ADAMSON COLLEGE OF LAW

NOTES ON REMEDIAL LAW2011 BAR OPERATIONS

I. GENERAL PRINCIPLESA. Concept of REMEDIAL LAWRemedial Law - is that branch of law which prescribes the method of enforcing rights or obtaining redress for their invasion (Bustos vs. Lucero, 81 Phil. 640). It is also known as adjective law.

Substantive Law - is one which creates, defines, and regulates rights (Bustos vs. Lucero, 81 Phil 640).B. Substantive law distinguished from remedial lawSubstantive LawRemedial Law

It is that part of law which creates, defines, and regulates rights concerning life, liberty or property or the powers of agencies or instrumentalities for the administration of public affairs.It refers to the legislation providing means or methods whereby causes of action may be enforced, wrongs redressed and relief obtained.

It makes vested rights possible.It has no vested rights.

It is prospective in application.As a rule, it can be applied retroactively, except when the application impairs vested rights.

It cannot be enacted by the Supreme CourtSupreme Court is expressly empowered to promulgate procedural rules.

C. rule-making power of the Supreme courtSec. 5 [5], Article VIII of the 1987 Constitution confers upon the Supreme Court the power to promulgate the rules concerning pleading, practice, and procedures.

1. Limitations on the rule-making power of the Supreme Courta) The rules shall provide a simplified and inexpensive procedure for the speedy disposition of cases.

b) The rules shall be uniform for courts of the same grade; and c) The rules shall not diminish, increase, or modify substantive rights.2. Power of the Supreme Court to amend and suspend procedural rules

The courts have the power to relax or suspend the rules when compelling reasons so warrant or higher interest of justice requires it. What constitutes sufficient cause is discretionary upon the court. Some of the reasons may be:

a) The existence of special and compelling circumstances;

b) The merits of the case;

c) A cause not entirely attributed to the fault or negligence of the party favored by the suspension of the rules;

d) A lack of showing that the review sought is merely frivolous and dilatory; and

e) The other party will not be unjustly prejudiced thereby. D. NATURE OF PHILIPPINE COURTS1. Meaning of a court It is an organ of government belonging to the judiciary, the function of which is the application of the laws to controversies brought before it as well as the public administration of justice. 2. Court as distinguished from a judgeCourtJudge

A tribunal officially assembled under authority of law and as a personality separate and distinct from the judge who sits therein.The judge is merely an officer of such tribunal.

A court is a being in imagination comparable to a corporation.A judge is a natural person.

The court is an office.The judge is a public officer.

The existence of the court is independent of circumstances that would affect the judge. It will continue to exist and its proceedings will remain effective despite the death of the judge.The judge shall have such powers only as he continues to occupy the office.

3. Classification of Philippine Courtsa)Courts of original and appellate jurisdictionb)Courts of general and special jurisdiction

c)Constitutional and statutory courtsd)Courts of law and equity

4. Courts of original and appellate jurisdiction

Courts of Original Jurisdiction Those courts, which under the law, has the power to take judicial cognizance of a case instituted for judicial action for the first time under the conditions set by the law.

Courts of Appellate Jurisdiction Courts which have the power to review on appeal the decisions or orders of a lower court.

5. Courts of general and special jurisdictionCourts of General Jurisdiction Those courts competent take cognizance of all cases except those expressly withheld from them either by the Rules or by law.Courts of Limited Jurisdiction Those courts whose jurisdiction extends only to particular or specified cases.

6. Constitutional and statutory courtsConstitutional Courts Those which owe their creation and existence to the Constitution and thus cannot be legislated out of existence or deprived by law of the jurisdiction and powers unqualifiedly vested in them by the Constitution. Statutory Courts Those created, organized and with jurisdiction exclusively determined by law.

7. Courts of law and equityCourts of Law A court of law decides a case according to the existing laws. Courts of Equity A court of equity adjudicates a controversy according to the common precepts of what is right and just without inquiring into the terms of the statutes.

8. Principle of judicial hierarchy Lower courts shall initially decide a case before it is considered by a higher court. A higher court will not entertain direct resort to it unless the redress designed cannot be obtained in the appropriate courts.

9. Doctrine of non-interference or doctrine of judicial stability Courts of equal and coordinate jurisdiction cannot interfere with each others orders. It also bars a court from reviewing or interfering with the judgment of a co-equal court over which it has no appellate jurisdiction or power of review. Taxation is a high prerogative of sovereignty. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good.Taxation is a legislative power. Taxation being a legislative power is the exercise of the high prerogative of sovereignty. Taxation is a set of rules: (1) how much is the tax to be paid; (2) who pays the tax, (3) to whom it should be paid, and (4) when it should be paid. This power is manifested by the prohibition on improper delegation of the legislative power to tax.The power to tax is subject to constitutional and inherent limitations. Although in one decided case the Supreme Court called it an awesome power, the power of taxation is subject to certain limitations. Most of these limitations are specifically provided in the Constitution or implied therefrom while the rest are inherent and they are those which spring from the nature of the taxing power itself although, they may or may not be provided in the Constitution.

E. CHARACTERISTICS OF TAXATION (See characteristics of tax)F. POWER OF TAXATION COMPARED WITH OTHER POWERS1. Power of Taxation Distinguished from Police PowerPower of TaxationPolice Power

As to purposeIt is levied for the purpose of raising revenuesIt is exercised to promote public welfare through regulations

As to amount of exactionThe amount of tax collected is practically unlimitedLimited to such amount as to cover the cost of regulation, issuance of the license or surveillance.

As to scopeIt interferes with property rights onlyIt regulates both liberty and property

As to benefits receivedNo special or direct benefit is received by the taxpayer other than the fact that the Government only secures to the citizen that general benefit resulting from the protection of his person and property and welfare for all.While no direct benefits are received, a healthy economic standard of society known as damnum obsque injuria is attained

As to non-impairment of contractsIt is inferior to the non-impairment clause, i.e., a taxing act cannot impair the obligation of contracts.Superior to the non-impairment clause.

As to transfer of property rightsTaxes paid become part of the public funds.No transfer, but only restraint on the exercise, of property rights exists.

As to property takenIt is generally moneyAny property, other than money, which is the source of the danger health, safety or morals.

What is done with the property taken.It is constructive because the money collected is spent for building infrastructure or providing public services.Destructive because the property taken is usually destroyed.

SurrenderIt may be bargained away through a contract such that if the government issues a tax-exempt bond, it could not withdraw the exemption because it would violate the non-impairment clause.This cannot be bargained away.

2. Power of Taxation Distinguished from Eminent Domain

Power of TaxationEminent Domain

As to Nature of the Power ExercisedIt is exercised in order to raise public revenuesIt is the taking of private property for public use.

As to Compensation Received.Payment of taxes results in the general benefit of all citizens and inhabitants of a State.A direct benefit results in the form of just compensation to the property owner.

As to Non-impairment of ContractsThe non-impairment of contracts rule subsists, i.e., a taxing act cannot impair the obligation of contracts.This non-impairment limitation does not apply.

As to Persons AffectedIt applies to all persons, property and excises that may be subject thereto.Only a particular property is comprehended.

Property takenIt is money that is takenIt is property, usually, land

Who could exerciseIt could be exercised by the legislative department and in certain cases by the President or the local government units only.It may be exercised by private entities.

3. Similarities Among the Power of Taxation, Police Power and Eminent Domain They all rest upon necessity because there can be no effective government without them.

They all underlie and exist independently of the Constitution although the conditions for their exercise may be prescribed by the Constitution and by law.

They are ways by which the State interferes with private rights and property.

They are legislative in nature and character, although the actual exercise of the powers is given to the executive authorities, national or local.

They are all presuppose an equivalent compensation received, directly or indirectly, by the persons affected by the exercise of these powers by the government.G. PURPOSE OF TAXATION1. Primary purpose:Revenue-raising. The basic purpose of taxation is to raise revenues. Taxes are imposed in order to raise funds used to meet the legitimate objectives of government. This is sometimes referred to as the lifeblood theory of taxation.2. Secondary purposes:a. Regulation. This is in the case of taxes levied on excises or privileges like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets, cockpits, etc.

b. Promotion of general welfare. In one decided case, it was ruled that taxation may be used as an implement of the police power in order to promote the general welfare of the people.c. Reduction of social inequality. This is made possible through the progressive system of taxation where the objective is to prevent the undue concentration of wealth in the hands of a few individuals.

d. Encourage economic growth. For instance, in the case of tax exemptions and tax reliefs, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the countrys economic growth.

e. Protectionism. In some important sectors of the economy as in the case of foreign importations, taxes sometimes provide protection to local industries like protective tariffs and customs duties.

H. PRINCIPLES OF SOUND TAX SYSTEMa. Fiscal adequacy. The sources of the government revenue must be sufficient to meet government expenditures and other public needs.

b. Administrative feasibility. Tax laws should be capable of being effectively enforced.

c. Equality or Theoretical Justice. Tax must be based on taxpayers ability to pay.I. THEORY AND BASIS OF TAXATION1. Theory of Taxation1.1Lifeblood Theory. Taxes are the lifeblood of the government, being such, their prompt and certain availability is an imperious need. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it.

Basis of the lifeblood theory of taxation. Acceptance that governmental existence is a necessity. Performance of governmental functions redounds to the benefit of the populace in general. In view of this, the government could levy proportionate forced contributions among the populace to defray its expenditures. Stated otherwise, revenues could be raised to defray expenditures for public purpose. Principles that flow from the lifeblood theory (these principles are applied in general).

Power to tax is an unlimited and plenary power. As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax in the constituency who are to pay it. The power to tax includes the power to destroy. Marshall Dictum - The power to tax includes the power to destroy if it is used in an unlimited manner to raise revenue. Holmes Dictum The power to tax is subject to certain limitations as expressly provided in the constitution.

Reconciliation of the two Dictum (a) The imposition of a valid tax could not be judicially restrained merely because it would prejudice taxpayers property; (b) An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayers property; and (c) Marshalls view refers to a valid tax while the Holmes view refers to an invalid tax. The presumption that tax laws are valid. While the courts may invalidate tax measures that run counter to the Constitution, it bears emphasis that deeply ingrained in our jurisprudence is the time-honored principle that a statute is presumed to be valid. The right to collect taxes is imprescriptible. This is because the very existence of the government depends upon the existence of this power.

Collection of taxes may not be enjoined by injunction. As a general rule, No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge. (NIRC, Sec. 218). However, the CTA is empowered to suspend the collection of taxes through administrative remedies when collection could jeopardize the interest of the government or taxpayer. Taxes could not be the subject of compensation and set-off. 1.2Necessity Theory. Taxes proceed upon the theory that the existence of the government is a necessity; that it cannot continue without the means to pay its expenses; and that for those means, it has the right to compel all citizens and properties within its limits to contribute.

2. Basis or Rationale of Taxation

2.1The Benefits-Protection Theory (Symbiotic relationship).The basis of taxation is the reciprocal duty of protection between the state and its inhabitants. In return for the contributions, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property.

2.2Jurisdiction by the State over persons and property within its territory.

Taxation is territorial in character because it is only within the territorial boundaries of the taxing authority where tax laws may be enforced. This is so, because it is only within the confines of its territory that a country, state or sovereign may give protection.

J. DOCTRINES IN TAXATION1. Prospectivity of Tax Laws

General Rule: Taxes must only be imposed prospectively.Exception: The language of the statute clearly demands or express that it shall have a retroactive effect.Important Points to Consider:i. In order to declare a tax transgressing the due process clause of the Constitution it must be so harsh and oppressive in its retroactive application (Fernandez vs Fernandez, 99 PHIL934)ii. Tax laws are neither political nor penal in nature, they are deemed laws of the occupied territory rather than the occupying enemy. (Hilado vs Collector, 100 PHIL 288)iii. Tax laws not being penal in character, the rule in the Constitution against the passage of the ex post facto laws cannot be invoked, except for the penalty imposed.

Imprescriptibility of Taxes

General Rule: Taxes are imprescriptibleException: When provided otherwise by the tax law itself.

Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein imposedImportant Point to Consider:The law on prescription, being a remedial measure, should be liberally construed to afford protection as a corollary, the exceptions to the law on prescription be strictly construed. (CIR vs CA. G.R. No. 104171, Feb. 24, 1999)

Double TaxationIt is defined as taxing the same property twice when it should be taxed but once. It has also been defined as taxing the same person twice by the same jurisdiction over the same thing.

Two (2) Kinds of Double Taxation

1. Obnoxious or Direct Duplicate Taxation (Double taxation in its strict sense) - In the objectionable or prohibited sense means that the same property is taxed twice when it should be taxed only once.Requisites:

1. Same property is taxed twice2. Same purpose3. Same taxing authority4. Within the same jurisdiction5. During the same taxing period6. Same kind or character of tax2. Permissive or Indirect Duplicate Taxation (Double taxation in its broad sense) This is the opposite of direct double taxation and is not legally objectionable. The absence of one or more of the foregoing requisites of the obnoxious direct tax makes it indirect.

Instances of Double Taxation in its Broad Sense

1. A tax on the mortgage as personal property when the mortgaged property is also taxed at its full value as real estate.2. A tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares.3. A tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares.4. A tax upon depositions in the bank for their deposits and a tax upon the bank for their property in which such deposits are invested.5. An excise tax upon certain use of property and a property tax upon the same property.6. A tax upon the same property imposed by two different states.Constitutionality of Double TaxationDouble Taxation in its stricter sense is undoubtedly unconstitutional but that in the broader sense is not necessarily so.General Rule: Our Constitution does not prohibit double taxation; hence, it may not be invoked as a defense against the validity of tax laws.a. Where a tax is imposed by the National Government and another by the city for the exercise of occupation or business as the taxes are not imposed by the same public authority (City of Baguio vs De Leon, Oct. 31, 1968)

b. When a Real Estate dealers tax is imposed for engaging in the business of leasing real estate in addition to Real Estate Tax on the property leased and the tax on the income desired as they are different kinds of tax

c. Tax on manufacturers products and another tax on the privilege of storing exportable copra in warehouses within a municipality are imposed as first tax is different from the second

d. Where, aside from the tax, a license fee is imposed in the exercise of police power.

Exception: Double Taxation while not forbidden, is something not favored. Such taxation, it has been held, should, whenever possible, be avoided and prevented.

a. Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer. The reason is to avoid injustice and unfairness.

b. The taxpayer may seek relief under the Uniformity Rule or the Equal Protection guarantee.

Modes of Eliminating Double Taxation1. Tax Deduction subtraction from gross income in arriving a taxable income2. Tax Credit an amount subtracted from an individuals or entitys tax liability to arrive at the total tax liabilityA deduction differ from a tax credit in that a deduction reduces taxable income while credit reduces tax liability.3. Exemptions

4. Treaties with other States. There are two methods of relief (a) the exemption method and (b) the credit method.5. Principle of Reciprocity

Escape from Taxation (Key: ESCATE)1. Shifting2. Capitalization3. Transformation4. Evasion5. Avoidance6. Exemption1. Shifting of tax burden. Transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else.Ways of shifting the tax burden:

1) Forward Shifting the burden of tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer2) Backward Shifting effected when the burden of tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production3) Onward Shifting this occurs when the tax is shifted two or more times either forward or backwardTaxes that can be shifted

All indirect taxes can be shifted. Direct tax cannot be shifted. Examples of indirect taxes are VAT, percentage taxes, customs duties excise taxes on certain specific goods.Impact of taxation - is the point at which a tax is originally imposed.Incidence of Taxation is the point on which a tax burden finally rests or settles down.Relations among Shifting, Impact and Incidence of Taxation.

The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result.2. Capitalization. The reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay3. Transformation. The method whereby the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost.4. Tax Evasion. The use of the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax.Indicia of Fraud in Taxation

a. Failure to declare for taxation purposes true and actual income derived from business for two consecutive years, and b. Substantial underdeclaration of income tax returns of the taxpayer for four consecutive years coupled with overstatement of deduction.Evasion of the tax takes place only when there are no proceeds. Evasion of taxation is tantamount, fiscally speaking, to the absence of taxation. 5. Tax Avoidance. The use by the taxpayer of legally permissible alternative tax rates or method of assessing taxable property or income in order to avoid or reduce tax liability. Tax Avoidance is not punishable by law, a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid by means which the law permits.

Distinctions between Tax Evasion and Avoidance Tax Evasion vs Tax Avoidance

accomplished by breaking the letter of the lawaccomplished by legal procedures or means which maybe contrary to the intent of the sponsors of the tax law but nevertheless do not violate the letter of the law

Exemption from Taxation1. Tax Exemption, defined. Broad sense. Whenever a tax on property does not apply to all property within the jurisdiction of the taxing authorities. The property not taxed is said to be exempt. Narrow sense. The grant of immunity, express or implied, to particular persons or corporations of a particular class, from a tax upon property or an excise tax which persons or corporations generally within the same taxing districts are obliged to pay. 2. Nature of Tax Exemption

1. It is merely a personal privilege of the grantee

2. It is generally revocable by the government unless the exemption is founded on a contract which is protected from impairment, but the contract must contain the other essential elements of contracts, such as, for example, a valid cause or consideration.

3. It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and in this sense is prejudicial thereto.

4. It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.

3. Kinds of tax exemption

As to clarity:

1. Express or affirmative exemption When certain persons, property or transactions are, by express provision, exempted all certain taxes, either entirely or in part.

2. Implied exemption or exemption by omission When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes.

As to extent:1. Total absolute immunity

2. Partial one where a collection of a part of the tax is dispensed with.

As to Object:1. Personal granted directly in favor of certain persons.

2. Impersonal granted directly in favor of a certain class of property.As to Source:1. Constitutional immunities from taxation that originate from the constitution.

2. Statutory those which emanate from legislation.

3. Contractual agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws.

4. Treaty

5. Licensing ordinances.

Circumstances that Partake the Nature of a Tax Exemption

1. Deductions from income tax purposes

2. Claims for refund

3. Tax amnesty

4. Condonation of unpaid tax liabilities

4. Rationale of tax Exemption

Public interest would be sub-served by the exemption allowed which the law-making body considers sufficient to offset monetary loss entailed in the grant of the exemption. (CIR vs. Bothelo Shipping Corp., L-21633, June 29, 1967; CIR vs. PAL, L-20960, Oct. 31, 1968)5. Grounds for Tax Exemptions

1. May be based on a contract in which case, the public represented by the Government is supposed to receive a full equivalent therefore

2. May be based on some ground of public policy, such as, for example, to encourage new and necessary industries.

3. May be created in a treaty on grounds of reciprocity or to lessen the rigors of international double or multiple taxation which occur where there are many taxing jurisdictions, as in the taxation of income and intangible personal property

Note: There is no tax exemption solely on the ground of equity, but equity can be used as a basis for statutory exemption. At times the law authorizes condonation of taxes on equitable considerations. (Sec 276, 277, Local Government Code)6. Revocation of tax exemptionsA tax exemption may be revoked.

Reason: It is an act of liberality which could be taken back by the government. Since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority.Restrictions on revocation of tax exemptions:

(1) Non-impairment clause. Where the exemption was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and, is covered by the non-impairment clause of the Constitution.

(2) A municipal franchise once granted as a contract cannot be altered or amended except by actual consent of the parties concerned.

(3) Adherence to form. If the exemption is granted by the Constitution, its revocation may be effected through constitutional amendment only.

(4) Where the tax exemption grant is in the form of a special law and not by a general law even if the terms of the general act are broad enough to include the codes in the general law unless there is manifest intent to repeal or alter the special law.

Compensation and Set-off

General rule: Taxes cannot be the subject of compensation or set-off. Reasons:

a) Lifeblood theory

b) Taxes are not contractual obligations but arise out of a duty to, and are the positive acts of government, to the making and enforcing of which the personal consent of the individual taxpayer is not required.

c) The government and the taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.Exception: Where both the claims of the government and the taxpayer against each other have already become due and demandable as well as fully liquated.

The SC upheld the validity of a set-off between the taxpayer and the government. In both cases, the claims of taxpayers therein were certain and liquidated. The claims were certain since there were no doubts or disputes as to their refundability. In fact, the government admitted the fact of over-payment.

In case of a tax overpayment, the BIRs obligation to refund or set-off arises from the moment the tax was paid. REASON: Solutio indebeti. Compromise (refer to the discussions of BIRs power to compromise) Tax Amnesty, defined.

General pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. Partakes of an absolute forgiveness or waiver of the government of its right to collect. To give tax evaders, who wish to relent and are willing to reform a chance to do so.

It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case.

Rules on Tax Amnesty

1. Tax amnesty like exemption, is never favored nor presumed and construed strictly against the taxpayer.

2. Government not stopped from questioning the tax liability even if amnesty tax payments were already received.

3. Defense of amnesty, like insanity, is personal defense.

Tax Amnesty Distinguished from Tax Exemption

Tax AmnestyTax Exemption

Immunity from all criminal, civil and administrative liabilities from non-payment of taxesImmunity from civil liability only

Applies only to past tax periods, hence retroactive applicationProspective application

Construction and Interpretations of Tax Laws, Tax Exemption and Exclusion, Tax Rules and Regulations, Penal Provisions and Non-retroactive Application. a. Tax Laws1. Construction of Tax Laws No statutory construction needed if law is clear. It is a cardinal principle of statutory construction that where a provision of law speaks categorically; the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance.

Tax laws, unlike remedial laws, are not to be applied retroactively. Revenue laws are substantive laws and their application must not be equated with remedial laws.2. Interpretation of Tax Laws1. Generally, tax laws are liberally interpreted in favor of the taxpayer and strictly against the government:

A tax cannot be imposed unless it is supported by the clear and express language of a statute.

Revenue laws are no intended to be liberally construed, exemptions are not given retroactive application, considering taxes are the lifeblood of the government and in Holmes memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented.2. Law imposing a tax is strictly construed against the state. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statute applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.

b. Interpretation of Tax exemption and Exclusion

General rule: Taxation is the general rule and exemption is the exception.

Principle of strictissimi juris

1) Laws granting tax exemptions are construed is strictissimi juris against the taxpayer and liberally in favor of the taxing power. The law does not look in favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.2) When a tax is unquestionably imposed, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.

3) One who claims to be exempted from payment of a particular tax must show exemption under clear and unmistakable terms found in the exempting statute.

4) An exemption from taxation cannot be allowed unless granted in the most explicit and categorical language and must be strictly construed against the taxpayer.

5) The power of taxation is a high prerogative of sovereignty. The relinquishment is never presumed any reduction or diminution thereof with respect to its mode or its rate must be strictly construed, and the same must be coached in clear and unmistakable terms. He who claims an exemption must be able to point out some provision of law creating the right; it cannot be allowed to exist upon a mere vague implication or inference.6) Tax exemptions are to be strictly construed, and they are not to be extended beyond the ordinary and reasonable intendment of the language actually used by the legislative authority in granting the exemption.

7) A BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor, and may be reversed for after all the government is never stopped from collecting taxes because of mistakes of errors on the part of its agents.

8) Tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference. When claimed, it must be strictly construed against the taxpayer who must prove that he falls under the exception. And, if an exemption is found to exist, it must not be enlarged by construction, since the reasonable presumption is that the state has granted in express terms all it intended to grant at all, and that, unless the privilege is limited to the very terms of the statute the favor would be extended beyond dispute in ordinary cases.

Exceptions: Instances where tax exemptions are construed strictly against the government and in favor of the taxpayer:

1) When the statute granting exemption provides for liberal construction thereof,2) In case of special taxes relating to special cases and affecting only special classes of persons;

3) If exemptions refer to the public property;

4) In cases of exemptions granted to charitable and educational institutions or their property;

5) In cases of exemptions in favor of a governmental political subdivision or instrumentality.c. Construction and Interpretation of Tax Rules and RegulationsWell settled is the rule that administrative regulations must be in harmony with the provisions of the law. In case of discrepancy between the basic law and implementing rule or regulation, the former prevails. Rules and regulations must not override, but must remain constant and in harmony with the law they seek to apply. They must neither supplant nor modify the law.d. Construction and Interpretation of Penal Provisions of Tax Laws1. Penal provisions enacted to meet tax evasion are subject to the rule of strict construction and it is for the Revenue to prove that the conditions laid down for the imposition of penalty are satisfied.

2. Statute enacting an offense or imposing penalty are construed strictly. e. Non-retroactive Application to axpayersWhile it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent. For instance, it has been the universal practice to increase taxes on income already earned; yet notwithstanding this retroactive operation, income taxes have not been successfully assailedK. SCOPE AND LIMITATION OF TAXATION(a) Inherent LimitationsThe following are the inherent limitations of taxation:

a) Public purpose;b) Inherently legislative

c) Territoriality

d) International comity

e) Exemption of government entities, agencies, and instrumentalities.

a. Public Purpose

The term public purpose is synonymous with governmental purpose; a purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals. The following have been considered governmental functions, and consequently taxes levied therefore are valid because they are for a public purpose:

a. The regulation of conduct for the promotion of the general safety, health, morals and welfare;

b. The discharge of the moral obligations of a state, like the support and maintenance of the indigent and those unable to take care of themselves, and the payment of pensions to soldiers and pensions and gratuities to governmental employees;

c. The conduct of service, enterprises, like the construction and maintenance of roads, parks, playgrounds, schools and universities;

d. The promotion of the natural resources of the country; and

e. The operation by the government of enterprises when redounding to the welfare of the people.

When a tax is for a public purpose:a. If for the welfare of the nation or greater portion of the population

b. It affects the area as a community rather than as individuals

c. Is designed to support the services of government for some of the recognized objects of the country. Stated otherwise, the revenues collected from taxation should be devoted to achieve the purposes of government. Principles to consider in the determination of whether tax revenues are devoted for a public purpose:a. The tax revenues are for a public purpose if utilized for the benefit of the community in general.

b. Inequalities resulting from the singling out of one of particular class for taxation or exemption infringe no constitutional limitation.

c. An individual taxpayer need not derive direct benefits from the tax.

d. A tax may be imposed, not so much for revenue purposes, but under police power for the general welfare of the community. This would still be for a public purpose.

e. Public purpose continually expanding. Areas formerly left to private initiative now lose their boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times.

f. Tax revenues must not be used for purely private purposes or for the exclusive benefit of private persons.

g. Private persons may be benefited but such benefit should be merely incidental as its main object is the benefit of the community in general.

h. Determine at the time of enactment of tax law and not at the time of implementation.

i. There is a presumption of public purpose even if the tax law does not specifically provide for its purpose.

j. Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and public convenience.

Test in determining Public Purposes in taxa. Duty Test whether the thing to be threatened by the appropriation of public revenue is something which is the duty of the State, as a government.b. Promotion of General Welfare Test whether the law providing the tax directly promotes the welfare of the community in equal measure.

b. Inherently Legislative GENERAL RULE:No improper delegation of legislative authority to tax.

The power to tax is inherent in the State, such power being inherently legislative, based on 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.EXCEPTIONS:

1) Delegation to the President

2) Delegation to local government units

3) Delegation to administrative units

A. Delegation to the President

Congress may authorize, by law, the President to fix, within specified limits and subject to such limitations and restrictions as it may impose: (ART. Vi Sec. 28(2), 1987 Constitution)

Tariff rates

Import and export quotas

Tonnage and wharfage dues

Other duties and import within the national development program of the governmentRequisites:

1) There must be a law authorizing the President to fix tariff rates.

2) The delegation of power must impose limitations and restrictions and specify the minimum as well as the maximum tariff rates.3) Taxes are limited to those enumerated under the Constitution.Flexible Tariff Clause (SEC. 401 TCC)

In the interest of national economy, general welfare and/or national security, the President upon the recommendation of the National Economic and Development Authority is empowered:

1) To increase, reduce or remove existing protective rates of import duty, provided that the increase should not be higher than 100% ad valorem.

2) To establish import quota or to ban imports of any commodity.

3) To impose additional duty on all imports not exceeding 10% ad valorem.

B. DELEGATION 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. (ART X Sec 5, 1987 Constitution)

It has been held that the general principle against the delegation of legislative powers as a consequence of the theory of separation of powers is subject to one well-established exception, namely, that legislative power may be delegated to local governments. The theory of non-delegation of legislative powers does not apply in matters of local concern

Delegation of legislative taxing power to local government is justified by the necessary implication that the power to create political corporations for purposes of local self-government carries with it the power to confer on such local government agencies the authority to tax.

C. DELEGATION TO ADMINISTRATIVE AGENCIES

For the delegation to be constitutionally valid, the law must be complete in itself (Completeness test) and must set forth sufficient standards (Standards test).

There are certain aspects of the taxing process that are not legislative in nature, and they may, therefore, be vested in an administrative agencies. The powers which are not legislative include: The power to value property for purposes of taxation pursuant to fixed rules; The power to assess and collect taxes; and The power to perform any of the innumerable details of computation, appraisement and adjustments, and the delegation of such details.

The powers which cannot be delegated include the: (1)determination of the subjects to be taxed;

(2)purpose of the tax; (3)amount or rate of the tax; (4)manner, means, and agencies of collection; and (5)the prescribing of the necessary rules with respect thereto.

c. Territoriala. Territorial/ Situs of taxation, defined. It is the place or authority that has the right to impose and collect taxes.

It is premised upon the symbiotic relation between the taxpayer and the State. The place that gives protection is the place that has the right to demand that it be supported in the form of taxes so it could continually give protection.Important Points to Consider:

Territoriality or Situs of Taxation means place of taxation depending on the nature of taxes being imposed.

It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise within the territory of the taxing power because:

1. Tax laws do not operate beyond a countrys territorial limit.

2. Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be compensation. However, the fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing state, where there is between him and the taxing state, a privity of relationship justifying the levy.b. Situs of Income Tax

The situs of income taxation is determined by the nationality, residence of the taxpayer and source of income. (Please refer to general principles of income taxation under income taxation).

1) From sources within the Philippines. Incomes derived from sources within the Philippines are taxable in the Philippines, unless exempted by law or treaty.2) From sources without the Philippines. Incomes derived from sources without the Philippines are not taxable in the Philippines, except for those incomes earned by a resident citizen or by a domestic corporation which are taxable in the Philippines.

3) Income partly within and partly without the Philippines. Incomes deemed to have been derived in the Philippines are taxable in the Philippines.c. Situs of Property Taxes1. Taxes on Real Property

a. Lex rei sitae or lex situs. In short, where the property is located.b. Reasons: (1) the taxing authority has control because of the stationary and fixed character of the property; and (2) the place where the property is situated gives protection to the real property, hence the property or its owner should support the government of that place.2. Taxes on Personal Property

a. Mobilia sequuntur personam. Generally, where the owner is found under the rule that movables follow the person.b. Tangible personal property. The modern rule is that it is taxable in the state where it has actual situs. Reason: The place where the tangible personal property is found gives it protection; hence the property or its owner should support the government or that place.c. Intangible personal property. Usually, the domicile of the owner is the place that provides protection to the property because intangible follows the owner. Exception: The situs is location not domicile. Where the intangible personal property has acquired a business situs in another jurisdiction. Example: Taxes imposed on the sale of shares of stocks in domestic corporations are payable in the Phils regardless of where they may be found, or where the owners domicile is.d. Situs of Excise TaxThe situs of excise taxes is the place where the privilege is exercised because it is that place that gives protection.

(1) Estate Tax. The transmission from a decedent to his heirs may be subject to taxation in the state where the transferor was a citizen or resident, or where the property is located. 1. In case of resident citizen, nonresident citizens and resident aliens, real property, tangible and personal property and intangible personal property, wherever situated, are taxable in the Philippines.2. In case of nonresident aliens, real property, tangible and personal property and intangible personal property located in the Philippines shall be taxable in the Philippines, unless there is reciprocity law in respect of intangible personal property, in which case, it is not taxable. 3. Intangible personal properties considered situated in the Philippines.

Franchise which must be exercised in the Philippines

Shares of stocks issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws.

Shares of stocks issued by any foreign corporation 85% of the business of which is situated in the Philippines.

Shares of stock issued by a foreign corporation, if such shares, obligations, or bonds, have acquired a business situs in the Philippines; and

Shares or rights in any partnership, business or industry established in the Philippines.

2. Donors Tax. The transmission from a donor to a donee may be subject to taxation in the state where the transferor was a citizen or resident, or where the property is located. Same rules apply as in the case of Estate tax above.e. Situs of Business Tax(1) Sale of Real Property The place where the property is located.(2) Sale of Personal Property The place where the sale is consummated and perfected.(3) VAT The place in which the act is performed or where the occupation is engaged in, or where the sale of good is consummated.d. International ComityComity, defined. Comity is the respect accorded by nations to each other because they are sovereign equals.The property or income of a foreign state or government may not be the subject of taxation by another. This is based on:

1) The Latin maxim, In par parem non habet imperium. As between equals there is no sovereign, hence may not be imposed upon foreign sovereigns.

2) The rule of international law that a foreign government may not be sued without its consent so that it is useless to impose a tax which could not be collected.

3) The concept that when a foreign sovereign enters the territorial jurisdiction of another, it does not subject itself to the jurisdiction of the other.

e. Exemption Of Government Entities, Agencies And Instrumentalities This is premised on the concept that with respect to the government, exemption is the rule and taxation is the exception.

Reasons:1) To levy tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over to itself;2) In order that the functions of the government shall not be unduly impede; and3) To reduce the amount of money that has to be handed by the government in the course of its operations.

Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers (Infantry Post Exchange vs Posadas, 54 Phil 866)

Notwithstanding the immunity, the government may tax itself in the absence of any constitutional limitations. Taxation being an act of high sovereignty, the state, if it so minded could tax itself including its political subdivisions.

Government-owned or controlled corporations, when performing proprietary functions are generally subject to tax in the absence of tax exemption provisions in their charters or law creating them.1) In case of GOCCs, the rule is taxation and exemption is the exception. 2) Tax-exempt government entities are, GSIS, SSS, PHIC, and PCSO.2. Constitutional Limitationsa. Provisions Directly Affecting Taxation1. Prohibition against imprisonment for non-payment of poll tax. No person shall be imprisoned for debt or non-payment of a poll tax. (Art. III, Sec. 20 of the 1987 Constitution)Points to Consider: The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge, but not to other violations like falsification of community tax certificate or non-payment of other taxes

A poll tax (or personal or capitation tax) is a tax of fixed amount on individuals residing within a specified territory, whether citizen or not, without regard to their property or the occupation in which they may be engaged. The community tax certificate is in the nature of a poll tax. (2) Uniformity and equality of taxation. The rule of taxation shall be uniform and equitable. (Art. VI, Sec. 28, ibid)Points to Consider:a. The criteria of equal protection and uniformity, are used interchangeably. In general, they mean the same.b. The criteria is MET when:

the laws operate uniformly on: (1) all persons; (2) under similar circumstances; all persons are treated in the same manner: (1) the conditions not being different; (2) both in privileges conferred and liabilities imposed; and (3) favoritism and preference not allowed.c. The criteria mean that all taxable articles or kinds of property of the same class shall be taxed at the same rate. d. The Constitution does not require things which are different in fact to be treated in law as though they were the same. Hence, the constant reiteration of the view that classification, if rational in character, is allowable.e. The taxing authority has the power to make reasonable and natural classifications for purposes of taxation. Requisites of a valid classification:a. It must be based on Substantial distinctionb. It must Apply not only to the present condition, but also to future conditions

c. It must be Germane to the purpose of the law

d. It must apply Equally to all members of the same class

Tests to determine validity of classification:a. The traditional (or rational basis) test. The classification is valid if it is rationally related to a constitutionally permissible state interest.b. The strict scrutiny (or compelling interest) test. Government regulation that intentionally discriminates against a suspect class such as racial or ethnic minorities, is subject to strict scrutiny and considered to violate the equal protection clause unless found necessary to promote a compelling state interest.c. The intermediate level of scrutiny (or quasi-suspect class) test. Classification based on gender or legitimacy are not suspect but neither are they judged by the traditional or rational basis test. Intentional discriminations against members of a quasi suspect class violate equal protection clause unless they are substantially related to important government objectives.f. The legislature has the inherent power to select the subjects of taxation, hence, it has the power to select whom to exemptg. Tax exemptions are not violative of the equal protection clause, so long as there is valid classification. It has been repeatedly held that inequalities which result from a singling out of one particular class of taxation, or exemption, infringe no constitutional limitation.

h. Equal protection does not demand absolute equality. It merely requires that all persons shall be treated alike, under like circumstances and conditions both as to the privileges conferred and liabilities enforced.

(3) Grant by Congress of authority to the President to impose 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. (ibid) Requisites:

1)There must be a law passed by Congress authorizing the President to impose tariff rates and other fees.

2)Under the law, there must be limitations and restrictions on the exercise of such power

3)The taxes that may be imposed by the President are limited to:

Tariff rates

Import and export quotas

Tonnage and wharfage dues

Other duties (customs duties)

4)The imposition of these tariff and duties must be within the framework of the National Development program of the government.

Congress may not pass a law authorizing the President to impose income tax, donors tax, and other taxes which are not in the nature of customs duties.

The Constitution allows only the imposition by the President of these custom duties

Customs duties which are assessed at the prescribed tariff rates are very much like taxes which may be imposed for both revenue-raising and regulatory purposes.(4) Prohibition against taxation of religious, charitable entities, and educational entities. 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 education purposes shall be exempt from taxation. (ibid)Points to Consider:

In the case of Lladoc v. Commisioner of Internal Revenue, et. al. (L-19201, June 16, 1965), the Supreme Court ruled that the abovementioned constitutional provision which grants tax exemption applies only to property or realty taxes assessed on such properties used directly, actually and exclusively for religious, charitable and educational purposes. It has been held that the test of exemption from taxation is the use of the property for the purposes mentioned in the Constitution.

It is important to note also that for purposes of tax exemption, use overrides ownership such that if property, although actually owned by a religious, charitable or educational institution, is actually used for non-exempt purpose, the exemption from tax of said property vanishes.

For tax exemption purposes, however, the term exclusively used is not limited to total or absolute use for religious, charitable or educational purposes. If a property is incidentally used for the aforementioned purposes, the tax exemption may still subsist.(5) Prohibition against taxation of non-stock, non-profit institutions. All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Proprietary educational institutions, including cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment. (Art. XIV, Sec. 4 (3), ibid)Points to Consider:

The exemption covers income, property, and donors taxes and customs duties;

To be exempt from tax or duty, the revenue, assets, property or donations must be used actually, directly, and exclusively for educational purposes.

Lands, buildings, and improvements actually, directly, and exclusively used for educational purposes are exempt from property tax (Art. VI, Sec. 28(3))

Congress is authorized to grant similar exemptions to proprietary (for profit) educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment. The restrictions are designed to insure that the tax-exemption benefits are used for education purposes.(6) Majority vote of Congress for grant of tax exemption. No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress. (Sec. 28(4) Art. VI.)The above provision requires the concurrence of a majority not of attendees constituting a quorum but of all members of the Congress.(7) Prohibition on use of tax levied for special purpose. All money collected or any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government. (ART VI Sec. 29 (3), ibid)Points to Consider:

If a President of the Philippines spent a special fund for a general purpose, he can be charged with culpable violation of the Constitution.

Illustration: Oil Price Stabilization Fund, or OPSF, created under P.D. 1956 to stabilize the prices of imported crude oil. In a decided case, it was held that that where under an executive order of the President, this special fund is transferred from the general fund to a trust liability account, the constitutional mandate is not violated. The OPSF, according to the Court, remains as a special fund subject to COA audit.(8) Presidents veto power on appropriation, revenue, tariff bills. 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 (Sec. 27 (2), ART VI)Points to Consider:a. An item in a revenue bill does not refer to an entire section imposing a particular kind of tax, but rather to the subject of the tax and the tax rate. In the portion of a revenue bill which actually imposes a tax, a section identifies the tax and enumerates the persons liable therefore with corresponding tax rate.b. To construe the word item as referring to the whole section would tie the Presidents hand in choosing whether to approve the whole section at the expense of also approving a provision therein which he deems unacceptable or veto the entire section at expense of foregoing the collection of the kind of tax altogether.9.Non-impairment of jurisdiction of the Supreme Court. The Supreme Court shall have the power to review, revise, reverse, modify or affirm on appeal or certiorari, all cases involving the legality of any tax imposed, assessment, or toll, or any penalty imposed in relation thereto. (ART VIII Sec. 5 (2B) 1987 Constitution)Congress cannot take away the Supreme Court the power given to it by the Constitution as the final arbiter of the tax cases.

10. Grant of power to the local government units to create its own sources of revenue. Local Government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them. (Sec. 6, Art. X of the 1987 Constitution)

11. Flexible tariff clause. Flexible Tariff Clause (SEC. 401 TCC)In the interest of national economy, general welfare and/or national security, the President upon the recommendation of the National Economic and Development Authority is empowered:

To increase, reduce or remove existing protective rates of import duty, provided that the increase should not be higher than 100% ad valorem.

To establish import quota or to ban imports of any commodity. To impose additional duty on all imports not exceeding 10% ad valorem.

12. Exemption from real property taxes

Charitable institutions, churches and personages or convents appurtenant thereto, morgues, non-profit cemeteries and all lands, buildings and improvements, actually directly and exclusively used for religious, charitable, or educational purposes shall be exempt taxation. (Sec. 28 (3) ART VI)

APPLICATION: The exemption only covers property taxes and not other taxesTEST OF EXEMPTION: It is the USE of the property and not ownership of the property. ABRA VALLEY COLLEGE vs. AQUINO (162 SCRA 106)Points to Consider: The exemption does not only extend to indispensable facilities but also covers incidental facilities which are reasonably necessary to the accomplishment of said purpose

A property leased by the owner to another who uses it exclusively for religious purposes is exempt property tax, but the owner is subject to income tax or rents received.

Real property purchased by any religious sect to be used exclusively for religious purposes are subject to the tax on the transfer of ownership or of title to real property (also if donated- donors tax)

Property held for future use is not tax exempt

13. No appropriation or use of public money for religious purposes. 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 as such. (ART VI Sec. 29 (2)1987 Constitution)

Points to Consider:

Public property may be leased to a religious group provided that the lease will be totally under the same conditions as that to private persons (amount of rent)

Congress is without power to appropriate funds for a private purpose.

b.Provisions Indirectly Affecting Taxation

1)Due ProcessNo person shall be deprived of life, liberty, or property without due process of law.Requirements of Due Process in Taxation:1) Tax must be for a Public purpose

2) Imposed within the Territorial jurisdiction

3) No arbitrariness or oppression in assessment, and collection

Due process in taxation does not require:1. Determination through judicial inquiry of property subject to tax

2. Amount of tax to be imposed

3. Notice of hearing as to: (a) amount of the tax; and (b) manner of apportionment.Requisites of due process of law2) There must be a valid law

3) Tax measure should not be unconscionable and unjust as to amount to confiscation of property

4) Tax statute must not be arbitrary as to find no support in the constitution

When is deprivation of life, liberty or property done in accordance with due process of law?

1) If done under authority of a law that is valid or of the constitution itself

2) After compliance with fair and reasonable methods of procedure prescribed by law.

If properties are taxed on the basis of an invalid law, such deprivation is a violation of due process

REMEDY ask for refund.

Kinds of due process: SUBSTATNTIVE DUE PROCESS requires that a tax statute must be within the constitutional authority of Congress to pass and that it be reasonable, fair and just.

PROCEDURAL DUE PROCESS requires notice and hearing or at least an opportunity to be heard.2. Equal protection clause x x x, nor shall any person be denied the equal protection o f laws. (ART III Sec. 1 1987 Constitution)

All persons, all properties, all businesses should be taxed at the same rate: Prohibits class legislation

Prohibits undue discrimination

Important Points to Consider:

1. Equal protection of the laws signifies that all persons subject to legislation shall be treated under circumstances and conditions both in the privileges conferred and liabilities imposed

2. This doctrine prohibits class legislation which discriminates against some and favors others.

Requisites for a Valid Classification

1.Must not be arbitrary

2.Must not be based upon substantial distinctions

3.Must be germane to the purpose of law.

4.Must not be limited to existing conditions only; and

5.Must play equally to all members of a class.

3. Religious freedom. No law shall be made respecting an establishment of religion or prohibiting the free franchise 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, Sec. 5, ibid)Points to Consider:1) Religious freedom is composed of: (1) Non-establishment clause; and (2) Religious freedom2) It bars government sponsorship of religion, government financial support of religion, and active involvement of government in religious activities. It also bars official preference of one religious denomination over another. Any law that grants a denominational preference is subject to strict scrutiny.3) Examples of government action that violate the non-establishment clause:a. Payment from government funds of field trip transportation is invalid, since parochial schools control the timing of such trips and the teachers play an integral part in making such educational experiences meaningful.b. Lending students instructional materials and equipment for use in parochial schools is invalid.c. A government program for auxiliary services to parochial school students, with public school personnel providing such things as remedial reading, accelerated instruction, guidance counseling, etc., is invalid if done within the parochial school.4) Government action that does not violate the non-establishment clause:a. If it has a secular purpose;b. If it has a principal or primary effect that neither advances nor inhibits religion; andc. If it does not foster excessive government entanglement with religion.5) Real property tax exemption does not violate the non-establishment clause.6) It is the activity which cannot be taxed. Activities which have connection with the exercise of religion7) The payment of license fees for the distribution and sale of bibles suppresses the constitutional right of free exercise of religion. It was once held that an ordinance of the City of Manila, which imposed a license fee on those engaged in the business of general merchandise could not be applied to American Bible Societys sales of bibles and other religious literature.8) The Free Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization.9) The Sale of religious articles can be the subject of the VAT. What cannot be taxed is the exercise of religious worship or activity. VAT registration of P1,000 not restrictive of press and religious freedom. It is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration.10) The income of the priest derived the exercise of religious activity can be taxed.4. Non-impairment of obligatins of contracts. No law impairing the obligation of contracts shall be passed. (Art. III, Sec. 10, ibid).

In relation to the grant of congressional franchises, the constitution likewise provides that, Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. (Art. XII, Sec. 11, ibid)Impairment, defined. There is impairment when a law substantially invalidates, releases, or extinguishes the obligations of a contract, or that derogates substantial contractual rights.

Circumstances considered as impairment of the obligations of contract:

1) When a person is deprived of the benefits of his contract, or

2) When the law takes from the party his whole contract and all the rights which it has intended to confer, or

3) When the terms of a statute is altered by imposing new conditions, or dispensing with conditions, or which adds new duties, or releases or lessens any part of the contract, obligation or substantially defeats its end, thereby: Diminishing the value of the contract;

Changing the intention of the parties;

Changing the mode of payment; and

Changing the remedy to enforce the contract without leaving any substantial remedy.

4) The state in the exercise of a reasonable discretion and for the public good, may surrender a part of its powers in this particular. However, this power may only be bargained away in the exercise by a state of its taxing and spending powers.

5) The parties to the contract cannot exercise the power of taxation.6) Police power prevails over the non-impairment clause. The non-impairment clause applies to taxation but not to police power and eminent domain. Furthermore, it applies only where one party is the government and the other, a private individual.7) A lawful tax on a new subject or an increased tax on an old one, does not interfere with a contract or impairs its obligation.8) The constitutional guarantee of the non-impairment clause can only be invoked in the grant of tax exemption, subject to the following rules:

If the exemption was granted for valuable consideration and it is granted on the basis of a contract, it cannot be revoked. If the exemption is granted by virtue of a contract, wherein the government enters into a contract with a private corporation, it cannot be revoked unilaterally by the government. If the basis of the tax exemption is a franchise granted by Congress and under the franchise or the tax exemption is given to a particular holder or person, it can be unilaterally revoked by the government (Congress)he non-impairment clause applies only to contracts and not to a franchise.9) Franchises with phrase, shall be in lieu of all taxes descriptive of the payment of a franchise tax on their gross earnings are exempt: (1) all taxes; (2) the franchise tax under the NIRC; and (3) the franchise tax under the local tax code

L. STAGES OF TAXATION

Aspects of Taxation1. Levy Determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes (strictly speaking, such refers to taxation). The determination by Congress of the subject and object of taxation as well as the rate.

2. Collection Consists of the manner of enforcement of the obligation on the part of those who are taxed. (this includes payment by the taxpayer and is referred to as tax administration). Prescribing the means, process and method of implementing the tax law for the purpose of satisfying the tax obligation. The actual effort in obtaining payment for the tax. Assessment, defined. An assessment is not an action or proceeding for the collection of tax. It is an administrative determination that one is indebted to the Government for taxes. This action necessarily involves: (1) the computation of the sum due; (2) the giving of a notice to that effect to the taxpayer; and (3) the making, simultaneously with or sometime after the giving of the notice, of a demand upon the taxpayer for the payment of the tax or deficiency stated.3. Payment. Payment by the taxpayer of the tax in compliance with the tax laws including whatever remedies are available to him under the law.4. Refund. Where an internal revenue tax has been erroneously or illegally collected or penalty has been imposed without authority, the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue before any suit in court is commenced. Tax recovery or refunds may encompass the following payments: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed without authority; and, (c) any sum alleged to have been excessive or in any manner wrongfully collected.M. DEFINITION, NATURE, AND CHARACTERISTICS OF TAXESTaxes, defined. Taxes are the enforced contributions, generally payable in money, proportionate in character, levied on persons, property, or exercise of a right or privilege by the state having jurisdiction, through its legislature, for public purpose and paid at regular periods or intervals.

From the above definition, the following may be said to be the essential characteristics of taxes (LEMP4):

1. It is levied by the law-making body of the State.

The power to tax is a legislative power which under the Constitution only Congress can exercise through the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.

2. It is an enforced contribution

A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.

3. It is generally payable in moneyTax is a pecuniary burden an exaction to be discharged alone in the form of money which must be in legal tender, unless qualified by law, such as RA 304 which allows backpay certificates as payment of taxes.

4. It is proportionate in character

It is assessed in accordance with some reasonable rule of apportionment, which means that conformably with the constitutional mandate on progressivity of a taxing system, taxes must be based on the taxpayers ability to pay.5. It is levied by the State on persons, property, or services within its jurisdiction A tax may be imposed on acts, transactions, rights or privileges.

6. It is levied for public purpose or purposesTaxation involves, and a tax constitutes, a burden to provide income for public purposes.

7. It is paid at regular periods or intervals.

Requisites of valid tax A valid tax should be within the jurisdiction of the taxing authority; That the assessment and collection of certain kinds; The rule of taxation should be uniform That either the person or property of taxes guarantees against injustice to individuals, especially by way of notice and opportunity for hearing be provided. The tax must not impinge on the inherent and Constitutional limitations on the power of taxation.M. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS1.Tax distinguished from tariff. A tax is an all embracing term to include various kinds of enforced contributions imposed upon persons for the attainment of public purposes, while a tariff should be understood to mean a kind of tax imposed on articles which are traded internationally.2. Tax distinguished from toll.

TAXTOLL

Levied for the support of governmentCompensation for the use of anothers property

Amount is determined by the cost the property or of the improvementAmount is determined by the sovereign

Imposed only by the stateMay be imposed by the government or private individual

3. Tax distinguished from License fee

License FeeTax

BasisPolice powerTax power

PurposeRegulatoryRevenue

LimitationLimited to cost of :

1. Issuing of license.

2. Necessary inspection or police surveillance

Inherent and constitutional limitations

Effect of defaultMakes the business illegalDoes not make the business illegal

4. Tax distinguished from special assessment TAXSpecial Assessment

Imposed on persons, property and exercisesLevied only on land

Personal liability attaches on the person assessed in case of non-paymentCannot be made a personal liability of the person assessed

Not based on any special or direct benefitBased wholly on benefit

Levied and paid annuallyExceptional both as to time and locality

Exemption granted is applicableExemption does not apply.

If property is exempt from Real Estate Tax, it is also exempt from Special Assessment

5. Tax is distinguished from debtTAXDEBT

BasisBased on lawBased on contract or judgment

Failure to payMay result in imprisonmentNo imprisonment

Mode of paymentGenerally payable in moneyPayable in money, property or service

AssignabilityNot assignableAssignable

PaymentUnless it becomes a debt is not subject to compensation or set-offMay be a subject

InterestDoes not draw interest, unless delinquentDraws interest if stipulated or delayed

AuthorityImposed by public authorityCan be imposed by private individuals

PrescriptionPrescriptive periods for tax under NIRCDebt under the Civil Code

N.KINDS OF TAXES1.As to object

1. Personal, poll or capitation tax - Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged, i.e. community tax.

2. Property tax - Tax imposed on property, real or personal, in proportion to its value or in accordance with some other reasonable method of apportionment.

3. Excise tax/Privilege tax - A charge impose upon the performance of an act, the enjoyment of privilege, or the engaging in an occupation.

2.As to burden or incidencea.Direct. Those that are extracted from the very person who, it is intended or desired, should pay them; they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in, which liability cannot be shifted to another. Examples: income tax, estate tax, donors tax, franchise tax etc.b.Indirect. 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 another not as a tax but as part of the purchase price. Examples: contractors tax, VAT, 3.As to tax ratesa.Specific imposed based on some standard of weight or measurement and which requires no assessment beyond a listing and classification of the object to be taxed. Example taxes on distilled spirits and wines.b.Ad valorem imposed based on a specific proportion of the value fixed by law or as appraised. Examples: real estate tax, excise taxes on automobiles, non-essential goods such as jewelry and perfumes, and others; customs duties (except on cinematographic films).c.Mixed or compound imposes both specific and ad valorem.4.As to purposes

a.General or fiscal imposed for the purpose of raising public funds for the service of the government. Examples: income tax, VAT, and almost all taxes.b.Special, regulatory, or sumptuary imposed primarily for the regulation of usefully or non-useful occupation or enterprises and secondarily only for the raising of public funds. Example: Protective tariffs or customs duties on imported goods to enable similar products manufactured locally to compete with such imports in the domestic market.5.As to scope or authority to imposea.National internal revenue taxes. Tax imposed by the national government. Examples: national internal revenue taxes, customs duties; and national taxes imposed by special laws.b.Local real property tax, municipal tax. Tax imposed by municipal corporations or local government units. Examples: real estate tax, professional tax.6.As to graduationa.Progressive or graduated increases as the income of taxpayer goes higher. Examples: income tax, estate tax; donors tax.b.Regressive decreases as the income of taxpayer goes higher, i.e., the tax rate decreases as the tax base or bracket increases. There is no regressive tax in the Philippines.c.Proportionate tax based on a fixed percentage of the amount of the property, receipts, or other basis to be taxed. The rate of the tax remains constant for all levels of the tax base or any given income level. It is also called flat or uniform tax. Examples: real estate taxes, VAT and other percentage taxes.

II.NATIONAL INTERNAL REVENUE CODE OF 1997 AS AMENDED (NIRC)A.INCOME TAXATION1.Income Tax Systems

a.Global Tax System(1)A system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual.

(2)A system which taxes all categories of income except certain passive incomes and capital gains. It prescribes a unitary but progressive rate for the taxable aggregate incomes and flat rates for certain passive incomes derived by individuals.

b.Schedular Tax System(1)A system employed where in the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer.

(2)A system which itemizes the different incomes and provides for varied percentages of taxes, to be applied thereto.

c.Semi-schedular or semi-global tax system (refer to Features of the Phil. Income Tax Law)2.Features of the Philippine Income Tax Law

a. Direct tax. It is payable by the person upon whom it is directly imposed by law. It cannot be shifted or passed on to others.b. Progressive. A tax rate system where the tax rate increases with the tax base. The tax liability increases much faster than the income in the tax base.The individual income tax system, in the main, is progressive in nature, i. e. the tax rates increase as the tax base increases. In certain cases, however, final taxes are imposed on passive income.

c. Comprehensive. The law has adopted the most comprehensive tax situs by using all possible legal criteria in the determination of its tax base as well as the source of the taxable income. d. Semi-schedular or semi-global tax system.The present income tax law is now more schedular than global in the case of individual income taxpayers, but it has maintained much of its global treatment on corporation.4. Criteria in Imposing Philippine Income Tax

1. Citizenship principle (Nationality theory) a citizen of the Philippine is subject to Philippine income tax: on income wherever if he resides in the Philippines; or only his income with sources in the Philippines if he qualifies as non-resident citizen.

2. Residence principle (Domicillary theory) a resident alien is liable to pay income tax on his income for sources within the Philippines but exempt from tax on his income from sources outside the Philippines.

3. Source principle (Doctrine of source) an alien is subject to Philippine income tax because he derives income from sources within the Philippines such as dividend, interest, rent or royalty, despite the fact that he has not set foot in the Philippines.4. Types of Philippine Income Tax

Types of income taxes:

1. Presumptive A scale of income taxes is imposed in relation to a group of persons actual expenditure and the presumed income.

2. Composite tax A tax consisting of a series of separate quasi-judicial taxes, assessed on the particular source of income with a superimposed personal tax on the income as a whole.

3. Unitary income tax Incomes are arranged according to source. The separate items are added together and the rate applied to the resulting total income.Kinds of income taxes under NIRC(1) Net Income Tax

(2) Gross Income Tax

(3) Final Income Tax

(4) Preferential Rates or Special Rates of Income Tax

(5) Improperly Accumulated Earnings Tax

(6) Minimum Corporate Income Tax

(7) Optional corporate Income tax

Kinds of income according to tax rates

1) Subject to scheduler rates;

2) Subject to final tax; and

3) Subject to the reduced rate (also known as then normal rate) or the minimum corporate income tax (MCIT) whichever is the higher of the two.

5.Taxable Period."The term 'taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. 'Taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the period for which such return is made. (Sec. 22(P), NIRC of 1997 Sec. 43. General Rule The taxable income shall be computed upon the basis of the taxpayers annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayers annual accounting period is other than a fiscal year, as defined in Sec. 22 (Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.a. Calendar Period The twelve (12) consecutive months starting on January 1 and ending on December 31.

Taxpayers who are required to use ONLY the calendar year are:

1) Individuals;

2) Estates and trusts; and

3) General professional partnerships.Instances when the calendar year shall be the basis for computing net income:

if the taxpayers annual accounting period is other than a fiscal year, as defined in Sec. 22 (Q); or if the taxpayer has no annual accounting period, or does not keep books; or if the taxpayer is an individualb. Fiscal Period The term 'fiscal year' means an accounting period of twelve (12) months ending on the last day of any month other than December. (Sec. 22(Q), NIRC of 1997)c. Short Period This means a period of less than twelve (12) months.Instances where a taxpayer may have a taxable period of less than 12 months:

When a corporation is newly organized and commenced operations on any day within the year.

When a corporation changes its accounting period.

When a Commissioner of Internal Revenue, by authority, terminates the taxable period of a taxpayer pursuant to Sec. 6(D) of the Tax Code; and

In case of final return of the decedent and such period ends at the time of his death.Basis of computation of taxable income:

The income shall be computed on the basis of the period for which separate final or adjustment return is made.6.Kinds of TaxpayersWhy do you need to know the classification? Because the tax concepts differ in accordance with the classification/kinds of taxpayers:

Gross income for tax purposes;

Exclusions from gross income;

Exemptions;

Deductions; and

Income tax rates.

(Mastery of this topic is a MUST to facilitate understanding of the succeeding topics)

a.Individual TaxpayersIndividual Taxpayers are classified into:

(1)Citizen

a) Resident citizen;

b) Non-resident citizen

(2)Alien

a) Resident alien;

b) Non-resident alien engaged in trade or business (NRAE)

c) Non-resident alien NOT engaged in trade or business (NRANE)

1)Citizens The following are citizens of the Philippines:1) Those who are citizens of the Philippines at the time of the adoption of the 1987 Philippine Constitution;

2) Those whose fathers or mothers are citizens of the Philippines;

3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and

4) Those who are natural