Tax1 LLB404 2012-2013 Midterms Notes

8/10/2019 Tax1 LLB404 2012-2013 Midterms Notes

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TAX MIDTERMS COMPILATIONJENNIFER, JASPER, REUVILLE, RYAN, JADE, KRISTEL, JARED, JAN, NEIL, JESSTONY| 2

few minutes. And again on August 4, I will not be around. I planned out myschedule for the entire year and Saturday (?). Do you know ? Saturday just beforemidterms. I would propose again that to cover up for August 4, we will be meeting-you want Monday for that. No. For June 30, we will have July 7 and July 14, an hourearly. But for August 4, that's the Saturday before midterms, it is imperative that Iwill meet you, it should be before midterms. Right? So, I was thinking that it shouldbe July 21, and 28, an hour early. So that means that the entire July for Saturdays,you, and me also, 12:30 to 4:30. I have another proposal. Instead of 21 and 28,we can have August 6, the day before you first midterm exam. It is a holiday. Youlike that? (?) You are not even sure what subject is for the 1st day, di ba, August

7? Not tax, your tax is either Friday or Saturday. So, you want the 1st option whichis/so for the entire July, all Saturdays will have to be for 4 hours. Heavy. It's noproblem because just before midterms, you have your Saturday free. We could havea special meeting if you like on a Saturday. Any other questions or do you have anyquestions? We haven't started yet. People at the back, can you hear me? It'susually a problem of my voice. It's very soft. So we will start.

First meeting, I am supposed to get to know you, di ba? But you have waived and Ihave waived our first meeting. We were supposed to meet last Saturday. Classeswere suspended. The outline that I have given you is for General Principles. I willbe giving you another one... It depends on the pace that we are going to have.Plenty of accounting and management accounting students. In the other class, thereare only like .. accounting students. For those who know, much is expected.

The outlines are there to help you follow through the discussions. It would frustrateme if the question that I am going to throw at you was given/was already availablein the outline and you still can't answer. This has happened in the past. So, shall westart with our oral recitations? It's not oral reading.

Remember the general principles, it's the easiest by far for Taxation. You havealready mastered it from Constitutional Law. What are the 3 main powers of thegovernment and who exercise the power of taxation. Simple recall...

Do you know the power of Taxation? What is the power of Taxation?Taxation is the power by which the sovereign, through its law-making body, raisesrevenue to defray the necessary expenses of government.

It is an inherent power of every sovereignty exercised by what branch ofthe government?It is exercised by the legislative department.

Exclusively?Student: Yes maam but subject to restrictions provided by the Constitution. Andcan be validly delegated to the President and through the local government units.

The power of taxation is inherent in every sovereignty and exercise by thelegislative branch of the government.

Burdens in the form of taxes against whom?Imposed upon subjects, objects, activities or transactions. Subjects maybe citizens,residents or not residents and even the type of tax that is to be imposed. Exactednot only on persons or the subjects of taxation, property or objects of taxation, andas well as activities or transactions performed within its jurisdiction.

Taxation is inherent in ever sovereignty, exercised by the legislative branch of thegovernment. Exacting burdens upon subjects, objects, transactions or activities. Forthe purpose of raising revenues in order to meet the legitimate needs of thegovernment.

Have you been affected of taxes? Are you working? How are you affected?Student: VAT maam! Buying in the fastfood.

So we cannot say that taxation will only affect those that are earning income.Because taxation is not just solely related to income taxation. Earning income, we

will have income tax. For all other type of transactions, is affected somehow byother tax. For a simple activity of purchase, value added tax affects almosteveryone in the consumer world. For every purchase that you make, did you noticethat you are passed on with a tax? Actually, its not the establishments that areliable for the value added tax. Their liability is only to remit whatever you haveshouldered. As in fact, if you purchase a watch. You purchased that watch at SM.Did you notice that the prices of these things include the value added tax? You arethe one that is burden with this tax. And not the seller whos going to just remitwhat you shouldered. If you buy a book, if you ride a plane, there is always a taxattached to it.

So in short, the nature of taxation boils down to three nature1. Inherent prerogative of the sovereignty2. Legislative in character

3. Subject to constitutional and inherent limitations

We were saying that the power of taxation is inherent in every sovereignty.Why do you say so? Is it not confirmed by the Constitution?So in short the government will not give services without the payment of taxes. Sowe will have to believe that these politicians are not interested in taxes? Student:Of course they are!

But for purposes of discussion, it is the State that is in need of taxes in order to runthe government.

Were saying inherent and not by the Constitution but what are theseconstitutional provisions saying about taxation? Is it not the State the rightto tax?Student: The constitution when talking about the taxation, it sets limits for thetaxation power.

When you come in point of time when there was no Constitution in effect,does it mean to say that there is still the right of the government to imposetaxes?Student: Yes ma'am.Since it is not based on the confirmation of the constitution, the absence of theConstitution make the government relinquish its rights to impose taxes. The powerof taxation, one of the key powers of the government, is the most pervasive of allalthough police power is pervasive also. Pervasive in the sense, all the differentstages in our life are affected by taxation.

It is primarily legislative and only the legislative can enact a law to impose taxes.And as mentioned, there are instance where it can be delegated. We will discuss

that when we reach inherent limitations.


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The third nature of the power of taxation is that there are limitations.

What are the two classes of limitations?Inherent and Constitutional limitations.

When we say inherent limitationson the power of taxation it means that theright to tax of the government, there exist a limit to tax or restrictions. It doesnot need any law or provision for the limitation to apply. For example, everytax that need to be imposed have for its purpose the general welfare or for thepurpose of the common good. Otherwise, if the legislative branch will enact atax for the purpose of aiding a private enterprise, that will be robbery in its

sophisticated form. Youre giving someone elses money for a private personand not for the general welfare.

And the second limitation to tax is the Constitutional limitationswhich arefound in our Constitution. You were saying a while ago that the provisions inthe Constitution simply refers not to grant the power but simply to set out thelimitations to power of taxation. Such as? (Students example was uniformityand equality of taxation.) So there are many Constitutional limitations, and oneof these is uniformity of imposing taxes. That means for all types of subjectsbelong to the same class will have to be subjected to the same rate.

What are the theories which would support the power of taxation?

Lifeblood theory?

Student: Taxes are need by the government in order to support the governmentand in order for it to survive.

Overused theory that came from various Supreme Court cases. When there is aquestion relating to whether an object, subject or activity is subject to tax,lifeblood theory will come in. In the same way, if you are not sure of what toanswer whether a transaction is subject to tax, you will probably have onechance left to discuss the lifeblood theory. But mind you class, it will not applyat all times. The lifeblood theory tells us that in order for the government tosurvive it has to be supported by its people and taxes will be the lifeblood ofevery government. And there are many cases where in it was illustrated andmany provisions in the tax code that somehow illustrate why collection of taxesis important to the government and how it is implemented. For examplegovernment through BIR, our tax authority, cannot be denied in the collectionof taxes. Meaning to say that courts cannot file an injunction to stop thecollection of taxes as it deems fit in a tax assessment, safe in one exception.You will learn that in tax 2. Practically all cases and methods of collection willbe supported by the government unless it is for an arbitrary right. Taxes willnot be subject to compensation or set-off. Meaning to say, that if you have aclaim for refund with the government for overpaid taxes and here comes anassessment of underpaid taxes, you did not tell the government that it shouldnot proceed with the levy of your property because you have an existingcollectible from the government, it cannot be set-off. For the simple reason thattaxpayer and the government are not debtors and creditors of each other.There are full of exceptions. (Tax 2)

And another instance where the lifeblood, the power of the tax is in relation to thepower to destroy. We will talk about that later.

CIR vs. CTA. Citytrust case! (sorry dili kayo clear ang transcription sa case)(justkindly read the case)

Student: Citytrust was asking for refund because they claimed that they haveoverpaid of their taxes. But when they claimed for refund, it was denied by BIR.

So you noticed class, when you file for a case for refund, usually half of the case isdenied by BIR.

It was in this case that there was a contention by BIR they could no longer theoverpaid tax because it was beyond the prescriptive period. _____________. Thecourt decided that indeed that the OSG is correct, the refund cannot be givenbecause it was beyond the prescriptive period.

That case is what year? 1994.Student: The Supreme Court provided that the state is not bound by the mistakesof its agents.

What agent? Did it not that BIR pursue the case?BIR is commissioner of internal revenue. Every case filed by BIR is conducted by thelegal officers of the bureau.

This is a claim for recon which was granted by what court?Granted by the court of tax appeals, confirmed by the court of tax appeals andgranting for recon was because the BIR failed to submit evidences as well. _______(do not know unsay sumpay)

of the BIR, or the tax appeals is required to submit proof such as official receipts,

invoices etc., and the other party is required to submit their evidences. So in thecase of Diliman vs. Tax Appeals, court gave another chance to BIR and requiredthem to submit their own evidences.

For purposes of our discussion, we are looking into is how did the SC decide onissues of requiring the govt to give back taxes that were supposedly erroneouslypaid? Did they give up easily to say that they should give back the taxes to thetaxpayer. Sure enough they would say that its the lifeblood of the govt, its whatthey use to pay for a civilized society and any form of relinquishment of such rightsshould not be decided so easily. In 2006 this was finally resolved by the SC.

MR CLEMENCIO? Was the lifeblood theory upheld in the case of CIR vs.ALGUE?Wait maam, Ill try to remember. I believe that the life blood theory was not upheldin the Algue case because what happened wasAlgue was claiming for deductions..

What type of deductions? What type of easement?Tubal: Deductions for the expenses that they incurred in the purchase of theproperties of PHILIPPINE SUGAR ESTATE and their venture in the experimentalbusiness called VEGETABLE OIL INVESTMENT CORP. so they were claiming for taxdeductions but..

Okay class, let me give you a background in tax deductions would actuallybe strictly looked into by the govt. Why?Whenever you claim expenses or tax deductions, it would not really lessen loweryour taxable income, which would be translated to lower tax collection, in this casethere was a claim for promotional expenses, usually this are incurred during thebilling of the corporation from the state while the operations are still going on. Wtwas claimed as an expense deduction.

Was it allowed by the BIR?


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Student: The BIR COMMISSIONER contended that these expenses were notordinary, reasonable, and necessary business expenses. Thats why they disallowedthe tax deductions claim. However when the case went up to the SC they said thatAlgue successfully proved that the expenses incurred were for such purposes thatwould benefit the GOVT also thats why it deserves to be a deductible item,because it says here that they were successful in convincing investors to ventureinto the experimental business and it will cost them millions which the govt will alsobenefit because of the revenues and the jobs that will be created.

Ok, since you are already in 3 rdyear, you will have subjects on corporation code

where you will learn that in the operation of business there are 3 operational stages,and in the operational stages you would either sell the stocks if you want investors,if you cannot invest in it solely or with your family you will somehow have to hiresomebody to sell your stocks successfully, somebody who is really engaged in thatkind of activity. There is a chance that they will be denied. Aside from the fact thatthey dont want to give tax deductions, for expenses to be considered as adeductible item it should be ordinary, reasonable and necessary. Those are the 3criterias you look into for the deductibility of an expense. If it s ordinary to thebusiness that you are engaged in, is it necessary, is it reasonable. So when you arein a pawnshop business ordinarily you need a security guard. Pero when yourbusiness is selling in the sidewalk it wouldnt be necessary, reasonable in amount, infact it involves million expenses for a ten million investment..is the amount forpromotional fees reasonable? Its not? Therefore it is allowed, but in this case it wasfound out to be ordinary, necessary, reasonable therefore it is deductible. the

doctrine was not upheld. you cannot argue that because of the lifeblood doctrine theBIR correctly decided that it is not deductible. So its not in all cases that thelifeblood doctrine is upheld.

What is the necessity theory?Student: the second theory of the basis of taxation is the necessity theory. It meansthat the basis of taxation is deeply rooted from the STATES necessity to raiserevenues to support public service. on the other hand the peoples necessity for

services and protection from the state in the form of infrastructure, navy, army, airforce and also for improvement in the economy and science and such needs of thepeople which they expect the government to provide for them.

So do you think the govt will be justified to raise the current taxes of

corporations which is 30% in order to raise revenues, to defend ourScarborough Shoal?Student: In my opinion, I think it would not be necessary, I believe that if theadministrative side of collecting taxes would be done properly, we would haveenough budget to fund our national defense, in fact I believe this is already in ourbudget but somewhere along the way it went to the pockets of politicians.

What is the symbiotic relationship theory?Student: It means that the people, although they are burdened or made tosurrender a part of their property to the government, they should do so because inturn the government is giving back compensation through services.

So its a give and take relationship between the govt and the people. The govt cansupport its people if the people will support the govt, and support should beproportional.

When you are saying through the benefits received by the people, can aperson who has not received any benefit from the gov't refuse to paytaxes?Student: As we have discussed earlier, the power to tax is (COULDNT HEAR WHATSHE SAID), and another reason is that it doesnt mean that a person did not directlybenefit from the government, it doesnt mean that ultimately he wasnt benefitedbecause the principle behind public purpose is it is both the direct and indirectbenefit that a person receives, even if a person is not directly benefited..Thedevelopment and the enhancement that the govt provided the state of the peoplein general is also considered.

Ok it is not required for a person or taxpayer to be liable to the gov t to support itthrough taxes, that he or she would receive a direct effect.. on the same note, evenif a person is directly benefiting from the govt through food allowances, etc. to theunderprivileged and that they are not paying any taxes, the other taxpayers cannotsay that they should be required to pay taxes because its a balancing situation,thats why we have a progressive system of taxation, the more you can afford. Themore you are liable to pay taxes. As for minimum wage earners, they are alreadyexempt from paying taxes.

What is the primary purpose of taxation?Student: They primary purpose of taxation is to raise revenues.

Is revenue raising an exclusive purpose of the power of the legislature?

Student: There are other purposes of taxation, such as (inaudible) giving of taxincentives for the welfare our economy and also for the welfare of our local industry.

How can our taxation affect our local industries?Student: Foreign investors will be encouraged to invest more because they will gettax exemptions. In a way the income tax we get from them are (inaudible)

So we have the primary purpose of taxation, which is to raise revenues in order tomeet the services for the govt. in all kinds of taxation whatever you call it, italways has the primary purpose of taxation which is to raise revenues such asestate taxes, when is it imposed? When does it take effect? So when somebodydies, automatically the state will be interested in the property or the estate left bythe decedent and it will be subjected to estate tax. What really is the purposebehind?, there should be a basis as well for imposing tax because its not incometax, all the decedent did was die, and now his estate is subject to tax? There shouldbe another purpose aside from revenue reasons? Because according to the state itis a silent partner in the accumulation of wealth of the decedent, the decedent andhis estate received benefits in perfecting the property throughout its lifetime. In thesame way income taxation or taxes in general encourages the local industry bygiving incentives like they dont pay income tax for the first 3 or 4 years ofoperation to encourage investment from outside the country.

And also another secondary purpose of taxation is that it would protect ourlocal industry from what?Student: From the intervention of

Ok, imagine the businesses in china, they could actually produce the same type ofproducts which they would then sell at a lower price. Where would they buy theproducts? So in order to protect the growth of our own local industry we can play

around with taxes, customs dues and tariffs in the importation of these products. Ifwe would like to protect our local industry from this type of dumping of very cheap


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items in the Philippines, we can raise customs duties and tariffs or even imposebans on certain products from entering into the country so we can enjoy our ownproducts produced by our local manufacturers. The regulation becomes secondary,although the collection of taxes has a revenue raising purpose.

And another secondary purpose is?Student: For regulation maam. For example cigarettes there is excise tax cause itsbad for the health of the people. Another would be to reduce social inequality..in thesense that if you have more you will be taxed more.

Could you give me an example?Student: The tax that you pay is proportionate to the income that you earn.

Ok, to reduce social inequality, in the sense that if you earn more income you willbelong to a higher tax bracket. as your income increases your tax increases..butactually its not happening..the gap between the rich and the poor is widening.

Is regulating a purpose of taxation?Student: Yes that is a secondary purpose of taxation. First taxation has the powerto destroy for example cigarettes, they are bad for the body so in order for peopleto avoid smoking, higher taxes are imposed on cigarette companies, and highertaxes mean higher prices thus higher prices mean people will get discouraged tobuy.

So these are the same taxes imposed on cigars and liquors..we are actuallydirecting our taxes against the products itself not to the business or producerbecause all corporations whether involved in the production of these items or notwill be slapped with the same tax rate in your taxable income..all your transactionswill be imposed the same taxes. The difference would lie in that if you producethese items such as c igars and liquors will be slapped with an additional type of taxwhich is the excise tax. If you see the stamp on top of the cigarette pack and thewines there is a stamp signifying they paid an excise tax. So not only the incometax paid by Lucio Tan, and not only the VAT which is ultimately passed on to thebuyer but there is another type of tax. It would result to a higher price but actuallyin our country its not that bad .even regulars smoke, so they could really afford.

So you were saying it involves the power to destroy?Student: It also has the power not to destroy, like it may strengthen our localindustry by giving incentives.

Lets talk about when it has the power to destroy and when not a power to destroy.

To what extent is taxation allowed as a power to destroy?Student: Only in regulatory purpose..

Lets make it simple, the power to tax involves the power to destroy if it is used toimplement the police power of the state, not for purposes to raise revenue. Becauseif the purpose of the taxation involves only to raise revenue you can never use it asa power to destroy, it only becomes a power to destroy if it is somehow policepower.

But, would all implementation of police power of the state carry with it thepower to destroy? or would there be any limitation to that power?

Student: Yes maam, as long as there is compliance to the substantial andprocedural requirements, prescribed by the constitution then it would limit thepower to destroy.

So that would apply to every enactment of the tax law. It would have to follow therules on substantive and procedural due process, so even if it is the interest of thegovt to implement the police power of the state we have to consider if the law isvalid or not. Otherwise the SC would not uphold it. Because in your reading youmay have read that the power to tax is not a power to destroy so long as the SCsits. It simply means to say that, so long as the SC is there to determine whether

the exaction is valid or not in the implementation or regulation of a business orentity, it will not involve the power to destroy. In more cases the power to destroyis only used to regulate or limit what type of entities? basically those that areinimical to the public or general welfare..ex. the closure of jaguar bar.

What are the 2 aspects of the power of taxation?Student: that is the levying/ imposition of taxes and the tax administration or thecollection of taxes.

Are both legislative in nature?Student: No maam. Only the imposition of taxes is legislative in nature, theassessment and collection of taxes is under the executive dept.

Aspects of taxation

Levy or imposition

Determination of purposeIt is with Congress to determine the public purpose of its law. So at the enactmentstage, the court has no right to inquire the wisdom/objectivity of the law. It is onlyexclusive to the legislative branch. But once if there is a person questions the taxlaw or taxpayers suit, the court caneventually determine whether or not the law isfor public purpose.

Determination of the subjects and objects of taxationSo to what type of person, property or activity is the tax directed against. Thereshould determination of who are the subjects, what objects, and what type oftransaction.

For example, the Local Government Code, insofar as the chapter on real propertytax is concerned, is only directed in determining what type of objects subject to realproperty tax. You cannot see in the chapter a tax directed against an activity. Somaybe...

And what else?

Determination of the amount and rate of taxYou will notice that most of the taxes imposed by the legislative branch are in theform of rates. Usually, it is in the form of tax rates. Ex: Income tax

And?

Determination of the kind of tax to be collected

Can you give us the different taxes that you know?


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Student: Income tax, excise tax... etc. (di maklaro)If youre engaged in the business of selling real properties, primary tax would bethe income tax. Second, is the VAT. Third, is the documentary stamp tax. Andfinally, you will pay local transfer tax to the LGU.

But it should be within our taxing jurisdiction

Determination apportionment of the taxApportionment of tax is determining what bracket of income would be subjected tothe tax. Example: Increasing the VAT rate from 10% to 12%.

Determination of the Manner and Mode of Enforcement and CollectionAs a general rule, it is from the legislative branch. But it is further expanded by theBureau of Internal Revenue (BIR) for its actual collection. In the tax code, you willsee that income taxes are to be paid on the intervals of every quarter of the year, itis already mandated by the Congress. If it is provided by the tax code that thereshould be withholding of taxes, but the tax code does not provide on how towithhold, it is now with the BIR to formulate the manner and mode of collection.

Administration

Agencies involved:

Can the BIR collect taxes without a tax law?

No, although the power of taxation inherent in every sovereignty, but its definitionwould continue to say that it shall be exercised by the legislative branch. It is purelystatutory. Without a law, no tax can be collected.

There must be a law to collect taxes. In fact, if the law imposing the tax is doubtful,it should be strictly construed against government, and in favor of the taxpayer.

But it should be other way around if the law is an exempting law, or amnesty, etc.

Lets now proceed to the second aspect of taxation Tax administration

What are the particular agencies involved in the tax administration?1. Bureau of Internal Revenue

Headed by its Commissioner, under the Department of Finance. So wecould say that the Secretary of Finance is more powerful than the

Commissioner.

If a Commissioner will issue a ruling or opinion and a taxpayer questions it,the Secretary of Finance can overturn the ruling or opinion.

2. Bureau of Customs (same with BIR, headed by its commissioner, underDOF)

3. Provincial, City and Municipal Assessors and TreasurersThe third collecting agencies are the Local Govt Units.

Basic Principles of a Sound Tax System

What are the basic principles of a sound tax system?1.

Fiscal adequacy

For the first basic principle, there has to be fiscal adequacy to meet theneeds of the government, expenditures and others. There is this revenuethat covers the expenses that needs to be incurred by the government inorder to serve its people somehow it should be, not necessary equal,adequate.

2.

Theoretical justice or equality3.

Administrative feasibility

Sources of revenues:

a. Taxesb. Borrowings from International Fundsc. Subsidies from foreign government

If there is 100-Billion in revenues, only 50-Billion expenses. Is there SoundTax System?...

Fiscal adequacy:

The sources of revenues of the government comes from what? Revenues must beadequate to support the service for the people.

There are 3 regular sources of Government revenues:1. Taxes2. Borrowings (international and local)

3. Subsidies coming from foreign government.

If the revenues generated is only one half of the necessary budget for thisyears expenditures, can we say that there is a sound tax system?No there is none because it doesnt coincide with and approximate the needs of thegovernment expenditures. It does not satisfy the fiscal adequacy requirement.

If its the other way around? There is 100 million in revenues and only 50m

in expenditures, is there a sound tax system?If the revenues would heavily come from taxes and itsnot adequately spent for theneeds of the public. Itsmore taxes collected and lesser expenses, if more is givenand there is less expense then there would be no sound tax system. (Because itwould violate the theoretical justice principle which states that the tax burdenshould be in proportion to the tax payers ability to pay, this will tantamount toconfiscation of property.)

More or less it should be somewhere in between. There should be no heavycollection of taxes without regards to need of the people and also there should beno less taxes and higher expenses. Otherwise you will always be engage inborrowings from the World Bank.

If fiscal adequacy in not met, would it make the tax laws of our countrypoor?No cause when we say passing tax laws, its the prerogative of the congress. If itsalready passed by the congress then it is constitutional however it may be avoided

If there is fiscal is not met, it will not disturbed the validity of the law which alreadybeing implemented. The problem is to meet the balance between sourcing the

revenues and spending it.


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What does theoretical justice mean?The tax burden should be proportion to the taxpayers ability to pay.

So every tax law in our government to have a sound tax system must follow thetheoretical justice requirement which are actually the ability to pay principle, somore income higher taxes. The equitable system taxation, the burden of taxationwill fall heavily on those better able to pay taxes.

When this theoretical justice or equality principle is not met, would it makethe tax law invalid?If the theoretical justice or equality is not met and its proven that upon applicationby the taxpayer that Its not just, fair and reasonable it may be declared by thecourt as unconstitutional, but hardly because the power of taxation is unlimited inits scope. Scarcely declared as unconstitutional. But once it has reached in theSupreme Court, which is vested with power to declare WON a law isunconstitutional.

What is the administrative feasibility principle?Tax laws should be capable of convenient, just and effective administration.

That every tax law should be capable of efficient and effective enforcement

otherwise collection cannot be made. Even there is a tax law, if the collection as tomode, manner and means is not properly implemented by the administrative branchof the government it will not benefit the government.

For there to a sound tax system, there must only be a valid law observingtheoretical justice, fiscal adequacy as well as the

If there are some adequacy as to the administrative feasibility it will not make thelaw valid as long as the law in itself is valid, just and reasonable.

The scope and limitation of taxation:The scope of taxationare:

1. Comprehensive in the sense that the power of taxation could not only

affect persons, properties, objects and transactions, may also subject yourresidency even if you are not a citizen of this country.

Can a non resident alien be subjected to community tax?- A non resident alien who has stayed in the Philippines for more than 3

mos. Will already be covered by the resident tax.- Even the properties that you own, you pay real property tax- If it has generated an income then you pay an income tax.

2. Unlimitedin the sense that even courts scarcely venture in declaring it

unconstitutional unless it is clearly so. In fact regular court cannot easilydeclare it unconstitutional and it is ultimately subjected to the review of theSC. But at least the SCs powerto review tax laws can never be ____. Itsan interplay of power. Co-equal branch. The role of the judiciary is theresimply to review the constitutionality of the tax law.

If ever there is a law taking away the constitutional power of theSC to declare a law unconstitutionality, would it prosper?

NO, because it is a guaranteed right of the Supreme Court. Otherwisethe there would be no use for the SC. And SCs decision forms part ofthe law of the land.

The final interpretation belongs to the Supreme Court.

3.

Plenary-meaning it is complete in the sense that tax laws enacted will notonly identify the subject but also supplies what type of tax, what kind oftax, rate, the amount the apportionment, how it to be collected includingthe remedies available to the government and the tax payer.Ex:

Remedy as to government- how will they go after the tax evadersdetailed into the tax code, the manner of confiscation how manyyears?

Taxpayer: ex. What is the remedy if they erroneously charged.

4.

Supreme in character- supreme only up to the extent to the selection ofthe subject of taxation.

Inherent Limitation:As we said there is an inherent limitation as to taxation, there is no need forthe law or the constitution to identify these limitations since you can find themindirectly mentioned in the constitution. There are 5 inherent limitation.

a.

Public purpose - only congress can enact taw laws, but must be foundedon a public purpose. It the purpose in for a private individual then suchlaw will be declared as unconstitutional.1.

Is for the welfare of the nation and/or for greater portion of thepopulation;

2.

Affects the area as a community rather than as individuals;3.

Is designed to support the services of the government for some of itsrecognized objects.

Refer case of Lutz vs. Araneta

Compared to the case the Atty. read. The law was enacted alone for thepurpose of imposing a fee not really a tax for every feeds manufactured.The objective of the law is to increase the fee for every stock of feeds torehabilitate another private entity engage in the same type of products.

Naturally that is unconstitutional because its purpose is directly for thebenefit of a private enterprise and not for the public in general. And feedsis not really for the people but for the animals.

And who really determines the public purpose?- Congress, but if there is any doubt the court can intervene.

Is the senior citizens act granting exemption (20%) on thepurchase and scrapping the 12 % VAT on meds purchases forpublic purpose?- Yes, because even if it only benefit the senior citizens in some way it

will affect the entire general population since all of us will be gettingold.

b.

Inherently legislative, non delegation unless expressly stated bythe constitution.



c.

Territorial jurisdictiond.

International comitye.

Exemption of government entities agencies and instrumentalities.

For every tax law, it has to be for the public purpose. For it to be declared that it isfor the public purpose, the ultimate result must favor the general public or for thecommon good. Not necessarily the direct result right after its implementation but ithas to be the ultimate result.

In the case of Pascual, the construction was for/in a private entity which resulted to

the appreciation of the value/price of the private land. The SC declared such asunconstitutional.

It is inherently legislative, we all agreed to that. Only the legislative branch?

The power to tax is inherently legislative but there are exceptions.a)

Delegation to the LGUthe Constitution provides for the delegation of thetaxing power to the Local Government Unit (Section 5 Article X 1987Constitution)

Section 5. Each local government unit shall have the powerto create its own sources of revenues and to levy taxes,fees and charges subject to such guidelines and limitationsas the Congress may provide, consistent with the basicpolicy of local autonomy. Such taxes, fees, and charges

shall accrue exclusively to the local governments.

The power to tax by a LGU, is it inherent or delegated power?It is delegated.

Is there a probability that the LGU will lose its power to tax? Yes.

In totality, does it lose its power to tax? Yes. How?The LGU is under the executive branch of the government.

But how do they implement/collect tax?It is thru their legislative branch, Sangguniang Panglungsod/ Panlalawigan/Bayan. This is an exception to the general rule that the power to tax isinherently legislative. The said power given to the LGU is a delegated power. In

the Constitution, every local government given its fiscal autonomy is given thepower to create its own sources of revenue, the raising of revenue includes thepower to tax. LGU do not have the power to tax without the provision on theConstitution. But the Constitution itself does not give the arbitrary power to theLGU, it provides for a further requirement that the Congress should enact a lawgranting the LGU the power to tax. And what law is that? Such is the LocalGovernment Code of 1991 (RA 7160). There is a chapter there, the LocalTaxation and Real Property taxation. It is what gives life to the LGU.

b)

Delegation to the President the Constitution provides for thedelegation of the taxing power to the President (Section 28 Article VI1987 Constitution)

Section 28. The Congress may, by law, authorize the President tofix within specified limits, and subject to such limitations and

restrictions as it may impose, tariff rates, import and exportquotas, tonnage and wharfage dues, and other duties or imposts

within the framework of the national development program of theGovernment. (flexible tariff clause)

Do you think that, just because, you were saying that the Customs aremore experienced in the said field, thats why they are given the poweras an exception? How about the BIR? What is the reason why suchpower was delegated to the President? Is it really a delegation of thesaid power?Unlike the LGU, as what we have discussed earlier, the delegation to the LGU isthat they impose an ordinance for the implementation of a tax law to its

constituents; such is limited to the territorial boundaries of the LGU.

I do not think that it is a delegation. It is the function of the President. Just likethe power of the LGU to tax, it is also in the Constitution. It is what we call theflexible tariff clause(power of the President to tax or impose tariff rates).When general or public welfare requires, upon the recommendation by theNEDA, the President can perform powers relating to custom duties andadjustment of tariff rates.A.

Increase or decrease existing protective (?) tariff rates; theincrease must not be more than 100 percent ad valorem, whichmeans it should not be double the existing tax or tariff rates.

B.

May impose quotas or totally ban the importation/exportation ofparticular products and

C.

It may increase the tariff rates but such increase shall not exceed

to 10%.This power of the President as provided in the Constitution has to betranslated first into a law by the Congress. Such has been enactedalready as part of the Tariff and Customs law. In the said law, you willfind there the flexible tariff clause providing for proper guidelines. Thereason why it is given to the President is for expediency (?) purposes.In order to protect local industries, there is a need to ban importationof certain products from other countries. The President can make theExecutive Orders for such. Otherwise, the President has to wait for theCongress to act upon it. It is not really within the expertise of thePresident but the law itself already sets the parameters. There mustbe a recommendation from the NEDA; a public hearing is also requiredfor it to be valid.

If you remember, the 10% VAT was increased to 12%. Where

is it found? EO of the President or by the Department ofFinance?It is found in the revisions made in the 2005 NIRC. It is provided therethat the 10% VAT is increased by the President to 12%.

c) Delegation to administrative agenciesit is not really a delegation. But itis somehow a delegation since these administrative agencies are given thepower to enforce tax and issue circulars, rules and regulations.

Are they part of the laws of the land?Yes, so long as it is within the confines of what the general law defines.

BIR by the Commissioner impose taxes; recommend regulations calledRevenue RegulationsDepartment of Finance, Secretary of Financeissues the regulations.

Checks WON if it is accordance with law.



DATE: 07/07/12

We said that we have 2 major topicsfor Tax 1: General Principlesand IncomeTaxation broken down to Income Taxation in General, Individual IncomeTaxation, and Corporate Income Taxation. By next Saturday, we will be startingtopic on income tax. So today, we continue with our discussion on inherentlimitations. Have we finished the entire time on inherent limitations? Publicpurpose? Yes. Inherently legislative, cannot be delegated, the 3 cases and theexceptions? Yes.

Territorial Jurisdiction

How will territorial jurisdiction limit on the power to tax?So as a general rule, our tax laws would operate only within the taxing jurisdictionof the State. The effectivity of these laws would cease beyond the territorial bordersof the Philippines so that our general rule only when the persons, subject matters,or objects come within our State is subject to our rules. That is the general rule butthere are various exceptions.

In the case of Atlas Mining, it involves Value Added Tax. This Value Added Tax,does this observe territoriality? So in the simplest equation, exports are not vatablewhile imports are presumed that its consumption will be in the Philippines, arevatable. That's why with import trading goods or property/personal property thatwill be subject to tax on top of the customs and duties that are collected by theBureau of Customs. However, you engage in the exports or selling of productsabroad/consumption abroad, it would not be subject to Va lue Added Tax.

There were 2 principles discussed in the Atlas case. It was the DestinationPrincipleand the Cross-Border Doctrine. More or less this two - the DestinationPrinciple and the Cross-Border Doctrine - are the same in the sense that:

1. Destination Principle- says that goods and services shall be taxable only

in the country where it is consumed. So if it is consumed in the Philippinesmeans it's vatable.

2.

Cross-Border Doctrine- says that no value added tax shall be added orshall form part of the cost of goods that will be destined for consumptionoutside the territorial border of the Philippines if its for exports. Those arethe 2 same principles.

While tax observers the general rule of territoriality but there are exceptions. The

exceptions would either be one of these categories:1. Where the tax laws would operate even beyond the territorial

jurisdiction of our country; or2.

Where the tax laws would not operate even within the territorialjurisdiction of the country.

Those are not the General Rule type.

Can you give me an example of each? Who is an OFW? Can you say that anOFW is a resident citizen? If an OFW stays outside of the country for more than 183days during the taxable year, it will be kept as a non-resident citizen.

An example of where the tax laws would operate still even beyond theterritorial jurisdiction of the Philippines. You're correct in applying to theresident citizen. Why? Under/If you want to have a legal basis, Sec. 23of

your Tax Code provides that resident citizens are taxable on their income withinthe Philippines and outside the Philippines. If you want to know the rationale

behind the principle is because a resident citizen receives benefit and protectionfrom the government full time because he is a resident / not only a citizen butalso a resident. For example, Manny Pacquiao. He is a resident citizen. He is aCongressman of Sarangani Province. If he earns from boxing abroad, thatincome is taxable in the Philippines because he remains to be a resident citizen,worldwide income. But if he chooses to become a non-resident citizen andaccording to Sec. 23 of the General Principles of the Tax Code, a non-residentcitizen is taxable only on income within the Philippines because he does notreceive full benefit and protection from the Philippine government. Of course, itis another matter when can you treat Manny Pacquiao or any individual for that

matter as a non-resident citizen or a resident citizen. That is another matter.

An example of where the tax laws would not operate even within theterritorial jurisdiction of the Philippines?Because of international comity. As we said that international laws forms part ofthe law of the land. Even if there is such a law, if an exemption is provided eitherby a municipal law or the tax code or an international tax treaty, then the tax lawwill not be made applicable to the person given an exemption.

What is the situs of taxation? An example?Situs would be based on one factor alone. Agree? Situs of taxation is the place oftaxation. It is where/ the State which has jurisdiction or dominion over a person orsubject matter is the one rightfully allowed to levy and collect tax.

So in the Philippines, we being resident citizens, we are subject to the jurisdiction ofthe Philippine government and our situs of tax is the Philippines as a general rule.What is a situs? It does not depend on one factor alone. It is not where you areresiding only. It is not what your nationality or citizenship is. It is not where thesource of income is. It is a combination of different factors. We have a verycomplex situs of taxation that we have adopted.

So what are the different factors to determine the situs? The different factors that you need to determine where the situs is: what kind oftax is imposed, what is the subject matter that is subjected to tax who thepersons or objects that receive benefit and protection from the State. Thoseare things you need to consider on top of the very basic Domiciliary Theorywherethe residence is - a person or a corporation, the nationality theory or thecitizenship principle - what the citizenship of that person is and where the source ofincome or where the service was rendered. So it is an interplay of different factors.

And sometimes there would be multiplicity of situs? You need say there there ismore than one jurisdiction, there is more than one state, claiming to levy andcollect the tax.

What could be the reason why multiplicity of situs would arise?The income of Filipino citizen here and his income abroad will be subject toPhilippine tax and his income abroad will be subject to foreign tax. Because thereare different concepts of residency for those tax.

For example, if the Philippines would treat a person as a resident of Philippines/ acitizen and a resident because he has stayed here for a number of days and it turnsout that he stays also in another country during the year for a number of months.That country, according to their own laws would treat that person as a resident of

their country, then both States would have a right to tax the income earned thereand here and we can also tax the income earned here and abroad. Both States



would have taxing jurisdiction. Therefore, multiplicity of situs would arise. And alsobecause of the various concepts would arise of different tax on properties - personalor real and multiple (?) relationship of intangible personal properties becauseintangible personal properties do not follow the rule of where it is located because itdoes not have physical presence. It cannot also at all times follow where thedomicile of the owner is because at times it would have a different situs. Soexample, the prime (?) of McDonalds. What state has the taxing jurisdiction? Is itthe United States or the Philippines? So because of the lack of physical presence/physical pinpoint who alone having the right to tax.

Now, in order to address the multiplicity of situs, what will the State do?What else? What are the other remedies?Allowances or deductions, in what form? Of what he has said already, giving taxexemptionson the municipal laws granting income tax holidays for (?) investors.

The second remedy to multiplicity of situs is entering into bilateral internationalagreements, either to exempt fully an income earned here by a non-residentbecause it is already taxable abroad or to grant partial exemption by givingpreferential tax rates meaning instead of 30%, it can be 10%, 5% or 15%.

There are other 2 remedies. Tax Credit and? Have you read the case of CarlosSuperdrug? It was mentioned there Tax Credit. The allowance of tax credit simplymeans that the foreign taxes that you have paid abroad for the income that is alsosubjected to tax in the Philippines can be offsetted against the Philippine IncomeTax. Example, you are a resident of the Philippines. In fact, you stayed here for 10months during the year. You went abroad for 2 months, you did a photo shoot,earned Php1 million. It was taxed abroad because the service was performedabroad. Now, since you are a resident citizen and according to the law, you aresubject to tax for worldwide income. That Php1 million that you have earnedabroad will be included in your income earned during the 10 month period of stayhere. Fully taxable here in the Philippines but a portion of that is already tax. Inorder to avoid double taxation, foreign tax that you have paid can be offsetted astax credit against the Philippine income tax due. But the Philippine income taxwould have a component that income that was earned abroad. Two taxes imposed!To avoid double taxation, offsetting is allowed to a certain extent and not full!

And the fourth remedy is to grant tax deductions. Tax deduction allowed claimingas expenses the taxes you have paid abroad. Tax credit, it is the tax offsettedagainst the tax due! But when you say tax deduction or tax expense deduction, the

tax that you have paid abroad will only be claimed as an expense against yourtaxable income and not directly to tax.

As to which is better?It will be tax credit because you can avail of the full benefitwhat you have paid abroad.

So we have identified four remedies to address the multiplicity of situs.

Moving on, situs of income tax.Domiciliary theory- residenceCitizenship or nationality theorySource principal or place of income, which is usually for services rendered, activitiesperformed, businesses engaged in!

Now, talking of domiciliary theory it creates a general rule of domicile or residency!

We are talking in fact of aliens who are resident in the Philippines and corporationsthat have acquired residence in the Philippines.

Why then?Because even if alien individuals or foreign corporations, the mere fact that theyhave acquired residency in the Philippines we use the domiciliary theory in order toapart jurisdiction over them.

Talking of nationality theory naman, we are talking of the citizens who are notresidents but because even if they are not residents of the Philippines but because

they are citizens of the Philippines, we can tax their income earned in or out of thePhilippines. A person outside of the Philippines, we lose jurisdiction of the personusing domiciliary theory because they are not residents of the Philippines. Butbecause of the nationality or citizenship principle, we can tax their income even ifthey are not in the Philippines.

If it is your nationality theory, resident citizens and domestic corporations. Domesticcorporations are organized in the Philippines regardless of who the owner is (not the60-40 sharing). We have plenty of corporations organized in the economic zones!Fully owned by foreign individuals. And taxable within the Philippines. The 60-40 isonly for the recognition if it is a Philippine Corporation or not a Philippinecorporation.

Source rule will apply to all other. Non-resident citizens have only taxable incomeswhich are only here in the Philippines. We dont have jurisdiction because state doesnot afford full protection and benefits to these nonresident citizens.

Who are nonresident citizens?Immigrant relatives who are staying abroad. Even if they have not acquiredAmerican citizenship but because of their immigrant status. Let's say they stayed 3months in the beginning and 4 months in the end of the year and 7 months total,they are still considered as nonresidents because of their status as immigrants.They are only taxable if they have income which was generated here in thePhilippines. Overseas contract workers, are not really exempt. They are actuallyoutside of the Philippines because of a permanent employment. They can beconsidered as nonresident citizens because of their permanent employment.

If you're a tourist of foreign county, are you a resident citizen or anonresident citizen?

You're a tourist and a talent scout discovered you and you were cast in the amazingSpiderman. And given talent fee, taxable in the Phils? Shooting in the movie andrequired physical presence for 10months during the year, you are alreadyconsidered as nonresident in that particular year and not taxable in the Philippinesof that talent fee earned abroad. You can play when you reach income tax. You canplay where you want to tax. No tax in Brunei daw! Stay 7 months! Tax free income!So much for Brunei.

Residence or poll tax is based on the residency?Its not based on the nationality theory, not based on source of income but basedon residency or domicile. Poll tax, capitation, community tax, personal tax, cedula!

A Friend, foreigner, met in Boracay. He asked you if he is liable for community tax.What will you say? Liable or not? If he stayed in the Philippines for 5 months and

made Boracay as temporary residence! Liable or not?



Residence, capitation or cedula is based on the residency not on nationality orsource. As long as he is a resident, he will be subject to this kind of tax. Residencydoes not mean that he has to make the Philippines as his principal seat ofresidence. It only means to say that one is considered that he makes the Philippineshis temporary stay. More than 3 months would make him an alien individual liablealready for this type of tax.

For property, where is the situs for personal, real, tangible and intangibleproperty?Student: For real property, situs will be where the property is located. Personal, will

follow the owner. If tangible, where it is located or usually kept. Intangible, it willfollow the owner.

Student: There are exceptions, for intangible. If the law provides for the situs ofsuch intangible property. Example? Foreign corporations, (explained thoroughly bymaamlater! Giuna niya ang real property)

Real property, situs= where it is located

Mr. Patindol has a real property located in Korea. Subject to Philippine tax ornot?Answer: For real property, although said it is subject to tax where it is located, thatis the general rule. We have also to consider different factors. The property islocated abroad but Mr. Patindol is still a resident, the income generated of the saleof such property is subject to Philippine income tax. Unless of course he decided notto declare it.

In so far as personal intangible, situs is follow where the owner resides. But thereare some rules to be followed.

Example: Mr. X, non-resident American, not residing in Phils. During his stayhere, he bought shares in GMA and at that time he died, the certificatesrepresenting his ownership was located in the US (place of residence).

Would that be subject of tax here in the Philippines?Answer: Still taxable here in the Philippines because he obtained benefits of thePhilippines. How did he benefit? More on the domestic corporation which issuedthe shares. GMA is receiving protection from government. It will be translatedinto the value of the shares of stocks and will benefit whoever the holder of thestocks certificates. The American was indirectly benefited. The intangible

property is related to a domestic corporation and hence will have situs here inthe Philippines.

You were talking about a foreign corporation. A foreign corporation will have aforeign situs. Situs outside the Philippines. A foreign corporation is a corporationorganized abroad and receiving protection and benefits from a foreign government.But if the Foreign Corporation operating more that 85% of its transaction here inthe Philippines, then we can consider the shares of stocks issued by the corporationas having situs here in the Philippines. Why?85% of income is derived here in thePhilippines and transactions are receiving protection and benefits here in thePhilippines. You dont limit your thinking that if it is a foreign corporations, it doesnot operate here in the Philippines. That is wrong thinking because corporations,identified where they are organized, but can do business in different countries. If itturns out it is a foreign corporation but doing business here, it can have Philippines

situs. In fact there are many corporations which are considered as foreigncorporations because it is organized in Hong Kong and other countries. Meaning it is

organized in countries where taxes are very low. Example, they organized it in thiscountry but the operation is in the Philippines because of cheaper labor. That willget situs within the Philippines.

(Transcriber's notes)Exceptions to personal intangible situs:1. When the property has acquired a business situs in the another jurisdiction2. When an express provision of the statute provide for another rule

Excise tax or donor's tax. Based on the place, nationality and residence.

Criteria are place, taxed upon properties located within the Philippines.

For nationality, taxed upon their properties wherever situated.

For residence, tax upon their properties where situated.

Reason given by Atty: Because donor's tax and excise tax is more on excisetaxation. When you reach tax 2, estate tax is different from income tax. (Subject tosuccession and will be thoroughly discuss upon reaching tax 2)

..The entire estate here and abroad...Why? Because the law on succession is basedonand estate is based onStudent: the law where he is a citizen.

And businesses where is the situs? Lets move on to international law and alimitation to the taxing power of the state.

Student: Foreign comity all the states are equal such that we dont tax foreigndignitaries coming into our country and they dont also tax us, also it alsorecognizes that we have to give credits when it comes to foreign corporations doingbusiness here in the country.

Is that part of international comity?Student: for me it is part because for example there is a business here in thePhilippines and we also have businesses in that country, we can have bilateralagreements to give tax exemptions.

There is already equality of the different states regardless of size and power andeven if we proceed on to tax the USA, the refusal to pay taxes would result in us

suing the USA and states are immune from suits, the non suability of states, thatswhy if they send in foreign dignitaries, ambassadors they will not be subject to taxin fact what they are bringing in will not be subject to import taxes or customsduties. In so far as the ownership by these foreign states of embassies are notsubject to real estate taxes because they are considered extensions of these states.

Can the govt tax itself?Student: no, the rule is the gov t cant tax itself because it would be like takingmoney from their own pockets.

In your study of the constitution, have you come up with a provisionstating that the congress cant pass a law taxing the govt? Although theconstitution is silent on such matter, but congress deems it important to exempt thegovt, its instrumentalities.

Are GOCCs also exempted?


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Student: only up to the real property is exempted.

The Republic of the Philippines, its compositions like cities, provinces,municipalities... its instrumentalities... like the MIAA, the fishing ports operated byinstrumentalities are generally exempt from taxation... instrumentality is not reallyan agency, not a GOCC its somehow, any agency of the govt not within the dept oftrade, dept of national defense etc. but it is vested with special functions andjurisdiction empowered by some or even all of the corporate powers found in thecorporation code and allowed to administer special funds giving operationalautonomy usually through a charter. Its not a GOCC,its not an agency itsexempt

from taxation. But when we talk about agencies it s generally exempt if itsperforming governmental sovereign functions, but when it performs a patrimonial,private, proprietary functions it will be subject to tax.

General rule all GOCCS are subject to tax except if there is a law exempting them.

Ex. Like the Tax Code of the Phils. It gives exemptions to four GOCCs: the GSIS,Philhealth, SSS, PCSO probably because its for general welfare and notproprietary.

NAPOCOR is still exempt but not because of the Tax Code but because of its charter.In so far as real property taxation is concerned, still the constitution is silent...butcongress has laid down in the local govt code that the RP its agencies andinstrumentalities shall be exempt from taxation so long as its beneficial use is notleased out to a taxable person... in whatever capacity that property is held on to bythe govt so long as it is not leased out to a taxable person.

Who is a taxable person?

Lets move on to constitutional limitations there are 2 categories the direct andindirect constitutional limitations.

The case of Laguna: What type of property? What capacity? Who owned it?Student: There was a warehouse and land and taxes were imposed in both. It wasgovt owned and it was reserved for use for NBC.

What is the status of NBC?Its a GOCC. The land was reserved for use for their primary functions, they erecteda warehouse They raised the propriety of taxing both. The decision of SC was that

the land was not actually rented, it was only reserved and the even if it was givento NBC, it was still govt owned and still exempt from tax but the warehouse wasnot govtproperty so it is taxable.

Atty: The classification of the land was a public land, for which ownership wasretained by the govt. although it leads me to question why it was given exemptionby the sc, probably because it happened before the effectivity of the local gov tcode, because it was expressly stated there that the RP its agencies andinstrumentalities shall be exempt from taxation so long as its beneficial use is notleased out to a taxable person, and NBC was a GOCC, a taxable person leasing theproperty.

Uniformity and equity in taxation, are they the same? As a limitation...Student: Equity and uniformity it doesnt mean that they are the same In

uniformity it means that the people of the same class are taxed the same rate whilein equity it means that it is based on the ability to pay.

Let me discuss uniformity first, all taxable articles or property of the same classshall be taxed at the same rate not the same amount because thats not uniformity.

Ex. I tax all students with 100 pesos It might be minimal o burdensome dependingon the person. A tax is uniform if operates with the same force and effect to allsubjects within the same class, as it is found in every place. meaning to say if theSanggunian will impose a tax it will be considered uniform if that tax would operateto all persons similarly situated wherever it is found in that jurisdiction. It shouldnot be very specific to one person it should be applied to all persons of the same

class within the taxing jurisdiction. Conversely naman we can say that articles of adifferent kind may be taxed at a different rate.

But equity is different or the equality in the burden or equitability of the tax, as yousay it depends on the ability to pay, it more or less is accomplished whenever theburden of the tax falls equally and impartially upon the persons under that law.Although in my understanding these are all equity. Uniformity is an equity.Equitability is an equity. One is a horizontal equit. One is vertical equity. If you lookat Section 24of tax code enumerated there are the different taxes applicable to anindividual taxpayer from 5%down to (writing a diagram on the board)...These arethe different tax rates... and the burden in each tax would be different as to thenext bracket because the 5% would only apply to income not exceeding 10,000,10% would apply to more than 10,000 but not more than 30,000, 15% would applyto income more than 30,000 but not more than 70,000.

But not more than 30, 15 percent would apply to the income of more than 30k but

not more than 70k. Your 20 percent tax would apply to income of more than 70k

but not more than 140k, the 25 % would apply to income of more 140k but not

more than 250k, and the income more than 250k is subjected to 30 % so long as

the income will not reach more than 500 k and any income more than 500k is

subjected to the highest tax rate.

If you look into the burden of taxes, this is the equity or the ability to y principle.Bigger taxes on those who are better able to pay. The more income you earn thehigher the tax rate that youd be imposed. This is the vertical equity of theequitability of the tax.

If you look into the uniformity of the tax, belonging to the same class, you look into

the horizontal equityor uniformity of the tax. The income earners on this bracketwill be subjected to tax whether or not he is located in Luzon, Visayas, or Mindanaoas long as his income is more than 10k this uniform tax rate would apply.

Discussing about the case (cant hear what was the title) involving the uniformity in

the VAT. Value added tax is uniform because it was uniformly applied to allconsumption of goods and service, thus constitutional.

2. What is progressive system of taxation?Taxation is progressive when tax rate increases as the income of thetaxpayer increases.

Its not only in income taxation that progressive system isencourage, even in estate taxation and donors taxation you willnotice in the tax code that the higher the value of the estate, the

higher the tax rate. Same applies as to tax on donations as tonon-stranger or a relative.


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Are REGRESSIVE taxes prohibited?

Regressive taxes are not prohibited however the constitution encouragesthe progressive system of taxation.

The constitution does not directly prohibit the imposition of regressivesystem of taxation.

What is a regressive system of taxation?The tax rate increases but the income decreases. There is no such systemin the Philippines. And when you talk of regressive taxes it does not

always mean that there is a set of rates.Regressive tax may refer to one rate of tax only. Not just the argumentthat VAT is a regressive tax. It is not necessary ___ no escalation rate of12%, its a flat rate.

In the case of Tolentino:o

It was said that it was a regressive tax, why? Itsnot because of the rates.o

Because the burden of 12% is uniformly apply to all types of incomeearners. The burden of 12% is higher for low income earner and lower tothose high income earners.

o

Compare the income of a janitor vs. the CEO. The 12% that would be paidby the janitor would be heavily burdensome as against his 10k income vs.the 12% paid by the one whose income is so big.

o

But the argument of the SC saying that its not a regressive tax is, the vatseeks to distribute to as many goods and services as possible andmaintains the exemption of vats to the basic goods and services for the lowincome earners.

o

So it still maintains that according to the VAT law, sec. 109 of tax code,there are many exemptions granted to the basic goods and servicesaffordable by the low income earners.

o

And also for the many exemptions provided by the tax law, ex. A parcel ofresidential lot, if the amount will not reach to a 1.995m then its notVatable, but if its 1.999m or 2m its vatable. It gives a lee way to the lowincome earners to avoid the value added tax. For leased property notexceeding 12k not subject to vat but those condo units, they are alreadysubject to vat.

o

One of the reasons why the constitutions provide the progressive system oftaxation is for the government to concentrate more on the direct taxesbecause itsbased on equity.

Indirect taxo

More burdensome. So the constitution wants to minimizeo

Ex. VAT, the burden is shifted on the ultimate consumer.Excise tax, the purchase on Tobacco, alcohol and same shifted also toThe consumer. Itssubject to vat and excise tax.

3. Exemption of the religious, charitable and educationalentities, non-profitcemeteries and churches from property taxation.

o

Exemption from real property taxes which are actually, directly andexclusivelyused for the purpose.

o

Real properties:Land, building and Improvements.

These 3 institutions are not exempt from personal property tax.

For these institutions to be exempt from real property tax do they need tobe a non-stock, non-profit institution or can they be a proprietaryinstitution?

o

BOTH (not sure about the answer.)

Who enjoys as far as the educational institution are concerned, what typeof educational institutions enjoys real property tax exemption (of coursewith the requirement that ADE)?

o

The constitution does not distinguish, therefore the real property taxexemption would be enjoyed by BOTH non-stock non-profit institution and

other private proprietary institution.

The test of exemption, is it the ownership of the property?o

No as long as the property is ADE for the purpose.

So if you have a parcel of land that you have leased out, to scientology. Forreligious purposes. Taxable or not?

o

Taxable because the rent that you get from the property is subject toincome tax

ADE = Actually, Directly, and Exclusively

So if you have a parcel of land that you have leased out to scientology(religious purposes nalang). Is that taxable? Im talking about the propertyand not the income it generates.Student: It is exempt from real property tax, if it is ACTUALLY, DIRECTLY ANDEXCLUSIVELY used for their religious purposes.

So the test for exemption is not the ownership but the use of the property

Class, regardless of who the owner is so long as the use is A, D, E for eitherreligious charitable or educational purposes, that would be exempt from realproperty tax. ONLY real property tax. The income generated from these is normallysubject to income tax.

The case of Lung Center Philippines talks about the incidental use of theproperty.

When you say exclusive use, does it mean the sole and primary use of the

property alone?Student: It admits of activities. In the case, Lung Center Philippines is a non-stock,non-profit entity and a portion of their building is vacant and another purpose isleased for commercial purposes. The issue in the case is whether the properties ofLung Center Philippines are exempt from real property taxes or not. Answer: It ispartially exempt. The portion of the building leased to private entities are notexempt as these are not ADE used for charitable purposes. Only those that wereused by Lung Center are exempt from real property tax.

Is the Lung Center still considered a charitable institution despite the factthat it admits patients who are paying?Because the contention here is that it has lost its charitable nature because it hasleased its properties to commercial entities and because it has admitted payingpatients.


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Student: It is still a charitable institution. It does not lose its charitable nature bythe mere fact that it derives income from patients and lessees.

But does that not make it now an ordinary corporation generating incomefrom its activities?Student: As long as the income generated is not used for a private purpose.

Okay. What defines a charitable institution class primarily, would be the articles ofincorporation as registered in the SEC. In fact, insofar as determining whether aschool is a non-stock, non-profit institution, you look at the articles of incorporation.

According to the articles of incorporation of Lung Center, it is a charitableinstitution. The fact that it is admitting paying patients constituting 40% of theiravailable beds does not strip it of its charitable nature because the main purpose ofLC is really to admit the needy patients and its only incidental that other patientswould avail of their services.

So long as that part of the real property is devoted for charitable purposes, it isexempt from real property tax. But the spaces leased to commercial entities wouldbe subject to real property tax. As to who would be liable to pay for such tax, itwould be subject to agreements between LC and their lessees (in the leasecontract).

The SC went on to say that ADE means the direct, immediate and actual applicationof the property itself. LC argued that the income generated from the leasedproperties was used for the charitable purpose. This is wrong because the basis forthe exemption is the direct, immediate and actual application of the property itself,not the proceeds or the application of the income.

The case of Abra Valley College.Student: The College was taxed (Real property) because it rented out the first floorto Northern Marketing Corporation and the 2 nd floor was used as the directorshome. The property was actually levied and sold at a public auction. AVC wanted toseek for the nullification of the seizure and the public auction because it argued thatthe property is incidentally used for educational purposes.

What did the SC say on the use of the property for the directors home and

the lease of the property to NMC?Student: The use of the director and his family of the 2 ndfloor was incidental to the

educational purpose of the school. However, the lease of the 1 st floor by NMC wasfor a commercial purpose so they should be taxed for that.

So incidental use of the property is allowed and it will come within the ambit of ADEuse because the incidental use was reasonably necessary.

What about the case of reverend Fr. Casimiro Lladoc?Student: This involves the donation of property from (some entity) to a parishpriest. It was taxed (Donors tax). The reverend claimed that it shouldnt be taxed.SC said that exemption only applies to real property tax. This tax is in the form ofan excise tax, and does not come within the ambit of the exemption.

So if there is a donor who paid a donors tax, and the donee (a priest) claims that

he is not liable for donees tax because the donation was used for religious

purposes.

Is he correct?No because the exception only applies to real property tax. This is an excise, notproperty tax.

Next constitutional limitation is that non-stock non-profit educational institutions areexempt from taxation on all revenues and assets ADE used for educationalpurposes. What is the extent of this exemption?Student: as long as they are ADE for educational purposes.

All taxes?

Student: No! They are exempt from income, property, donors tax and customsduties.

What properties of educational institutions are not taxable?Student: ALL! Even personal property.

The constitution is specific: all revenues and all assets of non-stock, non-profitinstitutions are exempt from taxes so long as its ADE used for educationalpurposes.

What are the requirements for a school to be exempt from income tax?Student: School must be a school. Must be private. Nonstock, non-profit. Must beaccredited by CHED, DECS. Assets must be used ADE for educational purposes.

The connotation of the exemption is that the school is only exempt from directtaxes. USC is still liable to pay for VAT! Tuition fees are not VATable but when USCpurchases appliances for example, it cannot claim that it is exempt from paying VATbecause the appliances will be ADE used for educational purposes.

Why?Because the exemption only applies to direct taxes, VAT is an indirect tax.

What type of property is exempt from tax? What property of theeducational institution is not taxable? All assets? Even personal property?The constitution is specific that all income, all assets of non-stock non-profiteducational institutions are exempt from taxes as long as it is actually, directly andexclusively used for educational purposes.

What are the requirements for a school to be exempt from income tax?

Not all schools are exempt from income tax. The requisites are as follows:1.

It should be a private institution2.

It should be a non-stock non-profit educational institution3.

It should be accredited by government institutions such as TESDA, CHED,DECS

4.

Revenues and assets must be actually, directly and exclusively used for thepurpose.

Once you have established all these requisites, then you can say that it is exemptfrom taxes.

The connotation of being exempt from income tax means that it would only be fordirect taxes.

Will the University of San Carlos, a non-stock non-profit educationalinstitution be exempt from VAT on its purchases? Can the supplier of San


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Carlos pass the VAT to San Carlos? Can San Carlos refuse to pay ValueAdded Tax on its purchases using the reason that it is exempt from tax? IfSan Carlos buys aircon from an appliance center, can the appliance centerpass the tax to San Carlos?Yes. Because the exemption provided by the constitution is an exemption on directtaxes and VAT is an indirect tax. Whatever vat forms part of the cost of the goodpurchases. So long as it is the purchase price, then VAT. It will have to pay. Theexemption is only for income tax.

It does not also include an exemption from withholding taxes. It cannot refuse to

pay withholding tax. Its exemption is only limited to its income and not my income.

Will the payment by Baristo of its rent to San Carlos be exempt of incometax? Even if its within the premises of the school?So the 2 requisites must be met:

1.

It must be an incidental activity by the school itself2.

And it must be located within the campus.

If San Carlos would invest your tuition fees to money market placement,time deposit, foreign exchange, is the interest subject to income tax?In accordance with the banking laws, whenever we make investments of ourmoney, you will notice that our deposits will earn interest, it will automatically besubject to income tax. San Carlos cannot actually refuse payment of these kinds oftaxes without a valid legal basis before it can claim that it is exempt. Theconstitution is very general lang in the sense that a ll assets, including deposits, willbe exempt if its ADE used so thats very debatable. But what is the fruits of theseinvestments, the interest will be used for educational purposes, why will it not beexempt from income tax?

In the opinion of the Secretary of Finance, the final withholding tax on pesodeposits, foreign exchange, money market placements are exempt from income taxif earned by a non-stock non-profit educational institution so long as:

1.

It will file an ample information every year2.

It will submit audited financial statements3.

It will produce a certification coming from the bank or financial institutionas to the income they have earned from the investments

4.

A certification of how it was actually utilized in the educational activities ofthe school

5.

A board resolution coming from the Board of Trustees as to the educational

purpose of the interest of such investments.

Now, how about proprietary educational institutions?What do you mean by proprietary?In the nature business which has the end of obtaining profit. Sec 27B of tax codeprovides partial exemption granted to proprietary institutions.

What is this exemption?It is an exemption of income tax. Ordinarily, institutions or private entities aresubject to 30% corporate income tax. When you say corporate income tax, it doesnot mean tax only on corporations. It is a tax on all businesses or entities otherthan sole proprietorships or other than those ran only by 1 individual. Whether wesay corporation, strict corporation, entity, foundation, institution or a partnership

that is taxable, it is subject to corporate rate of 30%. Supposedly, educationalinstitutions will be covered by this because it is not a sole proprietorship, it is an

entity. But by virtue of constitution, non-stock, non-profit educational institutionshas been granted full exemption from 30% income tax while proprietary educationalinstitutions under section 27B of tax code provides for a partial exemption of 20%.It means to say that proprietary educational institutions are subject only to a taxrate of 10% because the 20% is an exemption. Although it did not say 20% but wepresumed that the difference between 30% and 10% is 20%. Schools will besubject to 10% income tax.

On customs duties, San Carlos will be exempt from paying taxes if what it importsare ADE used for educational purposes such as computer units, projectors, air con,

etc. For all other cases such as motor vehicles, not exempt from tax.

Exemption from donors tax, what do you mean by that? Who is the donor?The non-stock nonprofit educational institution is the donee. The purpose is toencourage donations.

If a decedent in his will wrote in his will he bequests a certain property toUSC, will the estate be required to pay estate tax on the property donated?Transfers to non-stock nonprofit institutions are still subject to tax.Reason: Section 87 par. D.the following shall not be taxed:d) all bequests, devises, legacies or transfers to social welfare, cultural andcharitable institutions, no part of the net income of which inures to the benefit ofany individual; Provided, however, That no more than 30 percent of the saidbequests, legacies or transfers shall be used by such institutions for administrationpurposes.

Now, Section 30of your tax code: Sec 30 last paragraph of the tax code whichsays all entities otherwise exempt from income tax which includes non-stock non-profit educational institution are exempt from income tax. It is just but a repetitionof what the constitution provides, but in the last paragraph, it further went on toclarify that all income derived by these institutions including non-stock non-profiteducational institutions will be subject to income tax if it is an income derived fromthe use of real, personal prop. And the income from the activities conducted forprofit are subject to income tax regardless of the disposition thereof. So it wouldappear that if San Carlos earns income from any of the activities mentioned, it willbe subject of income tax even if the proceeds will be used for educational purposes.The third is very understandable, if San Carlos earns income by holding concerts,then it will be subjected to income tax because the school should not be engaged in

profitable activities. But what is questionable, is the use of real and personalproperty should be subject to tax regardless of the disposition

The first part of Section 30 is somehow being in conflict with the constitutionbecause the constitution provides that all assets so long as it is actually directly andexclusively used for education purposes are exempt from taxation. But as of thisdate that provision of section 30 has not been declared as unconstitutional thereforeit is still valid as of this date. Any income with the use of personal, the use of realproperty even if its not for the purpose of profit, remember the thirdparagraph/phrase of activities conducted for profit is now definitive of use of realand personal property, so flatly use of personal and use of real property subject totax, and activities conducted for profit are subject to tax regardless of thedisposition of the proceeds.

Lets go to proprietary education institution, has the constitution providedfor the exemption for these type of schools?


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Student: there is no direct constitutional provision that provides for exemption forproprietary educational institutions, however the constitution says that the congressmay grant exemptions to them because of the policy that we favor the growth ofeducation so they are granted partial exemption.

Law? And that is?Student: The tax code.

Which grants?Student: grants that the proprietary educational institutions are partially exempt

20% from income tax so they are only liable to pay 10%.

The constitution has no specific provision and what the exemption of proprietaryeducational institution, although it directs congress to enact a law if it deems fit togrant an exemption to this proprietary educational institutions.

Proprietary are those stock corporations although non-profit education institution,and in accordance with Section 27b of your tax code proprietary educationalinstitution are only liable to 10% income tax, where is the exemption? Theexemption is the difference between the normal 30% corporate income tax asagainst their liability of only 10%.

So what are the requirements?Is the private education institution although stock it must still be for non-profitaccredited with t

Documents

Tax1 LLB404 2012-2013 Midterms Notes