TAXATION Law Rev 1

7/30/2019 TAXATION Law Rev 1

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TAXATIONVER. 2008.09.10

copyrighted 2008

Prepared by the PRIMUS Board of Consultants

Prof. Abelardo T. Domondon

Principal Consultant

These Notes in the form of one or two sentences and questions and answers were speciallyprepared by a Board of Consultants specially commissioned by PRIMUS Information Center,Inc., for the use of candidates who are going to take the 2008 Bar Examination. They are not as

comprehensive as the otherPRIMUS publications such as the PRIMUS Bar Star Notes, or thePRIMUS Cut and Paste. They are intended to be read during the Pre-Week or before the startof the regular Bar review for any given Bar Examination year.

These Notes attempt to second guess the areas where questions may probably be sourced forthe 2008 Bar Examination in Taxation. They include enumerations and distinctions, as welldigests of some landmark cases, although they go beyond two sentences. They may also serveas memory joggers to help the candidate recall concepts. The reader is advised to concentrateon the One-liners that are in bold letters. Those that are not in bold are mere elucidations ofconcepts.

The PRIMUS 2008 ONE-LINERS shall be revised regularly to consider latest law and

jurisprudence to meet the requirements of future Bar Reviews such that the title shall changefrom year to year. For the 2009 Bar examination the title shall be PRIMUS 2009 ONE-LINERSwhich shall be released sometime in September, 2009. The reader is however advised toacquire and read the latest versions of the otherPRIMUS publications such as the PRIMUS BarStar Notes, or the PRIMUS Cut and Paste which contain more detailed information leading to amore comprehensive Bar review. Of course those who intend to take the 2009 Bar examinationare encouraged to attend the PRIMUS 2009 Wrap-up Reviews

Although primarily for the use of Bar candidates who have attended the PRIMUS 2008 Wrap-upReviews, the On-Liners may be availed of by other students who are interested in the subject.While available for the free use of all the contents of the PRIMUS 2008 ONE-LINERS arecovered by copyright protection and should never be published (whether through printed media

or through the internet) without written permission in writing from PRIMUS Information Center,Inc. Downloading and printing into hard copies is allowed only for private use and should not bedistributed on a commercial basis.

GENERAL PRINCIPLES OF TAXATION

GENERAL CONCEPTS


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1. What is the power to tax ? Define the power to tax. What is the concept of taxation, andits nature ?

SUGGESTED ANSWER: The power to tax is an inherent power of the state exercised throughthe legislature imposing burdens upon subjects and objects within its jurisdiction to raise revenues inorder to meet the legitimate objects of government.

Its nature is that it is both an inherent power of government and an exercise of legislativepower.

It is inherent in character because it could be exercised even in the absence of a constitutionalgrant. It is an exercise legislative power because it is that department that promulgate rules andtaxation is the promulgation of rules, such as how much tax is to be paid, who pays the tax, to whomshould it be paid and when it should be paid.

2. How should the power to tax be exercised ? Explain briefly.

SUGGESTED ANSWER: The power of taxation is sometimes called also the power to destroy.

Therefore, it should be exercised with caution to minimize injury to the proprietary rights of ataxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that laysthe golden egg. And, in the order to maintain the general publics trust and confidence in theGovernment this power must be used justly and not treacherously. (Roxas v. Court of Tax Appeals,No. L-25043, April 26, 1968, 23 SCRA 276, 282. cited in Pilipinas Shell Petroleum Corporation v.Commissioner of Internal Revenue, G. R. No. 172598, December 21, 2007)

3. It is said that taxes are the lifeblood of the government and any delay in its collectionwould impair the rendition of government services. May the collection of taxes be restrainedby a court ?

SUGGESTED ANSWER: As a general rule, No court shall have the authority to grant an injunctionto restrain the collection of any national internal revenue tax, fee or charge. (Sec. 218, NIRC)

However, the Court of Tax Appeals is empowered to enjoin the collection of taxes throughadministrative remedies when collection could jeopardize the interest of the government or taxpayer.(Sec. 11, Rep. Act No. 1125)

4. What is the procedure before the CTA for issuance of an order suspending the collectionof taxes ? SUGGESTED ANSWER: Where the collection of the amount of the taxpayers liability,sought by means of a demand for payment, by levy, distraint or sale of property of the taxpayer, orby whatever means, as provided under existing laws, may jeopardize the interest of the governmentor the taxpayer, an interested party may file a motion for the suspension of the collection of the tax

liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Court of Tax Appeals.

The motion for suspension of the collection of the tax may be filed together with the petition forreview or with the answer, or in a separate motion filed by the interested party at any stage of theproceedings. (Sec. 3, Rule 10, RRCTA effective December 15, 2005)

5. How should tax exemptions be construed ?


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SUGGESTED ANSWER: Tax exemptions are strictly construed against the taxpayer and liberally infavor of the State and must be clearly shown and based on language in the law too plain to bemistaken (Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, et al., 293 SCRA 76,88), because taxes are necessary for the continued existence of the State.

6. Why are tax laws construed strictly against the State and liberally in favor of the State ?

SUGGESTED ANSWER: Taxes, as burdens which must be endured by the taxpayer, should not bepresumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine Life InsuranceCompany, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

7. May a BIR ruling in favor of a taxpayer be reversed so as to subject a taxpayer to tax ? Why ?

SUGGESTED ANSWER:A reversal of a BIR ruling favorable to a taxpayer would not necessarilycreate a perpetual exemption in his favor, for after all the government is never estopped from collectingtaxes because of mistakes or errors on the part of its agents. (Lincoln Philippine Life InsuranceCompany, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

8. In 1996 Rosemarie, a nonresident citizen, was collected Philippine income taxes on herincomes derived from sources without the Philippines. Upon the enactment of the NIRC of 1997which took effect on January 1, 1998, she filed a claim for refund of the taxes she paid prayingfor the retroactive application of the provision that subjects nonresident citizens to tax only ontheir incomes from within. Should the refund be granted ?

SUGGESTED ANSWER: No. 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.

Revenue laws are not intended to be liberally construed, and exemptions are not given retroactiveapplication, considering that taxes are the lifeblood of the government. In Holmes memorablemetaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented.

(Commissioner of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007)

9. What are the purposes for the exercise of the taxing power ?

SUGGESTED ANSWER: The three purposes for the exercise of the taxing powerare:

a. the revenue purpose (also known as the primary purpose of taxation);

b. the sumptuary purpose (implementation of police power objectives);; and

c. the compensatory purpose.

10. Explain briefly the revenue purpose of taxation.

SUGGESTED ANSWER: One of the purposes of taxation is to raise revenues to meet therecognized objects of purposes of government. Thus, is based the lifeblood theory which posits thatthe revenues collected constitute the lifeblood that animates the existence of governments, withoutwhich governments cannot perform the functions for which they were established.

11. What is the sumptuary purpose of taxation and upon which is it based ? Explain briefly.


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SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare andto protect the health, safety or morals of the inhabitants. It is in the joint exercise of the power oftaxation and police power where regulatory taxes are collected.

Taxation may be made the implement of the states police power. The motivation behind manytaxation measures is the implementation of police power goals. [Southern Cross Cement

Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540,August 3, 2005 citing Lutz v. Araneta, 98 Phil. 148, 152 (1955); in turn citing Great Atl. & Pac. TeaCo. v. Grosjean, 302 U.S. 412; U.S. v. Biutler, 297 U.S. 1; McCulloch v. Maryland, 4 Wheaton 316]The reader should note that the August 3, 2005 Southern Cross case is the decision on the motionfor reconsideration of the July 8, 2004 Southern Cross decision.

The so-called sin taxes on alcohol and tobacco manufacturers help dissuade the consumers fromexcessive intake of these potentially harmful products. (Southern Cross Cement Corporation v.Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

12. Distinguish taxation from police power.

SUGGESTED ANSWER:

a. Purpose: Taxation is for revenue while police poweris for general welfare.

b. Amount: In taxation, the amount of tax collected ispractically unlimited while under police power, the license fee should not exceed cost of regulation.

c. Compensation: In taxation, the enjoyment of publicservices while in police power, the feeling of having done something good for society in general.

d. Property taken: In taxation, generally money whileunder police power, any property, other than money, which is the source of the danger health, safetyor morals.

e. What is done with the property taken: Taxation isconstructive because the money collected is spent for building infrastructure or providing publicservices while police power is destructive. The property taken is usually destroyed.

f. Relation to the non-impairment clause: Taxation isinferior to the non-impairment clause and could not override the same while police power is superiorto the non-impairment clause.

g. Scope. Taxation interferes with property rights onlywhile police power regulates both liberty and property.

h. Surrender. Taxation may be bargained awaythrough a contract such that if the government issues a tax-exempt bond, it could not withdraw theexemption because it would violate the non-impairment clause while police power cannot bebargained away.

13.What is the relation between the power of taxation and police power ? Explain.


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SUGGEWTED ANSWER: The motivation behind many taxation measures is theimplementation of police power goals.

Progressive income taxes alleviate the margin between rich and poor; the so-called sin-taxeson alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of thesepotentially harmful products.

Taxation is distinguishable from police power as to the means employed to implement thesepublic good goals. Those doctrines that are unique to taxation arose from peculiar considerationssuch as those especially punitive effects of taxation, and the belief that taxes are the lifeblood of thestate.

These considerations necessitated the evolution of taxation as a distinct legal concept frompolice power. Yet at the same time, it has been recognized that taxation may be made theimplement of the states police power. [Southern Cross Cement Corporation v. CementManufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz v.

Araneta, 98 Phil. 148, 152 (1955) in turn citing Great Atl.,& Pac. Tea Co. v. Grosjean, 301 U.S. 412,U.S. v. Butler, 297 U.S. 1; McCulloch v. Maryland, 4 Wheaton 316]

14. What are the similarities between the power of taxation and police power ?

SUGGESTED ANSWER:

a. Both are inherent in the State and may be exercised even if there is no specific authority grantedby the Constitution.

b. Without these powers the State could not attain the purposes for which it is established.Otherwise stated, the very existence of the State is dependent upon the exercise of these powers.

c. The powers are to be exercised by the legislative department.

d. Both interfere with ownership and use of private property.

15. What is the nature of the Sugar Adjustment Act which increased the existing taxes on sugar? Explain briefly.

SUGGESTED ANSWER: The Sugar Adjustment Act which increased existing taxes on sugar wasenacted to stabilize the sugar industry to prepare it for the loss of its quota in the U.S. market waslevied for a regulatory purpose to protect and promote the sugar industry which is also for a publicpurpose. (Lutz v. Araneta, 98 Phil. 148)

The Philsugin fund, an imposition on sugar, to raise funds to conduct research for the improvement of

the sugar industry, is for the purpose of stabilizing the sugar industry which one of the pillars of thePhilippine economy which affects the welfare of the State. The levy is not so much an exercise of thepower of taxation, nor the imposition of a special levy, but the exercise of police power which is for thegeneral welfare of the entire country, therefore for a public purpose. (Republic v. Bacolod-Murcia Co.,et al., G.R. No. L-19824, July 9, 1966)

16. Section 40 (g) of the Public Service Act authorizes the collection of x x x fees asreimbursement of its expenses in the authorization, supervision and/or regulation of the publicservices: x x x g) For each permit, authorizing the increase in equipment, the installation of new


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units or authorizing the increase of capacity, or the extension of means or general extensionsin the services, twenty centavos for each one hundred pesos or fraction of the additionalcapital necessary to carry out the permit. (paraphrasing supplied)

Is the imposition a tax measure ? Explain.

SUGGESTED ANSWER: No. It is not a tax measure but a simple regulatory provision for the collectionof fees imposed pursuant to the exercise of the States police power. A tax is imposed under the taxingpower of government principally for the purpose of raising revenues. The law in question, however,merely authorizes and requires the collection of fees for the reimbursement of the Commissionsexpenses in the authorization, supervision and/or regulation of public services. (Republic, etc., v.International Communications Corporation (ICC), G. R. No. 141667, July 17, 2006)

17. Explain the compensatory purpose of taxation. SUGGESTED ANSWER: The compensatorypurpose of taxation is to implement the social justice provisions of the constitution through theprogressive system of taxation, which would result to equal distribution of wealth, etc.

Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement

Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August3, 2005)

18. May the power of taxation be used to implement the power of eminent domain ? Explain.

SUGGESTED ANSWER: Yes. The power of taxation can also be used to implement power of eminentdomain. Tax measures are but enforced contributions exacted on pain of penal sanctions and clearlyimposed for public purpose. In most recent years, the power to tax has indeed become a mosteffective tool to realize social justice, public welfare, and the equitable distribution of wealth.(Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16,2005)

19. The senior citizens discount. The senior citizens shall be entitled to the grant of twentypercent (20%) discount from all establishments relative to the utilization of services in hotels andsimilar lodging establishments, restaurants and recreation centers, and purchase of medicines in allestablishments for the exclusive use or enjoyment of senior citizens, [Expanded Senior Citizens Actof 2003, Sec. 4 (a)]

20. The Senior Citizens Act is a legitimate exercise of police power. The law is a legitimateexercise of police power which, similar to the power of eminent domain, has general welfare for itsobject(Carlos Superdrug Corp., etc., et al, G. R. No. 166494, June 29, 2007)

21.Senior citizens discount not allowed anymore as a tax credit but as a deduction from grossincome. It ought to be noted, however, that on February 26, 2004, RA 9257, or The ExpandedSenior Citizens Act of 2003, amending RA 7432, was signed into law, ushering in, upon its effectivityon March 21, 2004, a new tax treatment for sales discount purchases of qualified senior citizens ofmedicines.

The establishment may claim the discounts granted to senior citizens as tax deduction based onthe net cost of the goods sold or services rendered: Provided, That the cost of the discount shall beallowed as deduction from gross income for the same taxable year that the discount is granted.Provided, further, That the total amount of the claimed tax deduction net of value added tax ifapplicable, shall be included in their gross sales receipts for tax purposes and shall be subject to


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proper documentation and to the provisions of the National Internal Revenue Code, as amended.[M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing ExpandedSenior Citizens Act of 2003, Sec. 4 (a)]

22.Just compensation, defined. The full and fair equivalent of the property taken from its owner bythe expropriator. The measure is not the takers gain but the owners loss. The word just is used to

intensify the meaning of the word compensation, and to convey the idea that the equivalent to berendered for the property to be taken shall be real, substantial, full and ample. (Carlos SuperdrugCorp., etc., et al, G. R. No. 166494, June 29, 2007)

THE LIMITATIONS ON THE EXERCISE

OF THE POWER OF TAXATION; GROUNDS

FOR THE NULLIFICATION OF TAX MEASURES

1. What criteria should be used by the judiciary in quashing a legislative act ?

SUGGESTED ANSWER: Subject to the determination of the courts as to what is a proper exerciseof police power using the due process clause and the equal protection clause as yardsticks, theState may interfere wherever the public interests demand it, and in this particular a large discretion isnecessarily vested in the legislature to determine, not only what interests of the public require, butwhat measures are necessary for the protection of such interests[Carlos Superdrug Corp., etc., et al,G. R. No. 166494, June 29, 2007 citing U.S. v. Toribio, 15 Phil.85 at 98 (1910) in turn citing Lawton v.Steele, 152 U.S. 133,136; Barbier v. Connoly, 113 U.S. 27; Kidd v. Pearson, 128 U.S. 1]

2. What is meant by a taxpayers suit ?

SUGGESTED ANSWER: A taxpayers suit is a case where the act complained of directly involves theillegal disbursement of public funds derived from taxation. (Justice Melo, dissenting in Kilosbayan, Inc.

v. Guingona, Jr., 232 SCRA 110)

3. What is locus standi ?

SUGGESTED ANSWER: Locus standi is a right of appearance in a court of justice on a givenquestion. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

It is a partys personal and substantial interest in the case, such that the party has sustained orwill sustain (Ibid.)direct injury as a result of the government act being challenged. It calls for more than

just a generalized grievance.

A party need not be a party to the contract to challenge its validity. (Ibid.)

4. Rationale for locus standi. The rationale for requiring a party who challenges theconstitutionality of a statute to allege such a personal stake in the outcome of the controversy is toensure that a concrete adverseness which sharpens the presentation of issues upon which the courtso largely depends for illumination of different constitutional questions. (Abaya v. Ebdane, G. R. No.167919, February 14, 2007)


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5. What are the requirements that must be met before taxpayers, concerned citizens andlegislators may be accorded standing to sue ?

SUGGESTED ANSWER:

a. The case should involve constitutional issues;

b. For taxpayers, there must be a claim of illegal disbursement of public funds or that the taxmeasure is unconstitutional.

c. For voters, there must be a showing of obvious interest in the validity of the election law inquestion.

d. For concerned citizens, there must be a showing that the issues raised are of transcendentalimportance which must be settled early.

e. For legislators, there must be a claim that the official action complained of infringes upon theirprerogatives as legislators. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R.

No. 171396, May 3, 2006)

6.Requisites for challenging constitutionality of law. The party bringing suit must show not onlythat the law or act is invalid, but also that he has sustained or is in immediate, or imminent danger ofsustaining some direct injury as a result of its enforcement and not merely that he suffers thereby insome indefinite way. (Soriano III v. Lista, et al., G. R. No. 153881, March 24, 2003)

7.Alternative statement of doctrine of brushing aside locus standi.In cases of paramountimportance where serious constitutional questions are involved, the standing requirements may berelaxed and a suit may be allowed to prosper even where there is no direct injury to the party claimingthe right of judicial review. [Coconut Oil Refiners Association, Inc., etc., et al., vs. Torres, etc., et al., G.R. No. 132527, July 29, 2005 citing Bayan (Bagong Alyansang Makabayan) v. Zamora, G. R. No.

138570, October 10, 2000, 342 SCRA 449, in turn citing Kilosbayan, Inc. v. Guingona, Jr., G. R. No.113375, May 5, 1994, 232 SCRA 110]

8. Locus standi being merely a matter of procedure, have been waived in certain instanceswhere a party who is not personally injured may be allowed to bring suit. Give some examples.

SUGGESTED ANSWER: The following are examples of instances where suits have been brought byparties who have not have been personally injured by the operation of a law or any other governmentact but by concerned citizens, taxpayers or voters who actually sue in the public interest:

a. Taxpayers suits to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law.

b. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, orthat public money is being deflected to any improper purpose, or that there is a wastage of public fundsthrough the enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919,February 14, 2007)

9. What is the rationale behind the inherent and constitutional limitations on the power oftaxation ?


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SUGGESTED ANSWER: The inherent and constitutional limitations to the power of taxation aresafeguards which would prevent abuse in the exercise of this otherwise unlimited and plenarypower.

10. What are the inherent limitations upon the power of taxation ?

SUGGESTED ANSWER: The inherent limitations are

a. Public purpose. The revenues collected from taxation should be devoted to a public purpose.

b. No improper delegation of legislative authority to tax. Only the legislature can exercise the powerof taxes unless the same is delegated to some other governmental body by the constitution orthrough a law which does not violate any provision of the constitution.

c. Territoriality. The taxing power should be exercised only within territorial boundaries of the taxingauthority.

d. Recognition of government exemptions; and

e. Observance of the principle of comity. Comity is the respect accorded by nations to each otherbecause they are equals. On the other hand taxation is an act of sovereign. Thus, the power shouldbe imposed upon equals out of respect.

Some authorities include no double taxation.

11. What are some of the principles to consider in the determination of whether tax revenuesare devoted for a public purpose ?

SUGGESTED ANSWER:

a. The tax revenues are for a public purpose if utilized for the benefit of the community ingeneral. An alternative meaning is that tax proceeds should be utilized only to attain the objectivesof government.

b. Public use is no longer confined to the traditional notion of use by the public but heldsynonymous with public interest, public benefit, public welfare, and public convenience.(Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16,2005)

c. The tax revenues are for a public purpose if utilized for the benefit of the community ingeneral. An alternative meaning is that tax proceeds should be utilized only to attain the objectives ofgovernment.

Public use is no longer confined to the traditional notion of use by the public but held synonymouswith public interest, public benefit, public welfare, and public convenience. (Commissioner of InternalRevenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)

12. The petitioners impugn the validity of the establishment of tax and duty-free shops withinthe Subic Special Economic Zone (SSEZ) and the removal of consumer goods and items fromthe zones without payment of corresponding duties and taxes for the reason that thisconstitute executive legislation in violation of the rule on separation of powers, that only raw


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material, capital and equipment should be allowed the privilege. Rule on the objections andreason out your answer briefly.

SUGGESTED ANSWER: The objections should not be given credence. It is legal to setup dulyauthorized duty-free shops in the SSEZ to sell tax and duty-free consumer items in the Secured Area.This is in line with the policy enunciated in the law that the Subic Special Economic Zone shall be

developed into a self-sustaining, industrial, commercial, financial and investment center to generateemployment opportunities in and around the zone and to attract and promote productive foreigninvestments.

While it is true that Section 12 (b) of Rep. Act No. 7227 mentions only raw materials, capital andequipment, this does not necessarily mean that the tax and duty free buying privilege is limited to thesetypes of articles to the exclusion of consumer goods.

It must be remembered that in construing statutes, the proper course is to start out and follow the trueintent of the Legislature and to adopt that sense which harmonizes best with the context and promotesto the fullest manner the policy and objects of the Legislature.

The concept of inclusio unius est exclusio alterius does not find application because the phrase taxand duty-free importations of raw materials, capital and equipment was merely cited as an example ofincentives that the SSEZ is authorized to grant, in line with its being a free port zone. Thus, thelegislative intent is that consumer goods entering the SSEZ which satisfy the needs of the zone andare consumed there are not subject to duties and taxes in accordance with Philippine law. ( CoconutOil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005)

` Would your answer be the same if a Presidential Proclamation allowed for the limitedwithdrawal from the Clark Special Economic Zone or the John Hay Economic Zone ofconsumer goods tax and duty-free ?

SUGGESTED ANSWER: The answer would not be the same. This time the Presidential

Proclamation would be invalid as the statutory tax exempt privilege was granted only to the SubicSpecial Economic Zone and not to John Hay or Clark. This is so because the Constitution mandatesthat no law granting tax exemption shall be passed without the concurrence of a majority of all themembers of Congress. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R.No. 132527, July 29, 2005 citing John Hay Peoples Alternative Coalition, et al., v. Lim, etc., et al., G.R.No. 119775, October 24, 2003, 414 SCRA 356)

Furthermore, the law is very clear that the exportation or removal of goods from the territory of theSubic Special Economic Zone to other parts of the Philippine territory shall be subject to customsduties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines.(Ibid.)

13. The VAT law provides that, the President, upon the recommendation of the Secretary of

Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent(12%) after any of the following conditions have been satisfied. (i) value-added tax collectionas a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of GDP of the previousyear exceeds one and one-half percent (1 %).

Was there an invalid delegation of legislative power ?


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SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of thediscretion as to the execution of the law. This is constitutionally permissible.

Congress does not abdicate its functions or unduly delegate power when it describes what job must bedone, who must do it, and what is the scope of his authority. In the above case the Secretary ofFinance becomes merely the agent of the legislative department, to determine and declare the even

upon which its expressed will takes place. The President cannot set aside the findings of the Secretaryof Finance, who is not under the conditions acting as the execute alter ego or subordinate. . [AbakadaGuro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companioncases citing various cases]]

14. Juliane a non-resident alien appointed as a commission agent by a domestic corporationwith a sales commission of 10% all sales actually concluded and collected through her efforts.The local company withheld the amount of P107,000 from her sales commission and remittedthe same to the BIR.

She filed a claim for refund alleging that her sales commission is not taxable because the samewas a compensation for her services rendered in Germany and therefore considered as income

from sources outside the Philippines.

Is her contention correct ?

SUGGESTED ANSWER: Yes. The important factor which determines the source of income ofpersonal services is not the residence of the payor, or the place where the contract for service isentered into, or the place of payment, but the place where the services were actually performed.

Since the activity of securing the sales were in Germany, then the income did not originate fromsources from within the Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No.153793, August 29, 2006)

15. A domestic insurance company decided to reinsure with a foreign reinsurer the risks it hasundertaken with its local clients. The foreign reinsurer does not have an office, neither does itdo business in the Philippines. Are the reinsurance premiums subject to Philippine incometaxation ?

SUGGESTED ANSWER: Yes because the undertaking of the foreign insurance company to indemnifythe local insurance company is the activity that produced the income.

The reinsurance premiums remitted to the foreign reinsurer had for their source the undertaking toindemnify the local insurer against liability. Said undertaking is the activity that produced thereinsurance premiums, and the same took place in the Philippines. The reinsured, the liabilities insuredand the risk originally undertaken by the local insurance company, upon which the reinsurancepremiums and indemnity were based, were all situated in the Philippines. (Alexander Howden & Co.,Ltd. v. Collector of Internal Revenue, 121 Phil. 579; 13 SCRA 601 (1965) cited in Baier-Nickel)

16. BOAC, a foreign airline company which does not maintain any flight to and from thePhilippines sold air tickets in the Philippines, through a general sales agent, relating to thecarriage of passengers and cargo between two points, both outside the Philippines.

Is BOAC subject to income taxes on the sale of the tickets ?


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SUGGESTED ANSWER: Yes. The source of income which is taxable is that activity which producedthe income. The sale of tickets in the Philippines is the activity that determines whether such incomeis taxable in the Philippines.

The tickets exchanged hands here and payments for fares were also made here in Philippine currency.The situs of the source of payments is the Philippines. the flow of wealth proceeded from and

occurred, within the Philippine territory, enjoying the protection accorded by the PhilippineGovernment. In consideration of such protection, the flow of wealth should share the burden ofsupporting the government. (Commissioner of Internal Revenue v. British Overseas AirwaysCorporation (BOAC), 149 SCRA 395 cited in Bauer-Nickel)

17. Give some of the general or indirect constitutional limitations.

SUGGESTED ANSWER: The general or indirect constitutional limitations are the following:

a. Due process clause;

b. Equal protection clause;

c. Freedom of the press;

d. Religious freedom;

e. No taking of private property without just compensation;

f. Non-impairment clause;

g. Law-making process:

1) Bill should embrace only one subject expressed in the title

thereof;

2) Three (3) readings on three separate days;

3) Printed copies in final form distributed three (3) days before

passage.

h. Presidential power to grant reprieves, commutations and pardons and remittal of fines andforfeiture after conviction by final judgment.

18. The specific or direct constitutional limitations are the following:

a. No imprisonment for non-payment of a poll tax;

b. Taxation shall be uniform and equitable;

c. Congress shall evolve a progressive system of taxation;


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d. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives,but the Senate may propose and concur with amendments;

e. 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;

f. Delegated power of the President to impose tariff rates, import and export quotas, tonnage andwharfage dues:

1) Delegation by Congress

2) Through a law

3) Subject to Congressional limits and restrictions

4) Within the framework of national development program.

g. Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto,mosques, and all lands, buildings and improvements of all kinds actually, directly and exclusivelyused for religious, charitable or educational purposes;

h. No tax exemption without the concurrence of majority vote of all members of Congress;

i. No use of public money or property for religious purposes except if priest is assigned to the armedforces, penal institutions, government orphanage or leprosarium;

j. Money collected on tax levied for a special purpose to be used only for such purpose, balance ifany, to general funds;

k. The Supreme Court's power to review judgments or orders of lower courts in all cases involvingthe legality of any tax, impose, assessment or toll or the legality of any penalty imposed in relation tothe above;

l. Authority of local government units to create their own sources of revenue, to levy taxes, fees andother charges subject to guidelines and limitations imposed by Congress consistent with the basicpolicy of local autonomy;

m. Automatic release of local government's just share in national taxes;

n. Tax exemption of all revenues and assets of non-stock, non-profit educational institutions usedactually, directly and exclusively for educational purposes;

o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutionssubject to limitations provided by law including restrictions on dividends and provisions forreinvestment of profits;

p. Tax exemption of grants, endowments, donations or contributions used actually, directly andexclusively for educational purposes subject to conditions prescribed by law.


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19. Equal protection of the law clause is subject to reasonable classification. If the groupings arecharacterized by substantial distinctions that make real differences, one class may be treated andregulated differently from another. The classification must also be germane to the purpose of the lawand must apply to all those belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R.No. 127410, January 20, 1999)

20. Classification, to be valid, must (a) rest on substantial distinctions, (b) be germane to thepurpose of the law, (c) not be limited to existing conditions only, and (d) apply equally to all membersof the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)

21. The law grant of tax and duty-free status under Rep. Act No. 7227, to retailers inside theSSEZ without granting the same to those outside the SSEZ. Is there a violation of the equalprotection clause ?

SUGGESTED ANSWER: There is no violation of equal protection because there exists a validclassification as shown below:

a. Significant distinctions exist between the two groups. Those outside of the SSEZ maintain their

business within Philippine customs territory while those within the SSEZ operate within the so-calledseparate customs territory. To grant the same privileges would clearly defeat the statues intent tocarve a territory out of the military reservations in Subic Bay where free flow of goods and capital ismaintained.

b. The classification is germane to the purpose of Rep. Act No. 7227. As held in Tiu, the real concernof the law is to convert the lands formerly occupied by the US military bases into economic or industrialareas. In furtherance of such objective, Congress deemed it necessary to extend economic incentives,in terms of a complete package of tax incentives and other benefits, to the establishments within thezone to attract and encourage foreign and local investors.

c. The classification is not limited to the existing conditions when the law was promulgated but to future

conditions as well, inasmuch as the law envisioned the former military reservation to ultimately developinto a self-sustaining investment center.

d. The classification applies equally to all retailers found within the secured area. As ruled in Tiu, theindividuals and businesses within the secured area, being in like circumstances or contributingdirectly to the achievement of the end purposes of the law, are not categorized further. They are allsimilarly treated, both in privileges granted and in obligations required. (Coconut Oil Refiners

Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tiu, et al., v.Court of Appeals, et al., G.R. No. 127410, January 20, 1999, 301 SCRA 278)

22. Is the statutory grant of tax and duty-free importation into the Subic Special EconomicZone violative the preferential use concept of the Constitution ?

SUGGESTED ANSWER: No. The mere fact that the law authorizes the importation and trade offoreign goods does not suffice to declare it unconstitutional on this ground.

While the Constitution does not encourage the unlimited entry of foreign goods, services andinvestments into the country, it does not prohibit them either. In fact, it allows an exchange on the basisof equality and reciprocity, frowning only in foreign competition that is unfair. ( Coconut Oil Refiners

Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tanada v.Angara, G. R. No. 118295, May 2, 1997, 272 SCRA 18)


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23. It is inherent in the power to tax that the State be free to select the subjects of taxation, andit has been repeatedly held that, "inequalities which result from a singling out of one particular class oftaxation, or exemption, infringe no constitutional limitation." (Commissioner of Internal Revenue, et al.,v. Santos, et al., 277 SCRA 617)

24. 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, within the meaning of the constitution. Even though such taxationmay affect particular contracts, as it may increase the debt of one person and lessen the security ofanother, or may impose additional burdens upon one class and release the burdens of another, still thetax must be paid unless prohibited by the constitution, nor can it be said that it impairs the obligationsof any existing contract in its true and legal sense. (Tolentino v. Secretary of Finance, et al., andcompanion cases, 235 SCRA 630)

25. Under the now prevailing Constitution, where there is neither a grant nor prohibition bystatute, the taxing power of local governments must be deemed to exist although Congressmay provide statutory limitations and guidelines in order to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. (CityGovernment of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

26. The Local Government Code explicitly authorizes provinces and cities, notwithstandingany exemption granted by any law or other special law to impose a tax on businessesenjoying a franchise. Indicative of the legislative intent to carry out the constitutional mandate ofvesting broad tax powers to local government units, the Local Government Code has withdrawn taxexemptions or incentives theretofore enjoyed by certain entities. (City Government of San Pablo,Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

27. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No.143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to imposeand collect a local franchise tax because the Local Government has withdrawn all tax exemptionspreviously enjoyed by all persons and authorized local government units to impose a tax on businessenjoying a franchise tax notwithstanding the grant of tax exemption to them.

28. Paradigm shift from exclusive Congressional power to direct grant of taxing power tolocal legislative bodies. The power to tax is no longer vested exclusively on Congress; locallegislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to

Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G.R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City ofCabanatuan, G. R. No. 149110, April 9, 2003)

29. The fundamental law did not intend the direct grant to local government units to beabsolute and unconditional, the constitutional objective obviously is to ensure that, while localgovernment units are being strengthened and made more autonomous, the legislature must still see toit that:

a. the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions;

b. each local government unit will have its fair share of available resources;

c. the resources of the national government will be unduly disturbed; and


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d. local taxation will be fair, uniform and just. (Manila Electric Company v. Province of Laguna, et al.,G.R. No. 131359, May 5, 1999)

30. The withdrawal of a tax exemption should not be construed as prohibiting future grants ofexemption from all taxes. Indeed, the grant of taxing powers to local government units under theLocal Government Code does not affect the power of Congress to grant exemptions to certain

persons, pursuant to a declared national policy. The legal effect of the constitutional grant to localgovernments simply means that in interpreting statutory provisions on municipal taxing powers, doubtsmust be resolved in favor of municipal corporations. (Philippine Long Distance Telephone Company,Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)

31. When Congress approved a provision that, Any advantage, favor, privilege, exemption, orimmunity granted under existing franchises, or may hereafter be granted, shall ipso facto become partof previously granted telecommunications franchises and shall be accorded immediately andunconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neitherapply to nor affect provisions of telecommunications franchises concerning territory covered by thefranchise, the life span of the franchise, or the type of service authorized by the franchise.(Underscoring supplied) there was no intention for it to operate as a blanket tax exemption to all

telecommunications entities. Applying the rule of strict construction of laws granting tax exemptionsand the rule that doubts should be resolved in favor of municipal corporations in interpreting statutoryprovisions on municipal taxation, it was held that said provisions cannot be considered as extending itsapplication to franchises such as that of PLDT. (Philippine Long Distance Telephone Company, Inc., v.City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)

32. When an item of income is taxed in the Philippines and the same income is taxed in anothercountry, this would be known as international juridical double taxation which is the imposition ofcomparable taxes in two or more states on the same taxpayer in respect of the same subject matterand for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al.,G.R. No. 127105, June 25, 1999)

33. A tax deduction is defined as a subtraction fro income for tax purposes, or an amount that is

allowed by law to reduce income prior to the application of the tax rate to compute the amount of taxwhich is due.

A tax deduction reduces the income that is subject to tax in order to arrive at taxable income.(Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15,2005)

34. The petitioners allege that the R-VAT law is constitutional because the BicameralConference Committed has exceeded its authority in including provisions which were neverincluded in the versions of both the House and Senate such as inserting the stand-by authorityto the President to increase the VAT from 10% to 12%; deleting entirely the no pass-onprovisions found in both the House and Senate Bills; inserting the provision imposing a 70%

limit on the amount of input tax to be credited against the output tax; and including theamendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in additionto the value-added tax. Thus, there was a violation of the constitutional mandate that revenuebills shall originate exclusively from the House of Representatives.

Are the contentions of such weight as to constitute grave abuse of discretion which mayinvalidate the law ? Explain briefly.


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SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the changes andmodifications made by the Bicameral Conference Committee were germane to subjects of theprovisions referred to it for reconciliation.

The Bicameral Conference Committee merely exercised the judicially recognized long-standinglegislative practice of giving said conference committee ample latitude for compromising differences

between the Senate and the House. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.168056, September 1, 2005 and companion cases citing Philippine Judges Association v. Pardo, G. R.No. 105371, November 11, 1993, 227 SCRA 703; Tolentino v. Secretary of Finance, et al., G. R. No.115455, August 25, 1994, 235SCRA 630]

35. The VAT is assailed as being regressive and therefore violative of the mandate to evolve aprogressive system of taxation. Do you agree ? Explain your answer.

SUGGESTED ANSWER: No. The VAT does not violate the progressive system of taxation. Themandate to Congress is not to prescribe but to evolve a progressive system of taxation. Otherwise,sales taxes which perhaps are the oldest form of indirect taxes, would have been prohibited with theproclamation of the constitutional provision. Sales taxes are also regressive. [Abakada Guro Party List

(etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citingTolentino v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]

CONSTITUTIONAL TAX EXEMPTIONS

1. What constitutional exemptions are enjoyed by real property ?

SUGGESTED ANSWER: Charitable institutions, churches and parsonages or convents appurtenantthereto, mosques, non-profit cemeteries, and all lands, buildings and improvements that are actually,directly and exclusively used for religious, charitable or educational purposes are exempt fromtaxation. [Sec.28 (3) Article VI, 1987 Constitution]

2. The above constitutional tax exemptions refer only to real property that are actually, directlyand exclusively used for religious, charitable or educational purposes, and that the onlyconstitutionally recognized exemption from taxation of revenues are those earned by non-profit, non-stock educational institutions which are actually, directly and exclusively used for educationalpurposes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)

The constitutional tax exemption covers property taxes only. What is exempted is not the institutionitself, those exempted from real estate taxes are lands, buildings and improvements actually, directlyand exclusively used for religious, charitable or educational purposes. (Lung Center of thePhilippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004 citing Justice Davide)

3. The 1935 Constitution stated that the lands, buildings, and improvements are usedexclusively but the present Constitution requires that the lands, buildings andimprovements are actually, directly and exclusively used. The change should not be ignored.Reliance on past decisions would have sufficed were the words actually as well as :directly are notadded. There must be proof therefore of the actual and direct use to be exempt from taxation. (LungCenter of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004 citingProvince of Abra v. Hernando, 107 SCRA 105)

4. What is meant by actual, direct and exclusive use of the property for charitable purposesis the direct and immediate and actual application of the property itself to the purposes for


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which the charitable institution is organized. It is not the use of the income from the real property thatis determinative of whether the property is used for tax-exempt purposes.

If real property is used for one or more commercial purposes, it is not exclusively used for theexempted purpose but is subject to taxation,. The words dominant use or principal use cannot besubstituted for the words used exclusively without doing violence to the Constitution and the law.

Solely is synonymous with exclusively. (Lung Center of the Philippines v. Quezon City, et al., etc., G.R. No. 144104, June 29, 2004)

5. Portions of the land of a charitable institution, such as a hospital, leased to private entitiesas well as those parts of the hospital leased to private individuals are not exempt from realproperty taxes. On the other hand, the portion of the land occupied by the hospital and portions ofthe hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.(Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

6.Distinction between Lung Center and City Assessor of Cebu. The ruling in City Assessor ofCebu v. Association of Benevola de Cebu, Inc.., G. R. No. 152904, June 8, 2007 was not aninterpretation of tax exemption. Furthermore, the doctors offices in City Assessor of Cebu were

exclusively used by doctors duly accredited with the hospital. No such showing was made in LungCenter.

7. As a general principle, a charitable institution does not lose its character as such and itsexemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government.

So long as the money received is devoted or used altogether to the charitable object which it isintended to achieve; and no money inures to the private benefit of the persons managing oroperating the institution. (Lung Center of the Philippines v. Quezon City, et al., etc., G. R. No.144104, June 29, 2004)

8. All revenues and assets of non-stock, non-profit educational institutions that are actually,directly and exclusively used for educational purposes shall be exempt from taxation.

9.. Revenues and assets of proprietary educational institutions, including those which arecooperatively owned, may be entitled to exemptions subject to limitations provided by lawincluding restrictions on dividends and provisions for reinvestments. There is no law at thepresent which grants exemptions, other the exemptions granted to cooperatives.

10. The NIRC recognizes the exemption from tax of the incomes of civic leagues ororganizations not organized for profit but operated exclusively for the promotion of social welfare,as well as clubs organized and operated exclusively for pleasure, recreation, and other non-profitable purposes where no part of the net income inures to the benefit of any private stockholderor member.

11. The tax exemption so recognized does not flow to income of whatever kind and character of theforegoing organizations from any of their properties, real or personal, or from any of their activitiesconducted for profit, regardless of the disposition made of such income, which shall be subject toincome taxes. (Commissioner of Internal Revenue v. Court of Appeals, et al., 298 SCRA 83)

OTHER CONCEPTS:


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1. What is a tax amnesty ?

SUGGESTED ANSWER: A tax amnesty is a general pardon or intentional overlooking by the State ofits authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or atax law. (Commissioner of Internal Revenue v. Marubeni Corporation, G.R. No. 137377, December 18,2001)

2.The purpose of tax amnesty is to

a. give tax evaders who wish to relent a chance to start a clean slate, and to

b. give the government a chance to collect uncollected tax from tax evaders without having to gothrough the tedious process of a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967,February 10, 2000)

c. To improve tax collection.

3. Distinguish tax amnesty from tax exemption.

SUGGESTED ANSWER:

a. Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising fromnonpayment of taxes (People v. Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a taxexemption is an immunity from civil liability only. It is an immunity or privilege, a freedom from a chargeor burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)

b. Tax amnesty applies only to past tax periods, hence of retroactive application (Castaneda,supra)WHILE tax exemption has prospective application.

4. Define tax avoidance and tax evasion.

SUGGESTED ANSWER: Tax avoidance is the use of legally permissible means to reduce the taxwhile tax evasion is the use of illegal means to escape the payment of taxes.

5. Tax evasion connotes the integration of three factors:

a. the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due,or the non-payment of tax when it is shown that a tax is due;

b. an accompanying state of mind which is described as being evil on bad faith, willful, ordeliberate and not accidental; and

c.a course of action or failure of action which is unlawful. (Commissioner of Internal Revenue v. TheEstate of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14, 2004)

6. What are the reasons why national taxes cannot be the subject of compensation and set-offwith debts ?

SUGGESTED ANSWER:


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a. The lifeblood theory;

b. Taxes are not contractual obligations but arise out of a duty to, and are the positive acts ofgovernment, to the making and enforcing of which the personal consent of the individual taxpayer isnot required. (Republic v. Mambulao Lumber Co., 4 SCRA 622)

c. The government and the taxpayer are not mutually creditors and debtors of each other anda claim for taxes is no such debt, demand, contract or judgment as is allowed to be set-off. (CaltexPhilippines, Inc. v. Commission on Audit, 208 SCRA 726, 756)

7. Compensation takes place by operation of law, where the local government and the taxpayer are intheir own right reciprocally debtors and creditors of each other, and that the debts are both due anddemandable, in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8SCRA 443)

8. In case of a tax overpayment, where the BIRs obligation to refund or set-off arises from themoment the tax was paid under the principle of solutio indebeti. (Commissioner of InternalRevenue v. Esso Standard Eastern, Inc, 172 SRCA 364)

9. But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001 which held that inorder for the rule on solutio indebeti to apply it is an essential condition that the petitioner must firstshow that its payment of the customs duties was in excess of what was required by the law at the timethe subject 16 importations of milk and milk products were made. Unless shown otherwise, thedisputable presumption of regularity of performance of duty lies in favor of the Collector of Customs.

10. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business itengages in, without transferring the burden to someone else. Examples are individual andcorporate income taxes, transfer taxes, and residence taxes. (Abakada Guro Party List (etc.) v. Ermita,etc., et al., G. R. No. 168056, September 1, 2005 and companion cases, citing Maceda v. Macaraig,Jr., G.R. No. 88291, June 8, 1993, 223 SCRA 217)

11. Acesite is the owner and operator of restaurant which caters to the patrons of a casinooperated by PAGCOR within its premises. it billed PAGCOR for the cost of the food andbeverages consumed by the PAGCORs patrons as well as the lease of the premises plus theVAT on these items. PAGCOR paid Acesite minus the VAT claiming exemption while Acesite, inorder to avoid legal implications, paid the P30 million tax and applied for a refund on theground of solutio indebeti.

Acesite cites the tax exemption grant in PAGCORs franchise as follows:The exemptions hereingranted for earnings derived from the operations conducted under the franchise specifically from the

payment of any tax, income, or otherwise, as well as any form of charges, fees or levies, shall inureto the benefit of and extend to corporation(s), association (s), agency (cies), or individual(s)with whom the Corporation or operator has any contractual relationship in connection with the

operations of the casino (s) authorized to be conducted under this Franchise and to thosereceiving compensation or other remuneration from the Corporation or operator as a result of essentialfacilities furnished and/or technical services rendered to the Corporation or operator. (emphasissupplied)

The BIR denied the claim on the ground that PAGCOR is exempt only from direct taxes and notfrom indirect taxes so Acesite may not avail of the exemption. Is this correct ?


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SUGGESTED ANSWER: No. As the law is worded the exemption flows to Acesite. The law is clearthat the exemption extends the exemption to entities or individuals dealing with PAGCOR.(Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, G. R. No. 147295,February 16, 2007)

12. Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from

Petron Corporation, which it uses for its operations. It now claims for refund or tax credit forthe excise taxes it paid claiming that it is exempt from the payment of excise taxes under theprovisions of Sec. 135 of the NIRC of 1997 which provides that petroleum products are exemptfrom excise taxes when sold to Exempt entities or agencies covered by tax treaties, conventions,and other international agreements for their use and consumption: Provided, however, That thecountry of said foreign international carrier or exempt entities or agencies exempts from similar taxespetroleum products sold to Philippine carriers, entities or agencies

Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between theGovernment of the Republic of the Philippines and the Government of the Republic of Singapore(Air Transport Agreement between RP and Singapore) which reads: Fuel, lubricants, spare parts,regular equipment and aircraft stores introduced into, or taken on board aircraft in the territory of one

Contracting party by, or on behalf of, a designated airline of the other Contracting Party and intendedsolely for use in the operation of the agreed services shall, with the exception of charges corresponding tothe service performed, be exempt from the same customs duties, inspection fees and other duties or taxesimposed in the territories of the first Contracting Party , even when these supplies are to be used on theparts of the journey performed over the territory of the Contracting Party in which they are introduced intoor taken on board. The materials referred to above may be required to be kept under customs supervisionand control.

Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreementbetween RP and Singapore grants exemption from the same customs duties, inspection fees andother duties or taxes imposed in the territory of the first Contracting Party. It invokes Maceda v.Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit orrefund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from

the payment of indirect taxes.

Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer.

SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons:

a. The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, anindirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid thesame even if he shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner ofInternal Revenue, G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that theexcise tax should be paid by the manufacturer or producer before removal of domestic products fromplace of production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to

claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreementbetween RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billedto Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine

Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]


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b. Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991,197 SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) onthe ground that the NPC is exempt even from the payment of indirect taxes.

In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No.140230, December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig,

Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from all taxesgranted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes.

An exemption from all taxes excludes indirect taxes, unless the exempting statute, like NPCscharter, is so couched as to include indirect tax from the exemption. The amendment under Republic ActNo. 6395 enumerated the details covered by NPCs exemption. Subsequently, P.D. 380, made even morespecific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on allpetroleum products used in its operation. Presidential Decree No. 938 [NPCs amended charter] amendedthe tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from all formsof taxes, duties[,] fees The use of the phrase all forms of taxes demonstrates the intention of the lawto give NPC all the tax exemptions it has been enjoying before.

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the AirTransport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, beconstrued as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi

juris against the taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist,it must not be enlarged by construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of InternalRevenue, G.R. No. 173594, February 6, 2008)

NATIONAL INTERNAL REVENUE CODE

INCOME TAXATION

1. Is a Commissioner of Internal Revenue liable for damages with respect to a ruling she

issued, without notice, that had adverse effects against a taxpayer ?

SUGGESTED ANSWER: Yes. A public officer who directly or indirectly violates the constitutionalrights of another, may be validly sued for damages under Article 32 of the Civil Code even if his actswere not so tainted with malice or bad faith. (Vinzons-Chato v. Fortune Tobacco Corporation, G. R.No. 141309, June 19, 2007 citing Cojuangco, Jr. v. Court of Appeals, G.R. No. 119398, July 2, 1999,309 SCRA 602, 604)

Thus, the rule in this jurisdiction is that a public officer may be validly sued in his/her privatecapacity for acts done in the course of the performance of the functions of the office, where saidpublic officer: (1) acted with malice, bad faith, or negligence; or (2) where the public officer violated aconstitutional right of the plaintiff. (Ibid.)

2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held, citing Mertens, that the termpartnership includes a syndicate, group, pool, joint venture or other unincorporated organization,through or by means of which any business, financial operation, or venture is carried on.

3. Co-heirs who own inherited properties which produce income should notautomatically be considered as partners of an unregistered corporation subject to income taxfor the following reasons:


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a. The sharing of gross returns does not of itself establish a partnership, whether or not thepersons sharing them have a joint or common right or interest in any property from which the returnsare derived. There must be an unmistakable intention to form a partnership or joint venture. (Obillos,Jr. v. Commissioner of Internal Revenue, 139 SCRA 436)

b. There is no contribution or investment of additional capital to increase or expand the

inherited properties, merely continuing the dedication of the property to the use to which it had beenput by their forebears. (Ibid.)

c. Persons who contribute property or funds to a common enterprise and agree to share thegross returns of that enterprise in proportion to their contribution, but who severally retain the title totheir respective contribution, are not thereby rendered partners. They have no common stock capital,and no community of interest as principal proprietors in the business itself from which the proceedswere derived. (Elements of the Law of Partnership by Floyd R. Mechem, 2nd Ed., Sec. 83, p. 74 cited inPascual v. Commissioner of Internal Revenue, 166 SCRA 560)

4. The common ownership of property does not itself create a partnership between theowners, though they may use it for purpose of making gains, and they may, without becoming

partners, are among themselves as to the management and use of such property and the applicationof the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v.Commissioner of Internal Revenue, 166 SCRA 560)

5. Income is gain derived and severed from capital, from labor or from both combined. For example, totax a stock dividend would be to tax a capital increase rather than the income. (Commissioner ofInternal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999)

6. An insolvent debtor does not realize taxable income from the cancellation or forgiveness.(Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10th)

7. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness

when he becomes solvent. (Lakeland Grocery Co., v. Commissioner36 BTA (F) 289)

8. The Global system of income taxation is a system employed where the tax system viewsindifferently the tax base and generally treats in common all categories of taxable income of theindividual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

9. The Schedular system of income taxation is a system employed where the income tax treatmentvaries and is made to depend on the kind or category of taxable income of the taxpayer. (Tan v. delRosario, Jr., 237 SCRA 324, 331)

10. What are the requisites for the deductibility of ordinary and necessary trade, business, orprofessional expenses, like expenses paid for legal and auditing services ?

SUGGESTED ANSWER:

a. the expense must be ordinary and necessary;

b. it must have been paid or incurred during the taxable year dependent upon the method ofaccounting upon the basis of which the net income is computed.


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c. it must be supported by receipts, records or other pertinent papers. ( Commissioner of InternalRevenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)

11. TMG Corporation using the accrual method of accounting. In 2005 XYZ Law Firm and ABCAuditing Firm rendered various services which were billed by these firms only during thefollowing year 2006. Since the bills for legal and auditing services were received only in 2006

and paid in the same year, TMG deducted the same from its 2006 gross income. The BIRdisallowed the deduction ?

Who is correct, TMG or BIR ? Explain.

SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the professional and legalfees in the year they were incurred in 2005 and not in 2006 because at the time the services wererendered in 2005, there was already an obligation to pay them. (Commissioner of Internal Revenue v,Isabela Cultural Corporation, G. R. No. 172231, February 12, 2007)

12. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary value offringe benefits furnished, granted or paid by the employer to the employee, except rank and file

employees. [1st

par., Sec. 2.33 (A), Rev. Regs. No. 3-98]

13. What is meant by fringe benefit for purposes of taxation ?

SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good, service, or otherbenefit furnished or granted in cash or in kind by an employer to an individual employee (except rankand file employees), such as but not limited to:

a. Housing;

b. Expense account;

c. Vehicle of any kind;

d. Household personnel, such as maid, driver and others;

e. Interest on loan at less than market rate to the extent of the difference between the market rateand actual rate granted;

f. Membership fees, dues and other expenses borne by the employer for the employee in social andathletic clubs or other similar organizations;

g. Expenses for foreign travel;

h. Holiday and vacation expenses;

i. Educational assistance to the employee or his dependents; and

j. Life or health insurance and other non-life insurance premiums or similar amounts in excess ofwhat the law allows. [Sec. 33 (B), NIRC of 1997; 1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]

14. What fringe benefits are not subject to the fringe benefits tax ?


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SUGGESTED ANSWER: Fringe benefits that are not subject to the fringe benefits tax:

a. When the fringe benefit is required by the nature of, or necessary to the trade, business orprofession of the employer; or

b. When the fringe benefit is for the convenience or advantage of the employer. [Sec. 32(A), NIRC of

1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]

c. Fringe benefits which are authorized and exempted from income tax under the Tax Code or underany special law;

d. Contributions of the employer for the benefit of the employee to retirement, insurance andhospitalization benefit plans;

e. Benefits given to the rank and file employees, whether granted under a collective bargainingagreement or not; and

f. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of

Finance upon recommendation of the Commissioner of Internal Revenue. [1 st par., Sec. 32 (C),NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]

15. What is meant by de minimis benefits ?

SUGGESTED ANSWER: De minimis benefits are facilities and privileges (such as entertainment,medical services, or so-called courtesy discounts on purchases), furnished or offered by anemployer to his employees. They are not considered as compensation subject to income tax andconsequently to withholding tax, if such facilities are offered or furnished by the employer merely asa means of promoting the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1(A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]

16. What are the de minimis benefits not subject to withholding tax for both managerial andrank and file employees ?

SUGGESTED ANSWER: The following shall be considered as de minimis benefits not subject towithholding tax on compensation income of both managerial and rank and file employees:

a. Monetized unused vacation leave credits of employees not exceeding ten (10) days during theyear;

b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee persemester or P125 per month;

c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more thanP1,000.00;

d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;

e. Actual yearly medical benefits not exceeding P10,000.00 per annum;

f. Laundry allowance not exceeding P300 per month;


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g. Employees achievement awards, e.g. for length of service or safety achievement, which must bein the form of a tangible persona property other than cash or gift certificate, with an annual monetaryvalue not exceeding P10,000.00 received by an employee under an established written plan whichdoes not discriminate in favor of highly paid employees;

h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per

employee per annum;

i. Flowers, fruits, books, or similar items given to employees under special circumstances, e.g. onaccount of illness, marriage, birth of a baby, etc.; and

j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basicminimum wage.

The amount of de minimis benefits conforming to the ceiling herein prescribed shall not beconsidered in determining the P30,000 ceiling of other benefits provided under Section 32 (B)(7)(e)of the Code. However, if the employer pays more than the ceiling prescribed by these regulations,the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the

P30,000.00 ceiling, provided, further, that any amount given by the employer as benefits to itsemployees, whether classified as de minimis benefits or fringe benefits, shall constitute asdeductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev.Regs. No. 8-2000]

17. What is meant by income subject to final tax ?

SUGGESTED ANSWER: Income subject to final tax refers to an income collected through thewithholding tax system.

The payor of the income withholds the tax and remits it to the government as a final settlement of theincome tax as a final settlement of the income tax due on said income. The recipient is no longer

required to include the income subjected to a final tax as part of his gross income in his income taxreturn.

18. Disinguish exclusions from deductions.

SUGGESTED ANSWER: Exclusions distinguished from deductions:

a. Exclusions from gross income refer to a flow of wealth to the taxpayer which are nottreated as part of gross income for purposes of computing the taxpayers taxable income, due to thefollowing reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; and (3) Itdoes not come within the definition of income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are theamounts which the law allows to be subtracted from gross income in order to arrive at net income.

b. Exclusions pertain to the computation of gross income WHILE deductions pertain to thecomputation of net income.

c. Exclusions are something received or earned by the taxpayer which do not form part of grossincome WHILE deductions are something spent or paid in earning gross income.

An example of an exclusion from gross income are life insurance proceeds, and an example of adeduction are losses.


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19. What proceeds are excluded from gross income ?

SUGGESTED ANSWER: The following are excluded from gross income:

a. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insuredwhether in a single sum or otherwise.

b. Amounts received by the insured as a return of premiums paid by him under life insurance,endowment or annuity contracts either during the term, or at maturity of the term mentioned in thecontract, or upon surrender of the contract.

c. Value of property acquired by gift, bequest, devise, or descent.

d. Amounts received, through accident or health insurance or Workmens Compensation Acts ascompensation for personal injuries or sickness, plus the amounts of any damages received onwhether by suit or agreement on account of such injuries or sickness.

e. Income of any kind to the extent required by any treaty obligation binding upon the Government of

the Philippines.

f. Retirement benefits received under Republic Act No. 7641. Retirement received from reasonableprivate benefit plan after compliance with certain conditions. Amounts received for beyond controlseparation. Foreign social security, retirement gratuities, pensions, etc. USVA benefits, SSS benefitsand GSIS benefits.

20. What conditions must be present in order to exclude retirement benefits from grossincome ?

SUGGESTED ANSWER: Conditions for excluding retirement benefits from gross income, hence tax-exempt:

a. Retirement benefits received under Republic Act No. 7641 and those received by officialsand employees of private firms, whether individual or corporate, in accordance with the employersreasonable private benefit plan approved by the BIR.

b. Retiring official or employee

1) In the service of the same employer for at least ten (10) years;

2) Not less than fifty (50) years of age at time of retirement;

3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The

retiring official or employee should not have previously availed of the privilege under theretirement plan of the same or another employer. [1st par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98]

21. What kind of separation pay is excluded from gross income ?

SUGGESTED ANSWER: Separation (retirement) pay excluded from gross income, hence tax-exempt:


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a. Any amount received by an official, employee or by his heirs,

b. From the employer

c. As a consequence of separation of such official or employee from the service of theemployer because of

1) Death, sickness or other physical disability; or

2) For any cause beyond the control of said official or employee [Sec. 32 (B) (6) (b), NIRCof 1997], such as retrenchment, redundancy and cessation of business. [1st par., Sec. 2.78 (B), (1)(b), Rev. Regs. No. 2-98]

22. What prizes are excluded from gross income ?

SUGGESTED ANSWER: Prizes that are excluded from gross income, hence not taxable:

a. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational,artistic, literary, or civic achievement but only if

1) The recipient was selected without any action on his part to enter the contest orproceeding; and

2) The recipient is not required to render substantial future services as a condition toreceiving the prize or award. [Sec. 32 (B) {7} {c}, NIRC of 1997]

b. All prizes and awards

1) Granted to athletes

2) In local and international sports tournaments and competitions

3) Whether held in the Philippines or abroad, and

4) Sanctioned by their national sports associations [Sec. 32(B) {7} {d}, NIRC of 1997], which perBIR ruling is accreditation with the Philippine Olympic Committee. Note that the exemption refersonly to amateur sports. For professional boxing, a special law grants the exemption not the NIRC.

23. Who are allowed to deduct the optional standard deduction ?

SUGGESTED ANSWER: Only resident citizens and resident alien individuals are allowed todeduct the optional standard deduction on their gross income other than passive or compensationincome.

Nonresident individuals, estates, trusts or corporations are not allowed to avail of this deduction.

24.What is the optional standard deduction ?

Sec. 34. Deductions from Gross Income. Except for taxpayers earning compensation incomearising from personal services rendered under an employer-employee relationship where no


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deductions shall be allowed under this Section other than under Section (M) hereof, in computingtaxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1) there shall be allowed the following deductions from gross income:

(A) Expenses.

x x x

(L) Optional Standard Deduction. In lieu of the deductions allowed under the precedingSubsections, an individual subject to tax under Section 24, other than nonresident alien, may elect astandard deduction in an amount not exceeding forty percent (40%) of his gross sales or grossreceipts, as the case may be. In the case of a corporation subject to tax under Sections 27(A) and28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of itsgross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return hisintention to elect the optional standard deduction, he shall be considered as having availed himselfof the deductions allowed in the preceding Subsections. Such election when made in the return shallirrevocable for the taxable year for which the return is made. Provided, That an individual who isentitled to an claimed for the optional standard deduction shall not be required to submit with his tax

return such financial statements otherwise required under this Code: Provided, further, That exceptwhen the Commissioner otherwise permits the said individual shall keep such records pertaining tothis gross sales or gross receipts, or the said corporation shall keep such records pertaining to thisgross income as defined in Section 32 of this Code during the taxable year, as may be required bythe rules and regulations promulgated by the Secretary of Finance, upon recommendation of theCommissioner. (Sec. 34, NIRC of 1997 as amended by R.A. No. 9504)

(M) x x x.

25. What are the allowed itemized deductions from gross income ?

SUGGESTED ANSWER: Itemized deductions from gross income:

a. Ordinary and necessary trade, business or professional expenses.

b. The amount of interest paid or incurred within a taxable year on indebtedness inconnection with the taxpayers profession, trade or business.

Resident citizens, resident alien individuals and nonresident alien individuals who areengaged in trade and business, on their gross incomes other from compensation income are allowedto deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense.Nonresident citizens and foreign corporations on their gross incomes from within may also deductthis expense.

Nonresident alien individuals not engaged in trade or business in the Philippines are notallowed to deduct this expense.

c. Taxes paid or incurred within the taxable year in connection with the taxpayersprofession.

Resident citizens, resident alien individuals and nonresident alien individuals who areengaged in trade and business, on their gross incomes other from compensation income are allowedto deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense.


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Nonresident citizens and foreign corporations on their gross incomes from within may also deductthis expense.


d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses.

Resident citizens, resident alien individuals and nonresident alien individuals who areengaged in trade and business, on their gross incomes other from compensation income are allowedto deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense.Nonresident citizens and foreign corporations on their gross incomes from within may also deductthis expense.


e. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off

withi

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TAXATION Law Rev 1