Domondon Taxation Notes 2010

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“BAR STAR NOTES”

TAXATION

VER. 2010.06.12 copyrighted 2010

Prepared by Prof. Abelardo T. Domondon

(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker, Management Consultant,

Professor of Law and Pre-Bar Reviewer)

How to use the “BAR STAR

NOTES.”

The “BAR STAR NOTES” in the form of questions and answers as well as textual discussion were specially prepared by Prof. Domondon for the exclusive use of Bar Reviewees who attended his 2010 Lectures on TAXATION held at the University of the Philippines. Included in the presentation are doctrines contained in Supreme Court decisions up to April 2010.

The purpose of the ‘BAR STAR NOTES” is to provide the Bar Reviewee with a handy review material which serves as “memory-joggers” for the September 12, 2010 Bar Examinations in Taxation. The author tries to second guess what would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be formulated in the same manner as the “BAR STAR NOTES”. However, the doctrines tested in the Bar would in all probability be included in these Notes.

If pressed for time, the author suggests that the reader should focus his attention on the following:

 Nice to know  Should know

 Must know and master

It is further suggested that the reader should merely browse those without stars.

THE BEST OF LUCK

AND ADVANCE

CONGRATULATIONS

TAXATION

GENERAL PRINCIPLES OF

TAXATION

TAXATION, IN GENERAL



1. State briefly and concisely

the

nature

of

taxation.

Alternatively, define taxation.

SUGGESTED ANSWER: 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 government.



2. What is the nature of

the State’s power to tax? Explain

briefly.

SUGGESTED ANSWER: The nature of the state’s power to tax is two-fold. It is both an inherent power and a legislative power.

It is inherent in nature being an attribute of sovereignty. This is so, because without the taxes, the state’s existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise this power.

It is a legislative power because it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whom it should be paid, and when the tax should be paid.



3. What is the underlying

theory of taxation? Explain briefly.

SUGGESTED ANSWER: Taxes are the lifeblood of the nation. Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of

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motive power to activate and operate it.

(Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17)



4. Marshall said that, “the

power to tax involves the power to

destroy.” On the other hand,

Holmes stated that “the power to

tax is not the power to destroy

while the court sits.”

Reconcile

the statements.

In the alternative,

what are the implications that flow

from the above statements?

SUGGESTED ANSWERS: Marshall’s view refers to a valid tax while the Holmes’ view refers to an invalid tax.

a. The imposition of a valid tax could not be judicially restrained merely because it would prejudice taxpayer’s

property. b. An illegal tax

could be judicially declared invalid and should not work to prejudice a taxpayer’s property.



5. Discuss

briefly

the

basis/bases,

or

rationale

of

taxation.

SUGGESTED ANSWER: a. Reciprocal duties of protection and support between the state and its citizens and residents. Also called “symbiotic relation” between the state and its citizens.

b. Jurisdiction by the state over persons and property within its territory.



6. Discuss

briefly

but

comprehensively the objectives or

purposes of taxation.

SUGGESTED ANSWER: The purposes or objectives of taxation are the following:

a. The primary purpose: 1) Revenue purpose. b. The secondary purposes 1) Sumptuary or regulatory purpose. 2) Compensatory purpose. 3) To implement the power of eminent domain.



7. Distinguish a tax from a

license fee.

SUGGESTED ANSWER: The following are the distinctions:

a. Purpose: Tax imposed for revenue while license fee for regulation. Tax for general public purposes while license fee for regulatory purposes only.

b. Basis: Tax imposed under power of taxation while license fee under police power. c. Amount: In taxation, no limit as to amount while license fee limited to cost of the license and the expenses of police surveillance and regulation.

d. Time of payment: Taxes normally paid after commencement of business while license fee before.

e. Effect of payment: Failure to pay a tax does not make the business illegal while failure to pay license fee makes business illegal. f.

Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for lawful consideration while a license fee may be surrendered with or without consideration.

(Cooley on Taxation, pp.

1137-1138; Pacific Commercial Company v. Romualdez,

et al., 49 Phil. 924)



8. How may the power to

tax be utilized to carry out the

social justice program of our

government?

.

(Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and

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similar objectives. (Batangas Power Corporation v. Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)

9.

Explain the sumptuary

purpose of taxation.

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

Taxation may be made the implement of the state’s police power. The motivation behind many taxation measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al.,

G. R. No. 158540, August 3, 2005) The reader should note that the August 3, 2005 Southern Cross case is the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision.

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

10.

Taxation

distinguished

from police power.

Taxation is distinguishable from police power as to the means employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy and the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the government, their prompt and certain availability is of the essence.”

These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Ibid.)

11. How

the

power

of

taxation may be used to implement

power of eminent domain.

Tax measures are but” enforced contributions exacted on pain of penal sanctions” and “clearly imposed for public purpose.” In most 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. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)

Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]



12. What are the three

basic principles of a sound tax

system? Explain each briefly.

SUGGESTED ANSWER: The canons of a sound tax system, also known as the characteristics or, principles of a sound tax system, are used as a criterion in order to determine whether a tax system is able to meet the purposes or objectives of taxation. They are:

a. Fiscal adequacy.

b. Administrative feasibility. c. Theoretical justice.



13. What are the elements or

characteristics of a tax?

SUGGESTED ANSWER: a. Enforced contribution. b. Generally payable in money. c. Proportionate in character. d. Levied on persons, property or exercise of a right or privilege.

e. Levied by the state having jurisdiction.

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f. Levied by the legislature. g. Levied for a public purpose. h. Paid at regular periods or intervals.

14. State the requisites of a

valid tax.

.

b. That the assessment and collection of certain kinds (The same as the inherent limitations of the power of taxation) should be for a public purpose.

c. The rule of taxation should be uniform.

d. That either the person or property of taxes guarantees against injustice to individuals, especially by way or notice and opportunity for hearing be provided.

e. The tax must not impinge on the inherent and Constitutional limitations on the power of taxation.



15. What are the classes or

kinds of taxes according to the

subject matter or object?

SUGGESTED ANSWER: a. Personal, poll or capitalization – imposed on all residents, whether citizen or not. Example – Community Tax.

b. Property - Imposed on property. Example – Real property tax.

c. Excise – imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. Example – income tax, estate tax.



16. What are the kinds of

taxes classified as to who bears the

burden? Explain each briefly

.

SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into:

a. Direct taxes. Those that are extracted from the very person who, it is intended or desired, should pay them

(Commissioner of Internal Revenue v. Philippine

Long Distance Telephone Company, G. R. No.

140230, December 15, 2005); they are

impositions for which a taxpayer is directly liable on the transaction or business he is engaged in, (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) which liability cannot be shifted or transferred to another. Example – income tax, estate tax, donor’s tax, etc.

b. Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to

(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) to someone else not as a tax but as part of the purchase price.

(Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases and authorities) Example – value added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc.



17. Silkair (Singapore)

PTE, Ltd., an international carrier,

purchased aviation gas from Petron

Corporation, which it uses for its

operations. It now claims for refund

or tax credit for the excise taxes it

paid claiming that it is exempt from

the payment of excise taxes under

the provisions of Sec. 135 of the

NIRC of 1997 which provides that

petroleum products are exempt from

excise taxes when sold to

“Exempt entities or agencies covered by tax treaties, conventions, and other international agreements for their use and consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies”

Silkair further anchors its claim

on Article 4(2) of the Air Transport

Agreement

between

the

Government of the Republic of the

Philippines and the Government of

the Republic of Singapore (Air

Transport Agreement between RP

and Singapore) which reads:

“Fuel, lubricants, spare parts, regular equipment and

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aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exception of charges corresponding to the service performed, be exempt from the same customs duties, inspection fees and other duties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board. The materials referred to above may be required to be kept under customs supervision and control.”

Silkair likewise argues that it is

exempt from indirect taxes because

the

Air

Transport

Agreement

between RP and Singapore grants

exemption “from the same customs

duties, inspection fees and other

duties or taxes imposed in the

territory of the first Contracting

Party.

It

invokes

Maceda

v.

Macaraig, Jr., G.R. No. 88291, May

31, 1991, 197 SCRA 771.which

upheld the claim for tax credit or

refund by the National Power

Corporation (NPC) on the ground

that the NPC is exempt even from

the payment of indirect taxes.

Is Silkair entitled to the tax

refund or credit it seeks? Reason

out your answer.

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

a. The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317-318)

The NIRC provides that the excise tax should be paid by the manufacturer or producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of

the Air Transport Agreement between RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127 Phil. 461, 470 (1967)]

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

In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from “all taxes” granted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes.

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

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, and if an exemption is

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found to exist, it must not be enlarged by construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594,

February 6, 2008)



18. What

are

the

different kinds of taxes classified as

to purpose?

SUGGESTED ANSWER: a. General, fiscal or revenue – imposed for the purpose of raising public funds for the service of the government.

b. Special or regulatory – imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the raising of public funds.

LIMITATIONS OR RESTRICTIONS

ON THE POWER

1. Purpose

for

the

limitations on the power of taxation.

The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the exercise of this otherwise unlimited and plenary power.

The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. A violation of the limitations serves to invalidate a tax law or act in the exercise of the power to tax.

INHERENT LIMITATIONS



1. What are the inherent

limitations

on

the

power

of

taxation?



2. What

are

the

principles to consider in the

determination of whether tax

revenues are devoted for a public

purpose?



3. A law was enacted

imposing a tax on manufacturers of

coconut oil, the proceeds of which

are to be used exclusively for the

protection and promotion of the

coconut

industry,

namely,

to

improve the working conditions in

coconut mills and to conduct

research on the use of coconut oil

for motor fuel. Some of the

manufacturers

of

coconut

oil

challenge the validity of the law,

contending that the tax is to be

used for a private purpose, and

therefore, the law violates the rule

that public revenues shall not be

appropriated for

anything but a

public purpose. Decide with

reason

.

SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied that the coconut industry is one of the major industries supporting the national economy. It is, therefore, the state’s concern to make it a strong and secure source not only of the livelihood of the significant segment of the population, but also of export earnings, the sustained growth of which is one of the imperatives of economic growth. (Philippine Coconut Producers Federation, Inc. (Cocofed v. Presidential Commission on Good Government,

178 SCRA 236, 252)



4. Requisites

for

taxpayers,

concerned

citizens,

voters or legislators to have

locus

standi

to sue.

a. In general, the case should involve constitutional issues.

(David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

b. For taxpayers, there must be a showing:

1) That tax money is “being extracted and spent in violation of specific constitutional protections against abuses of legislative power.” (Flast v. Cohen, 392 U.S. 83)

2) That public money is being deflected to any improper

purpose (Pascual v. Secretary of Public Works, 110 Phil. 33) or a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. (David, supra)

3) A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007; Garcia v. Enriquez, Jr. G.R. No. 112655 December 9, 1993, Minute Resolution)

A taxpayer’s suit is properly brought only when there is an exercise of the spending or taxing power of Congress. (Automotive Industry Workers Alliance (AIWA), etc., et al., v. Romulo, etc., et al., G. R. No. 157509, January 18, 2005 citing Gonzales v. Narvasa, G. R. No. 140835, August 14, 2000,

337 SCRA 733, 741)

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

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

e. For legislators, there must be a claim that the official action complained of infringes upon their prerogatives as legislators. (David, et al., v. President Gloria

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Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

5. Only

those

directly

affected have

locus standi

to

impugn the alleged encroachment

by the executive department into

the legislative domain of Congress.

a. Only those who shall be directly affected by such executive encroachment, such as for example employees who would find themselves subject to disciplinary powers that may be imposed under the questioned Executive Order as they have a direct and specific interest in raising the substantive issue therein (Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005) or employees who are going to be demoted, transferred or otherwise affected by any personnel action subject o the rule on exhaustion of administrative remedies.

b. Moreover, and if at all, only Congress, can claim any injury from the alleged executive encroachment of the legislative function to amend, modify and/or repeal laws. (Automotive Industry Workers Alliance (AIWA), etc., et al., supra, citing Gonzales v. Narvasa, G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)

6. Locus standi

being merely

a matter of procedure, have been

waived in certain instances where a

party who is not personally injured

may be allowed to bring suit.

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

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

b. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or

unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)



7. The VAT law provides

that, the President, upon the

recommendation of the Secretary of

Finance, shall, effective January 1,

2006, raise the rate of value-added

tax to twelve percent (12%) after

any of the following conditions have

been satisfied. “(i) value-added tax

collection as a percentage of Gross

Domestic Product (GDP) of the

previous year exceeds two and

four-fifth percent (2 4/5%) or (ii)

national government deficit as a

percentage of GDP of the previous

year exceeds one and one-half

percent (1 ½%).”

Was there an invalid delegation

of legislative power?

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

Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. In the above case the Secretary of Finance becomes merely the agent of the legislative department, to determine and declare the even upon which its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego or subordinate. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing various cases]]

8. Instances of proper

delegation: When taxing power

could be delegated: Exceptions to

the rule on non-delegation:

a. Delegation of tariff powers by Congress to the President under the flexible tariff clause, Section 28 (2), Article VI of the Constitution

.

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b. Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution.

c. The delegation to the President of the Philippines to enter into executive agreements, and to ratify treaties which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the President.

d. Delegation to the people at large. e. Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1, 2005], which is referred to as subordinate legislation.

In this instance, there is a requirement that the law is complete in all aspects so what is delegated is merely the implementation of the law or there exists sufficiently determinate standards to guide the delegate and prevent a total transference of the taxing power.

9. “Paradigm shift” from

exclusive Congressional power to

direct grant of taxing power to local

legislative bodies.

The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)

Local government legislation, “is not regarded as a transfer of general legislative power, but rather as the grant of authority to prescribe local regulations, according to immemorial practice, subject, of course, to the interposition of the superior in cases of necessity.”

(People v. Vera, 65 Phil. 56)

10. Taxing power of the local

government is limited.

The taxing power of local governments is limited in the sense that Congress can enact legislation granting tax exemptions.

While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited.

While the power to tax by local governments may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains essentially the same power to tax is [still] primarily vested in the Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to

Mactan Cebu International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)

11. Further amplification by

Bernas of the local government’s

power to tax.

“What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be “consistent with the basic policy of local autonomy.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)

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12. Reconciliation of the local

government’s authority to tax and

the Congressional general taxing

power.

Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of local governments, such as provinces and cities for example Quezon City, to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City or a province may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions.

The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local government’s delegated power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)

“Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.”

[Ibid., referring to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao]



13. General principles of

income taxation in the Philippines

or the source rule of income

taxation as provided in the NIRC of

1997.

a. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

b. A nonresident citizen is taxable only on income derived from sources within the Philippines;

c. An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract

worker is taxable only on income from sources within the Philippines: Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; d. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

e. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

(Sec. 23, NIRC of 1997, emphasis supplied)



14. Juliane

a

non-resident alien appointed as a

commission agent by a domestic

corporation with a sales commission

of 10% all sales actually concluded

and collected through her efforts.

The local company withheld the

amount of P107,000 from her sales

commission and remitted the same

to the BIR.

She filed a claim for refund

alleging that her sales commission is

not taxable because the same was a

compensation for her services

rendered in Germany and therefore

considered as income from sources

outside the Philippines.

Is her contention correct?

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

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

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

15. Ensite, Ltd. is a

Canadian corporation not doing

business in the Philippines. It holds

40% of the shares of Philippine

Stamping Plant, Inc., a Philippine

company while the 60% is owned

by Fred Corporation, a

Filipino-owned

Philippine

corporation.

Ensite Co. also owns 100% of the

shares

of

Susanto

Co.,

an

Indonesian company which has a

duly licensed Philippine branch. Due

to worldwide restructuring of the

Ensite Ltd., group, Ensite Ltd.,

decided to sell all its shares in

Philippine Stamping Plant, Inc. and

Susanto Co. The negotiations for

the buy-out and the signing of the

Agreement of Sale were all done in

the Philippines. The Agreement

provides that the purchase price

will be paid to Ensite Ltd’s bank

account in the U.S. and that title to

the Philippine Stamping Plant, Inc.

and Susanto Co. shall be transferred

to General Co., in Toronto Canada

where stock certificates will be

delivered. General Co. seeks your

advice as to whether or not it will

subject the payments of the

purchase price to withholding tax.

Explain your advice.

SUGGESTED ANSWER: The payments of the purchase price will be subject to withholding tax. Considering that all the activities (sales) occurred within the Philippines, the income is considered as income from within, subject to Philippine income taxation. Ensite, Ltd. being a foreign corporation is to be taxed on its income derived from sources within the Philippines.



16. Ensite, Ltd. is a

Canadian corporation, which has a

duly licensed Philippine branch

engage in trading activities in the

Philippines. Ensite, Ltd. also,

invested directly in 40% of the

shares of stock of Philippine

Stamping Plant, Inc.., a Philippine

corporation. These shares are

booked in the Head Office of Ensite,

Ltd. and are not reflected as assets

of the Philippine branch. In 2009,

Philippine Stamping Plant, Inc.

declared

dividends

to

its

stockholders. Before remitting the

dividends to Ensite Ltd., Philippine

Stamping Plant, Inc. Co. seeks your

advice as to whether it will subject

the remittance to withholding tax.

There is no need to discuss WT

rates, if applicable. Focus your

discussion on what is the issue.

SUGGESTED ANSWER: Philippine Stamping Plant, Inc. should subject the remittance to withholding tax. Since Philippine Stamping Plant. is a Philippine corporation, its shares of stock have obtained a business situs in the Philippines, hence the dividends are considered as income from within. Ensite. Ltd., being a foreign corporation, should be subject to tax on its income from within.



17. Philippine Stamping

Plant, Inc., a Philippine corporation,

has an executive Larry who is a

Filipino

citizen.

Philippine

Stamping Plant, Inc., has a

subsidiary

in Malaysia

(Kuala

Lumpur Manufacturing, Inc.) and

will assign Larry for an indefinite

period to work full time for Kuala

Lumpur Manufacturing, Inc. Larry

will bring his family to reside in

Malaysia and will lease out his

residence in the Philippines. The

salary of Larry will be shouldered

50% by Philippine Stamping Plant,

Inc. while the other 50% plus

housing,

cost

of

living

and

educational allowances of Larry’s

dependents will be shouldered by

Kuala Lumpur Manufacturing, Inc.

Philippine Stamping Plant, Inc. will

credit the 50% of Larry’s salary to

his Philippine bank account. Larry

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will

sign

the

contract

of

employment in the Philippines. He

will also be receiving rental income

for the lease of his Philippine

residence.

Are these salaries, allowances and

rentals subject to Philippine income

tax? Explain briefly.

SUGGESTED ANSWER: The salaries and allowances of Larry, being derived from labor or personal services rendered outside of the Philippines is considered as income from without. Since Larry is an OCW, then he is to be taxed only on his income derived from within the Philippines such as the rentals on his Philippine residence, and not on his income from without.



18. Obama Airlines, Inc.,

a foreign airline company which

does not maintain any flight to and

from the Philippines sold air tickets

in the Philippines, through a general

sales agent, relating to the carriage

of passengers and cargo between

two points, both outside the

Philippines.

a. Is Obama, Inc., subject to

income taxes on the sale of the

tickets?

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

The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. the flow of wealth proceeded from and occurred, within the Philippine territory, enjoying the protection accorded by the Philippine Government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. [Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395]

Off-line air carriers having general sales agents in the Philippines are engaged in

or doing business in the Philippines and their income from sales of passage documents here is income from within the Philippines. Thus, the off-line air carrier liable for the 32% (now 30%) tax on its taxable income.

[South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010 citing Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA 395]

b.

Supposing that Obama,

Inc., sells tickets outside of the

Philippines for passengers it carries

from Gold City, South Africa to the

Philippines but returns to South

Africa without any cargo or

passengers. Would it then be

subject to any Philippine tax on such

sales?

SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any income tax because the activity which generated the income (the sale of the tickets) was performed outside of the Philippines.

It is not subject to the carrier’s tax based on gross Philippine billings because there were no lifts that originated from the Philippines. “Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)]

c.

Would your answer be the

same if Obama, Inc. sold tickets

outside of the Philippines for

travelers who are going to picked up

by Obama, Inc., planes from the

Diosdado Macapagal Intl. Airport at

Clark, Angeles, Pampanga, bound for

Nairobi, Kenya? Reason out your

answer.

SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the carrier’s tax based on Gross Philippine Billings. (GPB).

“Gross Philippine Billings” refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo

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and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)]

The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur from the Philippines, income is included in GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010)

19. No improper delegation

of legislative authority to tax.

The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)

CONSTITUTIONAL LIMITATIONS

1. Constitutional limitations

on the power of taxation.

The general or indirect constitutional limitations as well as the specific or direct constitutional limitations.

2. The general or indirect

constitutional limitations on the

power of taxation are:

a. Due process clause; b. Equal protection clause; c. Freedom of the press; d. Religious freedom;

e. No taking of private property without just compensation;

f. Non-impairment clause ; g. Law-making process:

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

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

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

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

3. The specific or direct

constitutional limitation.

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

b. Taxation shall be uniform and equitable;

c. Congress shall evolve a progressive system of taxation;

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

e. The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object;

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

1) Delegation by Congress 2) through a law

3) subject to Congressional limits and restrictions

4) within the framework of national development program.

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

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

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

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

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

l. Authority of local government units to create their own sources of revenue, to levy taxes, fees and other charges subject to guidelines and limitations imposed by

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Congress consistent with the basic policy of local autonomy;

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

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

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

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

5. Equal protection of the

law clause 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. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)



6. Requisites for valid

classification.

All that is required of a valid classification is that it be reasonable, which means that a. the classification should be based on substantial distinctions which make for real differences,

b. that it must be germane to the purpose of the law;

c. that it must not be limited to existing conditions only; and

d. that it must apply equally to each member of the class.

The standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and is not palpably arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

7. Equal protection does not

demand absolute equality.

It merely

requires that all persons shall be treated alike, under like circumstances and conditions, both as to the privileges conferred and liabilities enforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

It is imperative to duly establish that the one invoking equal protection and the person to which she is being compared were indeed similarly situated, i.e., that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC; and that they presented similar arguments and evidence in their defense - yet, they were treated differently. (Santos, supra)

8. Tests to determine

validity of classification.

The United States Supreme Court has established different tests to determine the validity of a classification and compliance with the equal protection clause. The recognized tests are: a. The traditional (or rational basis) test.

b. The strict scrutiny (or compelling interest) test.

c. The intermediate level of scrutiny (or quasi-suspect class) test.

9. The

traditional

(or

rational basis) test used in order to

determine

the

validity

of

classification.

The classification is valid if it is rationally related to a constitutionally permissible state interest.

The complainant must prove that the classification is “invidous,” “wholly arbitrary,” or” capricious,” otherwise the classification is presumed to be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61; McGowan v. Maryland, 366 U.S. 420; United States Railroad Retirement Board v. Fritz, 449 U.S. 166)

10. The strict scrutiny (or

compelling interest) test used in

order to determine the validity of

the

classification.

Government regulation that intentionally discriminates against a “suspect class” such as racial or ethnic minorities, is subject to strict scrutiny and considered to violate the equal protection clause unless found necessary to promote a compelling state interest.

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A classification is necessary when it is narrowly drawn so that no alternative, less burdensome means is available to accomplish the state interest.

Thus, it was held that denial of free public education to the children of illegal aliens imposes an enormous and lasting burden based on a status over which the children have no control is violative of equal protection because there is no showing that such denial furthers a “substantial” state goal. (Plyler v. Doe, 457 U.S. 202)

11. The intermediate level of

scrutiny (or quasi-suspect class)

test used in order to determine the

validity

of

he

classification.

Classification based on gender or legitimacy are not “suspect,” but neither are they judged by the traditional or rational basis test.

Intentional discriminations against members of a quasi-suspect class violate equal protection unless they are substantially related to important government objectives. (Craig v. Boren, 429 U.S. 190)

Thus, a state law granting a property tax exemption to widows, but not widowers, has been held valid for it furthers the state policy of cushioning the financial impact of spousal loss upon the sex for whom that loss usually imposes a heavier burden. (Kahn v. Shevin, 416 U.S. 351)

12. Equality and uniformity of

taxation may mean the same as

equal protection

. In such a case, the terms would mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens and granted the same privileges without any discrimination whatsoever.

13. It is inherent in the power

to tax that the State be free to select

the subjects of taxation

, and it has been repeatedly held that, "inequalities which result from a singling out of one particular class of taxation, or exemption, infringe no constitutional limitation." (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)



9. Benjie is a

law-abiding citizen who pays his real

estate taxes promptly. Due to a

series of typhoons and adverse

economic conditions, an ordinance

is passed by Soliman City granting a

50% discount for payment of

unpaid real estate taxes for the

preceding year and the condonation

of all penalties on fines resulting

from the late payment.

Arguing that the ordinance

rewards delinquent tax payers and

discriminates against prompt ones,

Benjie

demands that he be

refunded an amount equivalent to

one-half of the real property taxes

he paid. The municipal attorney

rendered an opinion that Benjie

cannot be reimbursed because the

ordinance did not provide for such

reimbursement. Benjie files suit to

declare the ordinance void on the

ground that it is a class legislation.

Will his suit prosper? Explain your

answer briefly.

SUGGESTED ANSWER: No. There is no class legislation because there is no violation of the equal protection suit. There is a valid classification between those who already paid their taxes and those who have not. Furthermore, the taxing authority has the prerogative to select the subjects and objects of taxation, including granting a 50% discount in the payment of unpaid real estate taxes, and the condonation of all penalties on fines resulting from late payment.

10. The rewards law to tax

collectors does not violate equal

protection.

The equal protection clause recognizes a valid classification, that is, a classification that has a reasonable foundation or rational basis and not arbitrary. With respect to RA 9335, it’s expressed public policy is the optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR and the BOC, the

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incentives and/or sanctions provided in the law should logically pertain to the said agencies. Moreover, the law concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for the national government through the collection of taxes, customs duties, fees and charges.

Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al.,

G. R. No. 166715, August 14, 2008)

11. The prosecution of one

guilty person while others equally

guilty are not prosecuted, however,

is not, by itself, a denial of the

equal protection of the laws

. Where the official action purports to be in conformity to the statutory classification, an erroneous or mistaken performance of the statutory duty, although a violation of the statute, is not without more a denial of the equal protection of the laws.

The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to those who are entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in it an element of intentional or purposeful discrimination. This may appear on the face of the action taken with respect to a particular class or person, or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferred from the action itself.

(Santos v. People, et al, G. R. No. 173176, August 26, 2008)

12. Equal protection should

not be used to protect commission

of crime

. While all persons accused of crime are to be treated on a basis of equality before the law, it does not follow that they are to be protected in the commission of crime. It would be unconscionable, for instance, to excuse a defendant guilty of murder because others have murdered with impunity.

Likewise, if the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a defense for others charged with crime, the result would be that the trial of the district attorney for nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a complete breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)



13. Illustration of double

taxation in local taxation.

there is indeed double taxation if Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority – City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845, August 4, 2009)

14. A lawful tax on a new

subject, or an increased tax on an

old one, does not interfere with a

contract or impairs its obligation

,

within

the

meaning

of

the

constitution.

(Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)

15. The withdrawal of a tax

exemption should not be construed

as prohibiting future grants of

exemption from all taxes.

(Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)