Tax Premidterm Compiled

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TAXATION I PRE-MIDTERM NOTES

June 15, 2010 Tuesday

What do you understand of the power of the government to impose taxes? This is simply Constitutional law.Russel answers. So youre saying that the existence of the Constitution is not to grant the power of taxationbecause it is already inherent in every sovereignty?

What is taxation?

- Taxation is the inherent power of every sovereign government exercised through the legislative body orthe Congress to impose or exact burdens, which we call as taxes, upon not only persons but uponsubjects or objects of taxation for the purpose of raising revenues in order to address the legitimateneeds of the government.

- It is a symbiotic relationship between the people and the government. The government cannot existwithout the people and the people cannot exist without the government protecting to help them.

The nature of the power of taxation is:

1. It is legislative in character.

- Who can actually exercise the power to impose tax?o Only Congress

- How about the President?o As a rule, no.

2. It is inherent.

- Even the Constitution does not grant the power to tax because the power to tax is already a right in itselfby the sovereign.

3. It is subject to inherent and constitutional limitations.

- So whenever you see the word tax or taxation in the Constitution, you will know that it is not a grant ofpower but simply it is a limitation to the unlimited, plenary and supreme power of the government toimpose taxation.

The inherent power to tax simply arose because there is a need of the government to raise revenues in order tosupport its activities.

- If you are reading the business section of the newspaper, it talks about budgets for the government to meet.The budget of the Commissioner of the BIR to raise.

So taxation actually plays a major part or a big part in running the entire government. Its basis is the basis ofnecessity the need of the government to protect the people and the need of the government to serve thepeople. And it is actually on what we call the famous doctrine of taxation the lifeblood doctrine.

So, what is the lifeblood doctrine? Ryan answers. So without taxes, the government cannot exist?

- 99% of the countries or nations impose taxes in order to survive. Government cannot exist withouttaxes. But I think there is one state which does not it mainly subsists in gambling activities. So that isan exception to the rule but most of us especially the Philippines would survive on the generation oftaxes in order to raise revenues and meet the needs of the government and its people.

- So whenever you have doubts, if there is a bar question asking if whether or not an object or a person or

an activity is taxable, you think of the lifeblood doctrine it should be taxable because the governmentneeds taxes. But the lifeblood doctrine is only the last recourse. You should not reach such point becauseyou should know the answer beforehand. Otherwise, you would just bet tackling legal ethics whereinyoure last recourse answer would be good moral character. The lifeblood doctrine answer is only tosupport your first answer, which should be the legal provision of the law.

Taxation as a theory, which we call as the symbiotic relationship between the government and its people. It isalso called the benefits-received theory or the compensation theory. These three theories are actually almostthe same.

What do you know of the symbiotic relationship theory between the government and its people? What is theneed of the government and what is the need of the people in so far as taxation is concerned?


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- When you say symbiotic relationship the one needs the other. In so far as taxation is concerned, whatthe government can offer to the people is protection and general welfare while what the people can offerto the government is the funds to operate the government. So taxes by the people to the government inexchange for the governments protection and regulation of the entire nation. So it is symbiotic in thesense that one needs the other. It is a benefits-received theory because it is for the benefit of both andcompensation for the activity (compensation theory).

- There are three theories actually. It is a compensation theory for the people. It is a compensation to thegovernment for the support to the people.

What is the main or primary objective of taxation?

- The primary purpose of the power of taxation is to raise revenues. Whenever there is a law for which thepurpose is raising revenue, then you have no doubt that it is in the exercise of the power of taxation.

But there are secondary purposes. What do you think are the secondary purposes of the power of taxation?

- To regulate businesseso Speaking of gambling, are winnings from gambling taxable? Winnings from lotto (PCSO) are

exempt. Let us say illegal gambling or games from cockfighting? Even illegal winnings or gainsfrom illegal gambling are as a rule taxable because subject to income tax because the definitionof income tax is a tax on any income from whatever source. Because of the phrase whateversource, it includes both legal and illegal games. But then again since it is illegal, I dont expectyou to declare it. If you dont declare it, you become not subject to tax by virtue of your owndecision.

o Are cigarettes subject to tax? Yes.

What kind of tax? Sin taxes or excise taxes. Excise taxes are those taxes which areimposed on items which are not essential. Cigarettes are not essential, in fact, dominantis the phrase, cigarette smoking is dangerous to your health. It is taxable not only toincome tax but as well as to excise tax. If you notice in a pack of cigarettes, there is adocumentary stamp but it is actually a proof that it has been paid of excise taxes. It isthe same as liquors.

Whenever you withdraw non-essential items or goods from the warehouse, it is expectedthat at that point, it will have to be paid of excise taxes or sin taxes. So that is proof thatit has been paid.

If it is imported from abroad then that is another kind of tax and what tax is that?Customs tariffs and duties.

If there is a business which is rendering non-essential services, such as movie theaters whenever you watch a movie, you expect that 30% of what you pay goes to amusementtaxes payable to the local government. So these are types of activities that are not really

necessary therefore, in order to regulate and at the same time raise revenues, thegovernment imposes larger taxes. So when you say that the power to tax is also used as the power to regulate, there

comes in the famous words that the power to tax also involves the power to destroy What do you mean by the power to tax involves the power to destroy? Is it not that

this phrase is in conflict with the provisions on the Constitution regarding due process oflaw and no taking of life, liberty and property?

The power to tax involves the power to destroy is not necessarily an invalidpremise. Therefore, it is not invalid to say that. The power to tax involves thepower to destroy if the purpose of taxation is the secondary purpose which is thepurpose for regulation such as trying to regulate an illegal activity, it has toimpose taxes but not really for the purpose of raising revenue but for thepurpose of regulating even to the extent of closing the business if it is illegal. Butit (the closing or destruction of the business or taking of the property through theimposition of taxes) becomes only valid if there is compliance with substantiveand procedural requirements as required by the Constitution. That is why wesaid earlier that one of the nature of taxation is that it must always follow theConstitutional and inherent limitations constitutional limitations as provided bythe Constitution and inherent limitations as provided by your consciencebecause the power to tax is inherent.

What are the other secondary purposes?

- To promote the general welfare, public health, public safety, public morals, and order in the community.o This power of taxation is exercised hand-in-hand with the police power of the state.

- Another secondary purpose is to reduce social inequality. Reduction of social inequality means that weimpose taxes with escalating rates to those who are earning income more than the others. You notice aprovision in the Constitution that Congress shall evolve a progressive system of taxation. This simply


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means that we, as much as possible, should try to enact a law which exacts taxes on those who have theability to pay.

o Example: If you earn P5, youll be taxed of 5% income tax. If you earn 1M, you belong to thatcategory of income earners subject to an income tax of 32%. So it is based on your ability to pay.

o If you purchase an egg, raw meat that has not been processed, mango (not the dried mango)from the grocery store, it is not subject to VAT. You notice the receipt you received from thegrocery store, at the bottom, there is a breakdown of what is vatable and what is not vatable.

o But if youre sosyal and you buy egg from the restaurant, even if it is just hard-boiled egg, it isimposed a VAT. So it is based on the ability to pay principle. Why? Because if you cant afford,then why would you buy egg from the restaurant.

o

But we cannot achieve a perfect system of taxation. Even the Constitution does not require butonly encourages progressive system of taxation.- Finally, another secondary purpose is to encourage economic growth by imposing tax or granting fiscal

incentives or exceptions. Notice that to encourage investors from abroad, we give them income taxholiday or exemption for the first four or six years of operation. Now, are we really giving an exemptionin order to raise revenue? No, because we are actually giving up our right to collect taxes but itencourages economic growth in the long run.

The scope of taxation is unlimited in scope. Even the amount and rate of taxes can be determined alone byCongress. But Congress is voted as representatives of the people so it actually comes from the people indirectly.

Taxation is comprehensive, plenary and supreme. So what makes it comprehensive, unlimited, plenary andsupreme? It is because when the power of taxation is exercised by both the House and the Senate, they candetermine who the subjects and objects of taxation are so long as these objects and subjects are within itsjurisdiction.

So are you class subject to US federal taxes? No because you are not within the jurisdiction of the US. But areyou subject to Philippine tax, even if you are not yet income earners? Yes example is VAT (such as when youpurchase gasoline).

So you will notice that the power of Congress to enact tax law is unlimited because whatever they can think of,they can actually enact a law and impose tax on it, which may be a person, a property or an activity.

Taxes are imposed not only in persons or properties but also activities. So more or less everything is covered.Congress has a leeway to enact the law imposing tax on such activity so long as it is within its jurisdiction.

Scope of the Legislative Taxing Power:

1. Determination of Purposes

- Who determines the purpose of taxation? Is it Congress or the President?o Congress then approved by the President.o Every tax law must have for its purpose a public purpose. The absence of a public purpose

makes the law invalid and unconstitutional.o Who determines whether the purpose is public or not?

It belongs to Congress.o So whenever, a law is approved by Congress and the President and it comes out as a valid law

and there is a doubt as to its constitutionality, to whom do you go to? Judiciary

o So remember the roles of the three branches of the government.o Again, the scope of the Congress taxing power is to determine the purpose. Dont give it to the

President. It is not even for the SC to give. What the SC does is actually to know whether the lawis constitutional or not according to the substantive and procedural requirements.

o Determination of the public purpose is the wisdom alone of Congress. It belongs to Congress.

2. Determination of the subject and objects of taxation (within its jurisdiction)

- This is the determination of who the person will be, what property and what activity. It still belongs toCongress.

3. Determination of the amount and rate of tax to be collected

- You may notice that in the tax code and other tax laws, some of the taxes imposed are given in rates, ofcourse in digits, some in figures fixed amount. In more cases than not, we usually have percentages soit is easier to memorize than the fixed rates.


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o Example: Youre income tax ranges from 5-32%. What I can think of as a fixed amount of taxunder the Tax Code is for common carriers tax, which includes shipping vessels, airplanes andjeepneys and taxis.

o So if you look at the Tax Code, jeepneys have different common carriers tax. It is fixed inamount depending on the capacity of the vehicle. But as far as the shipping vessel is concernedand those aircrafts, it is not subject to a fixed amount of tax, but rather it is subject to VAT,which is equivalent to common carriers tax. So if you travel by boat or by plane, you pay 12%VAT. But whenever you travel by land, you only pay nothing in tax. You dont pay taxes intraveling by land, but it is the operator of those vehicles who pay for common carriers tax.

o Why dont jeepney drivers impose tax? Because it is difficult to monitor or regulate jeepney

drivers because for VAT purposes, you have to have a receipt. So on their part, it is so difficult toissue a receipt.

4. Determination of the kind of tax to be collected

- At any point in this lifetime that you have, it may happen that Congress will always either increase theexisting tax rate or enact a new law imposing a new tax.

- Whenever the government cannot reach its budget to support all branches and departments of thegovernment, their next recourse if they dont go for borrowings and subsidies, they increase tax rates.

5. Determination of apportionment of the tax

- This also belong to Congress

6. Determination of the situs of taxation

- The situs of taxation also belongs to Congress.

7. Determination of the manner and mode of enforcement and collection

- The other scope of the taxing power is left to the executive branch of the government, which is theenforcement the means, manner and method of how to collect the tax.

There are two aspects of taxation:

1. Levy (impose the tax)

- So, the power of Congress is simply to enact a law it is the levying or the imposition of the tax law. Butit stops there. They cannot go forward to the point of collecting the tax themselves because theexistence of Congress is simply to enact a law.

2. Administration of the tax

- Taxation would not be successful without the administration aspect.- It is upon the executive branch on how to collect the taxes.- The role of the SC as one of the three branches of the government is to know whether a law is

constitutional or not.- So the power of taxation is not solely in the exercise of Congress but other 2 branches play their own

roles.- To which department of the government does the BIR belong to?

o Executive branch under the Department of Financeo The President has for his alter-egos the different secretaries of the departments.o Under the department of Finance is the BIR and Bureau of Customs (BOC)o Local treasuries belong to political subdivision units. Theyre not part of the Department of

Finance.- Who has more authority? Is it the Secretary of Finance or the Commissioner of the BIR?

o Secretary of Finance is the boss of the Commissioner of BIR.o Under the Sec. of Finance is the Commissioners of both BIR and BOC.

How do we develop a sound tax system?

1. It must be equitable or in technical terms, there must be theoretical justice or equality.

- What it simply says is that taxation must be based on the ability of the people to pay the taxes vis--vistheir income.

- You cannot actually impose taxes inequitably, oppressively. It is tantamount to confiscation of property.

2. To have your tax laws administratively feasible. (administrative feasibility)


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- It is not enough to enact a tax law. The tax law must provide for means and methods which makes iteffective and efficient for management. Meaning, the collection of taxes must be made easier.

3. Fiscal adequacy

- Your collection of taxes must be reasonable in terms of how much you will spend for the entire nation.- Tax collection and tax imposition must be so flexible as to expand and contract according to the needs

of the government.- Example:

o Can we say that our tax system is sound if the budget or the needed expense is 100B but thecollection of tax is 60B, short of 40B?

No, since fiscal adequacy is not satisfied.o How about if the needs of the government is only 60B and the tax collected is 100B?

No, since theoretical justice is not satisfied.- More or less, if there is a big disparity between the needs of the government and the services that it is

giving to the people, meaning, the expenses that it has incurred to provide the basic needs of thepeople. Then, we do not have a sound tax system because in that case, if the collection is 100B and theservices delivered is only 60B, then the government is underdelivering the basic needs to the people. Itis not a sound tax system.

- If we say that we dont have a sound tax system because it is not fiscally adequate, does that make allthe tax laws invalid?

o No. If it is not fiscally adequate because both the budget and the collection do not meet,

although we can say that it is not a sound tax system, but it doesnt make the existing tax lawsinvalid. Having passed both the substantive and procedural requirements, it is still a valid taxlaw. It is up to the government on how to make the tax system sound. All that the governmenthas to do is to create balance between the collection and expenses.

- If there is difficulty in collecting the taxes, the tax system becomes unsound (violation of administrativefeasibility). Does that make the law invalid?

o No because tax law is made by Congress and the means and methods of collecting taxes isformulated by the executive. So if there is a difficulty in the collection of taxes, it is not the faultof Congress. If you notice tax laws, at the end of the law, you will find there rules and regulationswill be drafted by the Secretary of Finance. So if there is difficulty in collecting, it is the fault ofthe executive branch of the government. It does not make the tax law as invalid. All it has to dois to loosen-up and formulate new rules and regulations or you can e-pay taxes (e-facility paying taxes through the internet or online) or enhance the collection process or draft another

manner, means and methods of collecting tax.

- If the ability-to-pay principle is not followed, meaning (violation of theoretical justice or equality), the taxsystem is not progressive, thus, not developing a sound tax system, does that make the tax lawsexisting at that point invalid?

o If the progressive system of taxation is reversed, it makes the tax law inequitable. Thus, it resultto invalidity or unconstitutionality of the law because it would result to confiscation of property inthe form of taxes against the people.

Distinguish taxation from police power and eminent domain:

Taxation Eminent Domain Police Power

Authority whichexercises the

power

May be exercisedonly by the

government or itspolitical subdivisions(LGUs)

May be:1)Exercised by the

government or itspolitical subdivisions

2)Granted to publicservice companies orpublic utilities

May be exercisedonly by the

government or itspolitical subdivisions(LGUs)

Purpose The property(generally in the formof money) is taken forthe support of thegovernment

The property istaken for publicuse; it must becompensated

The use of theproperty isregulated for thepurpose of promotingthe general welfare; itis not compensable

Persons affected Operates upon a: Operates on an Operates upon a:


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1)Community; or

2)Class of individuals

individual as theowner of a particularproperty

1)Community; or

2)Class of individualsEffects The money

contributed becomespart of the publicfunds

There is a transfer ofthe right to property

There is no transfer oftitle

At most, there isrestraint on theinjurious use of property

Benefits receivedor compensation

It is assumed that theindividual receivesthe equivalent of thetax in the form ofprotection andbenefits he receivesfrom the government

He receives themarket value of theproperty taken fromhim

The person affectedreceives indirectbenefits as may arisefrom themaintenance of ahealthy economicstandard of society

Amount of imposition

Generally, there is nolimit on the amountof tax that may beimposed

No amount imposedbut rather the owneris paid the marketvalue of propertytaken

Amount imposedshould not be morethan sufficient tocover the cost of thelicense and necessaryexpenses

Relationship toConstitution

Is subject to certainconstitutional andinherent limitations

Including theprohibition againstimpairment of theobligation of contracts

Is subject to certainconstitutionallimitations such asdue-process clauseand justcompensation

Inferior to theimpairmentprohibition;government cannotexpropriate privateproperty, which undera contract it had

previously bounditself to purchasefrom the othercontracting party

Relatively free fromconstitutionallimitations

Is superior to theimpairment of contract provision

- Can taxes be the subject of compensation or set-off or can the taxpayer refuse to pay taxes because ithas an existing claim against the government?

o No, because you cannot subject the government to uncertainty in the collection of taxes.Notwithstanding that you have an existing claim for refunds of taxes against the government,you cannot offer to set-off or exchange your payables with your receivables from thegovernment because the lifeblood of the government, the existence of the government and itssurvival rests on the collection of taxes.

- Note: Sometimes, the power of taxation is used as the power to destroy. In that case, you can close up abusiness so long as your purpose is not for revenue-raising but only for regulation.

- Note: Even if we take out the Constitution, does that make the power of taxation limitless? No becausethere are also inherent limitations which attach to the power of taxation. These inherent limitationsalways follow the power to tax. So whether or not the Constitution is there, still the power to tax islimited in some sense.

- GR: Taxes are payable in money.o Reason: Lifeblood doctrine Do you think the government can actually work and provide you

with basic services if it accepts property as payment? They have to liquidate it and sell it and ifthere is no takers or buyers, what will the government do? Thus, their operations will beparalyzed because taxes are like blood which runs through the veins of the government.

- So what are taxes?o Taxes are enforced proportionate contributions, in money, levied on persons, property or

activities of the persons and levied by the State which has jurisdiction over the subject or object


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of taxation and which is actually exercised by the lawmaking body of the government for thepurpose of raising revenues to meet the needs of the government.

- If you dissect the definition of taxes, you will arrive at the characteristics or elements or attributes oftaxes:

o It is an enforced contribution

If you have been paying taxes and you seek no concrete benefit from the governmentsuch as that you dont use the roads, you have been living in the mountains, can yourefuse to pay taxes considering that it is a symbiotic relationship?

You cannot refuse to pay taxes simply because you do not get direct benefit

from the government. Otherwise stated, you cannot solely be the person to paytaxes simply because you get more benefits than the rest. Purpose of taxation ispublic which is for the common good and general welfare. So long as itaddresses the common good of the people then taxation is proper.

o It is proportionate

This is based on the principle of ability-to-pay principle, which is actually the principle inequitable payment of taxes following the progressive system of taxation the higher theability to pay taxes, the more is expected of you by the government

o Taxes are generally payable in money

Reason: It is only money that is the standard of measure. Everything else will rise andfall but not money.

Exception: When taxpayer becomes delinquent in paying taxes (distraining or levying

properties). A lien is created on every property of a taxpayer once he fails to

settle his tax liability. But as much as possible, government is not interested intaking properties because its hard to dispose of them. But up to the pointwherein you cannot settle because you are not liquid, meaning no cash, it iswhen the government will sell your properties in a public auction.

When you pay through tax credit certificates, which are certificates issued by thegovernment itself. These are tax certificates issued by the BIR.

o Example: If you overpaid your taxes, you ask for a refund from thegovernment but the government will only give you a certificate which iscalled the tax credit certificate or TCC showing that you have overpaidtaxes.

o Why does the government not pay you in cash? Again, lifeblood doctrine.o So instead of giving back the money to you if the government realizes

that indeed you have overpaid the taxes then the government will simplygive you certificates and you use that as a taxpayer to pay out yourother tax liabilities to that same agency of the government.

o So if you have the certificate, next year you can use that certificate topay out your other taxes.

o So it is only this instance wherein government will not be receiving cashas tax payment

o It is levied on persons, properties or activities (these are subjects of taxation)

Activities: The privilege to transmit property upon death is subject to estate tax but the

privilege to receive property as an heir is no longer subject to inheritance tax. In the same way that donors are subject to donors tax for giving something but

donees for receiving are no longer subject to donees tax. Property

Real Property tax tax imposed against the property itself and not against aperson

Person Income tax is more of like a tax against an activity in earning or generating anincome because if you dont engage in an activity, you arent subject to incometax.

Community tax (cedula) is an example wherein tax is directed against a personhimself with or without an exercise of an activity.

o Levied by the state having jurisdiction over the subject matter or object of taxation

It simply means to say that the power to tax, although supreme and unlimited in naturesupposedly, it only extends until the boundary of the country. Somewhat physical innature that when you go abroad, or you are an immigrant abroad and not living in thePhilippines physically, then your income abroad is not subject to Philippine income tax.

So nurses abroad earning thousands of dollars are not expected to remit taxes to thePhilippine government.


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But if you are only a tourist abroad and still a resident in the Philippines, then you aresubject to Philippine income tax.

o It is exercised by the Congress or lawmaking body of the stateo Levied for a public purposes

- Taxes are divided into 4 categories:o Internal revenue taxes are those taxes imposed by the NIRC

Example: income tax, donors tax, estate tax, VAT, percentage taxes, common carrierstax, gross receipts tax, amusement taxes, documentary stamp tax, excise tax

So what is within the scope of the BIR? It is the enforcement of the taxes under the NIRC.

In short, the tax code.o Local/Municipal taxes taxes found in the LGC, which comes in 2 types:

Local taxes local transfer tax, amusement tax, franchise tax Real property taxes

o Tariffs and Customs Duties those that are found in the Tariffs and Customs Code

Examples: anti-dumping duties, retaliatory dutieso Taxes and tax incentives under special laws taxed found in different special laws, such as

special laws for sugar industry and coconut industry

June 22, 2010 Recap of Last Meetings Discussion starting of with is the definition of Taxation: It is an enforced contribution

to the government. We said that 1 of the nature of the taxation power is that it is legislative in nature. In relation to fiscal

adequacy as one of the basic principles to make the tax system sound, just in case the basic needs and

expenses is not met by the tax collector under the present taxing system, is it allowed that a tax or a fee willbe collected without a law so as to meet the needs of the government?

o Without a law imposing a tax, no tax can be collected. Notwithstanding that there is a deficit in thebudget or collection.

o When taxation or the power of taxation is inherent in every sovereignty it simply means to say thatevery government or every sovereign country can actually tax its people but through the legislativebody. That there is no need for the Constitution or any law to grant the power to tax because it cantax but in order for it to be effective, collecting from the people taxes, there must be a law imposedfor the government to collect taxes.

o The constitution is just there to limit the power of taxation which is otherwise inherent. At any pointin time, the government through the legislative body can enact a law imposing the tax. The lawimposing the tax will be enforced or executed by the executive branch of the government collectingthe tax from the people. If we make a short cut, for the government collecting directly from thepeople without the law, it is not possible.

o Cannot use the life blood doctrine cannot be used because this situation is the opposite.o It will result in chaos and oppression. And it will be arbitrary for the government, exercised through

government officials that they collect the tax without any guidelines or without any law.o Collection of taxes without any law will violate the basic provision of the Constitution- _________. That

when the nature of the power of taxation is legislative in character it simply means to say thattaxation is statutory in nature. Without a statute or law, no tax can be imposed or collected. Even ifthis is inherent, the power to tax, no collection can be made if no law is made by Congress.

We discussed what taxation is all about, it is inherent in every society, it is legislative in character and it islimited by 2 types: inherent and constitutional limitations.

We also discussed what is the basis why there is an inherent power to tax in every government becausethere is that need of the government to protect its people and serve its people. Having these needs of thegovernment, this can only be addressed by the people supporting the government through the payment oftaxes which is a symbiotic relationship between the government and its people. Taxes will be in monetaryform while the other one is through serving and protecting its people.

In life blood doctrine, we say the government has a need for it to survive will need taxes coming from itspeople.

o And we illustrated the life blood doctrine in an example, there can be no set off. Taxes can never bethe subject of any set off. No tax payer can offer can offer to set off his claimable against thegovernment against his liability for taxes. For one, the government and its people are not creditorsand debtors of each other. In civil law, compensation or set off can only happen if there is thatcreditor-debtor relationship but taxes are not debts of the people they are civil obligations that areactually enforced upon the people.

If the tax payer will have a liability for taxes, the tax payer will have to settle that obligationand it cannot be off-set against any right of the taxpayer, whether it be a right to berefunded of any tax, etc.

Only exception to the rule that there is no set off or compensation between taxes isthe case of Domingo v. Carlicos:


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o There was a set off of the obligation of the tax payer and his claimable fromthe government. But this will only hold true if the receivable from thegovernment is already LIQUIDATED and DEMANDABLE.

o A claim for refund from the government is not as yet liquidated, then it is notdemandable. It will have to be settled by the government and look into itsvalidity. So there can be no set off as a GENERAL RULE.

o Another illustration of the life blood doctrine, is when you cant enjoin the collection of taxes by filinga case in court. Say for example the government filed a civil case for collection of your unpaid taxesfor prior years, you cannot file an injunction against the government or BIR against the case filed.

You will see in last part of the Tax Code that there can be no injunction filed against a

collection made by the government for taxes. This is the GENERAL RULE. Exception: there is only 1 to be discussed in remedies.

Whenever the government undertakes a move to collect your taxes in any other type ofremedy not only the tax collection, administrative case, etc., whatever the remedyundertaken by the government, you cannot file an injunction case as a general rule.

We also discussed last meeting the purposes of taxation, the scope of the power of the legislativedepartment in which starts in determining the purpose of the tax law down to the kind, amount, nature oftax, etc.

We also discussed the 2 aspects of taxation: the administration aspect and preceded by the levy aspectwhich is undertaken by the legislative branch.

The 3 basic principles of the sound tax system and distinguished taxation from police power and eminentdomain, the 2 other powers of the government.

What is TAX? What are taxes? TAXES are enforced proportional contributions generally payable in moneyimpose or levied against persons, properties or objects of taxation within the taxing jurisdiction levied

through the legislative law making body of the state for purposes of raising revenues to meet the legitimateobjectives and public needs of the government and the people.o It is an enforced contribution. It can never be voluntary as nobody will voluntarily pay taxes.o It is proportionate in contributions because it proportions the burden of taxes to those who are able

to pay the taxes. It is more based on the ability to pay principle.o It is generally payable in money. However, TAX CREDIT CERTIFICATES (TCT) which are the

certificates issued either by the Bureau of Internal Revenue, Department of Finance or the Bureau ofCustoms, they are actually indications that you have a receivable or overpaid taxes to thegovernment and it symbolizes that you have advance payment to the government and you can usethis certificate to pay out your other tax liabilities. Thus, you are not paying in cash but throughanother item.

If TCT is issued by the BIR, it can only be used to pay taxes due to the BIR. So if its a TCT forincome tax that you overpaid, you can use that certificate to pay other taxes found in theIRC like documentary stamp taxes, donors tax. But you cannot use this TCT to pay off yourreal property tax before the LGU or to pay customs duties or VAT before the BOC. It mustonly be against a tax of the issuing authority.

o It is levied against persons, properties or objects of taxation so long as it is within the taxingjurisdiction.

o It is the levied by the law making body of the state for public purposes.

Generally, for tax to be valid, it must have the following major requirements:o 1. The tax should be for public purpose.

In the Constitution, any tax levied by the government should not be appropriated for anyprivate purpose but only for public purpose.

o 2. Taxation should be uniform in nature. When we say uniform in nature, then it must be applied toall persons within the same class similarly situated.

To be expounded when we reach equal protection clause and uniformity and equity intaxation.

o 3. It must be within the jurisdiction of the taxing authority to be expounded when we reach citus oftaxation.

o 4. There must be due process in the assessment and collection of taxes. So fair and reasonablemethods of collection.

o 5. With porper observance of both inherent and constitutional limitations to the Power of Taxation(POT).

How are taxes classified? What are the classification of taxes?o The subject matter or object against which it is taxed is directed can be classified into 3:

Personal Tax: tax imposed on a person who is a resident of a particular place without regardto his citizenship. Maybe an alien national or without regard to the type of business orprofession he is engaged in. He may be a minimum wage earner or a president of a multi-national corporation, it does not matter. Personal tax is a tax directed against a person whois a resident of a particular place.

When we say resident in a particular place, it means residence in the Philippines.


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Why cant we impose a personal tax against a residence of the US? Because he isoutside our jurisdiction.

Property Tax: it is assessed on properties that lie within the jurisdiction of the taxingauthority.

Example: Real property tax. Who is liable to pay the tax? Example: This class formed a corporation, which can be incorporated by a minimum

of 5 individuals. The corporation owns various real properties.o Since corporations have different personalities or distinct from the persons

composing the corporation or owning the corporation, the liability of the realproperty tax would actually call on the corporation itself. Stockholders would

not be liable. Thats the reason why you only 3 types of businesses or

organizations. It can be corporation, partnership, or soleproprietorship.

For purposes of protection of individual assets, you go for corporationbecause you create a separate and distinct personality and it cannotgo after your personal assets.

Now if the corporation has real properties, it is the corporation who pays for the realproperty tax (RPT).

The only instance wherein the stockholders will be liable to pay the RPT of thecorporation is when the corporation dissolves and properties are distributed to thetax holders without the tax having been paid because the tax follows the propertybeing a property tax. Property tax attaches to the property itself whoever the owneris.

Excise Tax: it is a kind of tax which does not fall within the meaning of personal or propertytax. It is a tax based, not on the persons residence or the persons property, but on theperformance of an act or enjoyment of an activity or privilege and the exercise or engagingof a particular profession. All others which do not fall under the definition of a personal orproperty tax will have to be called an excise tax.

Example: Income tax an excise tax? Estate tax an excise tax?o Second classification, under who is burdened by the tax: Direct and Indirect taxes.

What do you call a person who is liable for tax as provided under a law? STATUTORYTAX PAYER (STP).

o Is the STP always burdened by the tax imposed by the law? Not always. Sowe discuss, direct and indirect taxes.

Direct: the burden falls directly on the tax payer who is mentioned in the law. We call everytaxpayer or every person mentioned in the law as the one liable to remit the tax to thegovernment as a STP. He is a taxpayer as provided by the law. He is the one required to

remit. Is remittance to the government requirement equivalent to being burdened by the

tax itself? Not necessarily. In some cases where the STP is required to remit the taxthat he himself is burdened by it, by which he can no longer pass the tax to anyone.We call the tax as the direct tax.

o Example: Income tax for your lawyer. And you received for your professionas a lawyer, you will be liable, as a rule by income tax.

Can you shift income tax to your clients? No because income tax isonly computed at the end of the year when you realize your income.If your expenses is lower than your receipts from your clients. Sinceyou can no longer shift the burden to anyone ellse, you are liable topay the direct tax. Because you are burdened to pay the tax whichyou are required to remit to the government.

Indirect: the STP is found in the law can shift on or pass the burden to another person mayhe be a direct consumer or any other entity in the production chain.

Example: VAT. Under the law every person who sells, barters, exchanges goods,services, or properties are liable 12% VAT on the gross selling price or gross receipts.

o If you are a seller of a property, you will be liable to pay the 12% VAT. Youare a STP under the law. But the VAT of 12% is added on to the selling priceof the property which the consumer pays. So the consumer actually pays the12% vat to you for which you only conduit and you remit the 12% vat to thegovernment.

o So VAT is an indirect tax because the burden is shifted by the STP down tothe next person, may he be an individual or an entity.

o It may be consumer like us or an entity.o Example: if y have a mango and you sell it to someone who will convert it to

a dried mango chip. After which it is sold to a wholesaler, to a retailer sold toa hotel. Every chain, in every transfer of property or goods, there will be a


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12% added on. Everyone becomes burdened by tax. The last person,someone ate it in the hotel. That hotel also becomes a STP required to remitit to the government. But the burden was actually shifted to the one who ateit.

o That is why it is called VAT because it is a tax on every value added as it isdistributed in a production chain or chain of distribution, its tax is added up.

o Classification as how the amount of tax is determined:

Specific: tax imposed by the head or number, or by some standard of weight ormeasurement.

Excise taxes under the tax code imposed on non essential items, not totally though,

that they are more of specific taxes. Ad valorem taxes Ad Valorem: are imposed on the value of the item or goods.

Example: real property tax. Estate tax. Donors tax. They are always imposed on howmuch is the value of the property that is transferred or so.

o As to purpose:

Revenue raising, which is the general purpose of taxation. Regulatory purpose: imposed for a special purpose.

o As to the scope

National: by national government Local or Municipal: by municipal corporations or local governments.

o As to graduation or rate of taxation:

Progressive: taxes which escalate or increases as your income increase based on ability topay principle. The tax rate increase as the income increases.

This is more reasonable because you are imposing the buden of tax to those who are

able to pay them. Regressive: the tax rate decreases as the income increases.

No regressive taxes in the Philippines because these are discouraged. Otherwise itwill be unfair to those whose income is not so much.

What is only argued as a regressive tax is the VAT. But it is a proportional tax.

Proportional: it is neither regressive nor progressive. In between regressive and progressivetaxes, is proportional taxes which is a fixed percentage of tax based on the amount of theproperty subject or object to be taxed. What is fixed is the tax rate. What is increasing ordecreasing is the value of the property, object, subject or income.

Progressive: tax goes up, income goes up. Regressive: tax goes up, income goesdown. Proportional: stays as a fixed percentage whether the income is going up orincome is going down.

Example: real property tax. Because RPT in cities and municipalities within the MetroManila area is imposed at 2% of the assessed value of the property. Whether the

assessed value is 1M or 1peso, the RPT pays fixed at 2%o Corporate Income Tax: stays at 30% flat income tax even if the income of

the corporation is at 1B or 1peso. When you have progressive income taxation, it simply means that the tax laws of the country or system of

taxation is placing emphasis on more on direct taxes because equivalent to progressive system of taxation isthe ability to pay principle. While regressive system of taxation focuses more on the presence of indirecttaxes as against direct taxes. What is encouraged by the Constitution is for Congress to evolve a progressivesystem of taxation. This means, Congress would like to have as many direct taxes as can be.

o But the Constitution does not prohibit indirect taxes. It only encourages a progressive system oftaxation.

o That is why when a case was field in the SC, on the Constitutionality of the EVAT law as beingregressive in nature. The SC upheld its constitutionality. The constitution does not prohibit theimposition of indirect taxes. Long ago, sales taxes were there, indirect taxes were already present.The argument that VAT being regressive is that if you compute 12% as a fixed amount against the

purchases of a high income earner as against a VAT on low income earner, there would be a bigdifference of the take home pay of the individual.

Example: Mr. A is earning 100,000 per month, if he uses 30% of that 100% for purchasesimposed with VAT. And Mr. B whose income is and he uses 30% for purchases subject toVAT. His purchases per month is Php50,000 plus VAT of 12% which is equivalent 6000 asagainst the income component of Php 100,000. He actually paid VAT of 6% only.

If Mr. B earning only 10,000 in a month and spends 80% of his income to purchase in orderto subsist in his living expenses since we cannot say 5000 is enough. He will have to pay8000 purchases plus VAT. VAT is Php 916. So he actually spent for 9.6%.

Although both of them are subjected to a proportional tax of 12% because VAT belongs tothe proportional tax being fixed in amount imposed in varying degrees of the propertybought or sold, but in effect the burden of the tax is different as to Mr. A and Mr. B. Therewas a difference of 3.6%. Thus, argument is that it is regressive because the burdendecreases as your income increases.


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SC: upheld the VAT as valid: 1. Indirect taxes is not prohibited by the Constitution.

2. Indirect taxes or sales tax, which VAT is a sales tax, has been there for a longtime. It is impossible to take it out.

3. Because low income earners are expected to purchase items which are notvatable. As provided for in Section 109 of your tax code, it lists down from A to Zitems which are now exempt. It provides there that items, which are original in stakeor which has not been processed as yet are exempt from VAT. The SC is actuallysaying that this group of income earners will not spend on VAT because they willonly purchasing items which are not vatable. Therefore VAT is still a valid tax.

Distinguish Taxes from License or Permit Fees. (If to distinguish, the best answer is to answer as to everydistinction you can think of; Enumeration as to bullet points or numbers).

o As to source of power: Police Power for license and power of taxation for taxes.o As to purpose: License for regulation; Taxes for revenue.o As to amount: As to taxes, it is unlimited. It is for Congress to determine so long as provided under

the law, you follow the law. If its 50% tax, then its 50% tax. But for licenses, it is only to recover thecost of regulation. But sometimes if it is exercised in consonance with the power of taxation, thismay exceed the cost of regulation.

o As to when paid: Because every business before it starts would have to be licensed in order for it tobe operative, thus it is paid in the beginning. Taxes are only imposed if an income is earned or forother taxes, such as community tax, if there is capital, etc.

o As to legal effect: Non-payment of licenses will make the business illegal while non-payment of taxesmakes the business still valid but subject to civil and criminal liability.

Toll Fees vs. Taxes: Toll fees are payments for the use of property. It is not exercised in the power of

taxation.o Toll fees are imposed for the use of the property for purposes of recovering the construction cost. It

is not only the government who has the right to collect toll fees but any private entity as well. Thereason there being is that in some cases the government of the Philippines cannot afford to havethese kinds of structures. It will have another foreign company to do the Construction and thespending and allow the private entity or corporation to recover the cost of construction through toldfees. In some cases, the government will enter into a BOT Agreement, Bill-Operate-Transfer, whereina private entity will build something, operate it and after recovering the full cost will transfer theentire property to the government.

o Toll fees is a demand fo the government or private entity for purposes other than governmentalpurposes.

o As to demand: Tolls fees are a demand for ownership while taxes are a demand of the sovereignty.

Special Assessment vs. Taxeso Special Assessment is a levy on a parcel of land that has been directly benefited by the public.

Example: If a flyover, BTC flyover, can the government actually claim a levy against BTC?Can they say that that particular piece of land was benefited by the public improvement? Notall public improvements will entitle the government to levy a special assessment against theland surrounding the improvement.

SA is not personal in nature. It is directed against the parcel of land, directly benefited by thepublic improvement. It is more a property tax. When we said that thtere is only 1 kind ofproperty tax, which is real property tax. You will notice that SA is a real property tax underthe local government code. It is a property tax against a land benefited directly by the publicimproivement wherein the government can directly collect to up to 60% of the cost of theimprovement from all surrounding properties. If no benefit is given, no special levy can becollected.

o Tax is collected on a regular basis while SL is collected only after an ordinance has been passed bythe LGU imposing such levy. And there can be no public improvement every now and then in thesame area. For purposes of observance of due process, public hearing is necessary so that allproperty owners is given the chance to object on whether or not they will be benefited.

Compromise Penalty (1:13:10)o Compromise Penalties are those granted by the government in lieu of a prosecution for the violation

of the tax law. It is still in relation to taxes. You will see in the tax code that for every violation of taxlaw, you will be subjected to fines, imprisonments, surcharges, and interests. But if you want toescape criminal prosecution, if the government will offer to impose and collect from you thecompromise penalty in lieu of a criminal prosecution for the violation of the tax law. It is allowed.

Example: you have a business and you earn 1M in income and spend 1M in sales, and 1M inexpenses. You are at a lost of 1M. You were advised by your advisor that there is no need tofile an income tax return because you did not earn any income and thus not liable for anytax. Is this correct? NO.

As a rule, the tax code provides that every business has to file his income tax returnwhether it earned income or did not perform well. In this example, if you did not filean income tax return and its found that out, you will be liable for the non-filing of tax


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return which is criminal prosecution, violation of the tax code but in lieu of this thegovernment will offer you a compromise penalty of Php 10,000 for that failure to filethe tax return. But you will not be liable for interest or surcharge because you didnot earn income. Surcharge is only based on the tax that has not been paid, you arelosing. You will not be liable for interest because you did not earn income thus youare not liable for tax, no interest which to base on.

o So, the compromise penalty is monetary in nature. The government is not really interest inprosecuting tax payers but rather as much as possible into entering into compromise because taxesare the life blood of the state.

o Compromise penalty is for the government to determine and offer. There is another type ofcompromise which is not a penalty. The tax payer of the government wishes into compromisemeeting and middle ground in the assessment and in the capability of the tax payer to settle his pastobligations. This is a compromise which must be decided upon by both parties. But this compromisepenalty here is the sole prerogative and offer of the government. If accepted, then taxpayer has onlyto pay. But the government cannot force the tax payer to pay the compromise penalty. The onlyrecourse left for the government is to criminally prosecute the tax payer.

Debt vs. Taxeso Debt is assignable but tax is not generally assignable. Taxes are generally not assignable tax. If you

are the statutory tax payer, it is only against you with whom the government will collect from,whether its direct or not. Say for example, in VAT, there is a different statutory tax payer and the taxpayer burdened by the tax. If the purchaser of the property that you sold did not pay VAT. You arestill liable to pay the 12% VAT because you are the STP whether its a direct tax or not. The liabilityto remit the tax falls on the statutory tax payer.

Only in very few exceptional cases, wherein another person is liable for the tax of someoneelse.

Example: estate tax. If a person Mr. A dies, he leaves an estate. The tax payer is theestate, the person who died has no more personality. The estate left will be liable topay the estate tax. If the peroperty is distributed to the heirs before settling theestate tax, the government can actually proceed to run after the heirs not anymoreagainst the estate because of the violation of the law that distribution can only bemade after payment or settlement.

o Debts can be paid other in money. While tax is generally paid in money.o In debtedness, as provided in the Civil Code, there can be no interest collected if it is not stipulated.

Unless the promissory note or written agreement or loan contract provides for interest, it cannotcollect interest. But in taxation, interest would only come in after you failed to your tax on due date.In every regular interval, if you are very prompt in paying taxes, you dont have to pay interest.

If you are very early in paying your taxes, for NIR taxes, no incentive because of the lifeblood doctrine, you are not given any discount. But for LCG and real property taxes, you aregiven discount of 10% or 20% for real property tax discount but not to exceed these rates.

o Debts can be compensated or offsetted against each other but not taxes because in taxes, therelationship of the government and the tax payer is not that of a creditor-debtor. While in debts itcan be compensated or offsetted.

(Philex Mining Corp. Case): Philex actually offered its VAT claims for refund in lieu of thegovernments liability on excise taxes on mineral extracted. SC said no there can be nooffset or compensation between the vat refund filed and the excise tax due. Excise tax due isalready a civil obligation of Philex mining while the claims for VAT refund are simply inchoateor yet to be proven and is not yet liquidated and thus not yet demandable by the corporationso there can be no offset.

(Another Case) There was allowed an offsetting. Between the salary of a governmentemployee as against an estate tax liability.

Subsidy vs. Taxes:o Subsidies are those which is given or bounties given by the government to the Philippines while

taxes are.

o Revenue is the more general term. Revenue is that which is earned by the government through thetax imposition, subsidies from other nations and tariffs.o Whiles taxes and subsidies are part of the revenue of every government, taxes are actually imposed

against its constituents while subsidies are voluntary received by the government.o Revenue, that which enters the coffers of the government. It is more encompassing than taxes and

subsidies.o Internal revenues are the revenues of taxes imposed by the BIR which is part under the NIRC or tax

code.o Customs, duties and tariffs are those taxes imposed on goods coming in or out of the country. But,

the tariff and customs code focuses more on taxes on importation because these are the types ofactivities wherein we give up foreign exchanges or currencies. Under economics, the Bangko Centralcannot arbitrarily issue legal tenders of the Philippines without foreign currencies. Therefore, wefavor exportations rather than importations. As much as possible we utilize local products thanimporting from abroad.


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o Tariffs is a table of rates which is synonymously used with customs duties. Its like customs duties aswell.

Limitations to the power of taxation:o Inherent Limitationso Constitutional Limitations

INHERENT LIMITATIONS:o First: For public purpose

When you say the purpose is public, it means that it affects the inhabitants of the state notmerely the individual. It is more of directed to the common good of the people.

But there can be indirect benefits to particular individuals.

It can only be appropriated for public purpose. But it can happen that incidentally or a fewindividuals who can be benefited. So long as the main objective is for the common good ofthe people it is still for a purpose. The wisdom of the tax law is for Congress to decide. Themotive behind every law is also for Congress to determine.

So once a tax law is levied by Congress not for public purpose it violates not only theConstitutional limitation that it must be for public purpose but the inherent nature as well oftaxation that always it must be made for a public purpose.

A violation would actually result to a violation of the due process clause which is taking ofproperty from the individuals.

Example: Congress enacted a law which provides that there shall be levied Php1 for everysack of fertilizer produced by every fertilizer producer. Proceeds of which is to rehabilitateCompany B an ailing fertilizer company. Lets say it is a private corporation. Is this valid?

The law enacted by Congress, according to a SC decision, levying tax of every sackof fertilizer produced for the purpose of funding and rehabilitating an ailing company

which is a private company is invalid because the purpose is not public. The taxcollected or the tax levied is directed to rehabilitate a private corporation which isactually a direct benefit on a particular entity which is not for the common good.

It made the law void and unconstitutional because of violating the inherent limitationthat every tax law must be for a public purpose.

But it is not so general as to say that a law cannot be enacted to impose a tax in order tofund a particular industry of the country. Example, the levying of fees and taxes to supportthe sugar industry is valid because it was for the common good of the entire industry. It is forpublic purpose to support that industry, to support the entire government.

But if it is only for 1 entity or a few individuals or few entities and so it is not for publicpurpose. You identify someone to be directly benefited from the tax it is invalid.

To test whether a tax law is for public purpose or not determine whether the proceeds will beused for the support of the government or any of the government activities which isgovernmental in character and whether or not its proceeds is used to promote the general

welfare of the government. Other than that, if the main purpose is not any of those, then itbecomes for private purpose and an invalid tax law. If you are a tax payer, as a student of a class, if you realize that a law has been enacted

imposing a tax but the proceeds is used by the public official or the government to fundprivate purposes, your recourse is through a taxpayers suit.

To be able to file a tax payers suit, the requisites are:o

A taxpayers suit is for the discretion of the courts. The courts may not at all timesgrant you to file a taxpayers suit. But the basis of filing that case is generallybecause public funds are illegally disbursed for purposes other than for publicpurpose.

Public purpose should be determined at(2:01:00) We said that the scope of the taxing powerof every legislative department of a country is that they have this exclusive power ofdetermining the wisdom of the law, the motive, and the expediency and necessity of

enacting that tax law. So courts in that point have no power to inquire into the law, unless, atax payer comes in to question the wisdom or purpose of the law. In determining whether a law is valid or not or having violated the inherent limitation that a

tax law must be for a public purpose, public purpose must exist at the time that the law isenacted. If at the time the law is enacted, it will be there in the deliberations in Congress andit is for public purpose then the law is valid at that point.

If at the time of the implementation of the law, we dont have any control over that.But if and when it is actually proven that the proceeds of the imposition of that law isnot utilized for the public purpose determined at the time of the enactment of thelaw, that is when the taxpayer comes in. You question the illegal disbursement.

o Second: Non-delegation by the taxing authority: As a general rule, the power of taxation cannot bedelegated. The power to impose a tax law remains exclusive to the legislative branch of thegovernment as a general rule. The tax law cannot be delegated by Congress except in 3 instances:


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1. The president who does not belong to the legislative branch is also given the power to dosomething with the tarrif rates. Like increase, decrease, or remove protective tariff rates,impose bonds on imports or increase the customs duty rates by not more than 10%, whichare exceptions as provided for in the Constitution.

When it allows the executive branch of the government to enforce the law throughrevenue regulation making. It is the Secretary of Finance who makes a revenueregulation enforced in a tax law with the recommending approval of theCommissioner of Internal Revenue. Since certain regulations as we said forms part ofthe law therefore it is as if Congress is delegating that power to the executive part ofthe government. But very limited because the executive branch can only execute

rules and regulations within the bounds and parameters provided for and alreadyidentified by Congress in the law. Flexible Tariff Clause in the Constitution provides: Wherein the president can

actually, under this tariff clause, in the Constitution it provides the Congress mayauthorize by virtue of a law the president to fix the tariff rates whether to removeexisting protective tariff duties, to increase it, to reduce it, according to the needs ofthe country and to impose import or export quota bands, and to impose additionalcustom duties by not more than 10%. The constitution itself says that Congress candelegate through the president, the law making power not only in so far as tariff orcustom duties is concerned.

This provision is not self-executing. By the first phrase it says,Congress may authorize by law. As provided, Congress can authorizebut it has to make a law first before the President can actuallyexercise the right.

Congress already enacted a law with the Tariff and Customs Codeand its part of the Tariff and Customs Code.

WHY: The president is delegated with such power because: The primary reason being, the president is actually involved

in everything, not only in importation and exportation butalso with the budget, the annual budgets that we have.

Can the president actually say that VAT should be 100% or50%? No. Because there is no law providing the presidentsuch delegated power. The

The reason why this was delegated is for EXPEDIENCYpurposes. Importation will cause a major change in oureconomy vis a vis wqorld trade. If many goods will come inwithout proper regulation, local industries will be affected. Ifwe do not impose import bands or quotas in importation,automatically by will of the president, for us to be waiting by

Congress to enact a law, 3 separate readings, etc, then oureconomy will be greatly affected like the influx of Chinamade items, the influx of Ukay-ukay which is not actuallytaxed cannot be regulated properly. Its for the president, andonly 1 person who decides, you can say that anti-dumpingduties or retaliatory duties will be 100% more than what isexisting in order to prevent the flow of that particular itemthat we do not like in the Philippines.

The word flexible is so flexible as to this matter so long as thepresident will follow the rule that the protective rates can beincreased or reduced by not more than 100% additional duties ontop of the existing may be increased by not more than 10%. Theseare the guidelines Congress has provided the president and thepresident is so flexible as to move within these limits and

boundaries. The reason is for expediency, necessity and flexibility. But this can

only be done with NEDA recommendation for purposes of nationaleconomy, general welfare and national security.

Info: We have custom duties which we impose normally. If we have importations thatwe do not like coming from a country which discriminates against our products oranything about the Philippines, we can impose on top of the regular custom duties, adiscriminatory tax as well. This is where the president can move about.

2. LGU. The local government unit has been given by the Constitution as well the power toraise its own sources of revenue.

Every local government unit has the power to raise its own right to raise its ownsource of revenue by imposing taxes, fees and charges against its constituents asprovided under the Constitution.


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This is NOT self-executory. Just like the power of the president to do something withthe custom duties and tariff rates by virtue of a law granted by Congress, then LGUas well, needs a law coming from Congress so it can fully execute that provision inthe Constitution.

Congress has made a law granting this power through the Local Government Code of1991. This is the law enacted by Congress granting the local government units itspower to raise all sources of revenue.

Municipal corporations are mere creatures of the Congress so as the inherent powerto tax. If Congress decides to take away this power from the municipalities or citiesand do with centralized and national taxing system, then LGUs will be left without

recourse but to simply surrender its power to tax and let the BIR do the collection oftaxes. But we are for local autonomy. So still, we have the LGUs taxing. 3. Exemption of government agencies. If the government will tax itself for the purpose of

using it to fund its operations, it is superfluous and circuitry wherein you simply removemoney from 1 pocket and transfer it to another. It will also encourage or allow an opportunityfor corruption during the transfer. Also, immunity from tax for the government is necessaryso as not to impede the normal operations of the government.

When are government agencies or corporations exempt?o National government is exempt from tax.o Municipal governments, as a rule are exempt from tax , because they are

political subdivisions which are provinces, cities, municipalities andbarangay. They are taxable, if and when a government agency is performingproprietary functions it removes the exemption away from them.

o GOCCs, as a rule are taxable just like any other corporation. In the income

tax chapter in the tax code, there are 4 GOCCS which are exempt fromincome tax, all others are subject to income tax: The 4 GOCCs exempt are: SSS, GSIS(Government Service Insurance

System); PhilHealth and PCSO. Before PAGCOR is exempt but this has been removed from the

exemption. Those other GOCCs not mentioned, they are subject to income tax

unless their charter provides for exemption.o Fourth inherent limitation: International Comity.

The grounds for exempting foreign government from taxes, etc. on the income that theyhave is the sovereign equality of the states which is actually based on traditions, customs,and duties that we dont tax a state which we recognize as co-equal to us. Besides, everystate is immuned from suit. In case, they do not pay if we require them to pay, our suit willnot prosper. So there is no use. We do not tax them actually because of the sovereignequality of states and the immunity from suit included customs, duties and traditions.

o Fifth, territorial jurisdiction:

If you go abroad tomorrow, you perform an activity or do some concerts in the US for 1month and paid 1M USD, you did that outside the taxing jurisdiction of the state. Youtaxable? Yes.

It does not only mean to say that you will only be taxable if you are within the territorialboundaries. When you say within the taxing jurisdiction, there are many things to considerincluding of course the situs of taxation because the first thing that comes to mind when wesay that the power of taxation is limited by the territorial jurisdiction of the state is that weonly tax what is inside the Philippines. This only holds true for real property tax or taxes onproperty because we follow the rule wherever the property is situated.

But for people who can move about freely in and out of the country, we not only determinewhether they are in the Philippines or abroad but also where they earned the income, etc. Asof now, the limitation is territorial in nature. If the income is earned here, the property ishere, general rule, you will be taxable.

1. If your parcel of land is in the Philippines, it is subject to tax. 2. If you are in the Philippines working, it is subject to tax. 3. If you are a foreigner earning income in the Philippines, it is subject to tax because

you are enclosed in this territorial jurisdiction. If you are a foreigner earning incomeabroad, it is not within our power to tax. He is beyond us. But if you are a Filipinoearning income abroad, the answer is yes and no. It depends on how long you havestayed abroad.

4. Properties abroad. As a rule, properties are taxable where they are located. This isonly the general rule because there are different rules for different types of tax.

Constitutional Limitations: There are many limitations provided in the Constitution, it may be directly saidabout taxation or it may be indirectly and applicable to all other powers of the government.

o First, Concurrence of the majority of Congress is needed in order to pass a avalid law granting taxexemption, both Senate and the House. When you say majority, it means plus 1.


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When a tax exemption is granted by Congress there must be the concurrence of both thehouse and the Senate with atleast majority both in each. They have to vote separatelyotherwise Senate will be absorbed by the number of the House.

Does this hold true as well with passing a law granting tax amnesty? Tax amnesty means the intentional overlooking of the state of its right to collect

taxes which could have been due to it. While exemption is the foregoing thecollection of future taxes. While amnesty is for taxed taxes. Because in amnesty youare forgiving past violations. In exemption, not yet, in the future, you are supposedto be taxable but the government withheld its right to collect the tax.

This is the basic difference but bottom line, the government is not getting any

money out of it. Therefore, being a restriction on the governments part to collect.And the restriction that they are not in consonance with the life blood doctrine,therefore they have to have a strict majority vote.

Since tax amnesty is the same effect as tax exemption because bottom line is bothis that the government is actually forgoing the collection of amounts, therefore,coming up with a tax amnesty law by Congress also needs the concurrence ofmajority vote of both Senate and the house for it to be a valid law. For all others,may it be a law granting the refund of taxes for a particular period of payment or anyother amnesty, majority vote.

o Second, exemption of religious, charitable or education institutions (RCE), non-profit cemeteries,churches and parsonages are exempt from property tax.

All lands, buildings and improvements, as real properties, of all RCE institutions are exemptfrom property tax? It should be ACTUALLY, DIRECTLY, EXCLUSIVELY (ADE) used for thepurpose of RCE.

Example: you have a parcel of land owned by you is this subject to real property tax (RPT)?Yes. You have it leased and used by USC, a non-stock, non-profit educational institution, is itsubject to real property tax? NO. because it is ADE used for educational purpose.

If this is leased by USC and a chapel is built but not a school, it is not subject to RPT becausethe chapel is incidental to the main purpose which is for educational purpose.

If USC makes a school, chapel and a dormitory, which is all used by the students, is theentire parcel of land subject to RPT or partially subject to RPT? Constitution says that alllands, buildings and improvements should be ADE used by a RCE, etc are exempt from realproperty taxes. Therefore, the whole land is exempted. What is provided in the Constitutionis only exemption from real property taxes. Whatever other income that will come out withthe use of the property, lands, buildings and improvements, will be subject to other kinds oftaxes such as income from the rent of the building, donors tax for the donations, tax for thetransfer of the property in case its sold.

The only exemption is for real property taxes in this provision of the law.

The exemption is not absolute. It requires that the use and not the ownership that mattersbut its the use. So long as its actually ADE for RCE purposes, or any other purposes likecemetery, etc.

University of Cebu, is the parcel of land taxable or exempt from real property tax? Constitution says, ADE for RCE purposes does not require that the school must be a

non-stock, non-profit. So long as the purpose is education in nature, whoever thatschool is will be exempt from RPT. Whether UC is a proprietary school or whetherUSC a non-stock, non-profit school, properties used for education purposes will beexempt from real property tax.

Ex: School building. This is the parcel of land rented out by you from USC. There is a schoolbuilding, dormitory, a canteen was constructed off site. Will the canteen and garden be taxexempt?

Here is a canteen but operated by you. As a condition to USC that you will only allowto sell the parcel of land if you will be operating the canteen attached to thisbuilding. Is the parcel of land exempt from RPT?

o Example: Steyler (canteen in the main building), General rule, if the parcel of land is used for educational purposes

then it is exempt from RPT so long as it is ADE. It does not matterwhether the school is non-stock or non-profit or proprietary or forprofit. The religious institution is does not have to be Catholic. Solong as it is a charitable institution.

But for this incidental activities, like canteens, so long as the canteenis operated by the school itself and within the campus, then it will beexempt from RPT. But if it is operated by someone else, even ifinside the school, it will no longer be exempt.

So if in USC, there is a bar, which is part of the school building. Onlythat portion of the land will not be exempt. All others will be.


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o Example, dormitory, which is open for the public, you cannot placeexemption for this parcel of land.

o If the school is operated by the school, and located outside the school: If it isaccessible to the public, then strictly speaking, it is taxable.

o If a hotel in the school and accessible to the public, for HRM students in USC,the income from outside guests, being merely incidental, are subject toincome tax. But the property itself, RPT that will be exempt because having ahotel is part of the activities it will be having for school purposes. For theRPT, they can ask for exemption.

o Third, all assets and revenues of a non-stock, non-profit educational institution is exempt from

income tax, property tax, donors tax and custom duties. Because of the governments priority for education in the Philippines, it elevated the role ofnon-stock, non-profit education to a very special class which it granted exemption to the 4kinds of taxes. It will be exempt from income tax from revenues derived from educationalactivities. Donors taxes on donations of properties related to educational purposes. Customduties on importations on equipments and items used for educational purposes as well.Beyond that, NSNP will not be exempt if it is not for educational purpose. It must also be ADEused for educational purposes.

Taxation - june 29,2010CONSTITUTIONAL LIMITATIONS (cont.)

Revenue bill must originate exclusively in the House but the senate may propose with amendments

law making process

In drafting of tax law, it must originate from the house of representatives. Does that mean thesenate has to follow what the house does? No.

Just like the general ruling in making a law, for revenue laws or tax laws, every revenue bill mustoriginate from the house but it does not mean that everything has to originate from the house. Thepower of the senate is to amend whatever originated from the house or actually have in advance asubstitute bill already made in anticipation of the revenue bill which is to be passed by the house. Soit is just for formality purposes, but notwithstanding, it will have to follow the 3 readings in 3separate days wherein a panel form of such enactment is to be given 3 days before.

Exemption of religious, charitable and educational entities, non-profit cemeteries and churches from

property taxation

Provision: Charitable institutions, churches, parsonages, convents, mosques, nonprofit cemeteries andany improvements actually, directly and exclusively used for religious, educational and charitablepurposes shall be exempt from taxation.

What is the exemption granted to religious institutions? It only covers the property tax.When you say property tax, what do you mean by that? If a religious institution has various

properties, both real and personal prop, would all these prop be exempt from tax under theconstitution? Piano used by the choir, is it covered by exemption? No. Piano is not a real prop.

The coverage of exemption under this constitutional provision is only REAL prop tax exemptionon real prop. Real prop refers only to lands, buildings and improvements.

Would the ownership of a parcel of land by a religious institution automatically grant it realproperty tax exemption? No. The test of exemption is not ownership by the charitable institution,not the ownership by the religious institution, not ownership by educational institution. It is grantedreal prop tax exemption if it is actually, directly and exclusively used by such institutions. When yousay ADE, it refers to the use.

Does it mean to say that incidental use of the property will strip off its right to be exempted fromthe real prop tax? No. Incidental use of prop as long as it is - 11.30--- main purpose is still coveredby the exemption.

i.e. convents used by priests and nuns and canteen in school. When you say exclusively used, itdoes not mean that it has to be used only for that religious purpose. It does not mean sole use but itmust be used primarily for religious purpose.

i.e. a parcel of land owned by a private individual, leased out to a religious institution. 50% of thearea is used as parking space P10 per hour exclusively used for parishioners. ---- do not be confusedwith the exemption in so far as real prop taxes is concerned as against the income tax on theincome generated by the use of that prop. In that case, if it is incidental, when the use of the freespace to park the vehicles of those attending religious activities, the portion of that parcel of land isstill exempt from real prop tax because the use is incidental to the primary purpose of what theactivity is all about, but the income generated, the parking fees, is another matter. It is an incomesubject to income tax. The provision of the constitution does not grant exemption from income taxto income generated by these religious institutions. If we will move towards income taxation, whatsection 30 of the tax code provides for all those exempt organizations, nonprofit cemeteries,nonstock nonprofit educational institution, government educ. Inst. they are exempt from income


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tax but any use of their prop will be subject to income tax regardless of how the proceeds will beused. In that case, religious institutions earning income from parking fees, can they say that theywill be exempt from income tax because the fees will be used to maintain the premises? It is not anexemption because what is granted by the constitution is only real property tax exemption.

Q: if parking space would also be used by outsiders and not merely parishioners? We have todetermine what the numbers are. If majority are outsiders, probably it is not already incidental tothe existence of the church but will be a commercial parking space for everyone so that will not beexempt from real prop tax.

i.e. San Carlos is non-stock non-profit, if it leases out a portion of its space (10%) for use toJollibee, is it subject to tax? We are still in real property exemption, it says charitable, religious andeducational inst. is exempt from real prop tax whether they own the prop or not so long as the propis ADE used for the purpose. In this case, whether this parcel of land is leased out by USC or ownedby it. if it leases out or subleases out a portion to a commercial establishment, this is taken out fromthe coverage of the exemption. A portion of this entire parcel of land would have to be paid of realprop taxes. Jollibee space is to be paid of tax. Who is liable for this real prop tax? It depends on theagreement. The contract of lease would have been entered into, real prop tax follows first whoeverthe owner is, if it is leased out to somebody else, liability may be shifted to someone else.

Would it differ if USC will be changed to UC? Would your answer still be the same? If we changethis to UC, a proprietary private educational inst. which is for profit, would your answer still be thesame, 90% exempt, 10% taxable?

If the canteen is owned and operated by the school itself and it is located within the campus, itwill be exempt from real prop tax. Same holds true with operating dormitories, with operatingbookstores, computer rent outs, so long as it can be justified as related for the promotion ofeducational welfare of the students then you can say that the use of the space is still ADE used.

i.e. USC has an idle parcel of land that it plans to sell to UC, is this parcel of land held by USC as

an idle parcel of land be exempt from real prop tax prior to its sale to UC? No. Prop held for futureuse or for speculation purposes are not covered by the words ADE use for charitable, religious andeducation purposes.

Let us say this parcel of land is fully used for educational purposes and is sold by USC to UC. Itsexempt from real prop tax because it is entirely for educational purposes. Will the sale to UC besubject to income tax? If the sale is not for educational purposes it is not covered by the exemption.

If it is donated to UC, will it be subject to donors tax? No.Advance topic: Income taxation and donors taxation but nonetheless is preliminary to the

discussion of the exemptions granted to non-stock non-profit educational institution which we willexpound later.

Real prop tax exemption is that which is granted to the 3 major institutions - charitable, religiousand educational. All educational institutions are really exempt from real prop taxes so long as theirassets, buildings, lands, improvements are used for educational purposes. We do not distinguish.But the exemption stops there. Whatever they do to the prop, these religious, charitable andeducational institutions whether they transfer that, they donate that, etc, it will be subject normally

to taxes applicable to other institutions. But that is the general rule because we have not studiedyet the next exemption granted to a very special institution which we call the non-stock non-profiteducational institution.

i.e. If a religious institution has a parcel of land which it wishes to donate to a school, to a privateentity, to a charitable institution, will it be subject to donors tax? Yes, because religious institutionsare not exempt from donors tax as a rule. Will it be subject to local transfer tax which is a liabilityto the local government units? Yes. Because local transfer taxes are not real prop taxes thereforethey are still liable for that.

But how about educational institutions? Will they be taxable as charitable and religiousinstitutions are taxable? Not necessarily. Non-stock non-profit educational institution has a veryvery large scope of exemption granted under the constitution. What is it all about? The constitutionprovides that all revenues and assets of non-stock non-profit educational institutions used ADE foreducational purposes shall be exempt from taxes and duties.

Exemption of nonstock, nonprofit educational institutions from taxation

i.e. if this is USC leasing out to Jollibee earning P100,000 monthly rent income, will the P100k besubject to income tax? Yes it is taxable since income derived from leasing to Jollibee is not usedADE for educational purposes.

Notwithstanding that the constitution says that all assets. When it says all assets and revenues,assets refer to exemption from donors tax, real prop taxes. Revenues refer to exemption fromincome tax. All revenues of a non-stock non-profit educational institution shall be exempt fromtaxes which is income tax so long as it is ADE used for educational purposes.

What if USC raises the defense that P100k monthly income proceeds will be used to further thepurposes of education, meaning proceeds will be used for educational purposes, will they still besubject to income tax? The constitution grants income tax exemption to revenues of the school solong as it is ADE used for educational purposes. It is s

Tax Premidterm Compiled

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