer the questions briefly, concisely, and with legal basis. 8. I am only here to guide you, not to terrorize you. January 6, 2018 GENERAL PRINCIPLES

Recitation: 1. These are basic questions; in fact, these are the first three questions in the 2016 bar examinations. So, memorize these. Explain briefly the lifeblood doctrine, necessity theory and symbiotic theory? ssi one er of I nter nter nal nal The lifeblood doctrine is one that is enunciated by the Supreme Court in C ommi ssion R evenue venue v. v. P i neda, neda, as follows: “Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.” need.” This means that, without taxes, the State can neither exist nor endure. Taxes should be collected without unnecessary hindrance. uar anty C o., I nc. v. v. The necessity theory, as pronounced by the Supreme Court in P hili ppi ne G uar C ommi ssion ssi one er of I nter nter nal nal R evenue venue, states that taxation is a power predicated upon necessity. 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 State’s territory and facilities and protection which a government is supposed to provide. The doctrine of symbiotic relationship is a term culled from the ruling of the Supreme Court in C ommi ssion ssi one er of I nter nter nal nal Re R evenue venue v Algue Alg ue,, I nc. , which stressed that: “Taxes are what we pay for a 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 hardhardearned 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.” 2. Let us have cases on lifeblood theory. I citied 17. With all humility, 8 or 9 of these cases came out in the previous bar. Now, holistic approach --- interplay of lifeblood theory and tax remedies. This happened in the last bar exams. In enunciating certain rule, the court cited lifeblood theory and you must mark this with Sec. 112 of NIRC. Sec. 112 was asked in the bar for three consecutive bar exams. It will come out again. Now you must know how the court mentioned lifeblood theory here. Sec. 112 is about Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 1 of 54

tax remedy on value-added tax. Sec. 112 provides for remedies on tax refund or tax credit involving VAT. There are three prescriptive periods there: the 2-year period, the 90-day period under the TRAIN Law (no longer 120 days), and the 30-day period. Explain how they are applied. The 2-year period must be observed in filing tax refund with the BIR, reckoned from the close of taxable year. The 90-day period refers to the period within which the BIR Commissioner must render decision from the submission of the claim. The 30-day period must be observed in appealing the decision of the BIR Commissioner to the Court of Tax Appeals from the receipt of the adverse decision. What does lifeblood doctrine dictate regarding the application of these rules in Section 112? What is the ruling in CIR v. San Roque Power Corporation, 690 SCRA 336 ?

The lifeblood doctrine dictates that the rules in Section 112 must be applied strictly. Tax refunds are in the nature of tax exemptions which must be strictly construed against the taxpayers and liberally in  fav  favor of of the the gov governme rnment. nt. This is so becaus cause e taxes xes are the lifeb lifebloo lood of the the nat nation. ion. I can easily guide you if you really studied. 3. Camp John Hay Development Corporation v. CBAA, 706 SCRA 547, also appeared in the bar exam. It is about the interplay of the lifeblood theory and another tax remedy - one of the rules under real  property taxation. taxation. Mentioned Mentioned therein therein is the provision of Sec. 252 of of R.A. No. 7160, 7160, which is denominate denominated d as payment under protest. When must the payment under protest be lodged? It must be lodged within 30 days from payment of the tax. Explain the rule of payment payment under protest.

Payment under protest means payment of real property tax before filing a protest. What does the lifeblood doctrine dictate or require regarding the application of Sec. 252? Before you can  protest, you you must first pay pay the real property tax. tax. What does does lifeblood doctrine require regarding the the rule of  payment under under protest? protest?

The lifeblood doctrine requires strict compliance of this rule. Payment under protest is thus consistent with the lifeblood doctrine, and as such their collection cannot be curtailed by injunction or any like acti acti on; othe otherr wise, the stat state e or or , i n this thi s case, case, the local local gov g ove er nme nment unit, uni t, shall be cr cr i ppled ppled i n dispe dispensi nsing ng the need needed ed servi service cess to the peo people, ple, and its its machi machiner neryy gr g r avely avely disab disabled. led. 4. CIR v. Pineda, 21 SCRA 105, came out in the difficult bar exam in 1999 where only 5% passed taxation. What is the ruling of the Court in this case? This case enunciates that the Bureau of Internal Revenue has the necessary discretion to avail itself of the most expeditious way to collect taxes because taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. Explain such ruling.

T he ruli ruling ng means that that no one one should interfe interf er e wi wi th the reme remedy ava avaii led of by the B I R to collec collectt tax taxes because it has the discretion to do so. What was the administrative remedy resorted to by the BIR in that case, which may in effect bring about speedy collection of taxes?

E nfo nf or cem cement of of tax tax lie li en was was re r esorted sorted to to by by the B I R . Why is enforcement of a tax lien the most expeditious way to collect taxes? Hint: What is the difference  between administrat administrative ive and judicial remedies? remedies? Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 2 of 54

I t is is the most most ex expediti pediti ous way way to collect taxes taxes because because i t is is an adm admii nistr ni strative ative rem remed edyy which which may may requir requi r e no judici judi cia al proc pr oce eedings. ding s. 5.  Davao Gulf Lumber Corporation Corporation v. CIR, 293 SCRA 77  came   came out in the bar exam in 1998. Why are tax exemptions strictly construed against the taxpayer and liberally construed in favor of the government? Hint: relinquish power, lose revenue, odious to the law. Tax exemptions are strictly construed against the taxpayer and liberally construed in favor of the government because taxes are the lifeblood of the government. This is so because by the government’s relinquishment of its power to tax, it loses revenue. revenue . Thus, exemptions from taxation are highly disfavored, so much so that they may almost be said to be odious to the law. 6. This is yet to be asked in the Bar. What are the exceptions to the principle of  strictissimi  strictissimi juris? juris ? Read pp. 127-128. This may be asked in the form of enumeration, objective questions or application.  stri ctissim ctissimii juris juri s are: The exceptions to the principle of stri 1) when the law expressly provides for liberal liberal interpretation or construction of tax exemptions; exemptions; 2) when the grantee of tax exemption is a religious or charitable institution; 3) when the grantee of tax exemption is the government, its political subdivisions or  M aced ceda v. Maca Macaraig, raig, Jr., J r., 197 197 SCR SC R A 771); 771); instrumentalities ( Ma 4) when the taxpayer falls within the purview of exemption by clear legislative intent (CIR v.  Ar nold noldus us Ca Carpe rpent ntry ry Shop Shop, 159 159 SCR SC R A 199 199);  (J . Coole Cooley, y, 5) when the grantee is a municipal corporation with respect to its public property only  J.  pp  pp. 1414 1414-141 -1415 5); and 6) when the imposition is special taxes relating to special cases and affecting only special classes of persons. What is the principle of strictissimi of  strictissimi juris? juris?

This principle states that tax exemptions are strictly construed against the taxpayer and liberally constr constr ued i n fav f avor or of the gove over nme nment. What is a political subdivision?

P olitica oliti call subdi subdi visi ons ons includ i nclude e pr pr ovince vin ces, s, municip munici palities, li ties, cities, ci ties, and bar bar ang ang ays. ays. Is GSIS an instrumentality or GOCC?

G SI S is i s a g ove over nme nment i nstrumenta nstrumentalility. ty. Why does the principle of  strictissimi  strictissimi juris  juris  not apply to government, its political subdivisions or instrumentalities?

I t is i s because because i t will will r esult in i n the absur absurd d situa situatition on of of the gove over nme nment tak taki ng money oney fr f r om one pocket pocket and  put  puttting it in ano anotther. her. When do you apply this rule: exemption is the rule and taxation the exemption? The general rule is that taxation is the rule and exemption is the exemption.

I t shall apply apply when the gr antee antee is a muni munici cipa pall corpo cor porr ati ati on, and the proper proper ty is i s not held held in i n pri pr i vate vate ownershi ownershi p but but a publi publicc prop prope er ty. Mention the word “grantee” or “exemptee.” 7. This case is asked thrice already in the bar examinations. What is the jurisprudential ruling of the Court in Ferdinand in Ferdinand Marcos II v. Court of Appeals, Appeals, 273 SCRA 47 ? Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 3 of 54

The Court ruled therein that the approval of the court, c ourt, sitting in probate or as a settlement tribunal over the deceased’s estate, is not a mandatory requirement in in the collection of estate taxes. Explain such ruling.

The collection collection of taxes does does not necessi necessitat tate e the app apprr oval oval of the probate probate cour courtt because because tax taxes are the lifeblood of the government and should be collected without unnecessary hindrance. To require the appr approva ovall of the pr pr obate obate court cour t is i s a cause of of delay delay to the collection collection of taxes. taxes. Is there a provision that before the BIR can collect taxes there must be approval of the probate court?

N o. The T herr e i s none none.. Is there a revenue r evenue regulation regulation to that effect?

N o. The T herr e i s none none.. 8.  Philex Mining Corporation v. CIR, 294 SCRA 687, was also asked in the bar exam. It is about setoff of taxes. What is the ruling of the Court in that case? The Court did not allow the setoff of taxes. The lifeblood doctrine disfavors the setoff of taxes because it will reduce tax collection and there will be less revenue f or the government. May the taxes be the subject of setoff or compensation?

No. Taxes may not be the subject of setoff or compensation because: (1) taxes are not ordinary obli obliggati ati ons which may be be gover gover ned ned by by the Ci vil vi l C ode ode; ( 2) tax taxes are ar e not not based based on a contr contract act,, debt debt or or  judgm  judgme ent, nt, but on on lega legall im i mpositions sitions;; and (3) the gov governme rnment and and the taxpa xpayer yer are not not cred credito itors rs and debtor tor s of of each each othe otherr . (R ( R epubli ublicc v. v. Ma M ambulao ulao L umb umber C o., 4 SCR SC R A 622; F r ancia v. v. I A C , 162 SCR SC R A 753) Is there an exception to this rule?

Yes, that is the case of Domingo v. Garlitos, 8 SCRA 443 (1962). The peculiar circumstance therein is the enactm nactment of R .A . N o. 2700 appropri appropriat atii ng cer cer tai tai n amount amount of of money oney fo f or the taxpayer’s claim that made made such claim clai m due due and de demandab mandable le or liqui li quida date ted. d. Thus T hus,, the Cour C ourtt allowed allowed compe compensati nsation. on. The Francia case was also asked in the Bar. 9. YMCA v. CIR, 298 SCRA 83, also came out in the bar exams. YMCA claimed that as a non-stock, non-profit organization, it should be exempt from income taxation with regard to its profits on leasing its facilities to non-exempt entities. What is ruling in that landmark case? YMCA is taxable on its rental income. The exemption provided in Section 30(e) of the NIRC must be strictly construed against YMCA. Moreover, it is taxable because the Tax Code provides t hat the income of charitable organizations, such as YMCA, from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax. What does YMCA stand for? YMCA is short for Young Men’s Christian Association. Read Section 30(e) of the NIRC.

Non-stock corporation or association organized and operated exclusively for religious, charitable,  scien  scienttific, if ic, at athlet hletic, or or cult cultural ural purp purpo oses, ses, or or fo f or the the reha rehab bilit ili tation of ve veterans, rans, no no part of of its net net incom income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific  pe  person. rson. Read the last paragraph of Section 30 of the NIRC. That is the YMCA doctrine. Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 4 of 54

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and char char acte acterr of the for for egoing goi ng organiza org anizations tions fr f r om any any of thei thei r pr oper per ties, re r eal or or per sonal, sonal, or f r om any any of of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. 10. Explain the stages or aspects of taxation. These aspects do not refer to the fundamental principles of taxation. This is so basic. The stages of taxation are: (1) levy or imposition, which refers to the enactment of tax laws; (2) assessment and collection, which provides for the implementation, enforcement or administration of tax laws; and (3) payment, which is defined as the compliance by the taxpayer. What is the nature of levy or imposition?

I t is legisla legi slative tive i n nature nature.. What is the nature of assessment and collection?

They are administrative in nature. What is the technical term for levy or imposition?

I t is the i mpact pact of of taxation. What is the technical term for payment?

I t is the i ncid nci dence of taxation. taxation. You take note of these cases: 

Adamson v. Court of Appeals, 588 SCRA 27



Meralco v. Narvales, 433 SCRA 11 (may be asked in the bar)



Pilipinas Shell Petroleum Corporation, 589 SCRA 574

11. How is assessment under the internal revenue taxation? In Adamson v. Court of Appeals, 588 SCRA 27, assessment under the internal revenue taxation is defined as the written notice and demand made by the BIR on the taxpayer for the settlement of a tax due liability that is definite, final and fixed. Is the letter of the BIR to the taxpayer qualified? qualified?

N o, because because the assessm assessment ent must must be contai contain n fi f i nal assessment assessment or dete deterr minat minatii on. 12. What is assessment in real property taxation? Assessment under real property taxation is the act or process of determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. (Section 199(f) of R.A. No. 7160) 13. What are the requisites or conditions for a valid assessment of real property tax? There are five requisites. In Meralco v. Narvales, 433 SCRA 11, the Supreme Court enumerated the following guideline: (1) The assessment must contain the kind of property. (2) It must set forth the assessed value of the real property. (3) It must indicate the level of assessment. (4) It must specify the fair market value of the property. (5) It must clearly indicate the actual use of property. Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 5 of 54

If it comes out in the bar, I predict that very few examinees can answer this. Keywords: KALMA Kind of property Assessed value Level of assessment (Fair) market value Actual use 14. What is assessment in customs law? In Pilipinas Shell Petroleum Corporation, 589 SCRA 574, th e Supreme Court ruled that assessment in customs law is known as liquidation. It refers to the final computation and ascertainment of the collector of duties on imported merchandise, based on official reports as to the quantity, character and value thereof, and the collector’s finding of  the applicable rate of duty. Keyword: liquidation 15. Why is the power to tax inherent in a sovereign State? Read pp. 14-15, footnote 19. 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, 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. 16. Explain the two-fold nature of taxation. Read p. 15, footnote 20. Taxation is an inherent attribute of sovereignty, and it is also legislative in character. Such power is exclusively vested in the Congress. 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.” If you can cite that, the bar examiner will surely be impressed. Try to memorize. 17. What are the exceptions to the principle of non-delegation of powers? Delegation of the powers of the Congress is allowed in: 1) Article VI, Section 28(2) of the Constitution, which states that “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.” 2) Article X, Section 5 of the Constitution, which states that “Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.” Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 6 of 54

What is the law allowing the exercise by the President of tariff power?

I t is the flexible tariff clause. Read the Customs Modernization and Tariff Act or R.A. No. 10863: Sec. 102 in relation to Section 1608 (legal parameters where the President may exercise its tariff powers)  Sec. 102(u). F lexible Clause refer to the power of the President upon recommendation of the National E conomic and Development Authority (NE DA): (1) to incr ease, reduce or remove existing protective tariff rates of import duty, but in no case shall be higher than one hundred  percent (100%) ad valorem; (2) to establish import quota or to ban importation of any commodity as may be necessary; and (3) to impose additional duty on all i mport not exceeding ten percent (10%) ad valorem, whenever necessary.  Sec. 1608. F lexible Clause. –  (a) I n the interest of the general welfare and national securi ty, and, subject to the limitations  prescribed under this Act, the President, upon the recommendation of the NE DA , is hereby empowered to: (1) I ncrease, r educe, or remove existing r ates of import duty including any necessary change in classification. The existing rates may be increased or decreased to any level, in one or several stages, but in no case shall the increased rate of import duty be higher than a maximum of one hundred percent (100%) ad valorem; (2) E stablish import quotas or ban imports of any commodity, as may be necessary; and (3) I mpose an additi onal duty on all imports not exceeding ten percent (10%) ad valorem whenever necessary: Provided, That upon periodic investigations by the Commission and recommendation of the NE DA, the Pr esident may cause a gradual reduction of r ates of import duty granted in Section 1611 of this Act, including those subsequently granted  pursuant to this section. (b) B efore any recommendation is submitted to the President by the NE DA pursuant to the  provisions of this section, except i n the imposition of an additional duty not exceeding ten  percent (10%) ad valorem, the Commission shall conduct an investigation and shall hold public hearings wherein interested parties shall be afforded reasonable opportunity to be present, to  produce evidence and to be heard. The Commission shall also hear the views and recommendations of any government office, agency, or instrumentality. The Commission shall  submit its findings and recommendations to the N E DA within thir ty (30) days after the termination of the public hearings. (c) The power of the President to increase or decrease rates of import duty within the limits  fixed i n subsection (a) hereof shall include the authori ty to modify the form of duty. I n modifying the form of duty, the corresponding ad valorem or specific equivalents of the duly with respect to imports from the principal competing foreign country for the most recent representative period shall be used as basis. (d) Any order issued by the President pursuant to the provisions of this section shall take effect thir ty (30) days after promulgation, except in the imposition of additional duty not exceeding ten  percent (10%) ad valorem which shall take effect at the discretion of the President. (e) The power delegated to the President as provided for in this section shall be exercised only when Congress is not in session. (f) The power herein delegated may be withdrawn or terminated by Congress through a joint resolution. The NE DA shall promulgate rules and regulations necessary to carry out the provisi ons of this  section. Read Sections 130, 133 and 198 of the Local Government Code.

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 Section 130. Fundamental Pri nciples. - The following fundamental pri nciples shall govern the exercise of the taxi ng and other revenue-raisi ng powers of local government units: (a) Taxation shall be uniform in each local government unit; (b) Taxes, fees, charges and other impositions shall: (1) be equitable and based as far as practicable on the taxpayer' s ability to pay; (2) be levied and collected only for public purposes; (3) not be unjust, excessive, oppressive, or confiscatory; (4) not be contrary to law, public policy, national economic policy, or in the restraint of trade; (c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; (d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifi cally provided herein; and, (e) E ach local government unit shall, as far as practicable, evolve a progressive system of taxation.  Section 133. Common Li mitations on the Taxing Powers of Local Government Units. - Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (a) I ncome tax, except when levied on banks and other fi nancial institutions; (b) Documentary stamp tax; (c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein; (d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government uni t concerned; (e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise; (f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; (g) Taxes on business enterpri ses certifi ed to by the Board of I nvestments as pioneer or non pioneer for a peri od of six (6) and four (4) years, respectively from the date of registration; (h) E xcise taxes on arti cles enumerated under the national I nternal R evenue Code, as amended, and taxes, fees or charges on petroleum products; (i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; (j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in thi s Code; (k) Taxes on premiums paid by way or reinsurance or retrocession; (l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles; (m) Taxes, fees, or other charges on P hilippine products actually exported, except as otherwise  provided herein; (n) Taxes, fees, or charges, on Countryside and Barangay Busi ness E nterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R .A . No. 6938) otherwise known as the " Cooperative Code of the Phi lippines" respectively; and Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 8 of 54

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.  Section 198. F undamental Pr inciples. - T he appraisal, assessment, levy and collection of real  property tax shall be guided by the following fundamental pri nciples: (a) R eal property shall be appraised at its current and fair market value; (b) R eal property shall be classified for assessment purposes on the basis of its actual use; (c) Real property shall be assessed on the basis of a uniform classifi cation within each local  government unit; (d) The appraisal, assessment, levy and collection of real property tax shall not be let to any  pri vate person; and (e) The appraisal and assessment of real property shall be equitable. These all came out in the bar. 18. This came out in the bar. Reconcile these seemingly conflicting views: (1) Chief Justice Marshall opines that the power to tax is the power to destroy. (2) Justice Malcolm opines that the power to tax does not include the power to destroy. This is worth 5  points. Read p. 20 of your book. The conflict is more apparent than real. Chief Justice Marshall is correct in the sense that the power to tax is the power to destroy if it is used validly as an implement of the police power of the State. Justice Malcolm is likewise correct in this perspective: where the power to tax is used solely for the purpose of raising revenues, it cannot be allowed to confiscate or destroy. (J. Isagani Cruz) What is the meaning of the p hrase “the conflict is more apparent than real ”?

I t means that there is no real conflict here. What does this mean: “the power  to tax is not the power to destroy, so long as the Supreme Court sits”? Read Sison v. Ancheta, 130 SCRA 654.

While taxation is said to be the power to destroy, i t is by no means unlimited. I f 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. The Constitution as the  fundamental law of the land overrides any legislative or executive act that runs counter to it. I n 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. 19. Explain the scope of taxation. Taxation is said to be comprehensive, unlimited, plenary and supreme. It is comprehensive as it covers persons, businesses, activities, professions, rights and privileges. It is unlimited because the tax does not cease to be valid merely because it regulates, discourages or even definitely deters the activities taxed, and 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. It is plenary in the sense that it is complete. It is supreme insofar as the selection of the subject of taxation is concerned. J. Malcolm stresses that taxation is the strongest of all the powers of the government. What does that mean? It is strongest in what sense? The police power of the State is supreme under the principle of salus populi est suprema lex . The power of eminent domain is supreme under the concept of expropriation. Taxation thus, although Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 9 of 54

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.

Keywords: CUPS Comprehensive Unlimited Plenary Supreme 20. State the three fundamental principles of a sound taxation system. Briefly explain each. The three fundamental principles of a sound taxation are fiscal adequacy, theoretical justice, and administrative feasibility. Fiscal adequacy dictates that sources of revenue must be sufficient to meet government expenditures. Theoretical justice mandates that taxes must be imposed based on the taxpayer’s ability to pay. Administrative feasibility requires that tax laws must be capable of effective and efficient enforcement. If a tax law violates any of these principles, will it render the tax law invalid?

The purpose of these principles is to make tax laws sound. A tax law will therefore 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 r equir e so. H owever, i f a tax law runs contrary to the  pri nciple of theoretical justice, such violation will render the law unconstitutional consideri ng that under the Constitution, the rule of taxation should be uniform and equitable. (Section 28(1), Article VI) 21. What are the non-revenue /regulatory /secondary purposes of taxation? There are four. Explain each. The secondary purposes of taxation are as follows: 1) reduction of social inequality 2) implement of the police power of the State 3) protection of the local industry against unfair competition 4) encouragement of the growth of local industries Taxation is used to reduce the inequality in the distribution of wealth by preventing its undue concentration in the hands of a few individuals. It is likewise used in the form of exemtions and reliefs to serve as incentives to encourage investment in the local industry and thereby promote economic growth. It protects the local industry by imposing certain taxes upon imported goods or articles. It may be used as an implement of the police power of the State through the imposition of taxes with the end in view of regulating a particular activity. Keywords: RIPE Reduction Implement Protection Encouragement

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22. The Supreme Court ruled in CIR v. Central Luzon Drug Corporation, 456 SCRA 414   that in recent years, the power to tax has become the most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. This is an abandoned doctrine. Mark the case of  Manila  Memorial Park, Inc. v. DSWD Secretary, 711 SCRA 302, which abandons the Central Luzon ruling. What is that ruling? The power of taxation was used as an implement of police power in this case. Read p. 27 of your book. The senior’s citizen discount is an exercise of police power. In holding so, the Court explained that the 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses and other disabilities, and thus, in need of subsidy in purchasing basic commodities. The 20% discount may be properly viewed as belonging to the category of price regulatory measures which affect the profitability of establishments subjected thereto. On this face, the subject regulation is a police power measure. (Manila Memorial Park v. DSWD Secretary) We really look for keywords. The keyword here is price regulatory measures. Assignment: A. Start from the inherent and constitutional limitations of taxation. Exemption of the government from taxation is an emerging favorite bar question. B. Find the 16 instrumentalities exempt from taxation in the following cases: Manila International Airport Authority v. Court of Appeals, 495 SCRA 591, 618, 632, 633 MIAA is one. On page 618, there are four other instrumentalities enumerated by the Supreme Court. On pages 632-633, there are eight more. 

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1.  Manila I nternational Ai rport Authori ty  2.  Mactan-Cebu I nternational Ai rport Authori ty  3. Phi lippine Ports Authori ty 4. University of the Philippines  5. Bangko Sentral ng Pilipinas 6. Phi lippine Rice Research I nstitute 7. Laguna Lake Development Authority 8. Philippine F isheries Development Authority 9. Bases Conversion Development Authority 10. Philippine National Railways 11. Cagayan de Oro Port Authority 12. San F ernando Port Authori ty 13. Cebu Port Authority Republic of the Philippines v. City of Parañaque, 677 SCRA 246 There is only one mentioned in this case. This is the one asked in the bar. 

14. Philippine Reclamation Authority, formerly Public E states Authority City of Lapu-Lapu v. Philippine Economic Zone Authority, 742 SCRA 524 The remaining two instrumentalities can be found in this case. 

15. Philippine E conomic Zone Authority Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 11 of 54

16. Government Service I nsurance System C. Learn why the instrumentalities in those cases are exempt from taxation by determining their distinct characteristics or features in the following case: Manila International Airport Authority v. City of Lapu-Lapu, 757 SCRA 323. These are the reasons why instrumentalities are exempt from tax. 

I nstrumentality refers to any agency of the National Government, 1. not integrated within the department framework,  2. vested with special functions or jurisdiction by law,  3. endowed with some if not all corporate powers, 4. administering special funds, and 5. enjoying operational autonomy, usually through a charter. (Section 2(10) of the I ntroductory Provisi ons of the Administrative Code)

D. Research about technical smuggling. 

 Smuggling refers to the fraudulent act of importing any goods into the Philippines, or the act of assisting in receiving, concealing, buying, selling, disposing or transporting such goods, with full knowledge that the same has been fraudulently imported, or the fraudulent exportation of goods. Goods referred to under this definition shall be known as smuggled goods. (Section 102(nn), R.A.  No. 10863)



Technical Smuggling   refers to the act of importing goods into the country by means of fraudulent, falsified or erroneous declaration of the goods to its nature, kind, quality, quantity or weight, for the purpose of reducing or avoiding payment of prescribed taxes, duties and other charges. (Section 102(pp), R.A. No. 10863)

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January 13, 2018 GENERAL PRINCIPLES (continuation)

Recitation: You must know the prevailing jurisprudence here on pages 33-34 of your book. You must have noticed the decided cases there. There are mentioned 1,2,3,4. These were asked twice already in the bar exams. 1. In Progressive Development Corp. vs Quezon City, 172 SCRA 629, is market stall fee a license or a tax? The case involves a market in Cubao  –  the Farmers’ Market. So, there is this issue whether the market stall fee collected by the city government is a tax or a license. What is the prevailing  jurisprudence? The market stall fees are considered as license because the objective of imposing market stall fees is regulation and not revenue generation. Tax is imposed in the exercise of police power primarily for purposes of regulation, while the latter is imposed under t he taxing power primarily for purposes of raising revenues. Thus, if the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. What is the reason behind this ruling?

Tax is imposed in the exercise of police power primarily for purposes of regulation, while the latter is imposed under the taxing power primarily for purposes of raising revenues. Thus, if the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. Based on my experience as bar examiner for two bar exams, some examinees never take full credit though their answers were correct because their reasons are not enough to explain the SC ruling. 2. This came out in the bar examination. What are the distinctions between a license and a tax? As to the exercise of power  –   a tax is levied in the exercise of the taxing power, while license fees emanate from the police power of the State. As to purpose  –   the primary purpose of taxation is to generate revenues, while license fees are imposed primarily for regulation. As to subject –  the subject of taxation is persons, properties, activities, while the subject of license is limited to the right to engage in a business or activity. As to consequence in case of non-payment –   failure to pay tax makes your business illegal. while failure to pay does not have that effect as it is merely a regulatory fee. 3. Let’s have another case. This has yet to be asked in the bar exam. This is about the charge imposed under the EPIRA Law (Electric Power Industry Reform Act of 2001) called the Universal Charge. Is that a license or a tax? In Gerochi v. Department of E nergy, 527 SCRA 696,  the Supreme Court held that the Universal Charge is a license. It is imposed and can be amply discerned as regulatory in character because in the EPIRA Law, the State’s police power, particularly its regulatory dimension, is invoked.

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4. This is popular –   Coco Levy Fund. Is the Coco Levy Fund a tax or a license? Is it a regulatory imposition or tax? This is another probable bar question that is yet to be asked. In Cojuangco, Jr. vs. Republic, 686 SCRA 472,  the Court ruled that the coco levy funds are taxes since the purpose of its imposition is to raise revenue for the reh abilitation of the coconut industry. 5. Is the building permit fee a tax or a license? It is a regulatory fee ( Angeles University F oundation vs. Angeles City, 675 SCRA 359). What are the reasons? I think there are three cited in your book (but there are only two in the book.) Expound on the meaning of the word “regulation.”

That a building permit fee is a regulatory imposition is highlighted by the fact that: 1) I n processing an application for a building permit, the Building Offi cial shall see to it that the applicant satisfies and conforms to the approved standard requirements on zoning and land use, lines and grades, structural design, sanitary and sewerage, environmental health, electrical and mechanical  safety.  2) Clearances from vari ous government authori ties exercising and enforcing regulatory functions affecting buildings /structures may be requir ed before a building permit may be issued. If you cannot cite these reasons, you cannot be entitled to full credit. 6. Update your jurisprudence, this is not in your book. This is very popular in Quezon City  –  Socialized Housing Tax, the proceeds of which can be used for noble purposes. This may cover garbage fee. It is a probable bar question because this is a landmark case. Is the Socialized Housing Tax a tax or a regulatory fee? It is not a tax imposed by the local government but a license/regulatory fee. Its name is misleading. (F err er J r. vs. B autista, 760 SCR A 652) What is the reason behind this ruling?

I t is levied with a regulatory purpose. The levy is primari ly in the exercise of the police power for the  general welfare of the entir e city. I t is greatly imbued with public interest. R emoving slum areas in Quezon City is not only beneficial to the underprivileged and homeless constituents but advantageous to the real property owners as well. The situation will improve the value of the their property investments, fully enjoying the same in view of an orderly, secure, and safe community, and will enhance the quality of life of the poor, making them law-abiding constituents and better consumers of business products. 7. What are the inherent limitations on the exercise of the power of taxation? The inherent limitations on taxation are as follows: 1. public purpose 2. territoriality 3. international comity 4. exemption from taxation of government agencies and instrumentalities 5. non-delegation of the power to tax 8. What is the latest jurisprudence on the meaning of the word “ public purpose”? It is a broad concept. Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 14 of 54

In Planters Products, I nc. v. F ertiphil Corporation, 548 SCR A 485, the Supreme Court ruled that the term “public purpose” is not defined. It is an elastic concept that can be hammered to fit modern standards. It should be given a broad interpretation.

9. In this case concerning the grant of 20% discount to senior citizens, the Court explained the contemplation of the word “ public”  in public purpose. What is the test? Is it the number of  persons benefitted? “Public” may refer to a special group of persons. The senior citizens are a special group of persons who have contributed to the general welfare and common good of the nation in the prime of their lives. They are the parents and grandparents who have molded us into good citizens. 10. Let us focus on the principle of territoriality. This might come out in the bar exam. It is about a doctrine in value-added tax. Explain the meaning of Destination Principle. This is answered by the ruling in Atlas Consolidated Mining and Development Corporation v. CIR, 524 SCRA 73. It is a principle applied in value-added tax. It dictates that value-added tax may be imposed on goods and services only in the country where these are consumed. This is just a review. What is the tax situs of VAT?

I ts tax situs is the place where the transaction is made. What is the situs of real property tax?

I ts situs is the state or country where it is located, regardless whether its owner is a resident or a nonresident. What about income tax? Can we tax income derived from sources without? Whose income derived from sources without is subject to Philippine income tax? So, when we tax the income of a resident citizen derived from sources without, what is the criterion?

The situs of income tax depends upon the nationality and residence of the taxpayer. I f the taxpayer is both a resident and a national of the Philippines, the income is taxed upon sources derived from within and without the Philippines. Otherwise, the taxpayer is taxed upon sources derived from within the Philippines only. What about community tax?

Community taxes are imposed on the residence of the taxpayer. This is a bar question: Can estate tax be imposed upon property situated outside the Philippines? Yes, if the decedent is a citizen of the Philippines. The same is true in case of donor’s tax. Provided that the donor is a citizen, even if the property donated is situated outside the Philippines, the same can be the subject of donor’s tax. Let us go back to value-added tax. VAT is an emerging favorite topic in the bar exams. Explain the Cross Border Doctrine. This was a shocker question in the Bar.

The Cr oss Border Doctrine mandates that no VA T shall be imposed to form part of the cost of the  goods destined for consumption outside the terr itori al border of the taxing authori ty. H ence, 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.

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What are export processing zones? What is the tax treatment on the sales of goods or services within these export processing zones?

E xport 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. F or this reason,  sales by persons from the Philippine customs terr itory to those inside the export processing zones are effectively zero-rated. 11. This was once asked in the Bar. Can the income of the Ambassador of the United States derived from sources within the Philippines be subject to income tax? No, because it is one of the inherent limitations  –   international comity. Subjecting their income to income tax will violate the internationally accepted principle of sovereign equality among nations. Does it have a constitutional basis?

Yes. Article 2, Section 2 of the Constitution that the Philippines adopts the generally accepted  pri nciples of international law as the law of the land. Such generally accepted pri nciple pertains to the  sovereign equality of nations. Neither can we impose real property tax on the foreign embassies as these are extension of territories of sovereign states. 12. What are the 16 Exempt Instrumentalities of the National Government? I gave this as assignment. This may be asked in the Bar. This is the time to have mastery of this. The following instrumentalities are exempt from tax: 1. Philippine Economic Zone Authority 2. Government Service Insurance System  (Mactan C ebu I nternational Ai rport A uthority vs LapuLapu City, 757 SCR A 323). This has effectively abandoned no less than 3 decisions of the Court. Before, GSIS is exempt from real property taxation subject to certain qualifications. Now, in that ruling in 2015, there are no more qualifications. 3. Bangko Sentral ng Pilipinas 4. Mactan-Cebu International Airport Authority 5. Philippine Ports Authority 6. San Fernando Port Authority 7. University of the Philippines 8. Philippine Fisheries Development Authority 9. Philippine Rice Research Institute 10. Cagayan De Oro Port Authority 11. Cebu Port Authority 12. Manila International Airport Authority 13. Philippine Reclamation Authority 14. Laguna Lake Development Authority 15. Bases Conversion Development Authority 16. Philippine National Railways The Supreme Court has yet to rule on the status of SSS. In the meantime, it is not considered as an instrumentality.

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What must be the reasons why they are exempt? The Supreme Court explained that in the case of PEZA vs Lapu-Lapu City. They must possess the characteristics of an instrumentality of the national government? What are the 5 characteristics of an instrumentality of the national government (Sec. 2 (10) of the 1987 Administrative Code)?

The reasons are as follows: 1. they are not integrated within the department network  2. they are vested with special functions or jurisdiction by law  3. they are endowed with some if not all corporate powers 4. they are administering special fund  5. they are enjoying operational autonomy, usually through a charter 13. What underlying settled doctrine/principle will be violated if we allow the delegation of power to tax? Delegation of power to tax violates the principle of separation of powers. Delegation is allowed when expressly authorized by the Constitution. Under the Constitution, there are two provisions: 1. Art. VI, Sec. 28 (2) –  Tariff powers of the President 2. Art. X, Sec. 5 –  Delegation to Local Government 14. Congress passed a law authorizing the President to impose income tax on certain items of income. Is that covered by that constitutional provision? No, it is not covered by that constitutionally delegated power. So, what are the taxes covered by that constitutionally delegated power?  It made no mention about income tax, donor’s tax, estate tax, value -added tax. The taxes covered are

customs duties. The constitutional provision says that 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. What is that law authorizing the President to increase or decrease tariff rates?

That law is the flexible power clause under Sec. 221 of the Old Tari ff and Customs Law. H owever, there is a new law: R.A . No. 10863 –  Customs Modernization and Tariff Act. Read Sec. 102 (u) in relation to Sec. 1608 of RA 10863. 15. Explain the flexible power clause. The Constitution says, “within the national development  program of the Government.” Under what conditions or criteria will the President increase or decrease tariff rates? Under the Constitution, it says “within the national development program of the Government,” meaning in the interest of the national economy. Unfortunately, this is now deleted. I could not understand why it was deleted! It’s what the Constitution says! That’s how brilliant our Congressmen are. The most important criterion is deleted. What are left are “in the interest of national security,” “in the interest of the general welfare of the people.” Read Sec. 1608, you will not find therein this constitutional criterion “within the national development program of the Government.”

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16. What is that provision in the Constitution that likewise allow the delegation of the power to tax? Art. X, Sec. 5. Delegation to Local Government The Constitution made mention of these two striking words: guidelines and limitations. What do you understand by the word guidelines? R.A. No. 7160 does not use the word guidelines. It uses “fundamental principles.” These principles are found in two sections: Sec. 130 –  Fundamental principles of local government taxation, and Sec. 198 –  Fundamental principles of real property taxation.

 SE CTI ON 130. F undamental Pr inciples. - The following fundamental pri nciples  shall govern the exercise of the taxing and other revenue-raising powers of local  government units: (1) Taxation shall be uniform in each local government unit; (2) Taxes, fees, charges and other impositions shall: (a) be equitable and based as far as practicable on the taxpayer's ability to pay; (b) be levied and collected only for public purposes; (c) not be adjust, excessive, oppressive, or confiscatory; (d) not be contrary to law, public policy, national economic policy, or in restraint of trade; (3) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; (4) The revenue collected pursuant to the provisions of this C ode shall inure solely to the benefit of, and be subject to disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, (5) E ach local government unit shall, as far as practicable, evolve a progressive  system of taxation.  Section 198. F undamental Principles. - The appraisal, assessment, levy and collection of real property tax shall be guided by the following fundamental  pri nciples: (a) Real property shall be appraised at its current and fair market value; (b) Real property shall be classified for assessment purposes on the basis of its actual use; (c) Real property shall be assessed on the basis of a uniform classifi cation within each local government unit; (d) The appraisal, assessment, levy and collection of real property tax shall not be let to any private person; and (e) The appraisal and assessment of r eal property shall be equitable. 17. Tax ordinance is valid if complies with these fundamental principles of local government taxation. Assessment, or appraisal or collection or real property tax is valid if it complies with these fundamental principles of real property taxation. What are the common principles? 1. Rule on uniformity 2. That taxes must be equitable 3. No let principle

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18. What is the “no let principle”? The appraisal, assessment, levy and collection of real property tax cannot be delegated to any private person. 19. What about the collection of income tax, of internal revenue tax? Can that be delegated to private corporations such as banks? Yes. You should know that distinction. In the case of local tax or real property tax, in the light of that honored principle, the collection thereof should not be delegated or entrusted to private corporations. That’s why you must have noticed that banks are not authorized to collect local taxes or real property tax. But in the case of income tax, donor’s tax, estate tax, and other internal revenue taxes, these can be collected by authorized agents. 20. In the last bar examination, this was asked: common limitations on local government taxation, meaning these taxes cannot be imposed by local government units. When the Constitution says under Art. X, Sec. 5 “subject to limitations as the Congress may provide,”  that refers to Sec. 133 of R.A. No. 7160 which enumerates 15 taxes or charges which could not be imposed by local government units. Can you mention some of them?  SE CTI ON 133. Common L imitations on the Taxing Powers of Local G overnment Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and Barangays shall not extend to the levy of the following: (1) I ncome tax, except when levied on banks and other fi nancial institutions; (2) Documentary stamp tax; (3) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein; (4) Customs duties, r egi stration fees vessels and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government uni t concerned; (5) Taxes, fee and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units i n the gui se of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise; (6) Taxes, fees, or charges on agricultural and aquatic products when sold by marginal farmers or fi shermen; (7) Taxes on business enterpri ses certifi ed to by the Board of I nvestments as pioneer or non-pioneer for a period of six ( 6) and (4) four years, respectively fr om the date of registration; (8) E xci se taxes on articles enumerated under the National I nternal Revenue Code, as amended, and taxes, fees or charges on petroleum products; (9) Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; (10) Taxes on the gross receipts of transaction contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code; (11) Taxes on premium paid by way or reinsurance or r etrocession; (12) Taxes, fees or charges for the registration of motor vehicle and for the issuance of all kinds of li censes or permits for the driving thereof, except tricycles; Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 19 of 54

(13) Taxes, fees or charges on Philippine products actually exported, except as otherwise provided herein; (14) Taxes, fees, or charges, on Countryside and Barangay Busi ness E nterpri ses and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixtynine hundred thirty-eight (R .A. N o. 6938) otherwise known as the " Cooperatives Code of the Philippines" respectively; and (15) Taxes, fees or charges, of any kind on the National Government, its agencies and instrumentalities, and local government uni ts. You note here that all national internal revenue taxes are not within the taxing authority of the local government units. You must memorize these. 21. In the last item there, (15) Taxes, fees or charges, of any kind on the National Government, its agencies and instrumentalities, and local government units, it was cited in the landmark case of Manila International Airport Authority. Justice Carpio mentioned that. Since Manila International Airport Authority is an instrumentality of the national government, the City Government of Paranaque cannot impose real property tax against it. Now, he cited this Doctrine of Supremacy of National Government over Local Government Units. Explain the Doctrine of Supremacy of  National Government over Local Government Units based on three American cases. (Cases of McCollins vs. Maryland, Jackson vs. Maryland, US vs. _____) These cases are the sources of the doctrine. The doctrine finds support in RA 7160, Sec. 133 (o). 22. The basis of these limitations proceeds from this Doctrine of Pre-emption. This was explained in 1 case, Victorias Milling vs. Municipality of Victorias, 25 SCRA 192. What is this Doctrine of Pre-emption? The imposition of these limitations is a classic application of that Doctrine. Pre-empt. To pre-empt the exercise. Here, where it not for these limitations, local government units may impose these taxes. But the national government elects to over these field or area of taxation thereby withholding this power to tax on the part of local government units. So those taxes which may not be covered by these, they can be imposed by local government units. In other words, if the national government does not impose taxes on certain subject, that may be taxed by the LGU. CONSTITUTIONAL LIMITATIONS 23. How do you classify these constitutional provisions? These are provisions affecting the power of taxation. Classify them. 1. Constitutional Limitations (these provisions involve restrictions) (direct or indirect) 2. Constitutional Conferment (delegation) 3. Constitutional Exemptions EQUAL PROTECTION CLAUSE 24. Equal Protection Clause  –   There are so many cases here. It boils down to the application of the requisites of a valid classification. What are these requisites? So, there may be differential tax treatment or classification as long as it has these 4 requisites, that law does not violate equal  protection clause. Jurisprudence in a long line of cases classify things or articles for purposes of

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taxation. There may be differential tax treatment but for as long as the classification has these requisites, that law is still constitutional. 1. it must be based on substantial distinctions 2. it must apply to both present and future conditions 3. it must be germane to the purpose of the law 4. it must apply to all members of the same class 25. There are so many cases decided by the Supreme Court on this. I must tell you that in the  previous bar exams cases involving violations are the ones being asked. Can you think of a case where the Supreme Court held that this ordinance is discriminatory? Ormoc Sugar Co. vs. Treasurer of Ormoc City; Motor vehicles in Manila; Association of Customs Brokers vs. Manila There was this tax imposed on export sale made by Ormoc Sugar Co. The ruling of the Court was clearly, the tax was discriminatory. It singled out a particular sugar industry. It applied only to existing conditions. 26. Can you cite other cases that show violation of the equal protection clause? How do you cure the defect in the Ormoc Sugar Co. case? To conform with that condition number 2 that it must apply to both present and future conditions? Make it applicable to all sugar companies. If an ordinance was passed imposing tax on installation manager conditioned on the ground that it singled out a particular group of people, will you challenge that claiming that you were singled out and therefore it violates the equal protection clause. This is where the Supreme Court applies this- inequality or inequity, resulting from singling out a particular class for taxation or exemption infringe no constitutional limitation. The mere fact that he is singled out does not necessarily infringe constitutional limitations since all the requisites are present. Differential tax treatment or classification that will result in singling out a particular class provided that all the requisites of a valid classification are present. In other words, differential tax treatment is allowed as long as the classification is valid, meaning it must have all the requisites of a valid classification. UNIFORMITY IN TAXATION 27. Equal protection clause, Art. 3, Sec. 1, you cannot avoid equality here that’s why you jump to Art. VI, Sec. 28 (1) (Question No. 1 in Bar Exam 1996). Explain the rule of uniformity in taxation. Uniformity means that things belonging to the same class shall be treated alike - impositions, privileges conferred, limitation imposed. Uniform requires that persons, corporations, associations similarly situated must be taxed similarly. So, the important word there is “similarly situated” to make it allowed.

PROGRESSIVE SYSTEM OF TAXATION 28. Let’s go to this principle that the Congress shall evolve a progressive system of taxation. Explain that. What do you mean by this constitutional provision? It means that direct taxes are to be preferred and indirect taxes, as much as possible, should be minimized. These are the words of the Supreme Court in the ponencia of Chief Justice Enrique

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Fernando, which was given judicial imprimatur by the Supreme Court. I will look for these words which were mentioned in the recent case of Camacho: Directive; Not judicially imposable right; moral incentives. Is it a directive to Congress? Is it mandatory? No. That’s why the word “shall” is misleading. The operative word there is “evolve.” Now what does evolve mean? Definitely it does not mean prescribe, it means to develop. So it’s not mandatory. That’s why this Value Added Tax Law, which is a regressive tax, has been challenged for no less than 4 times before the Court. The Court consistently held that it does not violate this because it is not mandatory upon Congress to prescribe or impose direct tax. That’s why as much as possible, indirect taxes must be minimized. It is not a directive to Congress to pass a law imposing progressive tax. To pass a law imposing progressive tax, is that a legally enforceable or justiciable right? No! It is just a moral incentive.

This is where you apply the art of articulation. Pagalingan yan ng E nglish! We are impressed by answers that contain no grammatical error. 29. What do you understand by progressive system of taxation? It is a system of taxation that imposes progressive rates, which provides that the tax rates increase as the tax base increases. It means that the bigger your income, the higher your taxes; the lower your income, the lower your taxes. DUE PROCESS 30. The due process clause prohibits the taking of property, deprivation of property without due  process of law. So here, in taxation, the government is in effect taking your money. That’s why due process must be observed. Can you think of a case wherein the Supreme Court held that a tax law is not valid or unconstitutional because it violated the due process of law? Relate this to tax remedies. If you fail to pay your tax, the government will resort to these remedies- distraint of  personal property, levy of real property, tax lien. These are taking of property. But these could only be done with due regard with the requirement of due process law. Before the government will take your property as a result of your failure to pay your tax, there has to be notice. That is why we have this Notice of Assessment. That is mandated by due process. In your book, I hope you have come across the case of Reyes vs. Almanzor. That’s a case that shows a classic violation of due process. It is about a land in Tondo, Manila that has been the subject of real property assessment. That the land was in the nature of a residential and therefore subject to the Rental Control Law. So here, the Court ruled that there is a violation of due process. The assessment of real property tax is unjust, oppressive, and confiscatory. It is in this case that the Supreme Court recognized two (2) methods of making an assessment –  comparable sales approach method and income approach method. So, when a local government unit will make an assessment, it must be governed by this. It must observe either comparable sales approach method and income approach method. It turned out that the real property tax exceeded the income derived from the lease of the property, that’s why it is unjust, oppressive and confiscatory. So, if the property is leased, income is derived therefrom, this jurisprudence tells us that if the real property tax is more than the income derived from the lease of the property, is unjust, oppressive and confiscatory and is a violation of the due process of law.

31. This question came out in Political Law. The question in taxation has something to do with Value Added Tax. These are the two cases: (1) Tolentino et al vs. Secretary of Finance and (2) Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 22 of 54

American Bible Society vs. City of Manila. In the latter case, the City of Manila is requiring a religious society to pay a certain fee or amount before it could sell its religious articles. Is that valid? That’s an undue restraint in the exercise of religious profession. On the other hand, in the Tolentino case, there is no violation. VAT can be imposed on the sale of religious articles. What cannot be imposed are regulatory fees. The right is the religious freedom to disseminate, to sell. That could not be the subject of a fee because that is a regulation. You cannot regulate that. But the imposition of sales tax or VAT, that’s allowed. NON-IMPAIRMENT CLAUSE 32. The old case is the Tolentino case. Casanova vs Court - new case. Justice Vitug asked this in the  bar exams. It has something to do with revocation of tax exemptions. You associate that with revocation of tax exemption. When will the revocation of tax exemption constitute impairment of contract? Exemption may be granted under Congressional franchise. You recall this? Congress may grant a franchise subject to amendment or repeal. Can that be revoked unilaterally? Yes. Congress can unilaterally revoke a franchise it granted because the provision says “subject to amendment or repeal.”

33. So, when will it result in the violation of this non-impairment clause? When the exemption is based on contract whereby valuable consideration has been given. (Casanova ruling). In the case of Tolentino et al. vs. Secretary of Finance, it was an imposition of Value Added Tax on the sale of real property. At the time of the passage of that Act, VAT, which imposes VAT on the sale of real property, there were contracts executed for the sale of real estate. The parties argued it is a violation of non-impairment. Is there a violation? No. There can only be a violation when it involves revocation of tax exemption based on contract whereby valuable consideration has been given. That’s the settled jurisprudence. That where contracts were executed before the passage of a law, a subsequent tax law may be filed by Congress imposing tax on these certain contracts, that is allowed. Because it does not involve exemption. So, your knowledge of exemption comes into play. 34. When is tax exemption irrevocable? When is it revocable? It is revocable if it is based on franchise, equity, public policy, economic policy, the state can unilaterally revoke that. On the other hand, tax exemption is irrevocable if that revocation would result in violation of non-impairment clause- and that is when it is based on contract whereby valuable consideration is given. BILLS TO ORIGINATE FROM THE HOUSE OF REPRESENTIVES We now come to the most important, and this is the issue that will eventually be passed upon by the Court in the TRAIN Law and this I think has been raised by the petitioners. You read again Tolentino et al. vs. Secretary of Finance. You read the original, 235 SCRA 630. The contention of Speaker Alvarez, as you might have heard him, is that the insertion of the tax on coal is unconstitutional because it was not in the version of the House. On the other hand, Senator Drilon, opines otherwise  –  we have the power to amend. Is the Senate making an amendment? Is that tax on coal found in the original version of the House? I’m

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sure the court will be guided by this. What’s the ruling of the Court here? How did the Court construe that Article VI, Sec. 24? So please read that case and let us pre-empt the ruling of the Court. Let us discuss this in the light of the TRAIN Act. Is there a violation of Art. VI, Sec. 24?

Assignment: We will finish General Principles next meeting. Read Tolentino v. Secretary of Finance.

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January 27, 2018 GENERAL PRINCIPLES (cont.) J. Dimaampao: We will finish General Principles today, so that next week we will start with Tax Remedies. So we will start with a very interesting case, the case of Tolentino, et.al., vs. Secretary of Finance. Two prominent senators of the Republic questioned the constitutionality of the Expanded Value Added Tax (VAT) Law, on the ground that the same fails to comply with the constitutional requirement under Art. 6, Sec. 2 of the Constitution. What was the main argument of Senators’ Tolentino & Salonga? Student: In that case they are questioning the constitutionality of RA 7716 or the Expanded Value Added Tax Law because according to them it did not follow the procedural requirement in the constitution regarding the tax bills, which should originate from the House of Representatives (HOR). According to them the law that was passed was the consolidation of the senate and the HOR’s version, thus, unconstitutional. But, according to the Supreme Court J. Dimaampao: So, House Bill No. 1197 and Senate Bill 1630, what happened to this two? Student: Uhmmmm…House Bill No. 1197 and Senate Bill 1630, are separate and distinct versions of the the Expanded Value Added Tax Law.. J. Dimaampao: What happened? Student: Sir, when it was brought to the Senate, they made their own version and what was passed was merely a consolidation of the distinct versions of the HOR and the Senate. J. Dimaampao: You mean that, no single provision of House Bill No. 1197 has been enacted? Student: No Sir, there are similar provisions coming from the House. J. Dimaampao: So, what was the findings of the bicameral committee on this. Did it adopt majority of the provisions of House Bill No. 1197 or majority of the provisions of Senate Bill 1630? Yes, these two were consolidated. Did you come across the discussion, along that line? There were a lot of dissenting opinions. Anyway, what was the majority view? What is the prevailing jurisprudence? Student: Sir, the prevailing jurisprudence was that what was required by the Constitution is that.. J. Dimaampao: Constitutional or not? Student: It is constitutional. J. Dimaampao: Reason out in accordance with the ruling of the court. That was already asked in the bar exams, 10 points. Ruling of the Court, RA 7716 is declared constitutional, in other words it complies with the constitutional requirement under Art. 6, Sec. 2 of the Constitution. What was the reason? Student: The reason for that, what was required by the Constitution, is that the bill and not the law which must originate exclusively in the HOR, to insist that the bill must originate exclusively in the HOR, would undermine the power of the Senate. J. Dimaampao: There are two reasons cited by the Supreme Court. What are they? Student: The first is that,  to insist that the revenue statute must be substantially the same as that of the  HOR’s version would be to deprive the Senate of their power not only to concur but also to propose

amendments. Moreover, this will violate the principle of co-equality of legislative powers as it would make the House superior to the Senate. I n other words, what the constitution simply requires is that the initiative or the fi ling of the Revenue and Tariff bills must originate fr om the H OR. (as synthesized by  J. Dimaampao) J. Dimaampao: Reasons? Why?

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Student: Because as local representatives elected by their own districts, they are expected to be more sensitive to the local needs and problems. The Senate on the other hand, given that they are nationally (nationwide) elected, they are expected to approach these problems from the national perspective. J. Dimaampao: Let us focus on the TRAIN Law, with regard to Speaker Alvarez’ contention that the excise tax on coal was not on the version of HOR, answered by Senator Drilon that “ We  have the power to propose amendments.”. Now, whose contention is tenable? Student: It is the Senator’s contention that is more tenable. The Constitution merely requires that Revenue and Tariff bills must originate from the HOR, not the statute itself. J. Dimaampao: What do you mean by the word amend? Does it include modification or adding something which was not originally proposed. Student: Amendment, according to Tolentino vs Secretary of Finance, may include modification of the terms of the house bill. It may likewise include rewording, or a total overhaul of the provision included in the House Bill. J. Dimaampao: You focus on pages 631 (661) and 633 (663) of Tolentino, et. al vs Secretary of Finance. In pg. 631, there you will find the ruling of the case citing the 2 reasons. In pg. 663, there the Court said what the constitution simply requires is that the initiative or the filing of the Revenue and Tariff bills must originate from the HOR. Another favorite question of Bar Examiners is that which is found in Art. 6, Sec. 28 par. 3 of the Constitution as discussed there in your book. Compare this with another constitutional provision Art. 14, Sec. 4, par. 3. Now, point out the distinctions. What are the taxes covered by that exemption? What are the institutions covered by the exemptions? To avoid confusion, I made a comparative table there Student: Art. 6, Sec. 28 par. 3 Art. 14, Sec. 4, par. 3 Institutions Exempt Religious, Charitable, & Educational NonStock & Nonprofit Educational Taxes Covered Property Tax Income Tax, Custom Duties, & Property Tax (DECS Order No. 137-87 J. Dimaampao: Sec. 30(e) of NIRC, grant exemptions from income tax to Religious and Charitable Institutions, but for Educational Institutions, it depends. There are 3 kinds of educational institutions,  private, public, and nonstock nonprofit. Which of these 3 are exempt? Student: Government (Sec. 30 (i) of NIRC) and NonStock & Nonprofit Educational are exempt, however  private proprietary educational institutions are exempt. The rate may either be the corporate rate or the 10% preferential rate. J. Dimaampao: You must read Sec. 30 (e) of the NIRC (National Internal Revenue Code), because it likewise provides exemptions for religious and charitable institutions from corporate income tax. Now what are the constitutional criteria? Student: Art. 6, Sec. 28 par. 3 Art. 14, Sec. 4, par. 3 Scope Lands, Buildings, & Improvements Revenues and Assets Criteria Actually, Directly, & Exclusively Used Actually, Directly, & Exclusively Used J. Dimaampao: Are you familiar with the  Lung Center Case? Have you been there? There are commercial establishments there. Are they exempt? What was the ruling of the case? Student: No, only those properties, Directly, & Exclusively Used shall be exempt from tax. J. Dimaampao: What was the definition of the court of the word exclusively? The Supreme Court liberally construed that.

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Student: The word exclusively, should be construed to mean that it must be solely, primarily used for their main purpose. J. Dimaampao: That is why, the old principle including incidentally used properties among has now  been abandoned. What do you mean by actually, directly, and exclusively? Let’s focus on exclusively. Student: Actually- opposed to seemingly, pretendedly, or feignedly as actually engaged in farming means, truly in fact. Directly- in a direct way without anything intervening; not by secondary, but by direct means. Exclusively- Apart from all others; without admission of others to participation; in a manner to exclude. (National Power Corp. vs. Central Board of Assessment Appeals) J. Dimaampao: You answer this basic question. You always hear about these, “exemptions”. Exemptions are granted to charitable institutions. So now, I ask you, what is the rational of granting these exemptions. You must have a mastery of that, because you might be asked why we grant exemptions. Student: Charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of the government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a  part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes  by the government is compensated by its relief from doing public works which would have been funded from the appropriations from the Treasury. J. Dimaampao: So, what are the three reasons for the grant of exemptions? Student: First, they perform ministrant functions that would have done by the government. Second, in exchange for those taxes that have been forgone, are the services that these charitable institutions render. Third, the loss of taxes is compensated by the relief it gives to the government to perform certain acts that may require appropriation from the Treasury. J. Dimaampao: Now, let’s go to tax evasion. In 1998 Bar Exam, it asked, what is the distinction between tax avoidance and tax evasion? Student: Tax E vasion (Tax Dodgi ng) - Willful act to defeat or circumvent the law in order to illegally reduce one’s tax liability. Tax Avoidance (Tax Minimization)-   It is the act of taking advantage of legally available tax opportunities in order to minimize one’s tax liability J. Dimaampao: Can you give an example of tax avoidance relative to income tax? Okay, I will give you an example. When you sell capital assets, personal property. Apply this holding period rule. Holding  period rule, Sec. 39 (b) of the National Internal Revenue Code. When you sell capital asset, this is what you should do, so that, should gain be derived from that transaction, only half of it will be subjected to capital gains tax. So, this is a legally available tax opportunity. You can take advantage of that. So when are you going to sell your capital asset, within what period? Student: Sell it after twelve months. J. Dimaampao: What about a classic example of tax evasion? Have you read the Benigno Toda case? The mother of all tax evasion cases according to one author. There the Court cited the elements of Tax evasion, what are the elements? I must pressure you to memorize this. Student: Tax evasion connotes three factors: 1. the end to be achieved i.e. the payment of less than that known by the taxpayer to be legally due, or the nonpayment of tax when it is shown that tax is due;

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2. an accompanying state of mind which is described as being “evil”, in “bad faith”, “willful”, or “deliberate and not accidental”; 3. a course of action or failure of action which is unlawful; J. Dimaampao: Have you heard of estate planning scheme? Did I not mention the case of Delcar Trade vs IAC (159 SCRA 349) Read that, I might ask you that in your exam. What is estate planning? Please memorize that. Student: The preparation of the management of the person’s estate. How? Through wills, trust, insurance policies, and other arrangements designed to reduce administration costs and estate tax liabilities. J. Dimaampao: If a person fails to pay tax, will he be liable for tax evasion? Mere understatement of income, will that amount to tax evasion? Student: No, there has to be fraud! That is the defense of a taxpayer, e.g. honest mistake. J. Dimaampao: I mentioned in my example tax avoidance with regard to sale of capital asset. This time, can you mention another form of tax avoidance? When you deposit your money in the bank, that would earn interest income, hence it will be subject to 20% final tax. Now, how do you minimize it? This will eventually come out in your Bar exams. Student: Through Long Term deposits. The term of which is 5 years are exempt from tax. J. Dimaampao: Double Taxation was asked in the last Bar Exam as we predicted. That’s a favorite  bar question. There are two kinds of Double Taxation. They are? Distinguish one from the other. Which one is prohibited or forbidden? Student: Direct Double Taxation Indirect Double Taxation Elements: 1. Same Property/Subject Matter; If among the elements of 2. Same Purpose; Direct Double Taxation , 3. Same State/ Government/ Taxing Authority; one of them is absent, 4. Same jurisdiction/taxing district; then it amounts to 5. Same taxing period; indirect double taxation. 6. Same kind/character of tax. J. Dimaampao: You memorize that! Why is direct double taxation prohibited? What is the constitutional  provision that is being violated? Student: Direct double taxation is prohibited because it would amount to confiscation of property without due process of law. J. Dimaampao: Another probable bar question is International Juridical Double Taxation as enunciated in CIR vs S. C. Johnson & Sons. What do you understand by that? Is that an example of direct or indirect double taxation? Student: International Juridical Double Taxation refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for incidental periods. Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. This is an example of indirect double taxation because the tax is imposed by different jurisdiction and taxing authority. J. Dimaampao: What are its elements?

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Student: The elements of International Juridical Double Taxation are: 1. There are two or more states; 2. There is one and the same taxpayer; 3. The same subject matter is taxed; 4. The same period. (This is supplemented only by me according to the definition given by the Supreme Court.) J. Dimaampao: In the case of Philippines vs Germany, where the same taxpayer is being taxed on royalties, what were the ways enunciated by this case to eliminate/minimize double taxation. When did they use the word eliminate and minimize? Student: In order to eliminate double taxation, a tax treaty may be entered into, resorting to two methods. Exemption Method- the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer’s remaining income or capital. The focus is on the income or capital itself. It eliminates double taxation. Credit Method- the tax paid or levied in the state of source is credited against the tax levied in the state o residence. The focus is upon the tax. It only minimizes double taxation J. Dimaampao: Think of Manny Pacquiao, for you to understand this tax credit method. He earns income from the US, he also earns income here. He is taxed in both jurisdictions; thus he is claiming the taxes he  paid in the US as a deduction from his tax liability in the Phils. It’s a classical definition of th at. Again there is that double taxation, but to minimize its effect there is that tax credit. So, it does not eliminate double taxation here, it only minimizes. There is a case I mentioned in your book, which involves double taxation. It’s about Ericsson Telecommunications vs. City of Pasig. You mark that case, it’s a possible bar question. What is that case all about? It’s a classic case of direct double taxation. It  boils down to the tax base. What must be the tax base? Student: The imposition of local business tax based on gross revenue will inevitably result in the constitutionally proscribed double taxation –  taxing the same person twice by the same jurisdiction for the same thing- inasmuch as petitioner’s gross revenue or income for a taxable year will definitely include its gross receipts already reported during the previous year and for which local business tax has already been  paid. J. Dimaampao: Sec. 143 of RA 7160 provides that the tax base for local business tax should be gross sales or gross receipts, not gross revenue. Gross Sales are derived from the sale of goods and properties, on the other hand, gross receipts are derived from sale of services. So, with that, how will that amount to double taxation? Which is broader, gross sales or gross revenue? Gross revenue, because it covers both gross sales and gross receipts. So that, when the local government of Pasig prescribed it as the tax base, that compounded the tax because a portion of it has already been paid in the previous year. That is the simplification of the ruling. In case of a building can it be taxed twice? What is the tax that is imposed by the local and national government? Real Property tax. The income from the lease of the building, is it not subject to income tax? Rent Income is subject to income tax. In estate tax, what is that form of or method/device which may minimize the effect of double taxation? There may be double taxation there, what is that method/device? It’s a special form of deduction. Vanishing deduction. Do you recall there is double taxation there? This property has been taxed in the  previous decedent, and when its transferred it was taxed in the present decedent.\ Vanishing deduction presupposes double taxation. Because the same property forms part of the two estate, hence it is taxed twice. The purpose of double taxation is to reduce, minimize, lessen double taxation. What are its elements?

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1. Death of the decedent occurring within 5 years from the transfer of the property through succession; 2. Identity of property; 3. The same property is taxed; 4. It was previously taxed; 5.  No previous vanishing deduction; J. Dimaampao: What is this imprescriptibly of taxes? What is the general rule? Student: As a rule, taxes are imprescriptible as they are the life blood of the government. However, tax statutes may provide for statute of limitations. J. Dimaampao: You must bear in mind that there are four major tax statutes, namely? Student: 1. National Internal Revenue Code, as amended by the TRAIN Act (RA 10963); 2. Local Government Code (Book II Title 1, RA 7160); 3. Real Property Taxation (Book II Title 2, RA 7160); 4. Customs Modernization and Tariffs Act (RA 10863), this used be Tariff and Customs Code. J. Dimaampao: Do you apply the rule that taxes are imprescriptible in all these tax laws? State the rules. Taxes are imprescriptible; however tax laws may provide for statute of limitations. Student: J. Dimaampao: You memorize those periods! When do you apply the general rule that taxes are imprescriptible? Taxes as a rule are imprescriptible for those which are not covered by any statute of limitations! What is that tax? Minimum Corporate Income Tax? Student: Improperly Accumulated Earnings Tax. J. Dimaampao: You cannot compel corporations to report this. In effect its imprescriptible. Now when do you apply or consider that Taxes are imprescriptible? Student: If the law is silent. J. Dimaampao: Yes! If the law is silent, if it did not provide for any limitations! Thus, you cannot apply this rule to those 4 kinds of tax since the law provides for prescriptive periods. Now, what did you learn from your study of Civil Law, with regard to the application of laws? Is it applicable to tax laws? As a rule tax laws apply prospectively, except when it provides for its retroactive application. Exception to the exception as held in  Republic vs Oasan Vda. De Fernandez , is when its retroactive application will impose harsh and oppressive tax or would amount to denial of due process. That is the time when you will disregard the retroactive application of tax. There have been rulings in taxpayers suit. What are the two indispensable requisites of taxpayer’s suit as held in Gonzales vs Marcos? Student: The requisites of taxpayer’s suit under Gonzales vs Marcos are, First, illegal or unlawful disbursement of public funds. Second, the public funds must be derived from taxes. J. Dimaampao: Did I not mention that the coverage of your Bar Exam includes the distinction of taxpayers’. suit and citizens suit? What do you mean by a citizen’s suit. Yo u discuss that under the Constitution. Did I not ask you to research on that? Its discussed in David vs Arroyo. Including the doctrine of transcendental importance. This doctrine is always discussed in all these landmark cases. Its there in the case of 489 SCRA 160. In citizen’s suit the filer/ petitioner is just an instrument of public concern. There is a public concern there, its just that it don’t involve disbursement of public funds. If you question this TRAIN Law, what will you file, a taxpayer suit or a citizen suit?

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There is a public concern which may affect the people. It involves the general welfare of the people. What about this doctrine of transcendental importance? There are tax cases which involves matters of transcendental importance. Its an exception of the requirement of locus standi. In making this one of the coverage, it only pertains to tax cases. So locus standi may be relaxed when a cases has transcendental importance. So, you need not prove this so called locus standi. What do you think, does this apply to the TRAIN Act? Student: Yes, Sir! J. Dimaampao: Yes, it applies to the TRAIN Act. Can you think of other tax cases that are of transcendental importance, that’s why that doctrine is now included in the coverage? E -Vat Law RA 7716. So that ends our review on General Principles.

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February 3, 2018 TAX REMEDIES

Recitation: 1. There are remedies that may be availed of by the government. There are remedies that may be resorted to by the taxpayer. What are the remedies of the government? These are: 1) compromise 2) enforcement of a tax lien 3) forfeiture 4) distraint of personal property 5) levy of real property 6) civil action 7) criminal action 8) civil penalties 2. What is the purpose of the remedies that may be availed of by the government? Why is there a need for such remedies insofar as the government is concerned? Explain in not more than two sentences. *We really hate verbose answers.* These remedies available to the government are designed to ensure the collection of taxes. In resorting to these remedies, the government must observe/comply with the legal parameters that are set forth in the tax laws. 3. On the other hand, what is the underlying purpose of the remedies that may be resorted to by the taxpayer? *Clue: You really have to check whether the collection of taxes by the government is in accordance with law.* The purpose of these taxpayer’s remedies is to safeguard the interests of the taxpayers against unreasonable or arbitrary assessment, collection or investigation. 4. These remedies are either administrative or judicial. What is the difference between these administrative and judicial remedies? *Do not use the word “exercise.” We are not talking about power. Use the words “resorted to,” “availed of” because these are rem edies.* Administrative remedies are those that do not require judicial proceedings, whereas judicial remedies are those that require/necessitate/warrant judicial actions or proceedings. 5. There are two aspects of taxation: assessment and collection. In the bar examination, this came out: what is the difference between assessment and collection? Assessment is the written notice and demand to the taxpayer of his due tax liability. Collection is the enforcement of the assessment. Which comes first?

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6. Is assessment a condition sine qua non to collection insofar as the NIRC is concerned? Why? No. Sections 203 and 222 of the NIRC do not require prior assessment before collection may be made. Therefore, collection may be made with or without prior assessment. 7. What is meant by assessment?  Adamson v. Court of Appeals, 588 SCRA 27 is the authoritative definition. You memorize that.* An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. 8. What is meant by assessment under the NIRC? *This is a defective definition.* It is a written notice and demand made by the BIR on a taxpayer for the settlement of due tax liability that is set and fixed within a prescribed period. 9. What are the requisites of a valid assessment under the NIRC? *You are not asked to define. You are asked to enumerate.* The requisites of a valid assessment under the NIRC are as follows: 1) It must be a written notice and demand. 2) It must state the due tax liability of a taxpayer. 3) The taxpayer’s tax liability must be final. 4) It must state the law and the facts upon which it is based. (Section 228, NIRC; Commissioner v. Reyes) 5) It must be served on and duly received by the taxpayer. (Commissioner v. Pascor) The BIR wrote the taxpayer allowing him to counter or present his side, or asking him if the assessment is to be his final tax liability. Will that constitute valid assessment?  No, because it does not contain the taxpayer’s final tax liability. An affidavit executed by a revenue officer or agent setting forth the final tax liability of the taxpayer. Will that qualify as assessment?

No, because there is no written notice and demand. I t is just an affidavit. If there is a violation of the 4 th or the 5th requisite, what is the effect on the assessment?

The assessment is void ab initio because it is a violation of due process. There must be proof of receipt by the taxpayer of the assessment. Who has the burden of proof?

I t is the BI R who must prove that the assessment is duly received by the taxpayer. This is an exception to the presumption of regularity in the performance of official functions. Can the BIR invoke the presumption of regularity in the performance of official functions to discharge the  burden of proof?

No, because this is an exception to the presumption. 10.

What is assessment for purposes of real property taxation?

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Assessment for purposes of real property taxation is the act or process of determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. (Section 199(f), Local Government Code)

11. What is assessment for purposes of customs duties? Assessment for purposes of customs duties refers to the final computation and ascertainment by the collector of duties on imported merchandise based on official reports as to the quantity, character, and value thereof, and the collector’s own finding as to the applicable rate of duty. (Pilipinas Shell Petroleum Corporation v. Customs Commissioner, 589 SCRA 574) 12. What are the requisites of a valid assessment for purposes of customs duties? The requisites are as follows: 1) It must contain the final computation and ascertainment of duties on imported merchandise. 2) It must be based on official reports as to the quantity, character, and value of the imported merchandise. 3) It must set forth/contain the collector’s own finding as to the applicable rate of duty. 13. In your book, I mentioned methods that may be used by the BIR to make an assessment. What are these methods? The methods of assessment are: 1) networth method of investigation (Section 43 of the NIRC) 2) presumed gross sales or receipts method 3) expenditures method (Collector v. Jamir, 4 SCRA 718) 14. The networth method of investigation finds support in the  Best Evidence Obtainable Rule. It is a different concept in Remedial Law. What do you mean by best evidence obtainable? What does it consist of? This includes corporate and accounting records of the taxpayer who is the subject of the assessment process; the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales; data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the BSP, the BOC and the TCC. 15. What are the four instances wherein the BIR may resort to this best evidence obtainable rule? These are: 1. When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations 2. When there is reason to believe that any such report is false 3. When there is reason to believe that any such report is incomplete 4. When there is reason to believe that any such report is erroneous (Section 6b, NIRC)

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16. Can you strictly apply the hearsay evidence rule in tax cases? *Read Campbell v. Guetersloh and  Kenny v. Commissioner, as cited in CIR v. Hantex Trading Co., Inc., 454 SCRA 301).* No. Hearsay is admissible in tax cases because other sources may include information or data from third persons. 17. Can mere photocopies of records/documents constitute best evidence obtainable? No. They have no probative weight if offered as proof of the contents thereof. (CIR v. Hantex Trading Co., Inc., 454 SCRA 301) 18. Best evidence obtainable allows the BIR to use the networth investigation method. How do you apply this method? Step 1: Get the difference of networth end and networth beginning. Step 2: Add the non-deductible expenses which understated the income. Step 3: Deduct the exclusions which overstated the income. Step 4: Compare the total amount obtained with the taxpayer’s taxable income reported in the return. If there is discrepancy between the two, this will be the subject of assessment. 19. When is it proper for the BIR to fix the presumed gross sales or receipts? It is resorted to in the following cases: 1) When it is found that a person has failed to issue receipts and invoices in violation of the requirements of Sections 113 and 237 of this Code, or 2) When there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed under the provisions of this Code. (Section 6(c), NIRC) 20. Collector v. Jamir discusses the other method of assessment: the expenditures method. How does it apply? It is applied by deducting the aggregate yearly expenditures from the declared yearly income, not the expenditures incurred each month, from the declared income therefor. If the amount spent is more than the amount earned for the same year, the excess is the unreported income. Sections 203, 222 and 223 of the NIRC provide for prescriptive periods. This clearly shows that internal revenue taxes are prescriptible. Let us discuss in this regard these three related provisions. 21. Does Section 203 apply to assessment and collection? Yes. It is in the law. With due respect to the BIR, it not only applies to assessment, but also collection. 22. When do you reckon the three-year period? It is reckoned from the last day prescribed by law for the filing of the return or from the day the return was filed. 23. In the case of individual taxpayers, when will be the deadline for filing the return? What about the corporate taxpayers? Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 35 of 54

In case of individual taxpayers, the deadline is April 15 of the applicable year. In case of corporate taxpayers, the tax return is filed quarterly. If it has adopted the calendar year period, the deadline for filing the final adjusted return is April 15. If it has adopted the fiscal year period, the deadline is the 15th  day of the fourth month following the close of the fiscal year. (Section 77(b) of the NIRC)

24. The return has been amended. When do you commence/reckon the three-year period? *Check the  Phoenix doctrine in p. 205. Read the case.* It depends. If the amendment is substantial, the three-year period will be reckoned from the filing of the substantially amended return. Otherwise, the period will be reckoned from the date of the original filing. 25. What is the distinction between Section 203 and Section 222? In Section 203, the return is neither false nor fraudulent. Section 222, on the other hand, contemplates three situations *triple F * : when a false or fraudulent return is filed, or when there is failure or omission to file a return. 26. How do you apply the five-year period in Section 222? How about the ten-year period? The five-year period only applies to collection. It is reckoned from the assessment of the tax. The ten-year period is applied to both assessment and collection. It is reckoned from the discovery of the falsity, fraud or omission. This allows collection even without prior assessment. 27. Having discussed these prescriptive periods in Section 203 and 222, you must know the grounds in Section 223 to suspend the prescriptive period. What are these grounds? The grounds for suspension of prescriptive period are as follows: 1) when the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter; 2) when the taxpayer requests for a reinvestigation which is granted by the Commissioner; 3) when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected; 4) when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; 5) when the taxpayer is out of the Philippines; and 6) when there is a waiver of the Statute of Limitations. (not found in Section 223) 7) when the Commissioner files an answer to taxpayer’s petition for review (Fernandez Hermanos v. Commissioner, 29 SCRA 552) 28. Who can enjoin the collection of taxes? No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code. (Section 218, NIRC) The “court” referred to in the “No Injunction Rule” is limited to “regular courts” only. Republic Act No. 9282, in Section 9, para. 4 thereof, confers upon the Court of Tax Appeals the authority to enjoin/suspend the collection of taxes under the circumstances stated therein. Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 36 of 54

29. What are the grounds upon which the CTA may restraint/enjoin the collection of taxes? Section 9, para. 4 of R.A. No. 9282 provides for the following grounds: 1) when in the opinion of the Court the collection by the government agency may jeopardize the interest of the Government or the taxpayer; and 2) when the taxpayer is required either to deposit the amount claimed or to file a surety bond for not more than double the amount of the tax sought to be collected with the Court 30. Read Pacquiao v. CTA, 789 SCRA 19. The Court reiterated therein that a bond must be posted, whether cash or surety bond. If surety bond is posted, what is the requirement of the law? The surety bond must be posted for more than double the amount of the tax sought to be collected. 31. The posting of the bond in order to suspend the collection of taxes admits of two exceptions. What are these? 1) if the method employed by the Collector of Internal Revenue in the collection of tax is not sanctioned by law (Collector of Internal Revenue v. Avelino) 2) if the collection of taxes was made after the lapse of the three-year limitation period (Collector of Internal Revenue v. Zulueta) 32. The prescriptive periods may be extended by agreement between the BIR and the taxpayer. What are the requisites of valid waiver of prescriptive period? *Read the landmark case on the waiver of the  prescriptive period: Commissioner v. Kudos Metal Corporation, 620 SCRA 232. It discussed the requisites in Revenue Memorandum Order No. 2090.* 1) An agreement must be reached /made before the expiration of the prescriptive period. 2) It must be in writing. 3) It must be signed by the BIR authorized representative and the taxpayer. 4) It must be approved by the BIR. 5) If the taxpayer is a corporation, the Board must approve th e waiver. 33. There are five grounds for suspension of the prescriptive period under Section 223. Another ground is the waiver of prescriptive period. What is the other ground for suspension of prescriptive  period? *It is a judicial ground* The judicial ground for suspension of prescriptive period is the filing of Answer to taxpayer’s petition for review. (Fernandez Hermanos v. Commissioner, 29 SCRA 552) 34. Let us now discuss one of the most important topics - compromise. The BIR is authorized to compromise internal revenue tax cases. What are the grounds upon which the BIR may compromise an internal revenue tax? The grounds as stated in Section 204 of the NIRC are: 1) the existence of doubtful validity of the assessment against the taxpayer, or 2) the financial incapacity of the taxpayer to pay the assessed tax.

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35. There are nine doubtful validity cases in your book. Note that assessment made based on the best evidence obtainable is one of them. Why is it a doubtful validity case? Can you explain that? It is not explained in your book. We will explain it now. It falls under the doubtful validity cases because the source of information or data may come from other persons. It may be hearsay. That makes it doubtful. 36. Another one asked in the Bar is jeopardy assessment. It is another doubtful validity case. What is a jeopardy assessment? What may be jeopardized? Why is doubtful? A jeopardy assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the revenue officer's belief that the government’s interest will be jeopardized by delay caused by the taxpayer. It is doubtful because there is no audit made by the BIR. That makes it doubtful. 37. Out of these nine cases, these two are the most important  –   assessment based on best evidence obtainable and jeopardy assessment. Read the other seven cases of doubtful validity in the book. The other seven cases are: 1) Assessment appearing to be arbitrary or based on presumptions 2) Failure of taxpayer to file protest on account of alleged failure to receive notice of assessment or preliminary assessment 3) Failure of taxpayer to file request for reinvestigation or reconsideration within 30 days from receipt of final assessment notice 4) Failure of taxpayer to elevate to CTA an adverse decision of the Commissioner or his representative within 30 days from receipt thereof 5) Assessment issued on or after January 1, 1998, where demand allegedly failed to comply with the formalities of the Tax Code of 1997 6) Assessment issued within the extended prescriptive period where the waiver of the statute of limitations is being questioned or at issue 7) Assessment based on an issue decided against the Bureau, but for which the SC has not decided upon with finality 38. Can you mention the obvious grounds under the cases of the taxpayer’s financial incapacity? There are five in your book. These are: 1) when the corporation ceased operation or is already dissolved. 2) when the taxpayer is suffering from surplus or earnings deficit resulting in impairment of the original capital by at least 50%. 3) when the taxpayer is suffering from a networth deficit. 4) when the taxpayer is a compensation income earner with no other source of income, and the family’s gross monthly compensation income does not exceed the levels provided for under the revenue regulations. 5) when the taxpayer has been granted by the SEC or the competent tribunal a moratorium or suspension of payments to creditors, or otherwise declared bankrupt or insolvent.

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39. Memorize those that cannot be compromised. Memorize those seven and apply expressio unius. It is a must that you memorize these. Section 204 mentions only two. It is incomplete. The other cases are found in revenue regulations. It is in your book in page 198. What are these cases that the Commissioner cannot compromise? These cases are as follows: 1) criminal tax fraud cases (Section 204) 2) criminal violation already filed in court (Section 204) 3) withholding tax cases 4) delinquent accounts with duly approved schedule of installment payments 5) final reports of reinvestigation or reconsideration resulting in reduction in the original assessment, and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose 6) final and executory judgment of a court 7) estate tax cases where the ground for compromise is the financial incapacity of the taxpayer If there is fraud involved, why can we not compromise it?

I t is because that will open the floodgates to the commission of tax fraud. That is contrary to public  policy. When cases are compromised, the law or juri sprudence allows that if it is not contrary to public  policy. Why can we not compromise criminal cases not attended by fraud if it is already filed in court?

I t is because the BI R no longer has jurisdiction. I t is now the court which has jur isdiction, and the BI R can no longer interfere. Why can we not compromise final judgments or final reports?

I t is because they are already binding upon the taxpayer. Take note there is a qualification in estate tax cases. What does the qualification imply? Explain.

I t is not an absolute that estate tax cases may be compromised. This means that estate tax cases where the ground for compromise is the fi nancial i ncapacity of the taxpayer cannot be compromised. Why can we not compromise estate tax cases where the request for compromise is based on financial incapacity of the taxpayer? *If you can explain that, you are better than tax authors, revenue officers, and tax lawyers. If you ask them, they can hardly explain that.*

When there is a case filed with the Commissioner, all issues are passed upon. That is why that can no longer be raised. This rule is based on the fact that the taxpayer is given ample time to settle his tax liability. (5 years in case of judicial settlement of estate, 2 years in case of extrajudicial settlement of estate –  Section 91 of the NI RC) Let us have a brief review of these three administrative remedies that may be availed of the government: enforcement of a tax lien, distraint and levy. 40. Section 219 –  Enforcement of a tax lien. It is defined in your book. How is tax lien defined? A tax lien is a legal claim or charge on property, whether real or personal, established by law as a sort of security for the payment of tax obligations. (Hong Kong and Shanghai Banking Corp. v. Rafferty) 41.

What is the difference between tax lien and forfeiture?

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In tax lien, the excess, after satisfying the tax liability, will go to the taxpayer. (BPI v. Trinidad) In forfeiture, all the proceeds of the sale will go to the c offers of the government. (US v. Suria)

42. Who has the superior claim to these barges in CIR v. NLRC, 238 SCRA 42? Between a claim  based on judgment and a claim based on tax lien, which will prevail? Explain. The government’s claim predicated upon a tax lien is superior to a claim based on judgment. The reasons are as follows: 1) A tax lien attaches upon all property and rights to property of the taxpayer in case he fails to pay taxes. (Section 219) 2) It attaches from the moment the taxpayer fails to pay the tax. Thus, there is nothing left to be attached by the sheriff for a claim based on judgment because the government has acquired tax lien on the property. 43. Can LGUs avail of these administrative remedies? Yes. (Section 173, LGC) Section 173. Local Government's Lien. - Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which may be subject to the lien but also upon property used in business, occupation, practice of profession or calling, or exercise of  privilege with respect to which the lien is imposed. The lien may only be extinguished upon full payment of the delinquent local taxes fees and charges including related surcharges and interest. 44. Can LGUs resort to enforcement of tax lien? Yes. (Section 257, LGC) Section 257. Local Governments Lien.  - The basic real property tax and any other tax levied under this Title constitutes a lien on the property subject to tax, superior to all liens, charges or encumbrances in favor of any person, irrespective of the owner or possessor thereof, enforceable by administrative or  judicial action, and may only be extinguished upon payment of the tax and the related interests and expenses. 45. May the Collector of Customs avail of the enforcement of tax lien? Under the Old Customs Code, the answer is yes. Under the Customs and Tariff Modernization Act (R.A. No. 10863), the answer is no. 46. What is the subject of distraint? What is the subject of levy? The subject of distraint is personal property, such as goods, chattels, or effects of the taxpayer, as well as stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property. On the other hand, the subject of levy is real property or any interest therein. 47. It is clear under Section 207(a) that the BIR is allowed to resort to distraint. Is distraint an available remedy under the LGC? Yes. (Section 175, LGC) Section 175. Distraint of Personal Property. - The remedy by distraint shall proceed as follows:

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(a) Seizure - Upon failure of the person owing any local tax, fee, or charge to pay the same at the time required, the local treasurer or his deputy may, upon written notice, seize or confiscate any personal  property belonging to that person or any personal property subject to the lien in sufficient quantity to satisfy the tax, fee, or charge in question, together with any increment thereto incident to delinquency and the expenses of seizure. Is distraint available under real property taxation?

Yes, under Section 254 of the LGC. H owever, it is an erroneous provisi on because the subject of distraint is personal property. Section 254. Notice of Delinquency in the Payment of the Real Property Tax. xxx (b) Such notice shall specify the date upon which the tax became delinquent and shall state that personal  property may be distrained to effect payment.

Is distraint available under the Old Customs Code?

No. There is no such remedy in this law to that effect. Is distraint available under the CMTA?

Yes. (Section 1134a, CMTA) Section 1134. Summary Remedies. —  (A) Distraint of Personal Property. —   Upon failure of the person owing any delinquent duty, tax and other charges to pay at the time required, the Commissioner shall seize and distraint the goods, chattels or effects, and the personal property, including stocks and other securities, debts, credits, hank accounts, and interests in and rights to personal property of such persons, in sufficient quantity to satisfy the duty, tax or other charge and the expenses of the distraint and the cost of the subsequent sale. The officer serving the warrant of distraint shall make or cause to be made an account of the goods, chattels, effects, or other personal property distrained, a copy of which, signed by the said officer, shall he left either with the owner or person from whose possession such goods, chattels, or effects or other  personal property were taken, or at the dwelling or other place of business of such person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and note of the time and place of sale. Stocks and other securities shall be distrained by serving a copy of the warrant of distraint upon the importer and upon the president, manager, treasurer, or other responsible officer of the corporation, company or association, which issued the said stocks or securities. Debts and credits shall be distrained by leaving with the person owing the debts or having in his/her  possession or under his/her control such credits, or with his/her agent, a copy of the warrant of distraint. The warrant of distraint shall be sufficient authority to the person owing the debts or having in his  possession or under his control any credits belonging to the importer to pay to the Commissioner the amount of such debts of credits. Bank accounts shall be garnished by serving a warrant of garnishment upon the importer and upon the  president, manager, treasurer, or other responsible officer of the bank Upon the receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the government.

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A report on the distraint shall, within ten (10) days from receipt of the warrant, be submitted by the Commissioner to the Secretary of Finance: Provided , That the Commissioner shall have the power to lift such order of distraint subject to the rules and regulations promulgated pursuant to this Act. 48. It is clear under Section 207(b) that the BIR is allowed to resort to levy. Is levy available under the LGC? Yes. (Section 176, LGC) Section 176. Levy on Real Property. - After the expiration of the time required to pay the delinquent tax, fee, or charge, real property may be levied on before, simultaneously, or after the distraint of personal  property belonging to the delinquent taxpayer. Is levy available under real property taxation?

Yes. (Section 258, LG C) Section 258. Levy on Real Property.  - After the expiration of the time required to pay the basic real  property tax or any other tax levied under this Title, real property subject to such tax may be levied upon through the issuance of a warrant on or before, or simultaneously with, the institution of the civil action for the collection of the delinquent tax.

Is levy available under the Old Customs Code?

No. Is levy available under the CMTA?

Yes. (Section 1134b, CMTA) Section 1134. Summary Remedies. —  xxx (B) Levy on Real Property. —   After the expiration of the period within which to pay the duty, tax and other charges as prescribed in this section, real property may be levied upon, before, simultaneously, or after the distraint of personal property belonging to the importer. To this end, the Commissioner or the duly authorized representative shall prepare a duly authenticated certificate showing the name of the importer and the amounts of the duty and tax and penalty due. The certificate shall operate with the force of a legal execution throughout the Philippines. The levy shall be effected by writing upon the certificate a description of the property on which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the register of deeds of the province or city where the property is located and upon the importer, or if the latter is not in the Philippines, upon the agent or the manager of the business from which the liability arose, or if there be none, to the occupant of the property in question. In case the warrant of levy on real property is not issued before or simultaneously with the warrant of distraint on personal property, and the personal property of the importer is not sufficient to satisfy the duty and tax due, the Commissioner or a duly authorized representative shall, within thirty (30) days after execution of the distraint, proceed with the levy on the real property of the importer. Within ten (10) days after receipt of the warrant, a report on any levy shall be submitted by the levying officer to the Commissioner; Provided , That the Commissioner may lift such warrants of levy issued, subject to the rules and regulations promulgated pursuant to this Act.

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49. What are the distinction between distraint and levy? There are four or five. Mention two significant distinctions. 1) Distraint involves personal property. Levy involves real property. (Already a given!) 2) Distraint may be actual or constructive. There is no such thing as constructive levy. 3) Distraint merely requires posting. Levy requires publication. 50. How is constructive distraint effected? The constructive distraint of personal property shall be effected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same, in any manner whatever, without the express authority of the Commissioner. (Section 206, NIRC) 51. When can the BIR resort to constructive distraint? To safeguard the interest of the Government, the Commissioner may place under constructive distraint the property of any taxpayer: 1) when he is retiring from any business subject to tax, 2) when he is intending to leave the Philippines, 3) when he is intending to remove his property therefrom or to hide or conceal his property, or 4) when he is intending to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him. (Section 206, NIRC) 52. Is notice of sale still required to be served on the delinquent taxpayer? Did you not learn that  publication is a notice to the whole world? Read Section 213, para. 4 of the NIRC. Yes, because the taxpayer cannot exercise his right under Section 213 to prevent the sale if he is not informed of such sale. What you learned that publication is a notice to the whole world does not apply here because of that provision. SEC. 213. Advertisement and Sale. – x x x At any time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the taxes, penalties and interest. Assignment: We will review what you have learned in protest and refund. I have lengthily discussed refund in the book  because it always comes out in the bar. Read: Protest –  pp. 218-225 (mentioned seven cases, five of which came out in the bar)  

Refund –  pp. 225-242 (mentioned 35 cases, all of which came out in the bar)

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CTA –  pp. 243-263 (mentioned 18 cases in CTA, 2/3 of which came out)

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Appendix B –  New Revenue Regulations

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Cases which will answer this bar question: what may constitute decisions of the BIR appealable to the CTA? 1. Republic v. Lim Tian Teng Sons, 16 SCRA 584 2. Surigao Electric v. CA, 57 SCRA 523 3. Commissioner v. Ayala Securities Corporation, 70 SCRA 204 4. Yabes v. Flojo, 115 SCRA 278 Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 43 of 54

5. Commissioner v. Advertising Associates, 133 SCRA 765 6. Commissioner v. Algue, 158 SCRA 9 7. Commissioner v. Union Shipping Lines, 185 SCRA 547 8. Commissioner v. Isabela Cultural Corporation, 361 SCRA 71 9. Oceanic Wireless Network, Inc. v. Commissioner, 477 SCRA 205 10. Allied Banking Corporation v. Commissioner, 611 SCRA 692 I will ask you one or two liner on the jurisprudential ruling of the court.

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February 17, 2018 TAX REMEDIES

I declared a ceasefire last week. Today is a war. I am just here to guide you. I hope you read your assignment. Comparative Review of the Taxpayer’s Remedies NIRC Request for reinvestigation or reconsideration

LGC Section 195

Prescriptive Period

30 days from receipt of FAN/FLD

Where to File

Commissioner of Internal Revenue

60 days from receipt of local tax assessment Local treasurer

RPT Section 252 No need for payment under protest 30 days from the date of payment of taxes Local treasurer

Section 196 2 years from the date of payment or from the time he is entitled thereto Local treasurer

Section 253 2 years from the date of payment or from the time he is entitled thereto Local treasurer

PROTEST

REFUND Prescriptive Period

Where to File

2 years from the date of payment

Commissioner of Internal Revenue

CMTA Section 1106 Payment under protest is required 15 days from the date of payment of taxes Commissioner of Customs Section 193 12 months from the date of payment of duties and taxes Commissioner Customs

of

Protest under NIRC Where do you file? BIR What do you file? Request for reinvestigation or reconsideration When do you file? Within 30 days from receipt of the final assessment notice or final letter of demand Protest under LGC, Section 195 Where do you file? Local treasurer When do you file? Within 60 days from receipt of the local tax assessment Protest under RPT, Section 252 Where do you file? Local treasurer When do you file? Within 30 days from the date of payment of taxes Payment under protest is required. Check the recent case on the SC website regarding the definition of payment under protest. RESEARCH: Payment under protest and appeal to the Local Board of Assessment Appeals are "successive administrative remedies to a taxpayer who questions the correctness of an

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assessment." (City of Lapu-Lapu v. Phil. Economic Zone Authority, G.R. Nos. 184203 & 187583, [November 26, 2014])

Protest under the old Tax Code, Section 2308 Where do you file? Collector of Customs When do you file? Within 15 days from the date of payment of taxes Payment under protest is required. Protest under the CMTA, Section 1106 Where do you file? Commissioner of Customs When do you file? Within 15 days from the date of payment of taxes Payment under protest is also required. Section 228 of the NIRC is not complete. It is clarified by Appendix B of your book (Revenue Regulations) What must be protested? The final assessment notice or final letter of demand Is notice of informal conference under Rev. Reg. 12-1999 required? YES Is notice of informal conference under Rev. Reg. 18-2013 required? NO LONGER REQUIRED. Is preliminary assessment notice required? Yes (CIR v. Metro Star Superama, 637 SCRA 633, page 223 of the book) Why? Due process requires PAN. What is the prescriptive period to respond? 15 days from receipt of PAN When there is no response given within 15 days, what will happen? The BIR will issue the FAN/FLD. What is the difference between request for reinvestigation and request for reconsideration? Basis Suspension of period (Section 223)

prescriptive

Request for reinvestigation Newly discovered evidence Allowed (Section 228)

Request for reconsideration Existing records Not allowed

What is the case explaining why request for reinvestigation suspends the running of prescriptive period? CIR v. Philippine Global Communication, p.220 What is the reason? If both suspend the running of prescriptive period, then an erroneous assessment may never prescribe. General rule: PAN must first be sent before FAN Exceptions: (Section 228, pp.311-312) 1. finding based on mathematical error 2. deficiency tax has been withheld (such tax discrepancy brought about or resulted in tax withheld  because there is a difference between tax withheld and tax actually remitted 3. creditable withholding tax for corporate taxpayers (carried over) 4. excise tax on excisable articles has not been paid Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 46 of 54

5. locally purchased or imported goods such as vehicles and capital equipment Hypothetical question (analyze, go outside the box): What is the purpose of PAN? To rectify the amount. The taxpayer is given chance to explain why PAN is erroneous. Why are there 5 exceptions? The ratio decidendi is that in the 5 exceptions, the BIR can easily rectify the assessment. Who can issue PAN? BIR and its duly authorized representative Who are the duly authorized representatives? Regional Revenue Directors Explain the 60-day period. p. 314 It is required in request for reinvestigation where relevant supporting documents shall be submitted. This does not apply to reconsideration. Memorize definitions. Explain the 180-day period. p. 315 It is the period of inaction on the part of BIR. The taxpayer will have the option to either file a petition for review under Rule 42 within 30 days after the lapse of 180-day period, or await the final decision of the Commissioner of Internal Revenue. If there is a decision, the taxpayer may opt to appeal to the CTA within 30 days from receipt of the decision or file a request for reinvestigation within 30 days from receipt Two cases on the term “await final decision” are decided by the Supreme Court. With all due respect, this is a judicial legislation. The taxpayer must wait final decision. It is not in the law. Do not criticize this. You might not pass the bar. So let’s have tax refund. In comparative rules, where to file? Then prescriptive period? Let’s have  National Internal Revenue Code.  NIRC is 2 years from the date of payment so it’s available in the NIRC under sec. 229 Let’s go to Local Government taxation. Is there a remedy available to taxpayer? Sec. 196 Where do you file? The Local Treasurer Prescriptive Period? 2 years from the date of payment or from the time he is entitled thereto. You don’t find that in the NIRC. Under the NIRC sec. 229 is from the date of payment. Here (LGC) is from the date of payment or from the time he is entitled thereto. I am talking about Sec. 196 of RA 7160 of Local Government Taxation. What do you think the difference or its legal implications “from the time he is entitled thereto”? In sec. 229, is the doctrine of supervening cause or event applicable?  No, very clear, regardless of any event arises from the date. Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 47 of 54

How about the refund of Local government tax? Is that applicable? Yes because of that provision “from the time he is entitled thereto.” For instance, local tax was paid in 2016. In 2017, there was finding to effect that this taxpayer was exempt. What’s the reckoning date of the 2 -year period? 2016 or 2017? 2017 is from the time he is entitled thereto. But if it were a revenue tax, you should count that from the date of payment. Let’s have Real Property Taxation. Available to refund? Yes, Sec. 253. The same information. Prescriptive period? 2 years from the date of payment or from the time he is entitled thereto. Therefore, the doctrine of supervening cause applies. Please go to Customs duties. Under the Tariff and Customs Code, It is silent on the prescriptive period. There are provisions there from Sec. 1700 to sec. 1708 on refund but no prescriptive period must provide in such refund. Let’s find to check whether under the Customs Modernization Tariff Act  provides on prescriptive period. What is your guess? Refund is likewise an available remedy. Prescriptive period is on Sec. 193, RA 10863 It is 12 months from the date of payment of duties and taxes. This is a new prescriptive period. So, it’s 2 2-2 except customs duties. So, its 12 months or 1 year. What is the difference between 12 months and 1year? Art. 13 of New Civil Code provides that “It shall be understood that years are of three hundred sixty -five days each” In Administrative code, A year is counted 12 months regardless of the number of the days in each month. The law says 12 months from the payment of duties and taxes. NIRC 2 years from the date of payment so it’s available in the NIRC under sec. 229

LGC Sec. 196 2 years from the date of payment or from the time he is entitled thereto

RPT Sec. 253 2 years from the date of payment or from the time he is entitled thereto.

CMTA 12 months from the date of payment of duties and taxes

So Let’s us focus on Sec. 229, we can review here a lot of jurisprud ence. I hope you recall. I think I cited 38 decisions of the court from page 225 to 242. Some of them has already asked in the bar exam. With that number of cases, this serve as a notice of you that this is the most favorite bar question next to  protest. Bar Question. Here in NIRC, you need to file so-called refund, what are the requisites? First, it must be in writing. Written claim for refund. Second, it must contain a categorical demand. What is that? You are requesting for a refund. Therefore, demand for reimbursement of taxes illegally, erroneously, unlawfully or excessively assessed or collected. Third, it must file 2 years from the date of payment.  SE C. 229. Recovery of Tax E rr oneously or I llegally Collected . - no suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 48 of 54

without authority, of any sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. cralaw  In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of  payment of the tax or penalty regardless of any supervening cause that may arise after payment:  Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Sec. 229, RA 8424) It is clear that the doctrine of supervening cause does not apply and the 2 year prescriptive period lies from the date of payment. In Sec. 229 has a question who may file such refund? That’s the deficienc y there, then who shall file such refund? Of course, it is the taxpayer. (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction.  No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty:  Provided, however, That a return filed showing an overpayment shall be considered as a written claim  for credit or refund… (Sec. 204(C), RA 8424) Taxpayer was mentioned there. Was Taxpayer mentioned in Sec. 229? Bar Question. I think it was asked 5 times already. Be a withholding agent file a written claim for refund? In 1988, there were two conflicting decisions of the Court, The  Proctor & Gamble Case and the Wander  Case. In the Wander Case, Yes, but in  Proctor & Gamble Case, No. But has reconciled by the Supreme Court. What is the prevailing jurisprudence? Does the withholding agent has a legal personality to files a written claim for refund? Reasons. Yes, We focus as the agent of the government. The withholding agent is not only the agent of the government. It is also an agent of the taxpayer. As an agent of the taxpayer, the withholding agent has two fold duties to pay the tax and to file the return. So with that obligation to pay the tax, the withholding agent is technically considered as taxpayer. Withholding agent has the legal obligation to file the return of the taxpayer to pay the tax of the taxpayer as such withholding agent technically considered as taxpayer. That is the jurisprudence there.  Now from the date of payment, what do you mean by payment? That case that I cited to your book on  page 225 on the case of Commissioner vs. TMX Sales 25 SCRA 184  what asked not less than 5 times in the bar exams. That is the case explains the meaning of "date of payment". What is the jurisprudence there in "Date of Payment"? When there is payment in contemplation of law? Or recall what you learn in civil law. That’s why civil law in the suppletory law. When there is payment? Do you recall the three characteristics of payment? Identity of Payment, Integrity of Payment and Indivisibility of Payment. Which one is clearly applicable to you? Because that decision is deficient. It should have cited the Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 49 of 54

 payment under the provision of the civil code. From there, corporate taxpayer was the one making filing such refund. Now, when do you apply that the reckoning date of 2 year period? Remember that corporate taxpayers file their corporate income tax returns on quarterly. For instance, excessive payment or erroneous payment or illegal payment of the payment of the first quarterly return. So, payment was made there. Will you count the 2 year period from the first quarterly return? There is no payment in the contemplation of the law but a partial payment. In partial payment, there is no  payment at all under the civil code. There will only be payment when there is Integrity, when there is a final payment. And when there is be a final payment? From the filing of the Final Adjustment Corporate return where you read sec. 76, NIRC. There can be  payment in contemplation of law upon the filing of final adjustment corporate return. As the case of CIR v. Primetown property group, Inc., 531 SCRA 436,  supposed that leap year intervene, there is a problem now because there seems to be a conflict between the Civil Code and the 1987 Administrative code. Under the Civil Code, a year consists of 365 days and how about the declaration of 1 year in the 1987 Administrative Code? In Sec. 31, Chapter 7, Book I of the Administrative Code  provides a year is composed of 12 calendar months. Which will prevail? The administrative code. Why?  Lex posterior derogat priori. What does it mean? There is no “i” there at the end of the word “ posterior” That is a basic statutory construction. Which will prevail? The prior law or the recent law? It means that recent law prevails over prior law. The prior law must yield to recent law otherwise. The recent law is the 1987 Administrative Code. That is you’re your reason why. This 2 year period, let’s have these jurisprudence in Value added tax (because this is surely come out in the bar exams). In your book, the ruling of the Supreme Court has to be and must yield to the new  provision the TRAIN Act. So refund of Value added tax, so Sec. 112 vs. sec. 229? What’s the difference? Both speak of tax refund. Where lies the difference? One. In sec. 229, it involves internal revenue Tax such as Income tax other than Value added tax. On the other hand, sec. 112 covers refund of value added tax In relation to life blood. In Sec. 112 and sec. 229, all provides for this two year period. Where lies the difference? In Sec. 229, the running of the 2-year period commence to run from the date of payment and in the case of corporate taxpayer, the running of the 2-year period commence to run from the date of filing of the final adjustment corporate return. While in Sec. 112, the running of the 2-year period runs from the close of the taxable quarter which such sales were made. In sec. 229, it is obvious that there is no period from the BIR to render a decision. How about in Sec. 112, there is. In Sec. 112, NIRC as amended by TRAIN Act, the days of inaction is now 90 days in the TRAIN act as previously 120 days in the NIRC. 90 days from the completion of such receipts or invoices. That is very obvious. In sec. 229, it does not involved Value added Tax and no period of inaction by the BIR to render decision but in Sec. 112, it involves Value Added Tax and mentioned a period which is now 90 days. Is that mandatory and jurisdictional? In 120 day period, it is an old rule. You could just imagine and later on. Almost 40 decisions of the court consistently held that mandatory and jurisdictional. What does it mean? It means that you cannot appeal to the CTA before the lapse of that. Is such jurisprudence, is now 90 days period and still now applicable that it is mandatory and  jurisdictional which must be ruled out? This might go out to your bar exam. Abunales, Bernardo, Evidente, Pabalay, Rafael, Ramos Page 50 of 54

It is no longer mandatory and jurisdictional. There is no provision to appeal after the expiration of the  period. There is no provision similar to from NIRC to the TRAIN act. With that amended provision, the ruling of the court is deemed abandoned that it is mandatory and jurisdictional. Please read that Sec. 112 in the old provision and the new provision in the TRAIN law. Thus, it is no longer mandatory and jurisdictional. What is that 30 day period? 2-years, 90-days and then 30-days period. 30-days, it applies to… If the decision has been rendered by the BIR within the 90 -day period, what is the remedy of the taxpayer? The remedy is to file such petition for review on the BIR’s decision on the Value Added Tax to Court of Tax Appeals. There is a provision that 90-days or 30-days from the expiration of that period that has been deleted. What about the 30-days period in Sec. 229? It applies to the appeal of the BIR’s decision on the claim of refund to the Court of Tax Appeals. Under the Rules of Court of the Tax Ap peals, there is under Rule 4, it’s been there that there are two  period that must be observed. This is the common mistake of the Bar examinees. It is clear that the decision of the BIR for tax refund is appealable to the Court of Tax Appeals. Now let’s hav e the comparison between Sec. 229 and Sec. 112. Rule 4 of Rules of Court of Tax Appeals clearly provides that there are two periods that must be observed. What are these two periods? The 30-days period is just one of the period. So, you may appeal that in accordance to Sec. 229, claim for refund other than the Value added tax to the CTA within 30 days from the receipt of the decision of the BIR that without the receipt of the BIR is not enough. What do you learn? What’s the other period? Is the 2 year period from the date of payment also applicable? Yes. The appeal of the decision of the BIR for refund to the CTA must observed these two periods. One, it must be filed within 30 days from the receipt of the decision and it must also within 2 years from the date of payment.  Now let’s go to Sec. 112. Is the 2-year period applicable? No, it is not applicable. It is in your book, the decision of Justice Peralta. You read Sec. 112 (Last Paragraph). There is only one period must be observed. That why in your bar, you check the subject tax is a value added tax, income tax, donor’s tax or other revenue taxes. The court construed that there is only one period in the appeal of the decision of the BIR involving refund of Value added tax. The only remedy is 30 days from the receipt of such decision. These 2-year period must be observed and cannot be suspended by any supervening cause. Exception to the rule? In case of CIR v. Philamlife, 244 SCRA 446 and  PNB, 474 SCRA 303, what are the two exceptions to the rule according to jurisprudence? That two year period may be suspended on these two equitable and principle grounds 1. The BIR assured the taxpayer that the claim for refund will be granted. Why equitable consideration? That you apply the principle of, equitable principle, the assurance of the BIR is bound by that. I always mention that the equitable principle of estoppel . 2. Agreement between the Taxpayer and the BIR that they await the result of a pending case involving similar issue raised in the claim for refund. The situation is there such an issue. They learn that there is such a case with the same issue raise to the Supreme Court. They agree which await of that ruling of the Court which will eventually settled themselves.

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** From his Book** 1. Assurance on the part of the BIR that steps were being taken to credit taxpayer with the amount sought to be refunded. 2. An agreement or understanding with the BIR that they await the result of a pending case involving similar issue raised in the claim for refund. (Panay Electric Co., Inc. v. The Collector of  Internal Revenue, 103 Phil. 819)

Understand before you memorize. If you understood what the Supreme Court Said, that the time you memorize that.

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February 17, 2018 COURT OF TAX APPEALS Why is it considered a specialized court? It is tasked to resolves tax issues. Since it is a specialized court, is it bound by the technical rules on Evidence? As a rule, No. It is not bound by basic evidentiary rules Does rules on CTA allow filing of 2 nd Motion for Reconsideration? As a rule, filing of second motion for reconsideration is not allowed pursuant to Sec.7 Rule 15 Revised Rules of CTA  S E C . 7.  No second motion for reconsideration or for new trial.  – No party shall be allowed to file a second motion for reconsideration of a decision, final resolution or order; or for new trial. But BPI v. CIR, the p rocedural rules were relaxed in the interest of substantial justice and allowed the filing of the second motion for reconsideration as BPI was able to prove that it is entitled to refund. What are the 8 Decisions appealable to CTA? Decisions of the COMMISSIONER OF INTERNAL REVENUE Dispute assessements, refunds,fees, or other charges or penalties in relation thereto, or other matter arsing under the NIRC or other laws administered by the BIR

Decisions of the COMMISSIONER OF CUSTOMS Customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto or other matters arising under customs law

Decisions of the SECRETARY OF FINANCE Automatic review of Custom Commissioner ’s decision which are adverse to the government

Decisions of the SECRETARY OF TRADE & INDUSTRY Noagricultural product or commodity article cases

Decisions of the SECRETARY OF AGRICULTURE Dumping & countervailing duties

INACTION of the COMMISSIONER OF INTERNAL REVENUE Dispute assessements, refunds,fees, or other charges or penalties in relation thereto, or other matter arsing under the NIRC or other laws administered by the BIR

RULE 42

Decisions of the RTC Local tax cases decided in the exercise of its original or appellate  jurisdiction

Decisions of the Central Board of Assessment Appeals Assessment & taxation of real property cases

RULE 43

What is question of law and question of fact?  A question of fact is a question that must be answered by reference to facts and evidence as well as inferences arising from those facts.  A question of law, which must be answered by applying relevant legal principles. Is motion for extension to file a petition for review with the CTA allowed? Yes. City of Manila v. Coca Cola Bottlers Can you file a MR on the decision of the BIR before you can file an appeal with the CTA?  No. It is not allowed. The decision of the CTA division is appealable to the CTA en banc, is filing of MR mandatory? Yes. It is mandatory. Automatic review procedure? What is the purpose? The decisions of the Commissioner of customs which are adverse to the government shall be elevated to the Secretary of Finance automatically for review. The purpose is to protect the government against corrupt & conniving customs collector. What is the jurisdictional amount? Principal amount of taxes & penalties involved is 1 million or more. When you appeal to the CTA en banc, what is the exception to the 30 day period? Sec.3(b) Rule 8.Revised Rules of CTA:

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