of 34 /34
November 19, 2015 TAXATION Legend: in boxes with red pen text – based on the lectures (Added) Black pen text- based on the book TOPICS: I. General Principles of Taxation A. Definition and Concept of Taxation Taxation- is a mode of raising revenue for public purpose - the government cannot exist nor endure without taxation. TAXES- enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of the government and for all its public needs. -PERSONAL TO THE TAXPAYER TAXES ARE: a. ENFORCED CONTRIBUTIONS - obligations created by law b. PROPORTIONAL IN CHARACTER

General Principles otes Taxation

Embed Size (px)

DESCRIPTION

tAX

Citation preview

Page 1: General Principles otes Taxation

November 19, 2015

TAXATION

Legend: in boxes with red pen text – based on the lectures (Added)

Black pen text- based on the book

TOPICS:

I. General Principles of Taxation

A. Definition and Concept of Taxation

Taxation- is a mode of raising revenue for public purpose

- the government cannot exist nor endure without taxation.

TAXES- enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of the government and for all its public needs.

-PERSONAL TO THE TAXPAYER

TAXES ARE:

a. ENFORCED CONTRIBUTIONS

- obligations created by law

b. PROPORTIONAL IN CHARACTER

- based on one’s ability to pay

Page 2: General Principles otes Taxation

c. LEVIED BY AUTHORITY OF THE LAW

- power to impose taxes is only a legislative power.

d. Support of the Government and all its public needs

B. Characteristics of Taxation

(CUPS)

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

UNLIMITED- ( case of Tio vs Videogram Regulatory Board) where the Supreme Court upheld the constitutionality of a law, tuling that a tax does not cease to be valid merely because it regulates, discouraged, or even definitely deters the activites taxed. The power to impose taxes is one so unlimited in force and so searching in extent that the courts scarcely venture to declare that it is subject to any restrictions whatever, except

PLENARY – as it is complete.

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

C. Power of Taxation Compared with Police Power and Eminent Domain

A. Taxation distinguished from Police Power

PURPOSE AMOUNT OF EXACTION

BENEFITS RECEIVED BY THE TAXPAYER

SUPERIORITY OF CONTRACTS (NON-IMPAIRMENT CLAUSE)

TRANSFER OF PROPERTY RIGHTS

Taxation Levied for raising revenues

Amount gathered contemplated of no limits (UNLIMITED)

No special or direct benefit other than the fact that the government secures to the citizen that

Recognizes obligations imposed by contracts

(Inferior to non-

The taxes paid form part of the public funds

Page 3: General Principles otes Taxation

general benefit resulting from the protection of his person and property and the welfare of all.

impairment clause)

Police Power Exercised to promote public welfare through regulation

Exaction is limited to the cost of regulation, issuance of the license, or surveillance

No direct benefits received yet a healthy economic standard of society is maintained.

No limitation does not apply (UNLIMITED)

(Contracts may be impaired – Superior)

Allows merely the restraint on the exercise of property rights.

2. TAXATION AND THE POWER OF EMINENT DOMAIN

PURPOSE COMPENSATION PERSONS AFFECTEDTAXATION Raise public revenue Accrue to the general

benefit of the citizens of the taxing state

Applies to all persons, property and excises that may be subject thereto

Inferior to non-impairment clause

EMINENT DOMAIN Taking of property for public use

Just compensation is given the owner of the expropriated property

Only particular property is comprehended.

Inferior to non-impairment clause

D. Theory and Basis of Taxation

THEORY OF TAXATION:

Page 4: General Principles otes Taxation

NECESSITY THEORY- Taxation is a power predicated upon necessity. A necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State’s territory and facilities and protection which a government is supposed to provide.

BENEFITS-PROTECTION THEORY- bases the power of the State to demand and receive taxes on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society.’

- this theory spawned the DOCTRINE OF SYMBIOTIC RELATIONSHIP.

E. Nature of the Taxing Power

1. Taxation as an Inherent Attribute of Sovereignty

- Taxation is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure.

-belonging as a matter of right to every independent State or government.

2. Taxation as Legislative in Character

-The power to tax is inherent in the State, and the State is free to select the object of taxation, such power being exclusively vested in the legislature, EXCEPT where the Constitution provides otherwise.

POWER OF TAXATION (government can impose taxes)- No specific provision in the Constitution granting the legislative authority power of taxation because of its nature being an inherent power of the State.

- The provisions stated in the Constitution serves as a limitations only on the powers of the State.

F. Purposes of Taxation

PRIMARY PURPOSE is to raise revenues.

- to enable the State to promote the general welfare and protection of its citizens.

Page 5: General Principles otes Taxation

-(Bagatsing vs Ramirez case) where the tax ordinance enacted by the Municipal Board of Manila was assailed as not being a “tax ordinance”, because the imposition of rentals, permit fees, tolls and other fees is not strictly a taxing power but a revenue raising function. The Supreme Court observed that the pretense bore its own marks of fallacy. Precisely, the raising of revenues is the principal object of taxation.

SECONDARY OR NON-REVENUE PURPOSE/ SUMPTUARY PURPOSES

1. reduction of social inequality

- the present tax system adopted the PROGRESSIVE SYSTEM OF TAXATION. This system aims to reducing the inequality in the distribution of wealth by preventing its undue concentration in the hands of a few individuals.

2. ENCOURAGE THE GROWTH OF LOCAL INDUSTRIES

- the power to tax carries with it the power to grant tax exemptions. Tax exemption and Tax reliefs serve as incentives to encourage investment in our local industry and thereby promote economic growth.

3. PROTECT OUR LOCAL INDUSTRY AGAINST UNFAIR COMPETITION

- the Tariff and Customs code allows the imposition of certain taxes upon imported goods or articles to further protect our local industry.

4. AS AN IMPLEMENT OF THE POLICE POWER OF THE STATE (Regulatory measure)

-imposition of taxes with the end in view of regulating a particular activity.

MAY THE POWER OF TAXATION BE USED AS AN IMPLEMENT OF THE POWER OF EMINENT DOMAIN?

YES. The Supreme Court held in the case of CIR vs Central Luzon Drug Corporation, “Taxes measures are but enforced contributions exacted on pain o penal sanctions’ and clearly imposed for a public purpose. In recent years, the power to tax indeed become a most effective tool to

Page 6: General Principles otes Taxation

realize social justice, public welfare, and the equitable distribution of wealth.

G. Principles of a Sound Tax System

(FAT)

1. FISCAL ADEQUACY – Sources of revenues must be adequate to meet government expenditures, and other public needs. (but not too high)

2. THEORETICAL JUSTICE- a sound tax system must take into consideration the taxpayers’ ability to pay. (proportional contribution)

3. ADMINISTRATIVE FEASIBILTY- tax laws must be capable of effective and efficient enforcement. They must not obstruct business growth and economic development.

QUESTION:

Will a violation of these principles invalidate a tax law?

IT DEPENDS. A tax law will retain its validity even if it is not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so. These principles are designed to make our tax system sound. (Mere Guidelines)

However, is a tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. (a taxpayer’s ability to pay). Can use the ground to attest the validity of such a tax law if theoretical justice is violated.

THE TWO STATEMENTS CAN BE HARMONIZED:

A. POWER OF TAXATION INVOLVES THE POWER TO DESTROY

-VALID TAX IMPOSITION (to the point that the businesses can be closed since it involves noxious activities)

Page 7: General Principles otes Taxation

B. POWER TO TAX WILL NOT INVOLVE THE POWER TO DESTROY AS LONG AS THIS SUPREME COURT SITS

-INALID IMPOSITION OF TAX (question the constitutionality of the tax law)

H. Inherent Limitations of the Power of Taxation (NVIPT)

1. PUBLIC PURPOSE – the power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose.

WHO MAY DETERMINE “PUBLIC PURPOSE”?

- this is a legislative prerogative. The power to determine whether the purpose of taxation is public or private resides in Congress.

GOMEZ VS PALOMAR

- the eradication of a dreaded disease (TB) is a public purpose.

LUTZ VS ARANETA

- the protection and promotion of the sugar industry is a matter of a public concern the Legislature may determine within reasonable bounds.

TIO VS VIDEOGRAM

-the levy of 30% tax under PD 1987 is for public purpose, and therefore a valid imposition. It is imposed for answering the need for regulating video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights and the proliferation of pornographic video tapes.

RAMON VS BAGATSING

- The entrusting of the collection of the fees does not destroy the public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through which the money is dispensed is public or private.

Page 8: General Principles otes Taxation

2. INTERNATIONAL COMITY – Section 2 Article 2 of the 1987 Constitution (we cannot impose taxes on foreign embassies because it would violate the international law because Foreign embassies are extension of the territoriality of the foreign states).

- the rules of par in pparem non habet imperium, where even the strongest state cannot assume jurisdiction over another state, no matter how weak, or question the validity of its acts in so far as they are made to take effect within its own territory. All states, including the smallest and least influential, are also entitled to their dignity and the protection of their honor and reputation.

3. TERRITORIALITY – place of taxation

What is the Situs of taxation – real property (location of the property)

- US Embassy – is considered as the extension of US territory. We cannot impose taxes.

4. NON-DELEGATION OF THE POWER TO TAX – General rule: cannot be delegated

Exceptions: BIR (POWER TO IMPLEMENT)

Tariff rates ( power to impose taxes)

Tangible personal property- location of the property

Shares of stocks – follow the domicile of the property.

MOBILIA SEQUUNTUR PERSONAM- follows the principle that

5. VARIOUS TAX EXEMPTIONS GRANTED GOVERNMENT AGENCIES OR INSTRUMENTALITIES -

Page 9: General Principles otes Taxation

I. Constitutional Limitations of the Power of TaxationThe Constitution provides for certain restrictions on the power of taxation, among them:

1. due process- No person shall be deprived of life, liberty and property without due process of clause.

The implication that one may be deprived of property as long as the requirement NOTICE AND HEARING have been complied with.

THE FOLLOWING SITUATIONS ARE ILLUSTRATIVE OF VIOLATIONS OF THE DUE PROCESS CLAUSE

a. If the tax amounts to a confiscation of property

b. If the subject of confiscation is outside the jurisdiction of the taxing authority

c. If the law is imposed for a purpose other than a public purpose

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

e. Where the law is in violation of inherent violations.

2. equal protection of laws-Our Constitution requires uniformity, not equality in taxation.

-Equality o taxation is accomplished when the burden of the tax falls equally and impartially upon all persons and property subject to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon others similarly situated or of like character.

Whereas Uniformity requires that all taxable property subjected to the tax, shall be alike and this requirement is violated if particular kinds, species, or items of property are selected to bear the whole burden of the tax, while other should be equally subject to it, are left untaxed.

-Equal protection clause merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed.

Page 10: General Principles otes Taxation

3. uniformity – The rule of taxation shall be uniform and equitable. (Art. VI, Sec. 28[1] of the Constitution)

Uniformity in taxation — says Black on Constitutional Law — means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.

Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere, with all people and at all times.

A tax is uniform when it operates with the same form and effect in every place where the subject of it is found. (State Railroad Tax Case, 92 U.S. 575; Patton v. Brady, 184 U.S. 608)"

4. progressive system of taxation - Congress shall evolve a progressive system of taxation. (Art. VI, Sec. 2811])

Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. (Fernando, "The Constitution of the Phils.," 2nd Ed., p. 221)

Is a tax law adopting a regressive system of taxation valid?

The Constitution does not really prohibit the imposition of regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation. The constitutional provision should be construed to mean simply that "direct taxes are to be preferred and indirect taxes, as much as possible, should be minimized."

5. non-impairment clause- No law shall be passed impairing the obligations of contracts. (Art. Ill, Section 10, Constitution)

A contract is the law between the contracting parties. The obligation of a contract is the law which binds the parties to perform their agreement. This law must govern and control the contract in every shape in which it is intended to bear upon it, whether it affects its validity, construction or discharge. Any law which enlarges, or in any manner changes the intention of the parties discoverable in it, necessarily impairs the contract

Page 11: General Principles otes Taxation

itself. The manner or the degree in which this change is effected can in no respect influence this conclusion; for, whether the law affects the validity, the construction, the duration, the mode of discharge or the evidence of the agreement, it impairs the contract, though it may not do so to the same extent in all the supposed cases.

There is no room for any stipulation, therefore, that when the state has stipulated by contract to give exemption from taxation, or has commuted the uncertain taxes for a definite and fixed sum or sums, and afterwards undertakes to tax, in the same manner as it taxes other subjects, the persons, corporations or property which were the subject of the exemption or commutation, the obligation of the contract is impaired.

The constitutional prohibition against the impairment of the obligation of contracts only applies, however, where it is claimed that the obligation of a contract is impaired by a law of the state — a statute or constitutional provision of the state. It does not apply to mere decisions of courts construing a contract. (2 Cooley 1496)

IS A TAX EXEMPTION REVOCABLE?" IT DEPENDS.

If the grant of an exemption does not constitute a contract, but is merely "a spontaneous concession by the legislature, not connected with any service or duty imposed" it is REVOCABLE by the power which made the grant. A state may, at its pleasure, withdraw an exemption which is a mere gratuity possessing no element of a contract, even though the corporation may have incurred expense on the faith thereof.

Thus, a statute passed after a corporation has been created, and exempting it wholly or partially from taxation, without the payment of any consideration or the assumption of any new burden by the corporation, is a mere gratuity on the part of the state, and the exemption may be revoked at any time. An exemption from taxation does not confer a vested right, and hence, it may be modified or repealed by the legislature unless such modification or repeal would impair the obligation of a contract. (2 Cooley 1469-1473)

Similarly, if the basis of the tax exemption is by virtue of a franchise granted by Congress, the exemption may be revoked. (Art. Xll, Sec. 11)

On the other hand, if the tax exemption constitutes a binding contract and for valuable consideration, the government cannot unilaterally revoke the tax exemption.

The charter of a private corporation is a contract between the corporation and the state, based on a consideration and accepted by a corporation. However, the grant of a franchise to a corporation does not imply a contract exempting the property from taxation or from increased taxation; and there is no contract created by a provision in a charter or franchise that the corporation shall pay annually a certain tax.

When the government enters into a contract, it descends to the level of an ordinary individual. It cannot invoke state immunity.

Page 12: General Principles otes Taxation

While the Court has too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes of the nature of a grant which is beyond the purview of the non-impairment

clause of the Constitution. Indeed, Article XII, Section 11 of the 1987 Constitution, like its precursor provisions in the 1935 and 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as when the common good so requires.64

WITHDRAWAL OF TAX EXEMPTIONS UNDER THE LOCAL GOVERNMENT CODE; EXCEPTIONS

In Mactan Cebu International Airport Authority v. Marcos, the Supreme Court held that Section 193 of the

LGC prescribes the general rule, viz., the tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons are withdrawn upon the effectivity of the LGC except with respect to those entities expressly enumerated. In the same vein, the Court must hold that the express withdrawal upon effectivity of the LGC of all exemptions except only as provided therein, can no longer be invoked by MERALCO to disclaim liability for the local tax.

6. non-imprisonment for non-payment of poll tax- No person shall be imprisoned for non-payment of a debt or poll tax. (Art. Ill, Section 20, Constitution)

While a person may not be imprisoned for nonpayment of a cedula or poll tax (People v. Linsangan, 62 Phil. 646), he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides.

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

Page 13: General Principles otes Taxation

- All appropriation, revenue or tariff bills, bills authorizing the increase of the public debt, bills of local application and private bills, shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. (Art. Ill, Section 24, Constitution)

Both Houses of Congress may initiate bills, but only the Lower House may propose tax measures.

8. Presidential Veto

- The President shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill but the veto shall not affect the item or items to which he does not object. (Article VI, Section 27[2], Constitution)

The item or items vetoed shall be returned to the Lower House of Congress together with the objections of the President. If after a reconsideration 2/3 of all the members of such House shall agree to pass the bill, it shall be sent, together with the objection, to the other House by which it shall likewise be reconsidered, and if approved by 2/3 of all the Members of that House, it shall become a law.

9. Presidential power to fix tariff rates- The Congress may, by law, authorize the

President to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues and other duties or imposts within the framework of the national development program of the Government. (Article VIII, Section 2812], Constitution)

The President is vested with authority by law to increase tariff rates, even for revenue purposes only. Article VI, Section 8(2) of the Constitution expressly grants permission to Congress to authorize the President "to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates xxx and other duties and imposts xxx." Custom duties which are assessed at the prescribed tariff rates are very much like taxes which are imposed for both revenue raising and regulatory purpose. (Garcia v. Executive Secretary, 211 SCRA 219)

However, it bears stressing that the statutory power of the President to fix tariff rates, import or export quotas, and tonnage or wharfage dues must be subject to limitations and restrictions indicated within the law itself. Furthermore, such delegation must be in accord with the framework of the national development program of the government.

Page 14: General Principles otes Taxation

The term "flexible tariff clause"67 refers to the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the delegation of the taxing power to the President under the Constitution.

10. freedom of the press- No law shall be passed abridging the freedom of speech, of expression, or of the press... (Article III, Section 4, Constitution)

TOLENTINO VS SECRETARY OF FINANCE

11. freedom of religionNo law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship without discrimination or preference shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. (Article III,

Section 5, Constitution)

In the case of American Bible Society v. City of

Manila,"' the Supreme Court ruled that a municipal license tax on the sale of bibles and religious articles

by a non-stock, non-profit missionary organization at minimal profit constitutes a curtailment of religious freedom and worship which is guaranteed by the Constitution.

However, the income of such organizations from any activity conducted for profit or from any of their property, real or personal, regardless of the disposition made of such income, is taxable.

12. exemption from property tax of properties of religious, educational, charitable institutions

- Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. (Article VI, Section 28[3], Constitution)

REASON FOR THE RULE:

Page 15: General Principles otes Taxation

Cemeteries are exempt from the payment of taxes because of the difficulty of collecting a tax thereon and the obvious impropriety of selling the graves of the dead to defray the expenses of carrying on the government of the living.

Churches and parsonages or convents appurtenant thereto, etc., are exempt from taxation because such institutions perform work which would otherwise have to be carried on by the public at the expense of the taxpayers and that the expenses of such institutions from taxation lessens rather than increases the burden upon other taxpayers. (26 R.C.L. 316)

"ACTUALLY, DIRECTLY AND EXCLUSIVELY USED"

It would seem, however, that to be entitled to the exemption, lands, buildings and improvements of religious and charitable institutions should be "actually, directly and exclusively used" for religious and charitable purposes. In the case of Province of Abra v. Harold Hernando and the Roman Catholic Archbishop of Bangued, Abrar the Court ruled that it was not in accordance with the Constitution for the lower court to declare in a declaratory relief action that the properties of the Roman Catholic Church in Bangued, Abra are tax-exempt without first conducting a hearing thereon to determine whether it was actually, directly and exclusively used for religious purposes.

The test of exemption from taxation is the use of the property for the purposes mentioned in the Constitution. (Abra Valley College v. Hon. Juan Aquino, L-39086, June 15,1988,162 SCRA 106)

EXCLUSIVE BUT NOT ABSOLUTE USE

The term "exclusively used" does not necessarily mean total or absolute use for religious, charitable and educational purposes. Even if the property is incidentally used for said purposes, the tax exemption will apply.

Corollarily, if a property, although actually owned by a religious, charitable and educational institution is used for a non-exempt purpose, the exemption from tax shall not attach.

CONTROLLING DOCTRINE ON EXEMPTION

FROM TAXATION OF REAL PROPERTY OF RELIGIOUS, CHARITABLE AND EDUCATIONAL INSTITUTIONS70

However, in the recent case of Lung Center of the Philippines v. Quezon City and Constantino P. Rosas, City Assessor of Quezon City, G.R. No. 144104, June 29, 2004, 433 SCRA 119, the prevailing rule on the application of tax exemption to properties incidentally used for religious, charitable and educational purposes, as enunciated in the case of Herrera v. QC-BAA, 3 SCRA 187, has now been abandoned. In resolving the issue of whether or not the portions of the real property of Lung Center that are leased to private entities are exempt from real property taxes, die Supreme Court reexamined the intent of the constitutional provision granting tax exemption of properties.Thus, the records of the

Page 16: General Principles otes Taxation

Constitutional Commission reveal that what is exempted is not the institution itself; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.

Meaning of actually, directly and exclusively

"Actually is 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."

[Black's Law Dictionary, Third Edition, cited in National Power Corporation v. Central Board of Assessment Appeals

13. tax exemptions granted to non-stock non-profit educational institutionsSection 4. (3) All revenues and assets of nonstock, non-profit educational institutions used actually, directly and exclusively for

educational purposes shall be exempt from taxes and duties. Upon the dissolution and cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestments.

14 no public money or property used for a particular sect, priest, religious minister, etc.

No public money or property shall be appropriated, applied, paid or employed directly or indirectly for the use, benefit or support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such EXCEPT when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution or government orphanage or leprosarium. (Article VI, Section 29[l] Constitution)

This is in consonance with the inviolable principle of separation of the Church and State.

The rule is subject to an exception. A particular money may be set aside for a particular sect, priest or religious minister or dignitaries if they are assigned to the following institutions: leprosarium, orphanage, penal institution and the armed forces.

Page 17: General Principles otes Taxation

'

15. grant of tax exemptions

- The inherent power of the state to impose taxes naturally carries with it the power to grant tax exemptions. The power to exempt from taxation, as well as the power to tax, is an essential attribute of sovereignty, and may be exercised in the constitution, or in a statute, unless the Constitution expressly or by implication prohibits action by the legislature on the subject.

Exemptions from taxation may be created

directly by the Constitution, e.g., Art. VI, Sec. 28(3) of the Constitution granting tax exemptions to properties actually, directly and exclusively used for religious, charitable and educational purposes, or by an act of the legislature, subject to the limitations as the constitution may place, expressly or by implication, upon the power of the legislature.

LEGAL BASIS OF THE GRANT OF EXEMPTIONS

Art. VI, Section 28(4) of the Constitution provides that:

No law granting any tax exemption shall be passed without the concurrence of a.majority of all the members of Congress.

''Question No. 6, 2004 Bar Examination.

Note that in granting tax exemptions, an absolute majority vote of the Members of Congress is required, while in cases of withdrawal of such tax exemption, a relative majority vote is sufficient.

Tax amnesties, tax condonations, and tax refunds are in the nature of tax exemptions. Such being the case, a law granting tax amnesties, tax condonations, and tax refunds requires the vote of an absolute majority of the Members of Congress.

GENERAL RULE: NO EXEMPTION

A constitutional grant of exemption may be selfexecuting or may require an act of Congress for its operation. Where a constitutional provision granting tax exemption is self-executing, the legislature can neither add nor detract from it; it may, however, prescribe a procedure to determine whether a claimant is entitled to the constitutional exemption.

Page 18: General Principles otes Taxation

The intent to grant tax exemption must be clear, otherwise the rule of construction applies that exemption from taxation are to be strictly construed against exemption and in favor of the right to tax.

1415-1418)

Tax exemption and tax amnesty distinguished:76

Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive application. (People v. Castarieda, G.R. No. L-46881, 1988) On the other hand, tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)

16 grant of power of taxation to local government units- 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. (Article X, Section 5, Constitution)

The general principle against the delegation of legislative powers as a consequence of the principle of separation of powers is subject to one well-established exception: legislative powers may be delegated to local government units. (Pepsi Cola v. City ofButuan, L-22814, August 28,1968) Included in this grant of legislative power is the grant of local taxing power.

17. money collected for a special purpose shall be considered a special fund

18. exclusive appellate jurisdiction of the Supreme Court over judgments of lower courts involving the legality of taxes, imports, assessment, fees, penalty.

ASPECTS, PROCESSES, PHASES OF TAXATION"

Page 19: General Principles otes Taxation

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

In the case of Tolentino, et al. v. Secretary of Finance,22 the Supreme Court emphasized that:

Courts have no power to inquire into or interfere in the wisdom, objective, motive or expediency in the passage of a tax law, as this is purely legislative in character. To do so would be tantamount to a violation of both the letter and the spirit of the organic laws by which the Philippine Government was brought into existence to invade a coordinate and independent department of the Government, and to interfere with the legitimate powers and functions of the Legislature.

B. Assessment and Collection The act of assessing and collecting taxes is administrative in character, and therefore can be delegated. Nonetheless, the legislative body

has laid down certain rules governing the assessment and collection of taxes in order to prevent its abuse.

First, the tax law must designate which agency will collect the taxes. Usually, the Bureau of Internal Revenue and/or the Secretary of Finance wield this power.

Second, the circulars or regulations issued by the Secretary of Finance or the Commissioner of the Internal Revenue must be in accordance with the tax measures imposed by Congress.

Note that the power of taxation should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." (Antonio Roxas, et al. v. Court of Tax Appeals, L-25043, April 26, 1968, 23 SCRA 276)

C. Payment This signifies an act of compliance by the taxpayer.

Page 20: General Principles otes Taxation

J. Concept of Double TaxationThere is double taxation where one tax is imposed by the State and the other is imposed by the city; it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be enacted with respect to the same occupation, calling or activity by both the state and the political subdivision thereof. (Cooley on Taxation, 4th Ed. p. 492; and 51 Am. ]ur. 341)

1) Kinds of Double Taxation

a) DIRECT — constitutes double taxation in the objectionable or prohibited sense. This occurs when the same property is taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject matter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same

taxing period, and they must be of the same kind or character of tax. (84 C.J.S. 131-132)

b) INDIRECT — is permissible double taxation. This is allowed if the taxes are of different nature or character, imposed by different taxing authorities. It has been held that a real estate tax and the tenement tax imposed by local ordinance although imposed by the same taxing authority, are not of the same kind or character. (Villanueva v. Upilo City, 26 SCRA 578)

c) DOMESTIC — this arises when the taxes are imposed by the local or national government (within the same state).

d) INTERNATIONAL — 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 identical periods. (CIR v. S.C. Johnson and Sons, Inc., 309 SCRA 102)

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the city or municipality.

4. Modes of eliminating double taxation

In order to eliminate double taxation, a tax treaty resorts to two methods of relief, to wit:

1) 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.

2) CREDIT METHOD — the tax paid in the state of source is credited against the tax levied in the state of residence.

Page 21: General Principles otes Taxation

The basic difference between the two methods, is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. (Baker, Double Taxation Conventions and International Tax Law [1994], pp. 70-72)

TAX EVASION AND TAX AVOIDANCE DISTINGUISHED

Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes. On the other hand, tax avoidance is a legal means used by the taxpayer to reduce taxes. (Benny v. Commr., 25 TCI. 78)

Tax avoidance is the tax saving device within the means sanctioned by law while tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it subjects the taxpayer to further or additional civil or criminal liabilities.

TAX AMNESTY VS TAX EXEMPTION

Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive application. (People v. Castarieda, G.R. No. L-46881, 1988) On the other hand, tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are subjected. (Florer v. Sheridan, 137

Ind. 28, 36 NE 365) It is generally prospective in application.

K. Definition, Nature, and Characteristics of Taxes

Page 22: General Principles otes Taxation

I. Kinds of Taxes

1. As to object

a. Personal, capitation, or poll tax

-fixed amount imposed on individuals, whether citizens or not, residing within a specified territory, without regard to their property or occupation (e.g., community tax)

b. Property tax

is imposed on property, real or personal, in proportion to its value (e.g., real estate tax).

c. Privilege tax

A tax on the exercise of right or privilege or performance of an act is generally regarded as excise tax (e.g., income tax, estate tax, donor's tax and value added tax).

2. As to burden or incidence

a. Direct

A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in. Examples are the custom duties and ad valorem taxes paid by the oil companies to the Bureau of Customs for their importation of crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal Revenue after converting the crude oil into petroleum products. On the other hand, indirect tax is a tax primarily paid by persons who can shift the

burden upon someone else. For example, the excise and ad valorem taxes that oil companies pay to the Bureau of Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer like the NPC, by adding them to the "cash" and/or "selling price."

Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into either direct tax or indirect tax. In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them.

b. Indirect

Page 23: General Principles otes Taxation

- those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.

It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods or services, not in the buyer thereof. Thus, one cannot invoke one's exemption privilege to avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliers of the goods he purchased. Hence, it is important to determine if the tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable. (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, 478 SCRA 61 [2005])

3. As to tax rates

a. Specific

-imposed and based on weight or volume capacity or any other physical unit of measurement

b. Ad valorem

- based on selling price or other specified value of the goods. (Sec. 129, NIRC) Examples of specific tax are excise taxes on distilled spirits, tobacco products and petroleum products. Examples of ad valorem tax include excise tax on automobiles and non-essential goods.

c. Mixed

4. As to purposes

a. General or fiscal

imposed solely to raise revenue for the government, such as: income tax, donor's tax, estate tax and value-added tax.

b. Special, regulatory, or sumptuary

is imposed and collected to achieve a particular legitimate object of government. An example of special tax is oil price stabilization fund.

Page 24: General Principles otes Taxation

5. As to scope or authority to impose

a. National - internal revenue taxes

imposed by the national government (e.g., revenue taxes under the NIRC and custom duties)

b. Local - real property tax, municipal tax

levied and collected by the local government (e.g., real property tax and business tax).

6. As to graduation

a. Progressive

one whereby the rate increases as the tax base (amount) increases. Examples are income tax, estate and donor's tax under the NIRC.

b. Regressive

-is one where the tax rate decreases as the tax base increases. (A tax base is the assessed amount of an entity's assets or income that are subject to taxation. The concept is used to derive the tax income of a government entity.)

In Tolentino, et al. v. Secretary of Finance, EVAT En

Banc Resolution, October 30, 1995, the Supreme Court ruled that value-added tax is a form of regressive tax.

c. Proportionate

*Excise taxes are taxes imposed on the exercise of a right or privilege.

TAXPAYER'S SUIT, REQUISITES*

Page 25: General Principles otes Taxation

Taxpayer's suit requires illegal expenditure of public money. In Maceda v. Macaraig, Jr. [197 SCRA 771], the Supreme Court sustained the right of Senator Maceda as taxpayer to file a petition questioning the legality of the tax refund to NPC by way of tax credit certificates and use of said assigned tax certificate by oil companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.

However, in the case of Gonzales v. Marcos [65 SCRA 624], the Supreme Court held that the taxpayer has no legal personality to assail the validity of Executive Order No. 30 creating the Cultural Center of the Philippines. Assailed order does not involve the use of public funds. There was finding to the effect that the funds came from donations and contributions and not by taxation. Accordingly, there was that absence of the requisite pecuniary or monetary interest.

30. QUESTION:

Are taxes subject to set-off?

ANSWER:

No. It is settled that a taxpayer may not set-off taxes due from claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such debt, demand, contract or judgment as is allowed to be set-off.

31. QUESTION:

Are the tax exemptions strictly construed against government political subdivision or instrumentality?

ANSWER:

No. It is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality. The reason for the strict interpretation does not apply in the case of

exemptions running to the benefit of the government itself or its agencies. In such case, the practical effect of an exemption is merely to reduce the amount that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies (including NPC) may be construed liberally, in favor of non-taxability of such agencies.

(Maceda v. Macaraeg, 197 SCRA 771)

Page 26: General Principles otes Taxation

SITUS OF TAXATION:

1.

2.