Part 1 General Principles

Taxation 101

Part 1 General Principles

A. Taxation, defined

Taxation is the act of laying a tax, i.e., the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. It is merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens.

As a power, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.

Taxes enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of government and for all public needs.

B. Nature of the power of taxation1. Inherent prerogative of the sovereignty an incident or attribute of sovereignty, being essential to the existence of every government. It exists apart from constitutions and without being expressly conferred by the people. Hence, it can be exercised by the government even if the Constitution is entirely silent on the subject.

2. Legislative in character peculiarly and exclusively legislative and cannot be exercised by the executive or judicial branch of the government. Only Congress can impose taxes. Local legislative bodies can also impose taxes but subject to limitations provided by law.

3. Subject to constitutional and inherent limitations not absolute; subject to certain limitations or restrictions. The power to tax is said to be the strongest of all the powers of government. It is unlimited, plenary, comprehensive and supreme, in the absence of constitutional restrictions, the principal check on its abuse resting in the responsibility of members of Congress to their constituents.

C. Basis of taxation1. Necessity to serve the people

2. Necessity to protect the people

3. (correlate with the lifeblood doctrine)

D. Importance of taxes

Lifeblood doctrine the existence of government is a necessity; it cannot exist nor endure without the means to pay its expenses; and for those means, the government has the right to compel all its citizens and property within its limits to contribute in the form of taxes.E. Theory of taxation Benefits received or compensation theory Despite the natural reluctance to surrender part of the taxpayers hard-earned income to the government, every person who is able to must contribute his share in the running of the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values.

Symbiotic relationship1. Support by the taxpayers

2. Protection and benefits by the government

F. Purpose and Objectives of Taxation1. Primary: revenue raising

2. Secondary: non-revenue raisinga. Regulation e.g. protect local industries against unfair competition

Involves the power to destroy should be exercised with caution to minimize the injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg.

Does not involve the power to destroy as long as the SC sits the two limitations on the power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited power. It is the Courts role to see to it that the exercise of the power does not transgress these limitations.

b. Promotion of general welfare implementation of the police power

c. Reduction of social inequality progressive system of taxation prevents the undue concentration of wealth in the hands of a few individuals. Progressivity is keystoned on the principle that those who are able to pay shoulder the bigger portion of the tax burden.

d. Encourage economic growth by granting incentives and exemptionse. Protectionism to protect local industries from foreign competition.G. Scope of taxation

1. Unlimited

2. Comprehensive

3. Plenary

4. Supreme

H. Scope of the legislative taxing power

1. Determination of purpose(s) must be for a public purpose. The courts can inquire into whether the purpose is really public or private. Judicial action is limited only to a review where it involves: (a) the determination of the validity of the tax in relation to constitutional precepts or provisions; or (b) the determination in an appropriate case of the application of a tax law.

2. Determination of the subjects and objects of taxation (within its jurisdiction) refer to the coverage and the kind or nature of the tax. They may be persons, (natural/juridical); property (real/personal, tangible/intangible); businesses, transactions, rights, or privileges. Inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation so long as such exemption is reasonable and not arbitrary.

3. Determination of the amount and rate of tax As a general, the legislature may levy a tax of any amount or rate it sees fit. If the taxes are oppressive or unjust, the only remedy is the ballot box and the election of new representatives. Constitutionally, the rule of taxation shall be uniform and equitable.

4. Determination of the kind of tax to be collected

5. Determination of apportionment of the tax

6. Determination of the manner and mode of enforcement & collection

7. Determination of the situs of taxation In determining the situs of taxation, you have to consider the nature of the taxes. Example: Community tax - Residence of the taxpayer; Real property tax - Location of the property. We can only impose property tax on the properties of a person whose residence is in the Philippines.

I. Aspects of taxation

1. Levy or imposition (legislation) refers to the enactment of a law by Congress, imposing a tax

2. Administration (tax administration) administration and implementation of the tax law by the executive department through administrative agencies; assessment and collection.

Agencies involved:

a. Bureau of Internal Revenue

b. Bureau of Customs

c. Provincial, City and Municipal Assessors and Treasurers

J. Basic principles of a sound tax system

1. Fiscal adequacy means that the sources of revenue, that is, receipts therefrom, taken as whole, should be sufficient to meet the demands of public expenditure. It means also that the revenues should be elastic or capable of expanding or contracting annually in response to variations in public expenditures.

2. Theoretical justice or equality (ability-to-pay doctrine) means that the tax burden should be distributed in proportion to the taxpayers ability to pay. Similarly situated taxpayers should pay equal taxes, while those who have more should pay more. Taxation should be uniform as well as equitable.

3. Administrative feasibility means that tax laws should be capable of convenient, just and effective administration.

4. Economic efficiency

K. Taxation distinguished from police power and eminent domainTaxationEminent DomainPolice Power

As to purposeThe property (generally money) is taken for the support of the government.The property is taken for public use; it must be compensatedThe use of the property is regulated for the purpose of promoting the general welfare; it is not compensable.

As to compensationIt is assumed that the individual receives the equivalent of the tax in the form of protection and benefits he receives from the government.He receives the market value of the property taken from him.The person affected receives indirect benefits as may arise from the maintenance of a healthy economic standard of society.

As to persons affectedOperates upon

(1) A community; or

(2) Class of individuals.Operates on an individual as the owner of a particular property.Operates upon

(1) A community; or

(2)Class of individuals.

As to the authority which exercises the powerMay be exercised only by the government or its political subdivisions.May be:

(1) Exercised by the government or its political subdivisions;

(2) Granted to public service companies or public utilities.May be exercised only by the government or its political subdivisions.

As to the amount of impositionGenerally, there is no limit on the amount of tax that may be imposed.No amount imposed but rather the owner is paid the market value of property taken.Amount imposed should not be more than sufficient to cover the cost of the license and necessary expenses.

As to the relationship to the ConstitutionsIs subject to certain constitutional limitations.Inferior to the impairment prohibition; government cannot expropriate private property, which under a contract it had previously bound itself to purchase from the other contracting party.Relatively free from constitutional limitations.

EffectIncluding the prohibition against impairment of the obligation of contracts.There is a transfer of the right to property.Is superior to the impairment of contract provision.

L. Taxes, defined

1. Internal revenue taxes refers to taxes imposed by the legislature other than duties on imports and exports.

2. Local/Municipal taxes taxes imposed by municipal corporations or local government units.

3. Tariff and Customs duties the name given to taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country.

4. Taxes and tax incentives under special laws

M. Essential characteristics and attributes of taxation

1. Enforced contribution A tax is not a voluntary payment or donation and its imposition is in no way dependent upon the will or assent, open or implied, or the person taxed.

2. Generally payable in money unless qualified by law, taxes of tax is usually understood to be a pecuniary burden an exaction to be discharged alone in the form of money which must be in legal tender.

3. Proportionate in character ordinarily based on ability to pay some people pay very high taxes, others, very small amounts or none at all.

4. Levied on persons, property or the exercise of a right or privilege in each case, only a person pays the tax. The property is resorted to for the purpose of ascertaining the amount of tax that must be paid and of enforcing payment in case of default of the taxpayer. But not all who pay a tax shoulder the burden of the tax.

5. Levied by the state which has jurisdiction over the subject or object of taxation the object to be taxed must be subject to the jurisdiction of the taxing state for taxes to be enforced. Although a state can tax all persons subject to its jurisdiction, yet its taxing power necessarily stops at the state boundary lines. It cannot reach over into another jurisdiction to seize upon person or property for purposes of taxation.

6. Levied by the lawmaking body of the state under the Constitution, Congress can exercise through the enactment of tax statutes; and, local legislative bodies are now given direct authority to levy taxes, fees, and other charges subject to such guidelines and limitations as may be provided by law.

7. Levied for public purpose(s) imposed to provide income for the support of the government, the administration of the law, or the payment of public expenses, not for the exclusive benefit of private persons.

N. Classification of taxes

1. As to subject matter or object:

a. Personal, poll or capitation tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged. Taxes of a specified amount imposed upon each person performing a certain act or engaging in certain business or profession are not, however, poll taxes. (community tax)

b. Property excise tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable methods of apportionment. The obligation to pay the tax is absolute and unavoidable and is not based upon the voluntary action of the person assessed. (real estate tax)

2. As to who bears the burden:

a. Direct tax which is demanded from the person who also shoulders the burden of the tax; or tax for which the taxpayer is directly or primarily liable or which he cannot shift to another. (corporate or individual income taxes; community tax; estate tax; donors tax)

b. Indirect tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the ultimate purchaser or consumer; or tax who ultimately pays for it not as tax but as part of the purchase price. (VAT; percentage taxes; excise taxes on certain specific goods; customs duties)

3. As to the determination of amount:

a. Specific tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement; it requires no assessment (valuation) other than a listing or classification of the objects to be taxed. (taxes on distilled spirits, wines, and fermented liquors; cigars and cigarettes, and others)

b. Ad valorem (according to value) tax of a fixed proportion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. (real estate tax; excise taxes on automobiles, non-essential goods such as jewelry and perfumes, and others; customs duties [except cinematographic films])

4. As to purpose:

a. General, fiscal or revenue tax imposed for the general purposes of the government, i.e., to raise revenue for governmental needs. (income tax; VAT; and almost all taxes)

b. Special or regulatory tax imposed for a special purpose, i.e., to achieve some social or economic and irrespective of whether revenue is actually generated raised or not. (protective tariffs or custom duties on imported goods to enable similar products manufactured locally to compete with such imports in the domestic market. Tariff duties intended mainly as a source of revenue are relatively low so as not to discourage imports.)

5. As to the scope or authority imposing the tax:

a. National tax imposed by the national government. (national internal revenue taxes; customs duties; and national taxes imposed by special laws)

b. Municipal or Local tax imposed by municipal corporations or local government units. (real estate tax; professional tax)

6. As to graduation or rate:

a. Proportional (flat or uniform tax) tax based on a fixed percentage of the amount of the property, receipts, or other basis to be taxed. The rate of the tax remains constant for all levels of the tax base or any given income level. (real estate taxes; VAT; and other percentage taxes)

b. Progressive tax the rate of which increases as the tax base or bracket increases. (income tax; estate tax; donors tax)

c. Regressive tax the rate of which decreases as the tax base or bracket increases, i.e., the tax rate and the tax base move in opposite directions. We have no regressive taxes.

O. Taxes distinguished from other impositions

1. License or permit fee

TaxLicense Fee

PurposeImposed for revenue purposesImposed for regulatory purposes

BasisImposed under the power of taxationImposed under the police power of the State

AmountNo limit as to the amount of taxAmount of license fee that can be collected is limited to the cost of the license and the expenses of police surveillance and regulation

Time of paymentNormally paid after the start of businessNormally paid before the commencement of the business

Effect of non-paymentFailure to pay the tax does not make the business illegalFailure to pay a license fee makes the business illegal

SurrenderTaxes, being the lifeblood of the State, cannot be surrendered excepts for lawful considerationsLicense fee may with or without consideration

2. Toll fee

TaxToll

DefinitionEnforced proportional contributions from persons and propertyA sum of money for the use of something, a consideration which is paid for the use of a property which is of a public nature; e.g., road, bridge

BasisA demand of sovereigntyA demand of proprietorship

Amount No limit as to the amountAmount of toll depends upon the cost of construction or maintenance of the public improvement used

AuthorityMay imposed only by the governmentMay be imposed by the government or private individuals or entities

3. Compromise penalty

TaxPenalty

DefinitionEnforced proportional contributions from persons and propertySanction imposed as a punishment for violation of a law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty

PurposeIntended to raise revenueDesigned to regulate conduct

AuthorityMay be imposed only by the governmentMay be imposed by:

(a) Government; or

(b) Private individuals or entities

4. Special assessment-ordinanceTaxSpecial Assessment

Definition Enforced proportional contributions from persons and propertyAn enforced proportional contribution from owners of lands especially benefited by public improvements

BasisBased on necessityBased wholly on benefits

SubjectLevied on:

(a) Persons;

(b) Property; or

(c) Acts.Levied only on land

ScopeHas general applicationIt is exceptional both to the time and place

Person LiableIt is a personal liability of the taxpayerNot a personal liability of the person assessed; his liability is limited only to the land involved

5. Debt

TaxDebt

BasisBased on lawBased on contract or judgement

Effect of non-paymentTaxpayer may be imprisoned for his failure to pay the tax (except poll tax)No imprisonment for failure to pay a debt

Mode of paymentGenerally payable in moneyMay be payable in money, property or services

AssignabilityNot assignableCan be assigned

InterestDoes not draw interest unless delinquentDraws interest if stipulated or delayed

AuthorityImposed by public authorityCan be imposed by private individuals

PrescriptionPrescriptive periods for tax are determined under the NIRCCivil code governs the prescriptive period of debts

Are taxes subject of a set-off or compensation?Taxes for debts cannot be subject legal compensation or set-off, reason: the government and taxpayer are not mutually creditors and debtors of each other. Obligations in the nature of debts are due to the government in its corporate capacity, while taxes are due to the government in its sovereign capacity.Taxes for taxes general rule: not allowed to set-off excess taxes against other taxes payable to the government. The Commissioner of Internal Revenue, however, is authorized by law to grant refund or credit of taxes erroneously or illegally paid.6. Subsidy a pecuniary aid directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public; not a tax although a tax may be imposed to pay it.

7. Revenue refers to all the funds or income derived by the government, whether from tax or from whatever source and whatever manner; refers to the amount collected, tax refers to the amount imposed.

8. Internal revenue refers to taxes imposed by the legislature other than duties on imports and exports.

9. Customs duties taxes imposed on goods exported from or imported into a country. Taxes is broader in scope as it includes customs duties.

10. Tariff used interchangeably with customs duties in the Tariff and Customs Code. The term may be used in one of three senses:

a. As a book of rates drawn usually in alphabetical order containing the names of several kinds of merchandise with the corresponding duties to be paid for the same;

b. As the duties payable on goods imported or exported; or

c. As the system or principle of imposing duties on the importation (or exportation) of goods. P. Limitations on the power of taxation

1. Inherent limitations those which exist despite the absence of an express constitutional provision thereon.

a. Public purpose can only be used in aid of a public object, an object which is within the purpose for which government is established. It cannot be exercised in aid of enterprises strictly private, for the benefit of individuals, though in a remote or collateral way, the public may be benefited thereby. Tax proceeds must be used

1. for the support of the government; or

2. for any of the recognized objects of government; or

3. to promote the welfare of the community.

b. Non-delegation of the legislative power of tax Congress cannot delegate the power to the other branches of government. Exception:

1. Delegation to the President for practicality and expediency, our Constitution expressly allows a Congress to authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import or export quotas, tonnage and wharfage dues and other duties or imposts.

2. Delegation to LGUs under the Constitution, each LGU is now expressly given the power to create its own source of revenue and to levy taxes, subject to such limitation as may be provided by law.

3. Delegation to administrative agencies certain aspects of the taxing process that are not legislative may be vested in an administrative agency:

a. The power to value property for purposes of taxation pursuant to fixed rules;

b. The power to assess and collect the taxes; and

c. The power to perform any of the innumerable details of computation, appraisement, and adjustment, and the delegation of such details.

The powers which cannot be delegated include the determination of the subjects to be taxed, the purpose of the tax, the amount or rate of the tax, the manner, means, and agencies of collection, and the prescribing of the necessary rules with respect thereto.

c. Exemption from taxation of government entities reasons: to levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over itself; in order that the functions of government shall not be unduly impeded; to reduce the amount of money that has to be handled by the government in the course of its operations. The exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers. GICCs performing proprietary functions are generally subject to tax in the absence of tax exemption provisions in their charters or the special laws creating them.

d. International comity the property of a foreign state or government may not be taxed by another. This principle is based on any of the following grounds:

1. Sovereign equality among states under international law by virtue of which one state cannot exercise it sovereign powers over another.

2. Usage among states when one enters the territory of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the latter.

3. A foreign government may not be sued without its consent it is useless to assess a tax since anyway it cannot be collected.

e. Territorial jurisdiction A state may not tax property lying outside its border or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised. Persons, properties, businesses, activities, and other transactions within the territorial boundary of the State, which, and persons outside it, who, received benefits and protection from the government, are subject to tax.2. Constitutional limitations

Directa. Revenue bill must originate exclusively in the House but the Senate may propose with amendments (Art. 6, Sec. 24)b. Concurrence by a majority of all members of Congress for the passage of a law granting tax exemption No law granting any tax exemption shall be passed without the concurrence of a majority of all the member of the Congress. (Art. 6, Sec. 28[4]); majority of all the members of the Congress means at least one-half plus one of all the members thereof, voting separately.

c. Rule of uniformity and equity in taxation: (1) Uniformity: it implies that all taxable articles or properties of the same class shall be taxed at the same rate.

(2) Equity: uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under the Constitution must be equitable; based on the ability of the taxpayer to pay the tax.

d. Progressive system of taxation tax laws shall place emphasis on direct rather than indirect taxation, with ability to pay as the principal criterion. As income increases, so as the tax rate. e. Exemption of religious, charitable & educational entities, non-profit cemeteries, & churches from property taxation covers only property taxes and not other taxes; it is the use of the property that is exempt, not the ownership; property must be used actually, directly, and exclusively for religious, charitable, or educational purposes; exemption extends to facilities which are incidental to or necessary for the accomplishment of said purposes; self-executing provision of the Constitution (Art. 6, Sec. 28[31])f. Exemption of non-stock, non-profit EDUCATIONAL institutions from taxation covers income, property, and donors taxes, and customs duties; the revenue, assets, property or donations must be used actually, directly, and exclusively for educational purposes; lands, buildings, and improvements actually, directly, and exclusively used for educational purposes are exempt from property tax whether the educational institution is proprietary or non-profit; self-executing provision of the Constitution (Art. 14, Sec. 4[3,4])g. Non- impairment of the jurisdiction of the SC in tax cases Congress cannot take away from the SC the power given to it by the Constitution the power given to it by the Constitution as the final arbiter of tax cases (Art. 8, Sec. 2, Sec 5[2,b])Property TaxIncome TaxDonors TaxCustoms Duties

religious, charitable & educational entities, non-profit cemeteries, & churches (RCE NP-CC)

non-stock, non-profit EDUCATIONAL institutions (NS-NP-EI)

Power of judicial review Courts can determine public purpose, constitutionality or legality of a tax

Court cannot inquire into the wisdom of a taxing act/legislation

Indirecta. Due process of law No person shall be deprived of life, liberty, or property without due process of law x x x (Art. 3, Sec. 1); deprivation of life, liberty, or property is with due process if done with:

1. Substantive due process under the authority of a law that is valid; and

2. Procedural due process after compliance with fair and reasonable methods of procedure prescribed by law.

b. Equal protection of the laws x x x nor shall any person be denied the equal protection of the laws. (Art. 3, Sec. 1); all persons subject to legislation shall be treated alike under like circumstances and conditions both in the privileges conferred and liabilities imposed; a violation of the inherent limitations on taxation would contravene the constitutional injunction against deprivation of property without due process of law.

c. Non-impairment of the obligation of contracts the obligation of a contract is impaired when its terms or conditions are changed by law, executive orders and instructions from the President, administrative orders or circulars, or ordinances, or by a party without the consent of the other, thereby weakening the position or rights of the latter;

d. Non-infringement of religious freedom No law shall be made respecting the establishment of religion, or prohibiting the free exercise thereof. The free exercise of and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed x x x. (Art. 3, Sec. 5); the Constitution does not prohibit imposing a generally applicable tax on the sale of religious materials by a religious organization.

e. No appropriation for religious purposes No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister or other religious teacher or dignitary as such, except when such priest, preacher, minister, or dignitary, is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. (Art. 6, Sec. 29[2]); taxes can only be levied for public purposes.

f. Non-infringement of the freedom of the press - The press is not exempt from taxation; the sale of magazines or newspapers, maybe the subject of taxation; what is not allowed is to impose tax on the exercise of an activity which has a connection with freedom of the press (license fee); if we impose tax on persons before they can deliver or broadcast a particular news or information, that is the one which cannot be taxed.

TOLENTINO vs. SEC. OF FINANCEWhat is prohibited by the constitutional guarantee of free press are laws which single out the press or target a group belonging to the press for special treatment or which in any way discriminates against the press on the basis of the content of the publication.g. Power of the President to veto any particular item or items in a revenue or tariff bill The President shall have the power to veto any particular item or items in an appropriate, revenue or tariff bill, but the veto shall not affect the item or items to which he does not object. (Art. 6, Sec 27[2]); the items vetoed by the President shall not be given effect.

Q. Situs of taxation

1. Meaning of situs of taxation literally means place of taxation; basic rule: the state where the subject to be taxed has a situs may rightfully levy and collect the tax; the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question; a person may be subject to taxation in several taxing jurisdictions.

2. Situs of subjects of taxation depends upon various factors including the nature of the tax and the subject matter thereof (person, property, act, or activity), the possible protection and benefit that may accrue both to the government and the taxpayer, the residence or the citizenship of the taxpayer, and source of income.

a. Persons poll tax levied upon persons who are inhabitants or residents of the state

b. Real property subject to taxation in the state in which it is located whether the owner is a resident or not and is taxable only there

c. Tangible personal property taxable in the state where it has actual situs where is physically located although the owner resides in another jurisdiction; in the Philippines: Real property as well as personal property is subject to the law of the country where it is situated. (Art. 16, NCC); lex rei sitae

d. Intangible personal property for purposes of property taxation, general rule: at the domicile of the owner; in accordance with the principle mobilia sequuntur personam that the situs of personal property is the domicile of the owner. The principle ,however, is not controlling when it is inconsistent with express provisions of statute, or when justice does not demand that it be, as where the property has in fact a situs elsewhere. (exc: section 104, ra 8424)e. Income Income tax may properly be exacted form persons who are residents or citizens in the taxing jurisdiction and even from those who are neither residents nor citizens provided the income is derived from sources within the taxing state.

f. Business, occupation, and transaction general rule: the power to levy an excise tax depends upon the place where the business is done, or the occupation is engaged in, or the transaction took place.

g. Gratuitous transfer of property may be subject to taxation in the state where the transferor is (was) a citizen or resident, or where the property is located.

3. Multiplicity of situs

a. Effect due to the variance in the concept of domicile for tax purposes, and considering the multiple distinct relationships that may arise with respect to intangible personal property (e.g., debtor, creditor, trustee, etc.) and the use to which the property may have been devoted, all of which may receive the protection of the laws of jurisdiction other than the domicile of the owner thereto, the same income or intangible may be subject to taxation in several taxing jurisdictions.

b. Remedy to avoid this or at least to reduce the consequent burden, the taxing jurisdiction may:

1. provide for exemptions or allowance of deduction or tax credit for foreign taxes; or

2. enter into treaties with other states

R. Double taxation

1. Meaning of double taxation

a. Strict sense (direct duplicate taxation/direct double taxation) (a) taxing twice, (b) by the same taxing authority, (c) within the same jurisdiction or taxing district, (d) for the same purpose, (e) in the same year [or taxing period], (f) some of the property in the territory. Both taxes must be imposed on the same property or subject matter.

b. Broad sense (indirect duplicate taxation/indirect double taxation) taxation other than direct duplicate. It extends to all cases in which there is a burden of two or more pecuniary impositions.

2. Instances of double taxation:

a. A tax on a mortgage as personal property when the mortgaged property is also taxed at its full value as real estate;

b. A tax upon a corporation for its property and upon its shareholders for their shares;

c. A tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares;

d. A tax upon depositors in a bank for their deposits and a tax upon the bank for the property in which such deposits are invested;

e. An excise tax upon certain use of property and a property tax upon the same property; and

f. A tax upon the same property imposed by two different states.

3. Constitutionality of double taxation

a. General rule: not prohibited by the Constitution, hence, it may not be invoked as a defense against the validity of a tax law.

b. Exception: though not forbidden, it is not favored. Such taxation, it has been held, should, whenever possible, be avoided and prevented.

1. Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer to avoid injustice or unfairness.

2. Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee.S. Forms of escape from taxation

1. Six (6) basic forms (1) shifting, (2) capitalization, (3) transformation, (4) evasion, (5) avoidance, and (6) exemption.

2. Definition of terms

a. Shifting, in general the transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else.

1. Impact of taxation that point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government; also termed as statutory taxpayer the one on whom the tax is formally assessed.

2. Incidence of taxation that point on which the tax burden finally rests or settles down. It takes place when shifting has been effected from the statutory taxpayer to another or someone else who cannot pass the burden further. But there may be incidence without shifting, as in transformation.

3. Relations among impact, shifting and incidence the impact, the shifting, and the incidence of a tax corresponds respectively to the imposition, the transfer, and the settling or coming to rest, of the tax. The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result. Thus, the impact of sale tax is on the seller (manufacturer) who shifts the burden to the customer who finally bears the incidence of the tax.

Forward shifting takes place when the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer; from manufacturer/producer to wholesaler, then to the retailer and finally to the consumer.

Backward shifting effected when the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production.

Onward shifting occurs when the tax is shifted two or more time either forward or backward. Thus, a transfer form producer to consumer or from seller to purchaser involves one shift; from producer to wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the retailer, we have three shifts in all.

b. Capitalization the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay; (special form of backward shifting) occurs when the tax falls on an income-producing property (e.g., commercial building). The buyer naturally takes into account the taxes that he will be paying on the property when he becomes the owner thereof in determining whether the price is reasonable or not. The burden of the tax rests on the present owner (seller) if he reduces the price because of the tax; may be considered as a special form of backward shifting except that while the latter involves the throwing back of a whole series of taxes (e.g., real estate taxes which are payable every year) and takes place before any of them, with the exception of the first is paid.

c. Transformation the method of escape from taxation whereby the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. In such a case, the loss occasioned by the tax may be offset by the gains resulting from the economics of production; the taxpayer escapes, not by shifting but by transforming the tax into a gain through the medium of production.

d. Exemption the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay; an immunity or privilege; freedom from a financial charge or burden to which others are subjected. Double nexus rule;e. Tax avoidance (tax planning or tax minimization) the use by the taxpayer of legally permissible alternative tax rate or methods of assessing taxable property or income, in order to avoid or reduce tax liability. Here, the taxpayer uses tax saving device or means sanctioned or allowed by law, so no law is violated in any way. (tax minimization)f. Tax evasion (tax dodging) the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax; punishable by law, subjecting the taxpayer to civil and criminal liabilities.3. Distinction between tax evasion and tax avoidance

Tax EvasionTax Avoidance

The escape from taxation accomplished by breaking the letter of the tax law deliberate omission to report a taxable item for example.Covers escape accomplished by legal procedures or means which may be contrary to the intent of the sponsors of the tax law but nevertheless violate the letter of the law.

4. Elements of tax evasion

a. The end to be achieved the payment of less than that known by the taxpayer to be legally due, or in paying no tax when it is shown that a tax is due;

b. An accompanying state of mind which described as being evil, in bad faith, willful, or deliberate and not accidental; and

c. A course of action (or failure of action) which is unlawful.

5. Evidence to prove tax evasion

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. Thus:

a. The failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two (2) consecutive years has been held as an indication of his fraudulent intent to cheat the government of its due taxes. (Republic v. Gonzales, 13 SCRA 633, April 30, 1965)

b. The substantial under declaration of income in the income tax returns of the taxpayer for four (4) consecutive year coupled with his intentional overstatement of deductions justifies the finding of fraud. (Perez v. CTA, 103 Phil 1167 [1958])

T. Exemption from taxation

1. Exemption, defined

Exemption from taxation is defined as the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay; an immunity or privilege; freedom from a financial charge or burden to which others are subjected.

2. Nature of tax exemption

a. Personal privilege cannot be transferred or assigned by the person to whom it is granted without the consent of the legislature.

b. Generally revocable unless the exemption is founded on a contract which is protected form impairment; but the contract must contain the essential elements of other contracts, such as, for example, a valid cause or consideration.

c. Waiver on the part of the government the right to collect what is due to it. Hence, it exists only by virtue of an express grant and must be strictly construed.

d. Not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis. Where, however, no valid distinction exists, the exemption may be challenged as violative of the equal protection guarantee or the uniformity rule.3. Nature of the power to grant tax exemption

a. National government Like the inherent power to tax, the power to exempt from taxation is an attribute of sovereignty for the power to prescribe who or what property shall be taxed implies the power to prescribe who or what property shall not be taxed. It is inherent in the exercise of the power to tax that the sovereign state be free to select the subjects of taxation and to grant exemptions therefrom; unless restricted by the Constitution, the legislative power to exempt is as broad as its power to tax.

b. Local governments unlike a sovereign state, they are clothed with no inherent power to tax. Hence, they have also no inherent power to exempt from taxation. But the moment the power to impose particular tax is granted, they have also the power to grant exemption therefrom unless forbidden by some provision of the Constitution or law; the legislature may delegate its power to exempt from taxation to the same extent that it may itself exercise the power to exempt.

4. Rationale of tax exemption

a. Principle of public policy that can support a presumption that the public interest will be subserved by the exemption allowed; rests upon the theory that such exemption will benefit the body of the people, and not upon any idea of lessening the burden of the individual owners of property.

b. Its avowed purpose is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of exemption.

Thus, where the exemption serves the public, and not a private interest, it cannot be regarded as a gift or donation of public funds to, or in aid of, the individual, association, or corporation in whose favor the exemption is declared.5. Grounds for tax exemption

a. Contract where the public is represented by the government, and suppose to receive a full equivalent therefor. Ordinarily, the provisions of a contract of exemption from taxation are contained in the charter of the corporation to which the exemption is granted.

b. Public policy for example, to encourage new and necessary industries, or foster charitable and other benevolent institutions; or such as, at least makes the public at large interested in encouraging or favoring the class or interest in whose behalf the exemption is made. In this case, the government need not receive any consideration in return for the tax exemption.

c. Reciprocity may be created by treaty to lessen the rigors of international double or multiple taxation which occurs where there are many taxing jurisdictions, as in the taxation of income and intangible personal property.

6. Kinds of tax exemption

a. As to manner of creation

1. Express or affirmative exemption when certain persons, property, or transactions are, by express provision, exempted from all or certain taxes, either entirely or in part; may be made by provisions of the Constitution, statutes, treaties, ordinances, franchises, or contracts; and

2. Implied exemption or exemption by omission occurs when a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes. Every tax statute, in a very real sense, makes exemptions since all those not mentioned are deemed exempted. The omission may be either accidental or intentional.

Exemptions are not presumed, but when public property is involved, exemption is the rule, and taxation, the exception.

b. As to scope or extent

1. Total exemption only direct taxes. when certain persons, property, or transactions are exempted, expressly or impliedly, form all taxes; and

2. Partial exemption when certain persons, property, or transactions are exempted expressly or impliedly, from certain taxes, wither entirely or in part. , certain tax onlyc. As to object

1. Personal those granted directly in favor of such persons as are within the contemplation of the law granting the exemption; and

2. Impersonal those granted directly in favor of a certain class of property.

There can be no simultaneous exemptions under two laws, where one grants partial exemption while the other grants total exemption.

7. Examples of tax exemptions

a. As provided for in the Constitution

1. From property tax charitable institutions, churches and personages or convents appurtenant thereto, mosques, and non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes (Art, 6, Sec. 28[31]); and

2. From taxes and duties all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes, and, subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes. (Art.14, Sec. 4[3,4])

b. As provided for the tax code (see p. 77, De Leon)

1. From income tax (tax on net or gross income realized during a certain period)

2. From estate tax (tax on the privilege of a deceased person to transmit his property to his heirs or beneficiaries)

3. From donors tax (tax on the privilege of an owner to transfer his property without consideration)

c. As provided for under special laws

1. From income tax

2. From donors tax

3. From estate tax

4. From real property tax

8. Construction of tax exemption statutes

a. General rule: exemptions are not favored and construed strictly (strictissimi juris = by the most strict right or law) against the taxpayer; cannot be permitted to exist upon vague implication or inference. Taxation is the rule and exemption, the exception, and, therefore, he who claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms too plain to be mistaken and too categorical to be misinterpreted.

b. Exceptions:

1. when the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be resolved in favor of exemption; and

2. when the exemption is in favor of the government itself or its agencies, or of religious, charitable, and educational institutions because the general rule is that they are exempt from tax.

If there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction does not apply.

9. Tax amnesty, defined

A general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of tax evasion or violation of a revenue or tax law; partakes of an absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start a clean slate; not favored nor presumed in law; if granted by statute, terms of the amnesty must be construed strictly against the taxpayer and liberally in favor of the government.

10. Tax remission or tax condonation, defined

The word remit means to desist or refrain from exacting, inflicting or enforcing something as well as to restore what has already been taken. The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Such a set of taxes is a class by itself and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike. [Juan Luna Subd. v. Sarmiento, 91 Phil 370]; The condition of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when expressly provided in the law. [Surigao Consolidated Mining v. Commissioner of Internal Revenue, 9 SCRA 728]There is a tax condonation or remission when the State desists or refrains from exacting, inflicting or enforcing something as well as to reduce what has already been taken. The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when expressed in the law. U. Nature, construction, application of tax laws

1. Nature of internal revenue law

a. Not political in nature Internal revenue laws are not political in nature. They are deemed to be laws of the occupied territory and not of the occupying enemy. Thus, our tax laws continued in force during the Japanese occupation. (Hilado v. Collector, 100 Phil. 288); It is well known that our internal revenue laws are not political in nature and, as such, continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. Income tax returns that were filed during that period and income tax payments made were considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy.

b. Civil not penal in nature Tax laws are civil and not penal in nature, although there are penalties provided for their violation. The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof. (Republic v. Oasan, 99 Phil 934); The war profits tax is not subject to the prohibition on ex post facto laws as the latter applies only to criminal or penal matters. Tax laws are civil in nature.

2. Construction of tax laws

a. Rule when legislative intent is clear: Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent.They should not be construed as to permit the taxpayer easily to evade the payment of taxes.

b. Rule when there is doubt: No person or property is subject to taxation unless within the terms or plain import of a taxing statute. In every case of doubt, tax statutes are construed strictly against the government and liberally in favor of the taxpayer. Taxes,being burdens, are not to be presumed beyond what the statute expressly and clearly declares.

c. Where language is plain: the words employed are to be given their ordinary meaningd. Provisions granting tax exemptions: Such provisions are construed strictly against the taxpayer claiming tax exemption.

3. Application of tax laws

a. General rule: Tax laws are prospective in operation because the nature and amount to the tax could not be foreseen and understood by the taxpayer at the time the transactions which the law seeks to tax was completed

b. Exception: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent. But a tax law should not be given retroactive application when it would be harsh and oppressive.

4. Mandatory and directory provisions of tax laws

a. Directory provisions are those designed merely for the information or direction of office or to secure methodical and systematic modes of proceedings.

b. Mandatory provisions are those intended for the security of the citizens or which are designed to ensure equality of taxation or certainty as to the nature and amount of each persons tax.

The omission to follow mandatory provisions renders invalid the act or proceeding to which it relates while the omission to follow directory provisions does not involve such consequence. (Roxas v. Rafferty, 37 Phil 958)

5. Authority of the Secretary of Finance to promulgate rules and regulations

Sec. 244, NIRC the Sec. of Finance, upon recommendation of the Commissioner of Internal Revenue, shall promulgate all needed rules and regulations for the effective enforcement of the provisions of the Tax Code.

Revenue Regulations pronouncement by the DoF; define rules for the effective enforcement of the Tax Code and related statutes.

BIR rulings state the official position of the BIR to queries raised by a taxpayer or on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant laws and other issuances of the BIR, clarifying or interpreting them.

The power to recommend the promulgation of internal revenue rules and regulations by the Sec. of Finance is given only to the Commissioner. He is not allowed by law to delegate such power to any of his subordinates.

6. Nature of power to make regulations

Not the power to legislate, but only to be exercised for the purpose of implementing the law or putting it into effect; statutes being administered may not be altered or added to by the exercise of a power to make regulations therunder. Such regulations cannot increase or decrease the requirements of the law, nor embrace matters not covered or intended to be covered by the statute, otherwise, they are invalid for being in conflict with the law.

7. Necessity and function of regulations

Regulations are deemed necessary to the proper enforcement and execution of laws; they are intended to clarify or explain the law and carry into effect its general provisions by providing the details of administration and procedure; through rules and regulations, an administrative body, like the BIR, may implement broad policies laid down in a statute it is entrusted to enforce, by filling in the details which the legislature, may neither have the time nor expertise to provide.

8. Requisites for validity and effectivity of regulations

a. Requisites:

1. not contrary to law and the Constitution; and

2. published in the Official Gazette

b. Effectivity - Fifteen (15) days from the date of filing of three (3) certified copies in the UP Law Center, unless a different date is fixed by law, or specified in the rule in cases of eminent danger to public health, safety and welfare, the existence of which must be expressed in a statement accompanying the rule.

9. Force and effect of regulations

Regulations established and found to be in consonance with the general purposes and objects of the law have the force and effect of law. Its as if it has been written in the law itself. In case of conflict with the law, rules and regulations are null and void. They are invalidated only when the conflict is clear and unequivocal.

10. Administrative rulings and opinions

The power to interpret the provisions of the Tax Code and other tax laws is under the exclusive and original jurisdiction of the Commissioner of Internal Revenue subject to review by the Sec. of Finance. Rulings in the form of opinion on tax questions are also given by the Sec. of Justice who is the chief legal officer of the government. These rulings or opinions take on the character of substantive rules and are generally binding and effective if not otherwise contrary to law and the Constitution.

11. Administrative interpretation and the courts

Administrative interpretations by executive officers are entitled to great respect but not conclusive and will be ignored if judicially found to be erroneous.

12. Power of the Sec. of Finance to revoke the rulings of his predecessors

The Sec. of Finance has the power to revoke, repeal or abrogate the acts or previous rulings of his predecessors in office if the former becomes satisfied that a different construction should be given.

13. Non-retroactivity of repeal regulations or rulings, and its exceptions

No retroactivity if the repeal, revocation, modification or reversal of regulations or rulings is prejudicial to the taxpayer.

Exception:

a. Where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR;

b. Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; and

c. Where the taxpayer acted in bad faith.

14. Decisions of the Supreme Court and Court of Tax Appeals

Decisions of the SC applying and interpreting tax laws have the force and effect of laws. They are what the law means. Decisions of the CTA are the same as that of the SC but subject to review by latter by way of certiorari.V. Sources of tax laws

1. Constitution

2. Legislations/statutes (RA,PD, EO on taxation & tax ordinances)

3. Administrative rules and regulations, rulings or opinions of tax officials (Commissioner of Internal Revenue & Sec. of Justice)

4. Judicial decisions

5. Tax treaties or agreements have the force and effect as statutes; entered into for the avoidance of double taxation.