Taxation I Donalvo 1st Exam Lecture

2014 TAXATION 1 -1ST EXAM

FROM THE LECTURES OF ATTY. PERCY DONALVO Alabastro|Alvar|Bajenting|Ceballo|Juezan|Mendoza|Miles|Murcia|Quiaot|Ranises|Remoroza

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GENERAL PRINCIPLES

JUNE 17

What are examples of taxes?

Estate tax- a tax on the privilege to transfer properties

after the death.

Donors tax- Even if you donate: if it is not an exempted

donation, if your donation will not exceed 100

thousand, you will give it to someone who is not

considered exempted, you will be subjected to such tax.

Almost everything in our lives is connected to tax. We

should be aware of the tax consequences later on. Tax

is a burden and at the same time it is an enforced

contribution. Just remember, tax is a Burden.

Tax is a class in itself. It is just a set of rules that you will

apply later on in a given set of facts.

Taxes: (Power-Process-Means)

A power by which the sovereign power through

its lawmaking body raises revenue to defray the

necessary expenses of the government.

It is a process or an act imposing a charge by

governmental authority on property, Individuals

or transaction to raise money for public

purpose

It is a means by which the lawmaking body of

the state demands more revenue in order to

support its systems and carry out its legitimate

objectives.

Power to tax is a very long process. It starts with making

a law and enforcing it.

Taxation:

the inherent power of the sovereign exercised through

the legislature to impose burdens upon subjects and

objects within its jurisdiction for the purpose of raising

revenues to carry out the legitimate objects of the

government.

This definition encompasses the nature and

characteristics of Taxation.

Nature:

1. Inherent power

3 INHERENT POWERS OF THE STATE

a.) Police power

b.) Eminent Domain

c.) Taxation

The power to tax is inherent such that you do

not need the Constitution for the power to tax

to exist. The moment the Republic of the

Philippines came to existence, it comes with it

the power to tax. This is automatic together

with its existence.

Purpose of the Constitution: Only limits the

power to tax. Does it expand? NO.

GENERAL RULE: The power to tax is plenary,

encompassing and Unlimited.

o the power to tax is the most powerful

of the three inherent powers. Why?

Because the power to tax can tax

almost anything under the sun.

Objects/Subjects of Taxation

1. Persons Community tax

2. Properties- Real property Taxes

3. Rights- Right to give property to another

The subject of taxation practically encompasses not just

us as person but all other things around us, and our

actions. That is an example of how plenary our taxation

is.

Valentin Tio vs Videogram Regulatory Board (L-75697, June 19,1987)

Doctrine: a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed FACTS: There was a law creating the Videogram

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Regulatory Board. When this law was passed, another law was passed creating the NIRC. There was an amendment, it is about the videotapes, xxx there shall be collected for each videotape, cassette an annual tax of 5 pesos provided that locally manufactured videotapes shall be subject to sales tax xxx The sales tax is 30% of the gross sales (total sales without any deductions) Its so big. Valentin Tio is a videogram operator, went to the court challenging this provision of the NIRC. He said that the tax is harsh, oppressive, confiscatory in violation of the Constitution. Mamamatay ang business ko. In other words, the constitutionality of the law was challenged in such grounds. HELD: The SC said Yes the tax is harsh. We recognize the fact that it can possibly kill your business. The mere fact that the tax measure is harsh by itself does not make the law unconstitutional. It sustained the validity of the tax. It is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation.

The first line of defense is the legislature. The

legislature has the authority to tax what needs to be

taxed and how much would be taxed.

The power to tax involves the Power to Destroy

1.) Chief Justice Marshall of US: A destructive

power which interferes with the personal and

property rights of the people.

2.) Justice Holmes: The power to tax is not the

power to destroy while this court sits.

Comment (Sir Percy): Some sort of a qualification.

Because when you say the power to tax is the power to

destroy, it is essentially true. The implications of this

principle:

The power to tax is limited by our constitution.

That is why when there is a tax law and is

violative of our constitution, the court will not

hesitate to strike it down.

The power of the court to review or strike down

an invalid law.

The supreme court is the final arbiter of tax laws.

What is the purpose of sin taxes? In order to protect the

public. In the case of Tio, that is to protect the public

from the proliferation of porn.

3.) The power to tax involves the power to

destroy so it must be exercised with great

caution.

Philippine Health Care vs Commissioner

Doctrine: The power of taxation is sometimes called the power to destroy, it shall be exercised with great caution to minimize the injury of the proprietary rights of the taxpayer. FACTS: If you compare our net worth, it s around 200M and our deficiency taxes in Documentary stamps is at around 300M, if you will tax us, you will be killing our business. If you kill our business, there will be so many people affected. If you kill us by exacting that amount of tax, it would be a loss in your part. HELD: SC, it is oppressive. The power to tax is oppressive. Aside from the fact that PHIC is not an insurance company, it is not liable to DST because of the tax laws oppressiveness.

2. Legislative Power

3. Subject to inherent and constitutional

limitations

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JUNE 18

Let us discuss the case of:

Commissioner vs. SM Prime Holdings.

What is the business of SM Prime Holdings?

What was the tax deficiency according to the CIR? The payment of VAT.

Why was SM Prime paid under protest?

They were paying what kind of tax? Amusement tax. Sabin g SM, we will pay under protest but we contend that we are not liable for such tax deficiency (VAT) because we are already paying amusement tax.

What else are the contentions of SM?

Whats the issue here? WON SM should pay VAT?

What did the SC said?

You said earlier that one of the contentions of SM was that if they are going to pay VAT on top of the amusement tax, it would be burdensome. How did the SC ruled on that contention?

To sum it up, it would be an unreasonable burden which is why the SC said (balik tayo sa theory) the power to tax involves the power to destroy. It must be exercised with great caution.

The next principle is of course the lifeblood theory

one of the manifestations of the inherent power. What

is this lifeblood theory all about? Taxes are the lifeblood

of the government without which the government

cannot survive. It emanates from necessity. The

government needs money to operate at the same time

we need the government for public welfare. More or

less it is a symbiotic relationship between the

government and its constituents.

What is one of the implications when it comes to

lifeblood theory? Sabi natin lifeblood, kung walang

taxes mamatay ang government. So what is the effect

of this? One is that taxes cannot be subjected to

injunction.

Republic vs. Caguioa It is about the Subic Economic Freeport Zone. There is a certain provision here which provides that the importation of cigars, cigarettes and liquors which was previously tax free will not be subject to fees, taxes and charges.

Sec. 131 (A) of RA 9334: The provision of any special or general law to the contrary notwithstanding, the importation of cigars and cigarettes, distilled spirits, fermented liquors and wines into the Philippines, even if destined for tax and duty free shops, shall be subject to all applicable taxes, duties, charges, including excise taxes due thereon. This shall apply to cigars and cigarettes, distilled spirits, fermented liquors and wines brought directly into the duly chartered or legislated freeports of the Subic Economic Freeport Zone, created under Republic Act No. 7227; x x x

Now, the respondents filed an action in court. They filed a case for injunction. They prayed that the implementation of the law be stopped pending the case. What did the RTC do? It granted the injunction. Sabi niya, you are not supposed to collect the taxes yet because it will cause injury against respondents. So, this case went all the way to SC. The issue here is the writ of injunction order.

Is the writ of injunction proper? Ordinarily, its not. It is difficult for an ordinary citizen to stop the collection of tax. You may not enjoin the collection of taxes. HELD: According to the SC, the power to tax emanates from necessity without taxes the government cannot perform its mandate of promoting the welfare and being of its people. The SC further said that if you enjoin the collection of taxes it will create a limitation of its lifeblood. Its like choking the government. Basically, it is the lifeblood of the government thus generally, collection of taxes may not be enjoined. But later on that there are exceptions on the power to tax.

Legislative Character of the Power of Taxation

Now, we go the legislative character of power of

taxation. The power to tax is legislative in character and

it is exercised by the legislative department. Ganun lang

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ka simple. This is power is purely legislative and cannot

be delegated even to the executive department. So

essentially, since it is purely legislative it cannot be

delegated. The power to tax cannot be delegated to

somebody else. But you know that there are exceptions

like what? The Local Government. Is a local government

a government of its own? What did you learn in

pubcorp? Local government is not a government of its

own. What is it? Its a municipal corporation, diba?

Some sort of a special corporation

If its not a government, you cannot have the power to

tax. But by virtue of the constitution which allows the

congress to make a law granting these local

governments to exercise the power to tax, okay lang

but there must be a law but this law is the Local

Government Code. We will discuss more of that later

on.

Now, what is the scope of the taxing power?

One author says, The legislature has the power to

define what tax shall be imposed, the reason of the

exaction (you know that the purpose of taxation is for

public), why should it be imposed, how much tax shall

be imposed and where it shall be imposed. that is the

scope of the legislative taxing powers. In other words

let us list that down. The legislative is given the

discretion to determine:

nature of tax

object of tax

extent of the tax

coverage of tax

place or situs of taxation

Lets distinguish the power to tax with police power.

The police power is the power to make and enact laws

to promote public welfare. Can the power to tax and

police power go together? YES, the basic example is

syntaxes.

We already said that the power to tax can go together

with the police power. But how do we distinguish

them? What is our guiding principle in a particular

exaction in taking the property of a person under police

power or under power to tax? What is our primary

guiding principle? You look at the primary purposes of

the law. If the primary purpose of the law is to raise

revenues, so probably the nature of that exaction is

tax. But if the purpose is for regulatory even if the

government has made money later on (incidentally) it

will considered as an exercise of police power. So, you

just look at the main purpose.

Republic vs. International Communications

How much is the permit fee? Look at the permit fee, it more or less 1 million.

What did the International Communications do?

Why did Inter Comm refused to pay the permit fee? What was its contention? Pag tax gani isipan niyo bakit ayaw bayaran ng tax payer.

What is the nature of that permit fee according to Inter Comm? It is in the nature of a tax. Sabi ng Inter Comm, ayaw kong bayaran yan because it is in the nature of a tax. If its in a nature of a tax sinong magcollect nyan?

Sinong nagacollect ng permet fee? NTC. Granting it is a tax, does NTC have the power to collect? What does that make of NTC? Anong klaseng agency ang NTC? Its a GOCC. Can GOCC exercise the power to tax? No.

The basic issue in this case is that WON the permit fee is in the nature of tax or for a regulatory purpose. What was the ruling of the SC? Said permit fee is for a regulatory purpose. Pero bakit 1 million ang permit fee? Because of the nature of the business. It is an international company.

Basically, the contention of the ICC, sabi niya, I will not pay you that kind of amount because it is a tax. Kung tax yan it would seem that NTC will become a taxing authority. We go back to the basic principle that it is the legislature who has the power to tax. But NTC is just a GOCC so it does not have the power to tax unless the law declares it has power to tax. But what did the SC say? According to the Public Service Act, its just the reimbursement of the expenses. Its a regulatory

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provision provided for by law. Its not a tax but it is for purposes of regulation.

Chevron vs. Bases Conversion

What was the policy guideline all about? They are charging royalty fees.

Para saan ang royalty fees?

What is the issue here? What is the contention of Chevron? Bakit ayaw na bayaran ang royalty fees? Basically, what did Chevron say?

What is the nature of royalty fees according to Chevron? It amounts to a tax.

What is the nature of the royalty fees? It is not regulatory in nature.

What did the SC say in this case? Royalty is for regulatory purposes.

Where did the SC base that? The policy guidelines. It essentially provides the safety and security of petroleum fuel that passes the economic zone.

Was there a reasonable cost of exaction for said regulation? Sabi ng SC the cost is reasonable. It is a reasonable cost because there are possible expenses for the regulation. Because of the very nature of the petroleum fuel it is combustible. It can cause damage not only to properties but to persons. So, it needs expensive regulations. The higher the volume mas tumataas ang cause of regulation.

PAL vs. Edu

Ito ang pinakamadaling tandaan na case.

What did PAL do? Did it pay the registration fees? It paid the fees but later on it prayed for a refund.

What did the SC say about the Motor Vehicle Registration fees? It considered the fees as taxes.

The essence in this case is that Motor Vehicle Registration fees are in the nature of taxes because the money that is taken from that registration fees are actually revenue purposes.

JUNE 24

How do we distinguish the power to tax from police power?

TAXATION POLICE POWER

AS TO PURPOSE Raising revenue

Promote public welfare

AS TO AMOUNT OF EXACTION

No limit. Only such to cover the cost of regulation.

AS TO COMPENSATION/benefit

Continuous protection and a more organize society.

A healthy economic standard of society.

AS TO NON-IMPAIRMENT OF CONTRACTS

The rule on non-impairment of contracts subsists.

Superior to the non-impairment clause.

AS TO TRANSFER OF PROPERTY RIGHTS

Taxes paid become part of the public funds.

No transfer, but only restraint on the exercise of property rights exists.

TAXATION EMINENT DOMAIN

AS TO NATURE OF THE POWER EXERCISED

Raise public revenue.

Taking of the private property for public use.

AS TO COMPENSATION RECEIVED

Results in the general benefit of all citizens and inhabitants.

Direct benefit results in the form of jus compensation to the property owner.

AS TO NON-IMPAIRMENT OF CONTRACTS

Inferior. Superior.

AS TO PERSONS AFFECTED

Applies to all. Only a particular property.

Requirements in the exercise of Power of Eminent domain:

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(1) the expropriator must enter a private property; (2) the entrance into private property must be for more than a momentary period; (3) the entry into the property should be under warrant or color of legal authority; (4) the property must be devoted to a public use or otherwise informally appropriated or injuriously affected; and (5) the utilization of the property for public use must be in such a way to oust the owner and deprive him of all beneficial enjoyment of the property. As to Local govt unit:

1. Ordinance by a local legislature is enacted authorizing the local chief executive to exercise eminent domain;

2. For public use or purpose; 3. Payment of just compensation; and 4. Valid and definite offer previously made to the

owner of the property but such offer was not accepted.

Can the power to tax be used implement the power of eminent domain? Yes.

CIR VS CENTRAL LUZON Issue: The basic issue in this case is whether a tax credit is an exercise of States payment of just compensation Held: Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use.[77] The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public interest, public benefit, public welfare, and public convenience.[78] The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private

establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers to the issuance of a tax credit certificate indicating the correct amount of the discounts given. Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain.[80] Tax measures are but enforced contributions exacted on pain of penal sanctions[81] and clearly imposed for a public purpose.[82] In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is not entitled thereto.[84] For this reason, a just compensation for income that is taken away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter that fact.

Tax deduction: A deduction from the gross income that arises due to various types of expenses incurred by a tax payer. Note: No prohibition as to the govt. using this as just compensation. Tax credit: an amount of money that a tax payer is able to subtract from the amount of tax they owe to the govt. -Basically, tax credit and tax deduction have the same effect of lowering your tax. PURPOSES OF TAXATION:

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The primary purpose when you impose a tax is revenue generating. But is it the sole purpose? No. we also have secondary purpose. Again sabi natin we can use the power to tax with the police power, that is, for public purpose and regulatory purpose( other term is sanctuary). Also, we can use taxation to implement the power of eminent domain, that is, for compensatory purpose as discussed in the central Luzon case. And when you talk about compensatory purpose it has something to do with social justice. In other words the power to tax is use to support or implement the social justice mandated by the constitution.

JUNE 25

I think the last case we discussed was about the social

justice provision in relation to public purpose?

Another example where the SC talked about the

purpose of taxation is in the case of:

Batangas Power vs. Batangas City Facts: Basically, what happened in this case was that, sometime in 1991 there was a power crisis. And basically, Batangas Power Corp together withthere were certain contracts executed by Batangas Power Corp and National Power Corp such that Batangas Power Corp applied for a tax exemption under a certain law because it was supposed to be a pioneering industry and it was granted a certain certification. Now, Batangas city actually demanded for the payment of tax from Batangas Power Corp. In the middle of the problem between the city and the corporation, another National Power Corporation came in. So basically, the argument was that I am a National Corp and by virtue of my charter I am supposed to be a tax-exempt entity. I dont know if you have read cases but the National Power Corp before was exempt from any and all taxes including indirect taxes. Which is why Batangas Power Corp said that since Im deriving my right from National Power Corp, Im supposed to be tax-exempt also. Issue: WON Batangas Power Corp is liable for taxes? Should it pay Batangas city? YES

Held: The SC said Batangas Power Corp should pay Batangas city. Whatever tax exemption that was granted to the National Power Corp before was already amended by the Local Government Code. Saan papasok ang Social Justice dito? Anyway, the discussion here is the power of the LGU to tax. We all know right now that under the Constitution, the LGU already has the power to tax. Saan papasok ang Social Justice dito? Basically, the SC said that there was a paradigm shift from centralized government to decentralized system of government through the LGUs. So the government is going more and more decentralized. Thats why when the Local Government Code was enacted, the Congress deemed it proper to set limitations to the LGUs as to coverage of its tax. They will have the power to tax and the Local Government Code provides for the removal of whatever tax exemptions that other previous laws might have provided for some entities and this included National Power Corp. Now why is this a social justice provision? Because one of the main problem of decentralization before prior to the enactment of the Local Government Code is the financial aspect of this Local Government. Prior to the Local Government Code, wala pang tax review so what happens? The National Government will give money or projects to these Local Government Units but its so kulang, wala pa rin. Because of this, so that we will give more power or freedom to the LGUs to serve these constituents, it was then given the power to tax, repealing all other tax exemption. The effect is that it now has a wider tax base. Mas marami na siyang pwedeng i-tax so there could be more money that will come in that is going to be used only by the LGU. Hindi na xa mag rely sa National Government money. So that is the social justice there.

ASPECTS OF TAXATION

What are the aspects of taxation? What is the other

term for that? Aspects of Taxation is actually the

STAGES OF TAXATION. Pag tinanong kayo kung what are

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the Aspects of Taxation, you think of the Stages of

Taxation. So what are the stages of taxation?

1. Levying or imposition of the tax which is a

legislative act; and

2. Collection of the tax levied which is essentially

administrative in character

Other authors would provide 3 aspects of taxation, the

third being PAYMENT. Anyway, it doesnt really matter

but for me, I think the better stages idea for this is yung

3 aspects of taxation. (1) Levy; (2) Assessment and

Collection; (3) Payment.

LEVY OR IMPOSITION

Levy or imposition is the one that is legislative in nature.

This is something to do with tax laws. It involves the

determination by the legislature of the subjects and

objects of taxation, the amount and or rate of taxes and

also the manner of payment of the tax.

ASSESSMENT AND COLLECTION

This is already the administrative part of taxation. This is

no longer legislative, this is already a matter of

enforcement this is a matter of implementing whatever

the Congress has made. Its more on implementation

only. As to assessment and collection, most authors

would make ____ the two ideas but to be technical

about this, these are two different animals. When you

talk about assessment, there are 2 ideas of assessment:

(1) Process; (2) Figure or amount.

Now, as to process, assessment is a process of

determining how much is the tax liability of a tax payer.

More or less, you will determine how much are you

willing to pay the government. Under our government

laws, what is applied here in the Philippines is SELF-

ASSESSMENT. What do you mean by Self-assessment?

The tax-payers themselves would determine initially

how much he is going to pay the government. Sino ang

may business dito? Naka file ka na ng ITR? Why is it that

they initially determine how much they are going to

pay? Because they have the records with them. Sila ang

nakakaalam how much is their income. They are

supposed to declare it to the BIR and they will arrive

with their net taxable income. So ikaw ang magsabi, you

make your own assessment and submit it to the BIR.

After that self assessment, it doesnt end there because

the BIR will have to do something about it. They will

also determine if what you have declared is the correct

amount of income, the correct amount of deductions,

and what you have paid is the correct amount of taxes.

The government will audit you, they will investigate

your books, and if there is a deficiency, that is the time

the government will make an assessment against you.

They will make an assessment as to the tax deficiency.

So the BIR would say okay, you have a tax deficiency of

200k. What happens after that? They will send you a

criminal(?) assessment notice, notifying you of your tax

deficiency. And if you will not do anything about it, the

BIR will again send you a final assessment notice which

is actually the formal demand of the government for

you to pay your taxes. Its either you PROTEST or YOU

DO NOT DO ANYTHING ABOUT IT. If you do not do

anything, then you will have to pay your taxes because

the final assessment notice will be held final and

executory.

Now, the assessment of tax deficiency of the BIR will

become final and executory. Starting from that time,

the government will now exercise its right to collect the

taxes. That is the collection portion. When you talk of

the collection portion its more related to the

government. How will the government collect the taxes

from you? In collection, the government is now or can

now avail of its own remedies to compel the taxpayer to

pay the taxes. How? (1) administrative; (2) civil; or (3)

criminal in nature. Probably if you have a lot of

properties, the government will exercise its right to levy

your properties, they will get your properties and sell

them in public auction and whatever proceeds from

there will be applied to your taxes. So maybe the

government will just file a civil case against you but its

an ordinary collection case. Or if they will find that

there is fraud or a manifest intention to evade taxes,

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they will file a case of tax evasion against you. So those

are just few ways by which the government can exercise

its right to collect.

PAYMENT OF TAXES

Payment stage is more on the taxpayers side. This is

self-explanatory. You pay your taxes whether you pay it

voluntarily or you were compelled by the government

to pay. And when you talk about payment, it does not

only refer to the actual taking out of money to satisfy

your tax obligations. It also involves the remedies

available to the taxpayer to prevent the payment of

taxes or tax deficiency. The taxpayer can make a protest

and if the protest fails, they can go to the CTA appeal

there, then file a petition for review to the CTA en banc,

then file a petition for review under Rule 43 and then to

the SC. Again, payment is not only limited to the actual

giving out of money to satisfy the tax obligation but it

also includes the process wherein the taxpayer himself

would avail of the remedies to avoid completely or

partially the payment of his tax obligations. So basically

thats it when you talk about the aspects of taxation.

What are the PRINCIPLES OF A SOUND TAX SYSTEM?

1. FISCAL ADEQUACY it means that the sources

of revenue, that is, receipts therefrom, taken as

a whole, should be sufficient to meet the

demands of public expenditure. It means also

that the revenues should be elastic or capable

of expanding or contracting annually in

response to variations in public expenditures.

2. EQUALITY OR THEORETICAL JUSTICE it means

that the tax burden should be distributed in

proportion to the taxpayers ability to pay. This

is the so-called Ability to Pay Principle. It holds

that similarly situated tax-payers should pay

equal taxes, while those who have more should

pay more. In other words, taxation should be

uniform as well as equitable.

3. ADMINISTRATIVE FEASIBILITY it means that

tax laws should be capable of convenient, just

and effective administration and enforcement

at a reasonable cost.

What do you mean by FISCAL ADEQUACY? Does it

mean that the income of government must break-even

the expenditure? Kung sa pustahanay pa, gi-daog ra

nimo ug balik imong gi-pusta.

So anyway, when you talk about Fiscal adequacy, it

doesnt mean that the government funds should be

break-even. If you look at the actual scenario right now,

even if we take into consideration all of the taxpayers

would actually pay their correct taxes, still it will not

be____ When you talk about Fiscal adequacy, adequate

or sufficient, the resources of the revenue, taken as a

whole, should be sufficient to meet the expanding

expenditures. It also connotes flexibility of whatever

income that is received by the government.

Now, Fiscal adequacy is partially, you know, okay when

you talk about this flexibility characteristic of Fiscal

Adequacy, this is somewhat discussed in the case of

Chavez vs. Ongpin

There was an Executive Order issued by the government providing for the value of the property which would be the basis of the real property taxes to be adjusted(?). This was challenged by Atty. Chavez. What did Atty. Chavez say here? there was an unreasonable increase in the real property taxes which was brought about by the executive order and it amounts to a confiscation of property which is in violation due process. SC said Chavez is wrong because there is a need for the government to change its real property value as a basis for the real property taxes. You also have to take into consideration the passage of time. Since times are changing, property value may increase, expenses may also increase, therefore there is also a need for the government to revise the real property values so that it will have the appropriate income later on. Fiscal Adequacy, diba, it should be sufficient to cover the government expenses. In the same way, the money coming in should also be flexible enough to cover the changing needs of the government.

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ABAKADA vs. Ermita

Tthis also mentioned fiscal adequacy. This is about E-VAT. Prior to the passage of RA 9337, the VAT was still 10%. But the Congress actually provided for 2 conditions by which the president can actually adjust the VAT from 10% to 12%. What are these conditions?

1. Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

2. National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).

How did the Congress come up with that? I dont know. Basta nagbutang lang sila ug requirement. I dont even understand these requirements. But the petitioners here, the ABAKADA group, argued that this is not in line with the Fiscal Adequacy canon. Why? First, the condition is pegged on a specific percentage. What do you mean by that? It should be that the income should be flexible enough to cover the expenses diba? So by putting in a condition, there is a specific requirement already. It loses it s flexibility. Second, it disregards the other factors for collection. But what did the SC say? Now, actually, the petitioners are mistaken in this case because by pegging it with a specific percentage, the end result is that the president, maningkamot xa ba, he will _____ in order to achieve this kind of goal which in turn will produce more revenues. Its not actually just one, regarding the GDP, it also refers to the National Government deficit. The moment the deficit an amount of percentage, the president is allowed to get more VAT in order to reduce that deficit. So basically, that is the essence of that decision. If you read that, that is a very complicated case.

So anyway, what is ADMINISTRATIVE FEASIBILITY?

Administrative feasibility is somewhat connected to

convenience. It should be practical in application and it

should be convenient not only on the part of the

government, convenient for the government to collect,

but at the same time it should be convenient for the

taxpayer to pay. There must be no assets in the

payment and collection of taxes because can you just

imagine if our tax laws is more complicated than it is

right now? Ang daming rules. When we go along later

on to the provisions of the NIRC, you will notice that

there are a lot of things we have to remember. Like

what? You have to distinguish whether it is a personal

property or real; or a capital asset or an ordinary asset.

Because those qualifications will have a different effect.

So what if our tax law is more difficult than it is right

now? Do you think ganahan pa ka mubayad ug tax? So

thats why, one of the basis of a sound tax system is

Administrative Feasibility. It should be convenient for

both the government and the taxpayer. Case in point is

the case of

Diaz, et al vs. Secretary of Finance

In relation to VAT, what argument did the petitioners make here? What about the implementation of VAT regarding the toll way operators? The point here is that, VAT is not administratively feasible because it is very complicated to implement because of the substantiation requirement. There are a lot of things to comply so its very complicated. What did the SC say? SC said thats a wrong argument. The basic principles of sound tax system is not an economics book. By the fact that a tax is not administratively feasible does not mean that the tax law is automatically invalid. What makes a tax law invalid? If there is a violation of the Constitution or other statutory limitations. Non observance of the canon did not render the tax imposition is invalid except to the extent that specific constitutional or statutory limitations are impaired. It does not mean that if it is burdensome, it is automatically invalid. In the first place, tax is supposed to be a burden, diba?

We will discuss the next principle tomorrow. The one

based on the ability to pay.

JULY 1

Prospectivity

Tax laws apply prospectively. It does not have a

retroactive application. One author would say that

applying it retrospectively will violate the due process

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law of the tax payer. It is unfair. When you say tax law

applies prospectively this also goes with tax

exemptions. What if for example a tax law abrogated

another tax law previously but during the interim period

a tax payer has a tax liability. Can the tax payer say that

I will not pay that anymore kasi wala na yang tax law

nay an and tax laws do not apply retrospectively. Can

he say that?

The taxpayer cannot say that. Why? This has something

to do with the construction of the tax law unless the

new tax law repealed expressly the taxes assessed

during the interim period. You also have to consider

that the tax law and the tax dues that was assessed

during the interim period was still insisting.

Commissioner vs Acosta

Facts: Acosta here filed a tax refund before the court of tax appeals. The CTA did not grant her request because she did not comply with the mandatory procedural requirements in requesting for a tax refund. Issue: One of the issues here was that will the tax law apply prospectively? What happened here was that before the new tax code, the procedure was simple. But under the new tax code, there is already a requirement aside from filing your income tax return. Held: The sc said tax has a prospective application unless the language of the statute clearly provides otherwise. So the SC said here that at the time she filed her protest , the applicable law was the old tax code so why would you apply the new tax code. So its enough that she complied with the filing of her income tax return only.

IMPRESCRIPTABILITY

The right of the government to assessed tax is

imprescriptable because of the lifeblood theory. Taxes

are the lifeblood of the state. ( chika mode si sir sa

iyang bar exams)

Now , can the law provide for a prescription of taxes?

There is no prohibition for that. In fact the law provides

for prescriptive periods for the assessment of taxes.

Only for the assessment of taxes ha. What about in

income taxation? The govt can assess taxes from you

within 3 years from the date of deadline of filing of the

income tax return or date of actual filing of itr w/c ever

comes later. Normally april 15.

What would be the exception?

The government can assessed you for 10 years. What

would be the conditions or grounds?

1. There is willful neglect to file the ITR meaning you did not file at all and waited for the govt to notify you.

2. What you had filed was a fraudulent tax return

What about the collection of taxes? How long can the

govt collect? There is a prescriptive period. After the

assessment, the govt can just collect within 3 years.

After that , no matter how big or small the amount is,

the govt cannot collect anymore because the national

internal revenue code provides for a prescription.

So where does imprescriptability come in? for

example, if you do not file your itr and did not pay your

taxes. The 10 year period starts from the day of the

discovery of those conditions. Imprescriptability will

come in ( you do not file for 30 years , the government

can sit on it because the 10 yr period will start from the

day of the discovery of the govt that you did not file

your itr or you filed a fraudulent itr.)

DOUBLE TAXATION.

Double taxation is taxing the property and person twice

when it should be taxed but once. There is two tax

laws or one tax law but it imposes a dual burden to the

taxpayer. It is also called duplicate taxation.

Is double taxation illegal?

The principle is double taxation is not legal because of

the lifeblood theory and the power to tax is plenary, all

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encompassing and unlimited. If the government wills it

to tax a property twice , it can do so since as we said the

power to tax is plenary, all encompassing and unlimited.

The constitution does not prohibit the imposition of

double taxation in the broad sense. It will only become

illegal if it amounts to a direct double taxation. It will

become illegal if there is a constitutional violation for

example the equal protection clause and the uniformity

clauses of the constitution.

If ever you want to attack the tax law on double

taxation , just be sure you have a constitutional

violation or a statutory violation.

In the book of Aban: double taxation is defined as that

the same property is taxed twice when it should be

taxed only once and that both taxes are imposed on the

same subject matter for the same purpose by the same

taxing authority within the same jurisdiction during the

same taxing period and covering the same kind of tax.

CITY OF MANILA VS COCA-COLA

Doctrine: What are the requisites for double taxation? Taxing twice:

1. On the same subject matter 2. For the same purpose 3. By the same taxing authority 4. Within the same jurisdiction 5. During the same taxing period

The taxes must be of the same kind or character We said we can only attack the tax law on double taxation if there is a constitutional or statutory violation. ISSUE: In this case, are ordinances no. 23 amd 27 unjust and unfair? Held: The SC held that an increase in tax alone would not support the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in determining the rates of imposable taxes. This is in line with the constitutional policy of according the widest possible autonomy to local governments in matters of local taxation, an aspect that is given expression in the local tax code.

Ericcson vs city of pasig

Facts: City treasurer of pasig city here assessed the company of business tax based on gross revenues. city of pasig contented it should be based on gross receipts. Gross receipts include money or its equivalent actually or constructively received in consideration of services rendered or articles sold, exchanged or leased, whether actual or constructive. While gross revenue covers money or its equivalent actually or constructively received, including the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be received . It includes also those receivables while those gross receipts it means the money you actually received , gikuptan nimo so yung constructive here yung under your control. Held: If you read the decision, sabi ng batas based on gross receipts kasi yung actual na received mo. For if you based it on the gross revenue, it means yung receivables mo by that time you received it actually you will be tax again. So the basis should be gross receipts. So what is the law violated here? The law violated here is the provision of law defining the meaning of gross receipts

Cir vs BPI

Facts: Sabi kasi ng BPI since I will be subjected with a 20% final withholding tax it should be not be computed for the 5% gross receipts tax. If you will include that I will be tax twice. Issue: Is there a prohibited double taxation here? Held: The SC held NO because some of the elements here of double taxation are missing. Lets start with the subject matter. It does not pertain to the same subject matter. The 20% final wtax is for the amount deposits or deposit substitutes. The 5% gross receipts tax is the tax for engaging in the bank business. 2nd , taxing period is different. The 5% GRT is every quarter. The FWT is a tax on income while GRT is a percentage tax.



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ELIMINATING DOUBLE TAXATION

We are referring here to direct taxation.

These are :

1. Tax treaties - Allowing reciprocal exemption either by law or by treaty

What is the purpose of tax treaties? For

international trade and purposes. There is

reciprocity of tax exemptions with other countries.

This is between two governments for friendly

foreign relations.

2. Tax credits - allowance of tax credits for foreign taxes paid . Tax credit is a useful tool for reducing your taxes specially if you are earning income abroad. It is directly deducted from your taxes due or liablity. This is provided in sec 34 (c) of the NIRC.

3. Tax deductions for foreign taxes paid. It refers to the legislative dept. It involves enacting a new tax law to grant this deductions.

How is it different from tax credits?

Tax deductions is a direct reduction. You will deduct

the tax from the taxable income. Actually parang the

same lang with the tax credits. You deduct the tax

from your gross income. This is also provided in sec 34

of the NIRC. You have the option its either youll take

your foreign taxes as a tax credit or tax deductions.

JULY 2

The power to tax is plenary, all-encompassing and unlimited. The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax to its constituents. You also have to remember that while taxes are the lifeblood of the state, even if it is plenary, it is all-

encompassing, it has its own limits. There are certain limitations that you have to follow when you talk about the power to tax. What are the two kinds of limitations? INHERENT and CONSTITUTIONAL LIMITATIONS. Before we start discussing one by one, I want you to remember one thing regarding these limitations. Limitations to the power to tax is not presumed. There is no presumption and there is a limitation for that kind of tax even if there is an inherent limitation. Why? Because special taxation is the rule.

INHERENT LIMITATION Basically, inherent limitations are those which are brought about by the nature of the taxing powers itself. The very thing that it is a power to tax, you just look at that definition, if it will not fit in the definition well it is not called the power to tax. Probably it is an exercise of different powers of the government but if it will not fit into the definition then it is not a power to tax. What are the inherent limitations of the power to tax? You have at least five:

1. Public purpose 2. Inherently legislative 3. Territorial 4. International Comity 5. Exemption of Government Entities from

Taxation There are some authors would consider double taxation is part of the inherent limitation. Some authors would say that double taxation is not part of inherent limitation. As for me, I would like to believe that double taxation is not an inherent limitation. What did we discuss last time about double taxation? Double taxation, even though it is abhor, it is not illegal. The only time that double taxation will be considered illegal is that when there is a constitutional violation or when there is a statutory violation. So therefore, it is not an inherent limitation.

PUBLIC PURPOSE

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I think you are already familiar with this because this is a Consti Law 1 topic or you probably discussed this in Consti 2 when you discussed eminent domain. Lets go back to the basic definition of tax. Taxation is the power of the State, legislative in character to impose burdens upon some certain objects for the purpose of raising revenue, for the purpose of carrying out the ncessary objects of the government. The power to tax may only be exercised for a public purpose. In fact, one case would say that the public purpose is actually the heart of taxation. If the law will provide a tax measure and the beneficiaries for this tax measure are private institutions or private individual then most probably that tax measure be declared unconstitutional by the Court. How do you define public purpose? Usually, when we talk about public purpose you will relate it to general welfare or the general well-being of its constituents. If you run down the different decisions of the SC regarding public purpose, older cases would normally say or have this traditional definition of public purpose: Public purpose: means any purpose or use directly available to the public as a matter of right. So it is hard to imagine what are those which are directly available to the public as a matter of right. The basic things that you see are the street, national highway. Basically, it is ready for everyone to use. If it is a private property, you cannot get it and own it but because it is a public road, everyone can have access to that road. That is why yung makikita niyo sa kalsada, for example in Uyanguren, lalagyan ng no parking. Actually, that is not allowed. The public road is a public access. Technically, that is not allowed but why would they allow it? I dont know. Going back, one that is readily available to the public as a matter of right. It is also defined as an activity which will serve as ___ to the community as a calling which at the same time is related to the function of the government. Examples are hospitals, public schools. These are some which the public can benefit directly.

That is the traditional concept but if you read the more recent cases, you will find out that the term or meaning of public purpose has actually expanded. It expanded the concept of public purpose such that the SC in several cases said that there is no exact definition of public purpose because it becomes broader and broader. If you remember Central Luzon case, the term public use right now is not limited to those which are purely governmental functions. As long as it will benefit the public in general or if it is for the furtherance of the social justice, it can be considered as for public use. You read the case of:

Planters Products Inc. v. Fertiphil Corporation GR 166006, March 14, 2008.

Doctrine: According to this case, the term public purpose is not defined. It is an elastic concept that can be hammered to fit modern standards. It does not only pertain to those purposes which are traditionally viewed as essentially government functions such as taking roads but it also includes those purposes designed to promote social justice. In short, the trending now is when you say public use or public purpose for that matter, it is now equated with public interest as long as it will serve the interest of the public, it can be considered already as public use. And even if it will only benefit a certain segment in society. It is still considered as for public interest. Again, it will not be rendered unconstitutional or unlawful merely because incidentally the tax measure benefits a limited number of persons or entities. Facts: In this case, Planters and Fertiphil are both private corporations. They are engaged in business agri-chemical, fertilizers and they have been in this business for quite some time. During the time of Marcos, he can issue letters of instructions to a certain point in time they call Presidential Decrees. There is this letter of instruction wherein it stated that they will be levying 10pesos per bag of fertilizer and this will be collected by a certain government agency in charge of regulating the fertilizers, importation of

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fertilizers. These funds will be continuously collected from several corporations engaged in the same business until Planters will be able to really become ____ again. During that time, one of the corporations from which the 10pesos is against is Fertiphil. Fertiphil stopped paying the 10 pesos levy. Fertiphil filed a collection case against the government and at the same time filed a case against Planters. That is the story. There is a letter of instruction issued by the President at that time in exercise of his legislative powers and there is the levy of 10 pesos per bag for the benefit of Planters only until it become ____ again. Issues: One of the issues tackled in this case is whether or not the letter of instruction was a valid exercise of governmental powers. NO. it was not. But before we are able to answer that question, the SC said let us first determine what is the nature of that levy in the first place. Is it in the nature of the exercise of police power? Or is it in the nature of a tax? LEVY FOR TAX PURPOSES Held: The SC here said that the levy , the 10 pesos per bag, is actually a levy for tax purposes to raise revenue because the letter of instruction by itself says that we will levy 10 pesos per bag so that this corporation will become _____ again. So ano man yan? Raising income diba, raising capital! Therefore, it is an exercise of a power to tax. Ganoon lang kasimple sabi ng SC. It is not for the exercise of police power because we all know that the power to tax and police power _____. But this time it is very clear that this is an exercise of the power to tax because the main purpose is for revenue purpose. The second question is, since alam na natin na it is the power to tax, is that a valid exercise of the power to tax? It is not a valid exercise of taxation. It will not benefit the public because ultimately it is a single corporation who will benefit from the levy. Therefore, since it is not for a public purpose, the letter of instruction is actually an invalid power to tax. The SC discussed here the inherent limitation of the power to tax. An inherent limitation of the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private

purposes or for the exclusive benefit of private persons. The reason for this is simple. The power to tax exists for the general welfare hence implicit in this power is the limitation that it should be used only for public purpose. It would be inappropriate for the State to tax its citizens and used the funds generated for private purpose. While the categories of what may constitute a public purpose are continually expanding in the light of the expansion of the governmental functions, the inherent requirement that the taxes can only be exacted for a public purpose still stands. Public purpose is the heart of tax.

Pambansang Koalisyon v. Executive Secretary

Facts: This is the latest case about the Coco Levy Funds. Again, what is the purpose of this Coco Levy Funds? Is it for a private or public purpose? Because who will benefit from these Coco Levy Funds? Coconut farmers. Sila lang man. If you think about it they will just benefit from it, how about the others? Other people will not benefit from it. Held: But what did the SC say? We have already said before that the Coco Levy Funds is: 1) They were levied in the exercise of the governments power to tax and at the same time police power. Both of them may go together. But this is actually for raising revenue because this is for the protection of the coconut industry. The history of the several laws which were issued for the protection of the coconut industry is because there is a crisis pertaining to the coconut production. Copra is a big industry here in the Philippines. In this case, there are 3 points that you have to remember in the coco levy funds. Levy is the exercise of governments power to tax and at the same time police power. The coco levy funds are public in nature and the coco levy funds were raised pursuant to a law in support of the governmental action or function.

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INHERENTLY LEGISLATIVE Again, you are familiar with this. You go back again to the definition. Taxation is an inherent power of the government, legislative in nature. Who ____ the power to tax? It is actually the legislative department. Its a lawmaking power. In your Consti 1, it is supposedly the people who should exercise the legislative power. There is this principle that what has been delegated cannot be further delegated. Basically, if we talk on taxing laws the general rule is that it cannot be delegated but the law has at least four exceptions for this. By the way, what are the sources of our tax laws? The 1987 Constitution, the different statutes enacted by Congress, NIRC, RA 7160, miscellaneous updates of the NIRC and other tax laws. What is the nature of a tax law by the way? Tax laws are civil in nature. It is not political, it is not even penal. Even if it is not penal in nature, the Congress can actually provide for penal sanctions in case you were not able to pay your taxes. GENERAL RULE: the power to tax cannot be delegated. That is the principle. What are the exceptions?

1. Delegation to LGUs 2. Delegation to the President 3. Delegation to Administrative Bodies or

Subordinate Legislation 4. Delegation to the People at Large (diyan

papasok ang initiative and referendum)

Delegation to the Local Government Units What is the legal basis for this? Where will you find this delegation to the LGUs? The more important academic question that we should think about is, is it a delegation to begin with?

The basis for that is Article 10, Section 5 of the 1987 Constitution: Each LGU shall have the power to create its own sources of revenues and to levy taxes, fees and charges

subject to such guidelines and limitations as Congress may provide consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments.

The first is, does the local government have an inherent power to tax? Local government does not have an inherent power to tax. It is a municipal corporation. Again lets go back to the general rule the government in its legislature has the power to tax. However, by reason of its constitutional provision, it mainly(?) said that the power to tax is no longer exclusively vested in the Congress because local legislative bodies are now given the authority to tax and that is by virtue of this provision of the Constitution. Going back earlier, is the power to tax a mere delegated power? Is it a delegated power or is it a direct grant? Actually, there are two point of views here. The older point of view here is Manila Electric Corporation v. Province of Laguna. In this case the SC said the LGUs do not have the inherent power to tax except to the extent that such power may be delegated to them either by basic law or by statute. So it is a mere delegated power. Essentially yan ang sabi ng Manila Electric. However in recent SC decision particularly in Batangas Power v. Batangas City, they would say already that it is already a direct grant. When you are faced with this question, your answer should be it is a direct grant. I would actually agree that it is a direct grant because of the phraseology of the provision itself. ____ of what point of view you would want to adopt, they would suggest that use the latest jurisprudence. Depending on your view and depending on your explanation, what is important there is that the LGU has no inherent power to tax. Without the constitutional provision, the LGU cannot exercise taxing power. Another thing is that the LGUs taxing power is not that _____. It is not the same as the power which is exercised by Congress. It is subject to such guidelines



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and limitations as Congress may provide. These guidelines however is already found in the Local Government Code or RA 7160. Under the current set-up, as set forth by the Constitution, is the Local Government Code or any other law providing the LGU the power to tax necessary before the LGU could exercise the power to tax. Diba meron tayong constitutional grant diba? Is it self-executing or not? Do you need an enabling law? This is actually answered in the case of Manila Electric Corporation v. Province of Laguna. The pertinent portion of the decision states, under the now prevailing constitution, where there is neither a grant nor a prohibition by a statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. What does that mean? In other words, the mere fact that it is already granted by the Constitution, the Local Government Units can actually now have the power to tax. You dont need any enabling law. In fact, you dont need a local government code. If that is our basic ____, what is now the purpose or role of the Congress vis--vis the power to tax of the LGUs? What can the Congress do? The Congress can only set guidelines and limitations to the power to tax of the LGUs. Its because the Constitution has already provided the grant of this power to the LGUs. If you remember, it is a paradigm shift, more on local autonomy na tayo.

JULY 8

INHERENT LIMITATIONS

Constitutional Limitations

We said before that the power to tax is inherent. When

we say inherent, the moment that the State will exist,

automatically the power to tax follows. We do not need

the Constitution to provide for the power to tax.

What is the purpose of the Constitution vis a vis the

power to tax?

The Constitution is there only to limit the power of the

government in the exercise of its power to tax.

Due Process Art. III Sec 1. No person shall be deprived of life, liberty, or property without due process of law.

The power to tax involves the power to impose burdens

. It involves the taking of property. Thats why if you

take ones property through property tax ,of course ,

due process will necessarily come in . Thats why, if you

have observed the case you have been reading , most

likely someone can challenge a particular tax measure

and they will attack it under the due process clause. You

will notice that they will always say the tax measure is

oppressive and confiscatory which results to violation

of the due process clause of the Constitution.

Due process does not only refer to the procedural

aspect. It does not necessarily involve procedure but

also the substantive aspect of due process.

How do we apply due process in tax?

Pepsi Cola v Municipality of Tanauan

One of the issues is pertaining to due process. Theres a passage there in Pepsi Cola case which is quite good.

HELD: The SC said in this case: This is not to say though that the constitutional injunction against deprivation of property without due process of law may be passed over under the guise of the taxing power xxxx Basically, the SC is saying that, OK you have the power to tax but you are limited by the Constitutional mandate of due process. Xxx except when the taking of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are provided Essentially, this passage encompasses the entirety of



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the due process aspect of taxation. Of course, we discussed before that tax is for public purpose . If the tax is not for public purpose, it is violative of due process.

Procedural Due Process

Ill give you an overview of the due process requirement

pertaining to assessment and collection. The old

process goes like this.

First, the BIR will conduct an audit. Now, in the

process of an audit , the BIR most likely will be

able to discover that there are some tax

deficiencies. It could be because the taxpayer

overstated its expenses or understated its

income etc.

After that, if the BIR determines that there is a

tax deficiency , the first thing it will do is to call

for a notice of an informal conference.

What happens in that conference is that the

BIR will call the taxpayer and discuss. After this

informal conference, the BIR will issue a

preliminary assessment notice (PAN) and send

it to the taxpayer.

The preliminary assessment notice is a formal

document notifying the taxpayer that he has

some tax deficiencies. The role of the taxpayer

now is either to answer the PAN, mali man yan

BIR, you will specify the law and the facts, etc.

What is important is under the Tax Code you are

entitled to be served this PAN .Then, the BIR will issue a

Final Assessment Notice (FAN) , that is like a demand

letter given to the taxpayer to pay the tax deficiencies.

The taxpayer must protest, otherwise the FAN will

become final and the BIR can now collect tax from you .

CIR v Metrostar

FACTS: In Metrostar, what happened is this; the BIR conducted an audit against Metrostar. After that, Metrostar did not receive the PAN. The BIR issued a FAN. Of course, the taxpayer protested . Hindi ko yan babayaran , violation of due process, you did not give

me a PAN. That is the contention of Metrostar. Sabi naman ng BIR, perfunctory na man yang PAN na yan because when we sent you a Final Demand Notice, you are given the opportunity to challenge the assessment given to you by the BIR . The case went up to the SC. Issue: Was Metrostar afforded due process? No. Held: The SC said it was not afforded due process. There is a due process requirement . Sabi natin the process is due; if the law provides for a specific process before the government can take away your property then you must be able to follow that process. In this case, under the tax code during that time, it is specific that the taxpayer will first be informed of any deficiency taxes before the government may issue a FAN . Since that is a statutory right, it should not be taken away from the taxpayer . Even if it would mean na , parang doble na eh, di mo masabi yan. That is the essence of CIR v Metrostar. The SC said: It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law. x x x even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure.

Just take note of that case to understand about

procedural due process.

We will discuss together equal protection clause and

uniformity and equity of taxation because they are

somewhat related. Actually, when you read the

definition of uniformity of taxation and equal

protection, they are essentially the same.

As of now, there is no more distinction between equity

and uniformity of taxation. Bu if you want to be

technical about it , equitability or equity of taxation

means that the tax must be based on ones ability to



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pay. I should be equitable . You are not made to pay

something that you cannot pay.

Equal Protection and Uniformity of Taxation

What is the criterion for you to follow in equal

protection and uniformity rule?

When the tax laws operate uniformly of all persons

under similar circumstance and others are treated in

the same manner in both privileges conferred and

liabilities imposed.

It does not mean absolute equality. Absolute equality is

almost impossible. The State is actually allowed to make

reasonable qualifications as to the taxability of persons

and properties. The only requirement is that the

classification is reasonable and the classification is

based on substantial differences.

There are 4 basic requisites of equal protection:

(1)The classification rests on substantial distinctions;

(2) It is germane to the purposes of the law;

(3) It is not limited to existing conditions only; and

(4) It applies equally to all members of the same class.

Sison v Ancheta

Facts: This is based on the old tax code. Sison here, the taxpayer, he is saying that he will be unduly discriminated by the imposition of higher tax rate upon his income arising from the exercise of his profession in comparison with those who are salary individual taxpayer. There is discrimination , I am exercising my profession and you are taxing me this much. He characterizes the provision as arbitrary and amounting to class legislation, it is oppressive and capricious in character therefore violating the due process and equal protection clause. Held: The Court held that there is no violation to due

process. Due process may be invoked where the taxing statute is so arbitrary that it has no support in the Constitution. There is also no violation of the equal protection clause because the law applies equally and uniformly to persons under similar circumstances. There is also a substantial classification between the persons exercising that profession and those who are clearly salary employees. There is a substantial distinction, if you are exercising your profession, you have a chance of earning more, compared with the salary of an employee.

Tiu v CA

Facts: In Tiu v CA, there is a law providing for a Subic Special Economic Zone . Several Eos were issued by the President relating to this Special Economic Zone. There is a small portion in Subic gilineate niya, this portion is the only portion that is tax free for importations. Whatever is outside that portion is not tax free. This Eos were challenged in the premise that it is a violation of the equal protection clause. Bakit man? Diba the essence of equal protection is that there must be no discrimination or bias on a particular class of property or persons. Bias daw because if you only lineate a particular area bias siya sa big investors Held: According to the Court, there is no violation because there is a real and substantial distinction obtaining inside and outside the Subic Bay .Of course, there is a substantial difference between the big investors and the small businessmen.

Abakada v Ermita Facts: One of the petitioners here, sabi nila, RA 9337 violates the equal protection clause because there is a limit pegged on the maximum amount you can claim as creditable input VAT. Do you know how VAT works? *Sir talks about input and output VAT * According to petitioners, the limitation on the creditable input tax is not based on real and substantial differences as to make a valid classification.



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Held: In this case, the SC said that there is no violation of the equal protection clause. While the implementation of the law may yield varying end results depending on ones profit margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the affairs of business. Basically, there is no classification here because there is no classification as to those who are earning much and not earning much . So, if you come to think about it, since imposed siya sa lahat , you dont have to classify anything. Uniformity and Equitability is not violated. Ano ba ang uniformity? Same classes are taxed alike. Is there any distinction thats happening here? Is there a taxation between a class of business here? If you reach a certain profit margin man gud or if you reach a certain gross or receipt , you will be imposed of VAT and only those persons engaged in business who reach that threshold for profit, all of them will be liable for the VAT. In other words, the application for the VAT is uniform . There is no classification to begin with. Now, what about equitability of taxation? This is not an issue tackled here . Ano ba ang equitable? Taxes are equitable when it is based on the ability to pay. Whether dato ka or pobre ka, you are really to shoulder the burden of paying the VAT. So there is no distinction between the rich and poor and its not based on the ability to pay. But what did the SC say? The entirety of RA 9337 is not all about VAT. Thats why if you read the entire law, there are exemptions to those who do not reach a certain profit margin. Right now the margin is 1. 9 million. If you do not reach the 1.9 million, you will not be imposed VAT but a different form of tax which is smaller in rate. Aside from that , there are also businesses considered tax exempt. So, whatever inequalities produced by the provisions covering persons subject to VAT is actually tampered (?) by these provisions exempting certain persons from VAT and subjecting persons to zero rated transactions.

JULY 9

CONSTITUTIONAL LIMITATIONS

Now we said before that the power to tax is inherent so meaning if the state exists automatically is has the power of taxation already except for a local govt unit it has the power to tax because of the constitutional provision giving them such power- (LGUs have power to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. [Art X, Sec 5, 1987 Consti). Now, the purpose of the Constitution vis--vis the power to tax is only to limit the govt in its exercise of power to tax. Now, let us discuss some of these Constitutional limitations:

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

Is there any specific definition of due process? Due process is when the process is due (Sir). Traditionally, due process is viewed in relation to processes given which must be followed. Same thing with tax, diba we had discussed before that the power to tax involves the power to impose burdens. It involves taking of property. So that is why due process must necessarily come in. But right now, if you remember your consti law it is not limited only to the procedural aspect of due process. But it also involve the substantive aspect of due process. In short, there must be a valid law and a valid procedure. Now, in applying it the power of taxation. In the case of:

Pepsi-cola vs Municipality of tanauan on issue of due process the SC said in this case that:

This is not to say though that the constitutional injunction against deprivation of property without due process of law may be passed over under the guise of the taxing power, except when the taking of the



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property is in the lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are provided

Another case is:

CIR vs. METRO STAR In this case there was denial of due process. First, there was a failure to follow the procedure on the proper service of Assessment Notices. Because here the BIR failed to give Metro star the Preliminary Assessment Notice which required under our tax code. SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings ... The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void." Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made. Second, this failure to strictly comply with the requisites is tantamount to denial of due process.

It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law. In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizens right is amply protected by the Bill of Rights under the Constitution. Thus, while taxes are the lifeblood of the government, the power to tax has its limits, in spite of all its plenitude. Even as we concede the inevitability and indispensability of taxation, it is a requirement in all

democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure.

UNIFORMITY AND EQUITY OF TAXATION Art VI, Sec 28(1), 1987 Consti- The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

As of now there is no distinction about the uniformity and equity of taxation but if you want to be technical about it, uniformity means all taxable articles or properties of the same class shall be taxed at the same rate while equity means the burden of the tax should consider the taxpayers ability to pay.

SISON VS CONCHETA FACTS: Sison here claimed that he is unduly discriminated in the imposition of a higher tax rate on an income arising from the exercise of his profession in comparison with those who are salaried individual tax payer as mandated by Batas Pambansa Blg. 135. HELD: Now according to the SC the rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable. Equality and uniformity in taxation means that all taxable articles or kinds of 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

Taxpayers may be classified into different categories. To repeat, it is enough that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. As there is practically no overhead expense, these taxpayers are not entitled to make deductions for income tax purposes because they are in the same

Ruby



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situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

TIU VS CA

FACTS: In this case there is a law providing the SUBIC SPECIAL ECOMIC ZONE. It this case there is that 1 portion in which importation is tax free and outside of that portion the importation is already taxable. So mow the petitioners is claiming that there was a violation of the equal protection of the laws However, the Court found real and substantive distinctions between the circumstances obtaining inside and those outside the Subic Naval Base, thereby justifying a valid and reasonable classification. The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class. Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the same class. HELD: The Supreme Court believed it was reasonable for the President to have delimited the application of some incentives to the confines of the former Subic military base. It is this specific area which the government intends to transform and develop from its status quo ante as an abandoned naval facility into a self-sustaining industrial and commercial zone, particularly for big foreign and local investors to use as operational bases for their businesses and

Taxation I Donalvo 1st Exam Lecture

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Transcript of Taxation I Donalvo 1st Exam Lecture