Taxation Goofy Final

Taxation Law 1 Reviewer

Taxation Law 1 Reviewer

2011

3. Constitutional Limitations

Due Process of Law

Equal Protection of the Laws

Rule of Uniformity and Equity in Taxation

Prohibition against imprisonment for non-payment of poll tax

Prohibition against impairment of obligations of contracts

Prohibition against appropriation of proceeds

Prohibition against taxation of religious, charitable and educational entities

Prohibition against taxation of non-stock, non-profit educational institutions

OthersGrant of tax exemption

Veto of appropriation, revenue or tariff bills

Non-impairment of the jurisdiction of the Supreme Court

Revenue bills shall orginate from the House of Representative

Infringement of Press Freedom

Grant of Franchise

a. Due process of law

There must be a valid law

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

Tax statute must not be arbitrary as to find no support in the Constitution

When does the power of taxation impinge the due process clause?

The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown to amount to a confiscation of property, [Reyes v. Almanzor, 196 SCRA 322].

Sec. 1, Art. III, 1987 Constitution

No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied equal protection of the laws.

REQUIREMENTS OF DUE PROCESS IN TAXATION

1) Tax must be for a Public purpose

2) Imposed within the Territorial jurisdiction

3) No arbitrariness or oppression in

A) assessment, and

B) collection

DUE PROCESS IN TAXATION DOES NOT REQUIRE

1) Determination through judicial inquiry of

A) property subject to tax

B) amount of tax to be imposed

2) Notice of hearing as to:

A) amount of the tax

B) manner of apportionment

Tan v. del Rosario, supra.

The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of tax power.

Sison v. Ancheta, supra.

It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court that such an arbitrary act amounted to the exercise of an authority not conferred. That property calls for the application of the Holmes dictum The power to tax is not the power to destroy while this Court sits.

It has been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or in case a retroactive statute is so harsh an unreasonable , it is subject to attack on due process grounds.

b. Equal protection of the laws

No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied equal protection of the laws. Sec. 1, Art. III, 1987 Constitution

Sison v. Ancheta, supra.

The taxing power has the authority to make reasonable and natural classification for purposes of taxation, but the governments act must not be prompted by spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in privileges conferred and liabilities imposed, [Sison v. Ancheta, 130 SCRA 654].

Villegas vs, Hiu Chiong Tsai Pao HoGR L-29646, 10 November 1978

Facts: The Municipal Board of Manila enacted Ordinance 6537 requiring aliens (except those employed in the diplomatic and consular missions of foreign countries, in technical assistance programs of the government and another country, and members of religious orders or congregations) to procure the requisite mayors permit so as to be employed or engage in trade in the City of Manila. The permit fee is P50, and the penalty for the violation of the ordinance is 3 to 6 months imprisonment or a fine of P100 to P200, or both.

Issue: Whether the ordinance imposes a regulatory fee or a tax.

Held: The ordinances purpose is clearly to raise money under the guise of regulation by exacting P50 from aliens who have been cleared for employment. The amount is unreasonable and excessive because it fails to consider difference in situation among aliens required to pay it, i.e. being casual, permanent, part-time, rank and-file or executive.

[ The Ordinance was declared invalid as it is arbitrary, oppressive and unreasonable, being applied only to aliens who are thus deprived of their rights to life, liberty and property and therefore violates the due process and equal protection clauses of the Constitution. Further, the ordinance does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion, thus conferring upon the mayor arbitrary and unrestricted powers. ]


The court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions.

The legislative intent to increasingly shift the income tax system towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations, we certainly do not view this classification to be arbitrary and inappropriate.

CIR v. CA & Alhambra Ind., 267 SCRA 557 (1997)

Tiu v. CA, 301 SCRA 278 (1999)

The Constitutional right to equal protection of the law is not violated by an executive order, issued pursuant to law, granting tax and duty incentives only to businesses within the secured area of the Subic Special Economic Zone and denying them to those who live within the Zone but outside such fenced in territory. The Constitution does not require absolute equality among residents. It is enough that all persons under like circumstances or conditions are given the same privileges and required to follow the same obligations. In short, a classification based on valid and reasonable standards does not violate the equal protection clause.

We find real and substantial distinctions between the circumstances obtaining inside and those outside the Subic Naval Base, thereby justifying a valid and reasonable classification.

c. Uniformity and equity in taxation

Sec. 28 c, Art. VI of the Constitution provides that the rule of taxation shall be uniform and equitable.

Uniformity in Taxation

The concept of uniformity in taxation implies that all taxable articles or properties of the same class shall be taxed at the same rate. It requires the uniform application and operation, without discrimination, of the tax in every place where the subject of the tax is found. It does not, however, require absolute identity or equality under all circumstances, but subject to reasonable classification.

Equity in Taxation

The concept of equity in taxation requires that the apportionment of the tax burden be, more or less, just in the light of the taxpayers ability to shoulder the tax burden and, if warranted, on the basis of the benefits received from the government. Its cornerstone is the taxpayers ability to pay.

Classification of taxpayers, subject or items to be taxed

REQUISITES OF A VALID CLASSIFICATION (S A G E )

1. It must be based on substantial distinction.

2. Germane/relevant to the purpose of the law/ordinance.

3. Applies not only to the present condition, but also to future substantially identical conditions.

4. Equally applicable to all members of the same class.

Tolentino v. Sec. of Finance, supra., supra.

The constitution does not really prohibit the imposition of indirect taxes which like VAT are regressive. What is simply provides is that the congress shall evolve a progressive system of taxation. Indeed, the mandate of congress is not to prescribe, but to evolve a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form indirect tax would have been prohibited.

Mla. Race Horse v. dela Fuente, 88 Phil 60 (1951)

Ordinance No. 3065-tax on license stables, license fees for boarding stable for race horses. Tax assessed on the owners of the boarding stables for race horses is valid because there is equity and no arbitrary classification even no such tax imposed on boarding stables for other types of horses.

The owners of the stables are class by themselves, and are appropriately taxed when other kinds are taxed less or not at all, considering that equity in taxation is generally conceived in terms of liability In relation to the benefits received by the tax payer. Race horses as devoted to gambling, their owners derive fat income, and such demands heavy burden of resource from the government such as police supervision. Hence, taking into everything into account, the differentiation against which the plaintiffs complain conform to the practical dictates of justice and equity, and is not discriminatory within the meaning of the constitution.

Not valid or discriminatory when other boarding stables for race horses with the same number of horses were made to pay less or not at all.

Eastern Theatrical v. Alfonso, 83 Phil 852 (1949)

An ordinance which imposes a fee on the price of every admission ticket sold by the cinema, theaters, and boxing exhibitions is valid because same class, same rate.

Equality and uniformity in taxation means that all taxable articles or kinds or property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation, and the appellant cant point out what places of amusement taxed by the ordinance do not constitute a class by themselves and which can be confused with those not included in the ordinance.

Pepsi Cola v. City of Butuan, supra.

Valid classification of taxes are not full met by the city ordinance which imposes a tax upon the sale of merchandise payable only by agent/consignee of any outside dealer of such merchandise while the sales of the local dealers regardless of the amount would be exempt.

Shell v. Vano, Mun. Treas. of Cordova, Cebu, 94 Phil 389 (1954)

A municipal ordinance imposing an occupation tax on the profession or occupation of installation manager is valid even there is only one person with such occupation in the municipality. A person cant challenge the validity of an ordinance as being discriminatory since he is only one adversely effected because all other installation managers who may come within the jurisdiction of the municipality would be subject to tax under the ordinance.

What the ordinance tax is the occupation itself regardless who or how many exercise it. It will be applicable to any person/firm who may come to exercise such calling.

City of Baguio v. de Leon, 25 SCRA 938 (1968)

Equality and uniformity of taxation, means that, all taxable articles or kinds of property of the same class be taxed at the same rate. The taxing power has the authority to make reasonable and natural classification for purposes of taxation. To satisfy this requirement, it is enough that the statute applies equally to all persons, forms and corporations placed in similar situation.

Kapatiran v. Tan, supra.

VAT law does not discriminate unduly against custom brokers who are subject to said tax.

Villanueva v. City of Iloilo, supra.

An ordinance exacting tax on apartment owners/operators are violative of rule of uniformity of taxation because (a) R.A. 2264 does not empower cities to impose apartment taxes, (b) it is oppressive and unreasonable for it penalizes owners of tenement houses who fail to the pay tax, (c) it constitutes not only double taxation, but treble at that, and (d) that it violates the rule of uniformity of taxation.

Asso. of Customs Brokers v. Mun. Board, supra.

An ordinance which imposes tax upon owners of vehicles operating inside Manila is an infringement of rule of uniformity of taxation as ordained by the constitution because it does not distinguish the vehicle for hire or for private use, neither does it distinguish vehicle registered in the City of Manila or outside.

The owners of vehicles residing outside Manila who also use the streets are not made to share the corresponding burden. In this case, those owners of the vehicles which use the streets of Manila, regardless whether they are citizen or not fall within the same class.

5. Prohibition against imprisonment for non-payment of poll tax

No person shall be imposed for debt or non-payment of poll tax. [Sec. 20, Art. III, Constitution]

The non-imprisonment rule applies to non-payment of poll tax which is punishable only by a surcharge, but not to other violations like falsification of community tax certificate and non-payment of other taxes.

Poll tax

Poll tax is a tax of fixed amount imposed on residents within a specific territory regardless of citizenship, business or profession. e.g. community tax


community tax v. poll tax

Sec. 156-164, R. A. 7160

156. Community Tax-Cities or Municipalities may levy a community tax in accordance with the provisions of this article.

157. Individual Liable to Community Tax-Every inhabitants of the Philippines 18 yrs or over that has been regularly employed on a wage or salary base for at least 30 days....

158. Juridical Persons Liable to CT- Every Corp no matter how created or organize, domestic or foreign, engaged in or doing business in the Phils.

159. Exemptions-1.Diplomatic and consular representatives, 2.Transient visitors staying not more than 3 months

6. Prohibition against impairment of obligation of contracts


No law impairing the obligation of contracts shall be passed.

The obligation of a contract is impaired when its terms or conditions are changed by law or by party without the consent of the other, thereby weakening the position or rights of the latter.

An example of impairment by law is when a later taxing statute revokes a tax exemption based on a contract. But this only applies when the tax exemption has been granted for a valid consideration.

A later statute may revoke exemption from taxation provided for in a franchise because the Constitution provides that a franchise is subject to amendment, alteration or repeal.

Sec. 11, Art. XII, 1987 Constitution

No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be GRANTED except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.

Tolentino v. Sec. of Finance, (1994) supra.

CREBA contends Imposition of the VAT on the sales and leases of real estate by virtue of contracts entered into prior to the effectivity of the law. However, the Non-impairment of Contract Clause has never been thought as limitation on the exercise of the States power of taxation save only where a tax exemption has been granted for a valid consideration.

Oposa Vs. Factoran

Police power prevails over the non-impairment clause

La Insular Vs. Manchuca

A lawful tax on a new subject or an increased tax on an old one, does not interfere with a contract or impairs its obligation.

The non-impairment clause applies only to contracts and not to a franchise.

The non-impairment clause applies to taxation but not to police power and eminent domain. Furthermore, it applies only where one party is the government and the other, a private individual.

As a rule, the obligation to pay tax is based on law. But when, for instance, a taxpayer enters into a compromise with the BIR, the obligation of the taxpayer becomes one based on contract

The rule does not apply to public utility franchises. According to Sec 11, Art XI of the constitution, no public utility franchise or right shall be granted except under the condition that it shall be granted that it is subject to amendment, alteration or repeal by the Congress when the common good so requires.

Congress could impair the companys legislative franchise by making it liable for income tax. The Constitution provides that a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires.

When can a grant of tax-incentive be taken away by the government without violating the rule on non-impairment of contracts?

It depends on whether the grant is unilaterally or bilaterally given by the government. If unilaterally given, there is no impairment. It constitutes a mere revocation of a grant of privilege. If bilaterally given, there is impairment (Art. III, Sec. 10, Constitution). Exception: In case of grant of franchise to public utilities when common good so requires (Art. XII, Sec. 11, Constitution)

7. Prohibition against infringement of religious freedom

No law shall be made respecting an establishment of religion, or prohibiting the free exercises thereof.


The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.

Am. Bible Society v. City of Manila, 101 Phil 386 (1957)

The payment of license fees for the distribution and sale of bibles by a non-stock, non-profit, missionary organization at minimal profit suppresses the constitutional right of free exercise of religion which is guaranteed by the Constitution.

But a tax on the sale of religious materials is not unconstitutional because it is imposed after the activity (sale) taxed is done.


The power to impose a license tax on the exercise of these freedoms is indeed as potent as the power of censorship which this Court has repeatedly struck down

A tax on the income of one who engages in religious activities is different from a tax on property used or employed in connection with those activities.

8. Prohibition against appropriation of proceeds of taxation

No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.

-taxes can only be levied for public purpose

Sec. 29, (2) Art. VI, 1987 Constitution

No public money or property shall be appropriated, applied, paid, or employed directly or indirectly, for the use, benefit, or support of any 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.

(Sec. 29 (3) ART VI) Use of tax levied for a special purpose

All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the government.

-Separation of the Church and State

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

Osmena v. Orbos, supra.

OPSF as a special fund may be placed in a special trust.

9. Prohibition against taxation of religious, charitable and educational entities

Sec. 28 (3), Art. VI, 1987 Constitution

Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.

This is an exemption from real property tax only.

Public Cemeteries are exempt from the payment of taxes.

The term exclusively used for religious purposes does not necessarily mean total or absolute use for religious, charitable and educational purposes. Even is the property is incidentally used for said purposes, the tax exemption will apply.

Abra Valley College v. Aquino, 162 SCRA 106 (1988)

The exemption in favor of property used exclusively for charitable or educational purpose is not limited to property actually indispensable therefore, but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purpose.

Province of Abra v. Hernando 107 SCRA 104

To be exempt from realty taxation, there must be proof of actual, direct and exclusive use of lands, buildings and improvements for religious or charitable purposes.

Lung Center of the Philippines v. Quezon City G.R. 144104, June 29, 2004

Petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly, and exclusively used for charitable purposes. Thus the court ruled that portions of the land leased to private interties as well as those parts of the hospital leased to private individuals are not exempt from taxes.

To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties. a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. (Lung Center of the Philippines v. QC, GR 144104, 29 June 2004)

10. Prohibition against taxation of non-stock, non-profit educational institutions

Sec. 4 (3, 4), Art. XIV, 1987 Constitution

All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Requisites For Exemption:

1) It must be a private educational institution

2) It must be non-stock and non-profit

3) Its assets (property) and revenues (income) must be used actually, directly and exclusively for educational purposes

RULES:

1) If the first requisite is absent (meaning, its a government educational institution), it is nonetheless exempt from income tax

2) If the second requirement is absent (meaning, it is stock and profit) as long as the third requirement is present, it is nonetheless exempt from real estate tax

3) If the third requirement is absent, as long as it is non-stock and non-profit, it is nonetheless exempt from income tax

4) If the third requirement is absent, but it is private and non-profit, it is subject to income tax, but at the preferential rate of ten percent (10%)

> Under the present tax code, for a private educational institution to be exempt from the payment of income tax, all it has to be is non-stock and non-profit. However, a governmental educational institution is exempt from income tax without any condition

EXEMPTION DOES NOT EXTEND TO:

1) Income derived by these educational institutions from their property, real or personal, and

2) From activities conducted by them for profit regardless of the disposition made on such income

Sec. 28 (3), Art. VI, Constitution

Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. (Property Tax Exemption)

Sec. 27 (B) NIRC

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A 'Proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such:.

(H) A nonstock and nonprofit educational institution;

Note however the last paragraph of Sec. 30, which states: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations form any of their property, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

Department of Finance Order 145-85

Non-stock, non-profit educational institutions are exempt from taxes on all their revenues and assets used actually, directly and exclusively for educational purposes.

However, they shall be subject to internal revenue tax on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of its educational purposes or functions.

Interest income shall be exempt only when used directly and exclusively for educational purposes. To substantiate this claim, the institution must submit annual information return and duly audited financial statement. A certification of actual utilization and the Board resolution or the proposed project to be funded out of the money deposited in banks shall also be submitted.

Department of Finance Order 137-87

An educational institution means a non-stock, non-profit corporation or association duly registered under Philippine law, and operated exclusively for educational purposes, maintained and administered by a private individual or group offering formal education, and with an issued permit to operate by the DECS.

Revenues derived from and assets used in the operation of cafeteria/canteens, dormitories, and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises.

CIR v. CA, CTA and YMCA, 298 SCRA 83 (1998)

In this case, the SC held that the income derived by YMCA from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and from parking fees collected from non-members are taxable income

CIR v. CA, CTA and Ateneo, 271 SCRA 605 (1997)

Petitioner asserted that Ateneo de Manila University in conducting researches and studies of social organizations and cultural values thru one of its unit, the Institute for Philippines Culture thus subject to 3% independent contractors tax under Sec. 205 of NIRC to wit:

Sec. 25: Contractors, proprietors or operators of dockyards and othersA contractors tax of 3% of the gross receipts is hereby imposed on the following.

(16) Business agents and other independent contractors, except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors, and except gross receipts of or from a pioneer industry registered with the Board of Investments under provision of R.A. 5168

According to the CIR the contractor the term independent contractor is not specifically defined so as to de limit its scope, so much that any person who renders physical and mental service for a fee, is now indubitably considered as an independent contractor liable to 3% contractors tax. According to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law.

The court held that Ateneo is mandated by law to undertake research activities to maintain its university status. In fact, the researches carried out by IPC is not on business or profit but on social sciences studies of Philippine Society. Since the university can only finance limited number of IPC research projects, private respondents occasionally accept sponsorships from international organizations, private foundations and governmental agencies. These sponsorships are subject to the terms and conditions set by Ateneo such as no proprietary or commercial purpose research is done, topic confined to university academic agenda, and the absolute right to publish and ownership of the results conducted by IPC.

ARTICLE XIV AND ARTICLE VI COMPARED

Art. XIV, Sec. 4 (3)

Art. VI Sec. 28(3)

Grantee

Non-stock, non-profit, educational institution

Religious, educational, charitable, institutions

Taxes Covered

Income tax

Custom Duties

Property Tax

Property Tax

OTHER TAXES

TAX

Exempted Institution

Bases

Donors Tax

Non-stock, non-profit educational Institution

All grants, endowments, donations, contributions used, actually, exclusively, for educational purposes shall be exempt from tax. Art. XIV, Sec. 4 (4)

Estate Tax

Only transfers to social welfare, cultural and charitable institution are exempt from estate tax.

Sec. 87 R.A. 8424

11. Others

i.Grant of tax exemption (more on this under D4)


No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

RULES ON VOTE REQUIREMENT

1) Law granting any tax exemption = (absolute majority)

2) Law withdrawing any tax exemption= (Relative majority)

* Tax exemption, amnesties, refunds are considered in the nature of tax exemptions.

* A law granting such needs approval of the absolute majority of the Congress

Chavez v. PCGG, supra.

PCGG a body created by the executive department cannot enter into agreement with the Marcos to exempt the properties of the latter considered as ill-gotten wealth because it is only congress can do such.

ii.Veto of appropriation, revenue or tariff bills


The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object, [Sec. 27(2), Art. VI, Constitution].

Gonzales v. Macaraig, 191 SCRA 452 (1990)

An item in a bill refers to particulars, details, the distinct and severable parts of a bill. In budgetary legislation, an item is an invalid sum of money dedicated to a stated purpose.

iii.Non-impairment of the jurisdiction of the Supreme Court

Sec. 5 (2b), Art. VIII, 1987 Constitution

The Supreme Court shall have the power to review, revise, reverse, modify or affirm on appeal or certiorari, all cases involving the legality of any tax imposed, assessment, or toll, or any penalty imposed in relation thereto.

Congress cannot take away from the Supreme Court the power given to it by the Constitution as the final arbiter of the tax cases.

The decisions of BIR are appealable to CTA. Court of Tax Appeals may be appealed to the Court of Appeals. Decision rendered by the CA may be elevated to the Supreme Court.

CIR v. Santos, 277 SCRA 617 (1997)

Lower Courts (CFI) has the authority to decides questions of constitutionality of a law does not extend on deciding questions which pertains to legislative policy.

San Miguel Corp. v. Avelino, 89 SCRA 69 (1979)

CFI judge has the authority to pass upon the validity of a city tax ordinance even after its validity ahd been contested before the Secretary of Justice who rendered a decision thereon. The decision of Sec. Justice that the ordinance in questions I of doubtful validity is not a declaration that it is unlawful.

iv.Revenue bills shall originate from the House of Representatives

Sec. 24, Art. VI, 1987 Constitution

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

It is not the revenue law but the revenue bill which is required by the constitution to originate exclusively in the House of Representative.

Tolentino v. Sec. of Finance, supra., supra.

The Constitution simply requires that there must be that initiative coming from the House of Representatives relative to appropriation, revenue and tariff bills on the theory that, elected as they were from the districts, the members of the House can be expected to be more sensitive to the local needs and problems.

It is not the law, but the revenue bill, which is required by the Constitution to originate exclusively in the HR, because a bill originating in the House may undergo such extensive change in the Senate that result may be rewriting of the whole, and a distinct bill may be produced. (amendment by substitution)

The Constitution does not also prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, as long as action by the Senate is withheld until receipt of said bill

v.Infringement of press freedom


No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people peaceably to assemble and petition the government for redress of grievances.


The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services and the lease of properties purely for revenue purposes. To subject the press to its payment is not to burden the exercise of its right any more than to make the press pay income tax or subject it to general regulation is not to violate its freedom under the Constitution. (PPI v. de Ocampo GR 115931, 30 October 1995)

vi.Grant of Franchise

Tax exemptions included in the grant of a franchise may be revoked by another law as it is specifically provided in the Constitution that the grant of any franchise is always subject to amendment, alteration, or repeal by the Congress when the common good so requires.

Sec. 11, Art. XII, 1987 Constitution

No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.


Congress may withdraw tax exemption granted to any corporations or GOCCs such as PAL. The law could take back the privilege anytime without offense to the constitution. By granting exemptions, the State does not forever waive the exercise of its sovereign prerogative.

C.Situs of Taxation and Double Taxation

The power to tax is limited only to persons, property or businesses within the jurisdiction or territory of the taxing power.

EXCEPT:

A) Where the tax laws operate outside territorial jurisdiction

1) TAXATION of resident citizens on their incomes derived from abroad

B) Where tax laws do not operate within the territorial jurisdiction of the State

1) When exempted by treaty obligations

2) When exempted by international comity

1. Meaning of situs

Situs- place where a thing is considered for taxation. It is necessary for the exercise of dominion/authority of a state over a subject matter.

The determination of the situs of taxation depends on various factors including the:

1. Nature of the tax;

2. Subject matter thereof (e.g. persons, property, act or or activity);

3. Possible protection and benefit that may accrue both to the government and the taxpayer;

4. Residence or citizenship of the taxpayer; and

5. Source of income.

2. Situs of subjects of taxation

KIND OF TAX

SITUS

Personal or Community Tax

Residence or domicile of the taxpayer

Real Property Tax

Location of the property

Personal Property Tax

TANGIBLE: where it is physically located or permanently kept (Lex Rei Sitae)

INTANGIBLE: Subject to Sec 104 of the NIRC * and the principle of Mobilia Sequuntur Personam **

Business Tax

Place of Business

Excise or Privilege Tax

Where the act is performed or where occupation is pursued

Sales Tax

Where the sale is consummated

Income Tax

Consider: (1) citizenship, (2) residence,

(3) source of income (Sec 42, 23, NIRC of 1997)

Transfer Tax

Residence or citizenship of the taxpayer

or location of the property

Donors Tax

Location of the property

and the citizenship of the donor (Sec 98, NIRC 1997)

Estate Tax

Location and citizenship of the decedent.(Sec 85, NIRC)

Franchise Tax

state which granted the franchise

*Lex Rei Situs -where the property is located

* Mobilia Sequuntur Personam movables follow the person. According to this maxim, the situs of personal property is the domicile of the owner. This is a merely a fiction of law intended for convenience and not to be controlling where justice does not demand it.

** the following intangible properties are considered as properties with a situs in the Philippines:

a. Franchise which must be exercised in the Philippines

b. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws.

c. Shares, obligations or bonds issued by any foreign corporation 85% of business which is located in the Philippines

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

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

Sec. 42, 104

CIR v. British Overseas Airway Corp., supra.

Revenue derived by an of-line international carrier without any flight from the Philippines, from ticket sales through its local agent are subject to tax on gross Philippine billings

CIR v. Japan Airlines, supra.

JAL made PAL its sales ticket agent in the Philippines. For the source of income to be considered coming from the Philippines, it is sufficient that the income is derived from the activities within this country regardless of the absence of flight operations within Philippine territory.

Wells Fargo Bank v. Collector, 70 Phil 325 (1940)

The shares of stock are subject to Philippine inheritance tax considering that the decedent was domiciled in California


All subjects of taxation similarly situated are to be treated alike both in privileges confirmed and liabilities imposed.

3. Multiplicity of Situs, Collector v. de Lara, 102 Phil 813 (1958)

CIR v. De Lara, 102 Phil 813

The Supreme Court did not subject to estate and inheritance taxes the shares of stock issued by Philippine corporations which were left by a non-resident alien after his death. Considering that he is a resident of a foreign country, his estate is entitled to exemption from inheritance tax on the intangible personal property found in the Philippines. This exemption is granted to non-residents to reduce the burdens of multiple taxation, which otherwise would subject a decedents intangible personal property to the inheritance tax both in his place of residence and domicile and the place where those are found.

This is, therefore, an exception to the decision of the Supreme Court in Wells Fargo v. CIR. This has since been incorporated in Sec. 104 of the NIRC.

Sec. 104, NIRC- No tax shall be collected for intangible personal property if the decedent at time of his death was citizen and resident of a foreign country.

Multiplicity of suits

Multiplicity of situs, or the taxation of the same income or intangible subjects in several taxing jurisdictions, arises from various factors:

1. The variance in the concept of domicile for tax purposes;

2. Multiple distinct relationships that may arise with respect to intangible personal property; or

3. The use to which the property may have been devoted all of which may receive the protection of the laws of jurisdictions other than the domicile of the owner thereto.

The remedy to avoid or reduce the consequent burden in case of multiplicity of situs is either to:

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

2. Enter into tax treaties with other States.

4. Double Taxation

Definition: Taxing the same person, property, business, object twice when it should only be taxed once.

Is Double Taxation Prohibited In The Phils?

No, there is no Constitutional prohibition against double taxation. It is not favored but permissible. (Pepsi Cola Bottling Co. v. City of Butuan, GR L-22814, 28 August 1968)

Double taxation becomes obnoxious only when the taxpayer is taxed twice for the benefit of the same government entity. (Commissioner vs. Lednicky (GR L-18169, L-18286, L-21434; 31 July 1964)

1. Kinds of Double Taxation

a. Direct Double or Duplicate Taxation this is objectionable or prohibited because this constitutes a violation of substantive due process.

ELEMENTS: (Villanueva v. City of Iloilo, supra)

Taxing twice

By the same taxing authority

Within the same jurisdiction or taxing district

For the same purpose

In the same taxing period

The same subject or object

Of the same kind or character of tax.

b. Indirect Duplicate Taxation not legally objectionable. The absence of one or more of the above-mentioned elements makes the double taxation indirect.

EXAMPLES:

A) The taxpayers warehousing business although carried on in relation to the operation of its sugar central is a distinct and separate taxable business.

B) A license tax may be levied upon a business or occupation although the land or property used in connection therewith is subject to property tax.

C) Both a license fee and a tax may be imposed on the same business or occupation for selling the same article and this is not in violation of the rules against double taxation.

D) When every bottle or container of intoxicating beverages is subject to local tax and at the same time the business of selling such product is also subject to liquors license.

E) A tax imposed on both on the occupation of fishing and of the fishpond itself

c. Domestic this arises when the taxes are imposed by the local or national government (within the same state)

d. International refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of of the same subject matter for identical periods

a.Meaning

In its strict sense, referred to as direct duplicate taxation, double taxation means:

1. Taxing twice;

2. by the same taxing authority;

3. within the same jurisdiction or taxing district;

4. for the same purpose;

5. in the same year or taxing period;

6. same property in the territory.

CIR v. S.C. Johnson and Son, Inc., 309 SCRA 87 (1999)

Double Taxationtakes place when a person is resident of a contracting state and derives income from, or owns capital in the other contracting state and both states impose tax on that income or capital.

b. Double taxation in its broad sense

In its broad sense, referred to as indirect double taxation, double taxation is taxation other than direct duplicate taxation. It extends to all cases in which there is a burden of two or more impositions.

Villanueva v. City of Iloilo, supra.

An ordinance imposing a municipal tax on tenement houses was challenged because the owners already pay real estate taxes and also income taxes under the NIRC. The Supreme Court held that there was no double taxation , so long as it does not violates any other constitutional provision. The same tax may be imposed by the National Government as well as the local government. There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling or activity by both the state and a political subdivision thereof. Further, a license tax may be levied upon a business or occupation although the land used in connection therewith is subject to property tax.

b. Constitutionality of double taxation

City of Baguio v. de Leon, supra.

The argument against double taxation may not be invoked where one tax is imposed by the state and the other imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and a political subdivision thereof. And where the statute or ordinance in question applies equally to all persons, firms and corporations placed in a similar situation, there is no infringement of the rule on equality.

Pepsi Cola Bottling v. City of Butuan, supra.

An ordinance imposing sales tax on agents/consignee selling merchandise from outside dealers does not amount to double taxation. Double taxation, in general, is not forbidden by our fundamental law. However, the ordinance is arbitrary to other member of the same taxable class hence the law violates the rule of uniformity in taxation. There is no constitutional prohibition against double taxation in the Philippines. It is something not favored but is permissible, provided that the other constitutional requirements is not thereby violated

Sanchez v. Collector, 97 Phil 687 (1955)

A license tax may be levied upon a business or occupation although the land or property used therein is subject to property tax. The state may collect an ad volarem tax on property used in a calling, and at the same time impose a license tax on the pursuit of that calling, the imposition of the later kind of tax that being no sense as double tax.

City of Mla. v. Interisland Gas Service, 99 Phil 847 (1956)

The fees paid by the defendant under a city ordinance was a license fee, in the exercise of police power and not under its inherent power of taxation, and double taxation is not prohibited in our constitution.

Cpa. General de Tabacos v. City of Mla., supra.

Both license fee and a tax may be imposed on the same business or occupation, or for selling the same article, this is not being a violation of the rule against double taxation.

Doctrines On Double Taxation

1) Direct Double Taxation (DDT) is not allowed because it amounts to confiscation of property without due process of law

2) You can question the validity of double taxation if there is a violation of the Equal protection clause or Equality or Uniformity of Taxation

3) All doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer

D.Means of Avoiding and Minimizing the Burden of Taxation

1. Shifting of tax burden

SHIFTING

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

Process by which such tax burden is transferred from statutory taxpayer to another without violating the law.

a. Ways of shifting the tax burden

1) FORWARD SHIFTING

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.

Example:

Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who also shifts it to the final purchaser or consumer

2) BACKWARD SHIFTING

When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factors of production.

Example:

Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after the price is reduced, and from the latter to the wholesaler, or finally to the manufacturer or producer.

3)ONWARD SHIFTING

When the tax is shifted two or more times either forward or backward

Example:

Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the 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.Taxes that can be shifted

Sec. 105-VAT

Only indirect taxes may be shifted: VAT, professional tax, amusement tax, customs duties

c. Meaning of impact and incidence of taxation

Impact of taxation is the 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. He is also termed as the statutory taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax.

Incidence of taxation is that point on which the tax burden finally rests or settle down. It takes place when shifting has been effected from the statutory taxpayer to another.

Relationship between impact, shifting, and incidence of a tax

The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result. Thus, the impact in a sales tax (i.e. VAT) is on the seller (manufacturer) who shifts the burden to the customer who finally bears the incidence of the tax.

Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the setting or coming to rest of the tax.

2. Tax evasion

It is also known as tax dodging

It is punishable by law.

Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax.

Elements of tax evasion

Tax evasion connotes the integration of three factors:

1. The end to be achieved. Example: the payment of less than that known by the taxpayer to be legally due, or in paying no tax when such is due.

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

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

INDICIA of FRAUD IN TAX EVASION

Failure to declare for taxation purposes true and actual income derived from business for two (2) consecutive years; or

Substantial under-declaration of income tax returns of the taxpayer for four (4) consecutive years coupled with unintentional overstatement of deductions

EVIDENCE TO PROVE TAX EVASION

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

Republic v. Gonzales, 13 SCRA 633 (1965)

The Supreme Court affirmed the assessment of a deficiency tax against Gonzales, a private concessionaire engaged in the manufacture of furniture inside the Clark Air Base, for under-declaration of his income. SC held that the failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two consecutive years is an indication of his fraudulent intent to cheat the government of taxes due to it.

Sec. 254-Attempt to Evade or Defeat Tax-Any person willfully attempts in any manner to evade or defeat any tax imposed under this code of the payment thereon shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less then Php 30,000.00 but not more than Php 100,000.00 and suffer imprisonment of not less than 2 years but not more than 4 years. Provided, that the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes.

3. Tax avoidance

Tax avoidance is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is politely called, tax minimization and is not punishable by law

Ways of avoiding tax (minimizing or escaping tax)

1. Shifting

2. Capitalization

3. Evasion

4. Exemption

5. Transformation

6. Avoidance

Note: With the exception of evasion, all are legal means of avoiding taxes.

What is TRANSFORMATION?

The manufacturer in an effort to avoid losing his customers, maintains the same selling price and margin of profit, not by shifting the tax burden to his customers, but by improving his method of production and cutting down or other production cost, thereby transforming the tax into or earn through the medium of production.

Delpher Traders Corp. v. IAC, 157 SCRA 349 (1988)

The Supreme Court upheld the estate planning scheme resorted to by the Pacheco family in converting their property to shares of stock in a corporation which they themselves owned and controlled. By virtue of the deed of exchange, the Pacheco co-owners saved on inheritance taxes. The Supreme Court said the records do not point to anything wrong and objectionable about this estate planning scheme resorted to. The legal right of the taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them by means which the law permits cannot be doubted.

Yutivo v. CTA, 1 SCRA 160 (1961)

The intention to minimize taxes, when used in the context of fraud, must be proven by clear and convincing evidence amounting to more than mere preponderance. Mere understatement of tax in itself does not prove fraud.

4. Exemption from taxation

a.meaning of exemption from taxation

It is 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. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected.

1. Principle Governing Exemptions

In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer.

One who claims exemption should prove by convincing proof that he is exempted.

Taxation is the rule and exemption is the exemption

Exemption is not presumed

Constitutional grants of tax exemption are self executing

Tax exemption are personal and cannot be delegated.

Exemption generally covers direct tax, unless otherwise provided.

Exemption is allowed only if there is a clear provision there for.

It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.

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

Greenfield v. Meer, 77 Phil 394 (1946)

PLDT v. City of Davao, 363 SCRA 522 (2001)

with the passing of LGC which grant taxing power to the Local Government, all exemptions granted to all persons, whether natural or juridical, including those which in the future might be granted, are withdrawn unless the law granting the exemption expressly states that the exemption also applies to local taxes.

PLDT v. City of Davao, G.R. 143867, March 25, 2003

Legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.

i.compared with tax remission, condonation

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.

Tax exemption, on the other hand, is the grant of immunity to particular persons or corporations of a particular class from a tax of which persons and corporations generally within the same state or taxing district are obliged to pay. Tax exemptions are not favored and are construed strictissimi juris against the taxpayer.

Juan Luna Subd. V. M. Sarmiento, 91 Phil 371 (1952)

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.

Surigao Corp. Min. v. Collector, 9 SCRA 728 (1963)

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 expressly provided in the law.

Condonation of taxes which are unpaid does not extend to refund of paid taxes.

For refund of taxes, in the suit for recovery of the payment of taxes as having been illegally collected, the burden is upon the taxpayer to establish the facts which show the illegality of the tax or that the determination thereof is erroneous.

ii.tax amnesty

tax amnesty

Tax amnesty, being a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue to collect what otherwise would be due it and, in this sense, prejudicial thereto. It is granted particularly to tax evaders who wish to relent and are willing to reform, thus giving them a chance to do so and thereby become a part of the new society with a clean slate.

Note:

Like tax exemption, tax amnesty is never favored nor presumed in law, and the terms of the tax amnesty shall be strictly construed against the tax payer and liberally in favor of the government.

Unlike tax exemption, tax amnesty has limited applicability as to cover a particular taxing period or transaction only.

Commissioner v. CA and ROH Auto, 240 SCRA 368 (1995)

People v. Castaneda, 165 SCRA 327 (1988)

To be entitled to the extinction of liability under PD370, the claimant must have (1) voluntarily disclosed his previously untaxed income or wealth and paid the required 15% tax on such previously untaxed income or wealth. In this case, claimant is not entitled since the disclosure or previously untaxed income was not voluntarily but was a result of tax cases already pending.

Pascual v. CIR, 166 SCRA 560 (1988)

2 isolated transactions is not a case of partnership, hence petitioners are not liable for corporate income tax. As they have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are relieved of any further tax liability arising therefrom.

Republic v. IAC, 196 SCRA 335 (1991)

Tax amnesty payments bar an action for recovery of deficiency income taxes under PDs 23, 213, and 370. Even the deficiency tax assessment against the spouses were correct, since the latter have already paid almost the equivalent amount to the Government by way of amnesty taxes under P.D. 213, and were granted not merely an exemption, but an amnesty, for their past tax failings, the Government is stopped from collecting the difference between the deficiency tax assessment and the amount already paid by them as amnesty tax.

CIR v. Marubeni Corp., 372 SCRA 576 (2001)

He who claims exception (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state.

In this case, amnesty (EO 41) is given except (sec 4, b) those with income tax cases already filed in court as of the effectivity thereof which is on August 22, 1986. Since the case against the corporation was filed on Sept. 26, 1986, it is not disqualified to avail the amnesty for income tax under EO 41.

iii.VAT zero-rating, Sec. 106 (A) (2)

R.A. 7716 (An act restructuring the value added tax (vat) system, widening its tax based and enhancing its administration and for these purposes amending and repealing the relevant provisions of the national internal revenue code, as amended, and for other purposes.)

"(b)transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered persons shall be subject to 0%:

"(1)Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

"(2)Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

"(3)Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate.

"(4)Services rendered to vessels engaged exclusively in international shipping; and

"(5)Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

Sec. 106 (A)(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws.

(b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale" means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

iv.exclusions, deductions, Sec. 32 (B), 34

EXCLUSION

Exclusion refers to income received or earned but is not taxable as income because it is exempted by law or by treaty. Such tax-free income is not to be included in the income tax return unless information regarding it is specifically called for.

NIRC Sec. 32 (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title:

1. Proceeds from life insurance

2. Amount received by insured as return of premium

3. Gifts, bequests and devises

4. Compensation for injuries or sickness

5. Income exempt under treaty

6. Retirement benefits, pensions, gratuities, etc.

7. Income derived by foreign government

8. Income derived by the Philippine Government or its political subdivisions

9. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement.

10. Prizes and awards in sports competitions sanctioned by the national sports associations

11. 13th month pay and other benefits not exceeding P30,000.00. Applies both to public and private employees.

12. GSIS, SSS, Medicare and other contributions

13. Gains from the sale of bonds, debentures or other certificate of indebtedness. 5 eyars or more. If maturity is less than 5 years, it is taxable.

14. Gains from redemption of shares in mutual fund. It must be emanate from the mutual fund.

DEDUCTIONS FROM GROSS INCOME

Deductions are items or amounts which the law allows to be deducted under certain conditions from gross income in order to arrive at taxable income.

NIRC SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;

1. Expenses

2. Interest

3. Taxes

4. Losses

5. Bad debts

6. Depreciation

7. Depletion of oil and gas wells and mines

8. Charitable and other contributions

9. Research and development

10. Pension trusts

11. Premium payments on health and/or hospitalization insurance of an individual taxpayer

Deduction v. exemption

Deduction is an amount allowed by law to be subtracted from gross income to arrive at taxable income. Exemption from taxation is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which others generally within the same taxing district are obliged to pay.

Deduction v. exclusion

Deduction is an amount allowed by law to be subtracted from gross income to arrive at taxable income. Exclusion refers to income received or earned but is not taxable as income because exempted by law or by treaty. Such tax-free income is not to be included in the income tax return unless information regarding it is specifically called for. [Section 61, Revenue Regulation 2]

Basic principles governing deductions

1. The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the deduction; and

2. He must be able to prove that he is entitled to the deduction authorized or allowed.

Kinds of deductions

1. Itemized deduction which is available to individual and corporate taxpayers

2. Optional standard deduction which is available to individual taxpayers only, except a non-resident alien.

3. Special deductions which is available, in addition to the itemized deductions, to certain corporations, i.e. insurance companies and propriety educational corporations.

Time within which to claim deduction

1. As a rule, if a taxpayer does not, within a year, deduct certain of his expenses, losses, interests, taxes, or other charges, he cannot deduct them from the income of the next or any succeeding year.

2. If he keeps his books on the cash receipts basis, the expenses are deductible in the year they are paid.

3. If on the actual basis, then in the year they are incurred, whether paid or not.

Who may not avail of deductions form gross income?

1. Citizens and resident aliens whose income is purely compensation income.

* They are allowed personal and additional exemptions and deduction for premium payments on

health and hospitalization insurance.

2. Non-resident aliens not engaged in trade or business in the Philippines

3. Non-resident foreign corporations.

Some rules on deduction

Itemized deduction may apply to corporate tax payer as well as individual taxpayer.

A corporation may avail only of the deduction from (1) to (10): premium payments on health and/or hospitalization insurance is deductible only by an individual taxpayer.

A corporation may avail only of the itemized deductions: an individual, except a non-resident alien, may elect the itemized deductions or the optional standard deduction.

Thus, the optional standard deduction is not available to corporations.

An individual earning purely compensation income is not allowed itemized deductions, except premium payments on health and/or hospitalization insurance. In addition, he is also granted personal and additional exemptions.

An individual, who earns income other than purely compensation income, is allowed personal additional exemptions in addition to the itemized deductions or the optional standard deductions.

Two kinds of deduction available to individuals, except a non-resident alien

1. Itemized deduction

2. Optional standard deduction

Note: Optional standard deduction is not available to corporations.

b. Kinds of tax exemption

Express or implied, total or partial

Kinds of Tax Exemption According to Manner of Creation

1) Express or affirmative exemption

When certain persons, property or transactions are, by express provision, exempted from all certain taxes, either entirely or in part.

2) Implied exemption or exemption by omission

When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes.

3) Contractual

Agreed to by the taxing authority in contracts lawfully entered into them under enabling laws. (i.e.: treaty, licensing ordinance)

Kinds of Tax Exemption According to Scope or Extent

1) TOTALwhen certain persons, property or transactions are exempted, expressly or impliedly from all taxes.

2) PARTIALwhen certain persons, property or transactions are exempted, expressly or impliedly from certain taxes, either entirely or in part.

Exemption from direct tax, from indirect tax

A law granting exemption from direct tax does not exempt the subject form indirect tax.

Does the provision in a statute granting exemption from all taxes include indirect taxes?

No. As a general rule, indirect taxes are not included in the grant of such exemption unless it is expressly stated.

Atlas Fertilizer v. Commissioner, 100 SCRA 556( 1980)

While the burden of proof is on the claimant to establish his right of exemption, there may be situations when he need not to adduce further evidence to show that he is entitled to exemption.

Commissioner v. Phil. Ace Line, 25 SCRA 912 (1968)

Every tax exemption implies a waiver of the right to collect what otherwise would be due to the government. The Constitution does not bar tax exemption. Purpose of tax exemption is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption.

Com. v. RTN Mining, 202 SCRA 137 (1991); 207 SCRA 549 (1992)

When obvious inconsistency between an earlier law and latter law granting an exemption, the court is compelled to abide by the maxim that all doubts granting exemption must be resolved in favor of the taxing authority. Tax exemptions must be strictly construed and can only be given force when the grant is clear and categorical.

Caltex v. COA, supra.

In claiming tax exemption, the burden of proof lies upon the claimant

It cannot be created by mere implication

It cannot be presumed that you are entitled to tax exemption

You must prove it

c. Nature of the power to grant tax exemption

1. National government

The power to grant tax exemptions is an attribute of sovereignty for the power to prescribe who or what persons or property shall be taxed implies the power to prescribe who or what persons or property shall be taxed implies the power to prescribe who or what persons or property shall not be taxed.

2. Local governments

Municipal corporations are clothed with no inherent power to tax or to grant tax exemptions. But the moment the power to impose a particular tax is granted, they also have the power to grant exemptions therefrom unless forbidden by some provision of the Constitution or the law.

The legislature may delegate its power to grant tax exemptions to the same extent that it may exercise the power to exempt.

Basco v. PAGCOR [196 SCRA 52]

The power to tax of municipal corporations must always yield to a legislative act of Congress which is superior, having been passed by the State itself. Municipal corporations are mere creatures of Congress which has the power to create and abolish municipal corporations due to its general legislative powers. If Congress can grant the power to tax, it can also provide for exemptions or even take back the power.

Maceda v. Macaraig, (1993) supra.

In the case of property owned by the state or a city or other public corporations, the express exception should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property exception is the rule and taxation the exception.

d. Rationale for tax exemption

Rationale for granting tax exemptions

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 the exemption.

The theory behind the grant of tax exemptions is that such act will benefit the body of the people. It is not based on the idea of lessening the burden of the individual owners of property.

Davao Light v. Com., 22 SCRA 122 (1972)

Facts: Davao Light is a grantee of a legislative franchise to install, operate and maintain an electric light, heat

and power plant in the city of Davao, for 50 years. On two occasions, it imported electrical supplies, materials

and equipment for installation in its power plant. The importations arrived in the port of Cebu City, where the

Collector imposed custom duties and taxes amounting to P9,928. Davao Light paid under protest, claiming it

is similarly tax-exempted as the National Power Corporation, which is allegedly posing as competition to

Davao Light in its business.

Issue: Whether Davao Light is similarly tax-exempt as Napocor.

Held: Davao Lights purpose in securing a franchise to establish and operate an electric plant and power

stations was to engage in a business or profit-making venture, while Napocor was specifically created to

undertake the development of hydraulic power nationwide and the production of power from other sources,

for use of the government and the general public. In isolated sale of electric power to one government-owned

plant (National Development Co., in Davao) would not be enough to classify the Napocor as a competing

concern to Davao Lights enterprise. Napocors tax exemption (RA 358) was granted in order to facilitate the

liquidation by said corporation of its liabilities, and the consequential release by the government itself from its

obligation in the transactions entered into by the President on behalf of Napocor. Davao Light is not entitled

to the same exemption privileges enjoyed by another operator without an express provision of the law to that

effect. Exemption from taxation is never presumed. For tax exemption to be recognized, the grant must be

clear and express. It cannot be made to rest on vague implications.

Tan Kim Kee v. CTA, 7 SCRA 670 (1963)

NPC v. RTC Presiding Judge, Cagayan de Oro, 190 SCRA 477 (1990)

When conflict between general and special law arises, the special law prevails. When the law does not distinguished as to the kinds of tax exemptions withdrawn, the plain meaning is that all tax exemptions are covered.

Chavez v. PCGG [GR No. 130716, Dec. 6, 1998]

In a compromise agreement between the Philippine Government, represented by the PCGG, and the Marcos heirs, the PCGG granted tax exemptions to the assets which will be apportioned to the Marcos heirs. The Supreme Court ruled that the PCGG has absolutely no power to grant tax exemptions, even under the cover of its authority to compromise ill gotten wealth cases. The grant of tax exemptions is the exclusive prerogative of Congress.

In fact, the Supreme Court even stated that Congress itself cannot grant tax exemptions in the case at bar because it will violate the equal protection clause of the Constitution.

Davao Gulf v. CIR, 293 SCRA 76 (1998)

A tax cannot be imposed unless it is supported by the clear and express language of a statute; on the other hand, once the tax is unquestionably imposed, a claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. Since the partial refund authorized under Sec. 5, RA 1435, is in the nature of a tax exemption, it must be construed strictissimi juris against the grantee. Hence, petitioners claim for refund based on specific taxes it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken.


Tolentino v. Sec. of Finance,(1995) supra.

By granting exemptions, the State does not forever waive the exercise of its sovereign prerogative.

e. Nature of tax exemption

1) It is a mere personal privilege of the grantee.

2) It is generally revocable by the government unless the exemption is founded on a contract which is contract which is protected from impairment.

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

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

5) It is not transferable except if the law expressly provides so.


PLDT v. City of Davao, (2001) supra.


Applying the rule of strict construction to statutory provisions granting tax exemptions or deductions would minimize differential treatment and foster fairness and equality of treatment among taxpayers.

Phil. Acetylene v. Commissioner, supra.

In the construction of tax statutes, exemptions are not favored and are construed stictissimi juris.

Wonder Mech v. CTA, 64 SCRA 555 (1975)

A tax exemption in the manufacture and sale of machines for making cigarettes paper does not include the manufacture and sale of the products produced by these machines of the manufacture and sale of other types of machines for cigarettes production.

Atlas Fertilizer v. Com., supra.

The Secretary of Finance was convinced that the equipment imported were not only needed for exclusive use in the manufacture of fertilizer but the same were actually used therefore thus approving the application for exemption without adducing evidence that he is entitled for exemption.

f. Laws granting tax exemption, incentives

i. Constitution

Sec. 28 (3), Art. VI and Sec. 4 (3, 4), Art. XIV, 1987 Constitution

Sec. 28 (3), Art. VI, Constitution . (Property Tax Exemption).

Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation

Sec. 4 (3, 4), Art. XIV, 1987 Constitution (Income tax, Property Tax, and Donors Tax exemption)

All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Sec.4, (3)

Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. Sec. 4, (4)

Abra Valley v. Aquino, supra.

The test of exemption from taxation is the use of the property for the purpose mentioned in the Constitution. The term exclusively uses does not necessarily means total or absolute use for religious, charitable, educational purposes. Even if the property is incidentally and necessarily used for the accomplishment of the said purposes, tax exemption will apply.

Lung Center of the Philippines v Quezon City, G.R. 144104, 433, June 29, 2004 SCRA 119

When the property is used for one or more commercial purposes, it is subject to taxation. Portions of the land leased to the private entities as well as those parts of the hospital leased to private individuals are not exempt from taxes.

ii.tax statutes

Sec. 30, 32 (B), 106, 199 Exemption Granted by NIRC (R.A. 7716)

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

NIRC Sec. 32 (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title:

1. Proceeds from life insurance

2. Amount received by insured as return of premium

3. Gifts, bequests and devises

4. Compensation for injuries or sickness

5. Income exempt under treaty

6. Retirement benefits, pensions, gratuities, etc

Taxation Goofy Final

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