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(1)Taxation Law 1 Compilation Based on the outlined discussion of Atty. Kim Aranas. Compiled by: MFLH Updated as of: AY: 2014 - 2015. Societas Spectra Legis.

(2) Societas Spectra Legis Taxation Law 1 Compilation. TABLE OF CONTENTS INTRODUCTION ............................................................................................................................................................. 3 I. HISTORY OF TAXATION ........................................................................................................................................................................................................... 3 II. DEFINITION OF TAXATION ..................................................................................................................................................................................................... 5 III. NATURE OF POWER OF TAXATION ...................................................................................................................................................................................... 6 IV. BASIS OF TAXATION .............................................................................................................................................................................................................. 7 V. IMPORTANCE OF TAXES (Lifeblood Doctrine) ...................................................................................................................................................................... 7 VI. THEORIES OF TAXATION ....................................................................................................................................................................................................... 7 VII. PURPOSE AND OBJECTIVE OF TAXATION ........................................................................................................................................................................... 8 VIII. SCOPE OF TAXATION........................................................................................................................................................................................................... 9 IX. ASPECT OF TAXATION ........................................................................................................................................................................................................... 9 X. BASIC PRINCIPLE OF A SOUND TAX SYSTEM (F-A-T-E) ....................................................................................................................................................... 10 XI. TAXATION DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN ................................................................................................................. 10 XII. TAXES, DEFINED.................................................................................................................................................................................................................. 14 XIII. ESSENTIAL CHARACTERISTICS AND ATTRIBUTES OF TAXES (please memorize) ........................................................................................................... 14 XIV. CLASSIFICATION OF TAXES ............................................................................................................................................................................................... 15 XV. TAXES DISTINGUISHED FROM OTHER IMPOSITIONS (From Tiu Notes) ......................................................................................................................... 16 XVI. LIMITATION OF THE POWER OF TAXATION .................................................................................................................................................................... 18 XVII. SITUS OF TAXATION ......................................................................................................................................................................................................... 29 XVIII. DOUBLE TAXATION ......................................................................................................................................................................................................... 30 XIX. FORMS OF ESCAPE FROM TAXATION .............................................................................................................................................................................. 32 XX. EXEMPTION FROM TAXATION .......................................................................................................................................................................................... 33 XXI. NATURE, CONSTRUCTION AND APPLICATION OF TAX LAWS ........................................................................................................................................ 36 XXII. SOURCES OF TAX LAWS ................................................................................................................................................................................................... 39. REVENUE REGULATIONS ...............................................................................................................................................39 TAXABLE INDIVIDUALS .................................................................................................................................................60 INCOME TAX RATES .................................................................................................................................................................................................................. 62 INCLUSIONS (GROSS INCOME FOR INDIVIDUALS) ................................................................................................................................................................. 62. CORPORATE INCOME TAXATION ..................................................................................................................................68 I. INTRODUCTION AND DEFINITION OF TERMS ...................................................................................................................................................................... 68 II. TAXABLE CORPORATIONS .................................................................................................................................................................................................... 68 III. PARTNERSHIPS AND CO-OWNERSHIPS .............................................................................................................................................................................. 69 IV. CORPORATE INCOME TAX EXEMPT ENTITIES ................................................................................................................................................................... 71 V. TYPES/CLASSIFICATIONS OF INCOME FOR A CORPORATION ........................................................................................................................................... 73 VI. DEDUCTIONS ....................................................................................................................................................................................................................... 78 VII. ITEMIZED DEDUCTIONS (EX-IN-TA-LO-BA-CHA-RE-PEN-PRE-DEP-DEP) ......................................................................................................................... 79 TAX RATES ............................................................................................................................................................................................................................... 106. ACCOUNTING PERIOD; METHODS OF ACCOUNTING; TAX RETURNS AND PAYMENT OF TAX ......................................118 FILING OF TAX RETURN AND PAYMENT OF THE TAX ........................................................................................................................................................... 120. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 2.

(3) Societas Spectra Legis Taxation Law 1 Compilation. INTRODUCTION I. HISTORY OF TAXATION EGYPT During the various reins of the Egyptian Pharaohs tax collectors were known as scribes. During one period the scribes imposed a tax on cooking oil. To insure that citizens were not avoiding the cooking oil tax scribes would audit households to insure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil. It started in a place back taxation in Egypt, in Ancient Egypt – where tax collectors were known as scribes and even impost taxes on cooking oil. Because it was even said that during this period this people even make audit if people are using the cooking oil na girasyon ug gihatag sa ilaha. So that’s the base form of tax/ taxation. GREECE In times of war the Athenians imposed a tax referred to aseisphora. No one was exempt from the tax which was used to pay for special wartime expenditures. The Greeks are one of the few societies that were able to rescind the tax once the emergency was over. When additional resources were gained by the war effort the resources were used to refund the tax. In this also, taxation/tax is referred to as aseisphora which is used to pay for special war time expenditure. Different ang rates because during this time they engage in different wars so the tax, if they engage in war they will have to collect the tax, if they have a loot in a while then the loot will also be used, iuli ang gi.collect the tax to their citizens. So when additional resources were gained by the war, the resources were used to refund the taxes to the people so sila ang nakauna sa concept of tax refund/credit/carry-over. Athenians imposed a monthly poll tax on foreigners, people who did not have both an Athenian Mother and Father, of one drachma for men and a half drachma for women. The tax was referred to as metoikion Athenians imposed a monthly poll tax on foreigners. Poll/community tax imposed by the Atheneans were poll tax on foreigners lang. In Philippines, poll taxes are applied to residents. ROMAN EMPIRE The earliest taxes in Rome were customs duties on imports and exports calledportoria. In Roman Empire, they usually use the taxation-- they applied it in collecting for customs duties on their imports and exports. They call it the portoria. What is the good thing in this Roman Empire is sila nakauna sa what you call Tax Haven, in every area there is a tax but for this particular area there is no tax. So what they did is that there was this specific canal where there will be no taxes. Why? So that they can use it during war para dali ang pagsulod ug gawas sa resources. Caesar Augustus was consider by many to be the most brilliant tax strategist of the Roman Empire. During his reign as "First Citizen" the publicani were virtually eliminated as tax collectors for the central government. During this period cities were given the responsibility for collecting taxes. Caesar Augustus instituted an inheritance tax to provide retirement funds for the military. The tax was 5 percent on all inheritances except gifts to children and spouses. The English and Dutch referred to the inheritance tax of Augustus in developing their own inheritance taxes. During the time of Julius Caesar a 1 percent sales tax was imposed. During the time of Caesar Augustus the sales tax was 4 percent for slaves and 1 percent for everything else.1 Saint Matthew was a publican (tax collector) from Capernaum during Caesar Augustus reign. He was not of the old publicani but hired by the local government to collect taxes. Also during this period Caesar Augustus was considered by many as most brilliant tax strategist of the Roman Empire. For us Catholics we know Caesar Augustus, “give to Caesar what is to Caesar, and give to God what is to God”. So they implemented 5% inheritance tax and 1% sales tax. So what is the purpose for the 5% inheritance tax? For retirement plan for his soldiers. Tax collectors in this time were known as publican, example of it is Saint Matthew (apostle of Christ).. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 3.

(4) Societas Spectra Legis Taxation Law 1 Compilation. GREAT BRITAIN The first tax assessed in England was during occupation by the Roman Empire. Lady Godiva was an Anglo-Saxon woman who lived in England during the 11th century. According to legend, Lady Godiva's husband Leofric, Earl of Mercia, promised to reduce the high taxes he levied on the residents of Coventry when she agreed to ride naked through the streets of the town. In Great Britain, the first tax was during the occupation of the Spanish Empire so, basically it the Roman Empire who brings the tax to Great Britain. The tax in the United States was brought by the English. The legend of Lady Godiva, Lady Godiva is the wife of an Earl or Duke in an area in Great Britain (you will have this area, manage this area and collect taxes in this area). The earl/duke imposes very high taxes. Now Lady Godiva is for the people man daw, so nihangyo si Lady Godiva to her husband na i.demise ang tax. So and condition sa iyang husband was he will minimize the tax if Lady Godiva will roam the town naked riding a horse. Lady Godiva roamed around the town naked riding a horse, the tax then was minimized. PHILIPPINES In the Philippines of course we trace our taxation during the Spanish Era or during the Spanish Regime where several taxes and monopolies were established. Tribute It was the resident tax during the Spanish times. It may be paid in cash or kind, partly, or wholly. But in 1884, the tribute was replaced by the cedula personal or personal identity paper, equivalent to the present community tax certificate. In our case the tribute/buwis/dugyot during that Spanish period basically can still be paid in kind and in cash. It can be paid using chicken, goose, wool blanket, cotton, rice or any other products depending of on the region. Bandala System It is a form of direct taxes that the Spaniards implemented in which the natives were coerced to ell their products to the government at very low prices. It comes from the tagalog word mandala, which is a round stock of rice stalks to be threshed. We also had what we call as the bandala. It is an annual forced sale and requisitioning of goods such as rice, customs duties and income tax were also collected. During the Spanish period, the collecting of taxes was specific in a particular area nga rebellious to the Spaniard. Basil(wine made with rice) Revolt, the source is the bandala. People in there were already making the Basil, when the Spaniards knew about it, they wanted to centralized everything daw they implemented the bandala. What they did was there is this forced sale of the raw materials for the making of the Basil to the government in the North Luzon. Then the North Luzon government gisugo nasad nila balik ang mga namaligya to it process to basil and then they will have to resend the basil to the same people who sold to them the raw materials at a much higher price. Cedula Personal In 19th century, the cedula served as an identification card that had to be carried at all times. A person who could not present his or her cedula to a guardia civil could then be detained for being indocumentado. A legal identity document issued by cities and municipalities to all persons that have reached the age of majority and upon payment of a community tax, it is considered as a primary form of identification in the Philippines and is one of the closest single document the Philippines has to a national system od identification, akin to a driver’s license and a passport. Andres Bonifacio and other Katipuneros tore their cedulas in August 1896, signalling the start of the Philippine Revolution.   . Everyone over 18 yrs., but not more than 60 yrs. old, were required to pay for personal identification. Tax payers were responsible for Spanish authorities for payment for the tax. If you cannot present the cedula receipt, the authorities can immediately arrest you. Play a very important part in the Philippine history involving our hero Andres Bonifacio in a particular event—Pugad Lawin, where the Filipinos tore their cedula as a sign that they are not anymore adhering to the policies of the Spaniads. Still existing until up to now, community tax certificate is still called cedula. Technically it is not anymore the same cedula that was implemented during the Spanish period.. DEVELOPMENT OF THE COMMUNITY TAX The cedula was imposed by the Americans on January 1, 1940, when Commonwealth Act. No. 465 went into effect, mandating the imposition of a base residence tax of 50 centavos and an additional tax of one peso based on factors such as income and real estate holdings. The pyment of this tax would merit the issue of residence certificate. Corporations were also subject to the resident tax. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 4.

(5) Societas Spectra Legis Taxation Law 1 Compilation . Implemented to all the Indios. Eventually, it was abolished during the American regime. But it was reinstated under CA 465. Proof of payment is the residence tax. From cedula it was changed from residence tax. Eventually, when we had our independence we passed our local government code. The local government code mandated for the payment of Community Tax and proof of entries is the community tax certificate but it has one root source which is the cedula.. Polo Y Servicio It was the forced labor for 40 days, of men ranging from 16 to 60 years of age who were obligated to give personal services to community projects. One could be exempted from the polo by paying a fee called falla (wich is worth one and a half real)  . forced labor; explains why in the Philippines we have so many churches; all male are required at least 40-days/ 15days(reduced) of work in one year for a ration of rice only. To be exempted from work, payment of falla must be made. Falla - sum of money for exemption from polo y servicio.. Different taxes UNDER THE NATIONAL INTERNAL REVENUE CODE: 1. Income tax - FOCUS FOR THIS SEMETER a. Individuals b. Corporation c. Other persons 2. Business Taxes – different from income tax a. Value-added tax b. Other percentage taxes 3. Transfer taxes a. Donor’s tax b. Estate tax Atty. A’s discussion:  Taxation is a destructive power of the state which interferes with personal and property rights of the people and takes a portion of their property from them for the support of the government. Being a destructive power, it can be used to kill an activity or business if it wants to. Thus it must be exercised with caution.  And among the three inherent power of the state, the most powerful is? It is a battle between police power and taxation. Both are supreme.  Taxation is more powerful if we are looking at coverage because taxation is plenary and unlimited. So if we’re looking at object/subject to which we impose the power of taxation, then taxation is more powerful  But if we look at vested rights not being impaired, then police power is more powerful. Because taxation cannot impair vested rights but police power can impair.. II. DEFINITION OF TAXATION i. Taxation vis-à-vis Tax Taxation Power wherein the sovereign raise revenue to defray the necessary expenses of the government from among those who in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens. Primary purpose is to raise revenue. If the primary purpose of imposition by the government is to raise revenue, the power exercised by the government is the power of taxation. But if that amount imposed by the government is not primarily for revenue purposes like for example if it is for regulation purposes, it may be police power. In police power, the primary purpose is for regulation. Idea that taxation must be progressive Tax -. Enforced proportional contributions from proeprerties and persons levied by the state by virtue of its sovereignty for the support of th govt and public needs made by the legislative body in order to raise revenue despite the absence of constitutional provisions (inherent nature). *Taxation is broader. Q: If the local government of cebu imposed amusement tax on local swimming pools, not provided for in the local govt code or other laws. Can it validly enact law imposing such tax?. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 5.

(6) Societas Spectra Legis Taxation Law 1 Compilation A: No. they cannot. Although it is an inherent power, for local government units, there must be a delegation. Cebu city is not sovereign thus there is no inherent power of taxation. Thus it cannot impose any tax only those delegated to it by the legislative branch of the government. *Only the legislative branch (Congress) have an unlimited power to exercise the power to tax Paseo Realty vs CA Pelizloy Realty vs Province of Benguet. III. NATURE OF POWER OF TAXATION i. Inherent prerogative of the sovereignty a. Basis: Lifeblood theory The existence of the state is necessary If the government will not collect tax it becomes useless because it wont have any money to finance its own operations b.. Manifestations Tax can be imposed even absence of constitutional provision The state can select the object and subject matter of taxation thus unlimited No injunction in the collection of taxes, as a general rule, unless you have a pending case filed in the CTA to enjoin the collection of tax. Taxation is not subject to set-off or off-set. (Domingo vs Cardigon: although general rule in taxation there is no off-setting, but when it is due and demandable and has been fully liquidated, there can be offsetting. Will be discussed later) As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. Concurring and Dissenting Opinion of Justice Leonen (Manila Memorial Park). ii. Legislative in Character a. Basis Taxes are a grant of the people who are taxed and the grant must be made by the immediate rep of the people It should be our representatives who must levy and impose the tax All revenue appropriations must originate in the house of representatives (constitutional provision) General Rule: cannot be delegated Exception: o Local taxes by Local Government Units thru the Local government code (Actually the constitution provides that taxation must be delegated to LGUs but the congress merely set out the limitations) o Flexible tariff clause o Administrative regulation (assessment and collection) b.. Scope: To determine— 1. Purpose(s) must be for a public purpose The courts can inquire into whether the purpose is really public or private. Judicial action is limited only to a review where it involves: (a) the determination of the validity of the tax in relation to constitutional precepts or provisions; or (b) the determination in an appropriate case of the application of a tax law. 2.. Subjects and objects of taxation (within its jurisdiction) refer to the coverage and the kind or nature of the tax. They may be persons, (natural/juridical); property (real/personal, tangible/intangible); businesses, transactions, rights, or privileges. Inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation so long as such exemption is reasonable and not arbitrary.. 3.. Amount and rate of tax. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 6.

(7) Societas Spectra Legis Taxation Law 1 Compilation -. As a general rule, the legislature may levy a tax of any amount or rate it sees fit. If the taxes are oppressive or unjust, the only remedy is the ballot box and the election of new representatives. Constitutionally, “the rule of taxation shall be uniform and equitable.”. 4.. Kind of tax to be collected. 5.. Apportionment of the tax. 6.. Manner and mode of enforcement and collection. 7.. 8.. Situs of taxation you have to consider the nature of the taxes. Example: Community tax - Residence of the taxpayer; Real property tax - Location of the property. We can only impose property tax on the properties of a person whose residence is in the Philippines. Grant tax exemption or condonation. 9.. Provision of administrative and judicial remedies that may be availed by the taxpayers and government. Q: Can the mayor impose tax? A: No. only the sangunian. In short in so far as local government units are concerned, imposition of taxes are still made by the legislative branch—sangunians. iii. Subject to constitutional and inherent limitations. IV. BASIS OF TAXATION -. Necessity Theory: existence of state is a necessity therefore there is a need to levy and impose taxes for the countenance of the state, to defray the expenses. i. Necessity to serve the people ii. Necessity to protect the people. V. IMPORTANCE OF TAXES (Lifeblood Doctrine) VI. THEORIES OF TAXATION i. Lifeblood Theory Taxes are lifeblood of the government and should be collected without hindrance. It is said that taxes are what we pay for a civilized society, without taxes, the government will be paralyzed for the lack of motive to operate. CIR vs Metro Star Superama Inc. But even if we concede as to the indispensability of taxation, it is a requirement in all democratic regime that it be exercised reasonably and in accordance with the prescribed procedure. (Prescriptive Periods to assess/collect) ii. Necessity Theory iii. Benefits received Theory/Reciprocity Theory/Symbiotic Theory (Doctrine of Symbiotic Relationship) a. Support by the taxpayers b. Protection and benefits by the government Atty. A: Mutual Benefits; There exist reciprocal duties of protection and support between the state and its inhabitants. TAKE NOTE: state and inhabitants, not citizens, because even if you’re an alien and an inhabitant here, you are still taxed. The protection is in the form of security (either tangible/intangible aspects). University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 7.

(8) Societas Spectra Legis Taxation Law 1 Compilation VII. PURPOSE AND OBJECTIVE OF TAXATION i. 4 R’s of Taxation a. Revenue b. Redistribution c. Re-pricing—i.e. sin taxes, as a way to change behavior d. Representation—demand for accountability from the government on taxes collected ii. Primary: Revenue Raising iii. Secondary: Non-revenue Raising a. Regulation—e.g. to protect local industries against unfair competition Holmes Dictum: McCulloch vs Maryland  The power of taxation involves the power to destroy Marshall Dictum: Panhandle Oil vs Mississippi  The power of taxation does not involve the power to destroy as long as this (SC) court sits How are they reconciled? Reyes vs Almanzor  The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for all its plenitude the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to destroy while this Court sits.” So it is in the Philippines.  In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to confiscation of property. That would be a clear abuse of power.  The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed.  Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxations, which is the promotion of the common good, may be achieved. Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties. b.. Promotion of general welfare—implementation of the police power - primary purpose is police power; secondary purpose is power of taxation - power of taxation can be a tool in exercising police power. c.. Reduction of social inequalities (redistribution) progressive system of taxation prevents the undue concentration of wealth in the hands of a few individuals. Progressivity is the keystone on the principle that those who are able to pay, shoulders the bigger portion of the tax burden.. d.. Encourage economic growth by granting incentives and exemptions, giving lower taxes encourage business investments; i.e. PEZA, IT Park, Cebu Business Park – given lower tax rates. e.. Protectionism to protect local industries from foreign competition.. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 8.

(9) Societas Spectra Legis Taxation Law 1 Compilation VIII. SCOPE OF TAXATION i. Unlimited unlimited with regards to the object or subject of the power of taxation subject to the inherent limitations ii. Comprehensive iii. Plenary iv. Supreme Pepsi Cola vs Municipality of Tanauan  The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers.  The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax.  Under the New Constitution, local governments are granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the power of local taxation. Tio vs Videogram Regulatory Board  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 tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the realization that earnings of videogram establishments of around P600 million per annum have not been subjected to tax, thereby depriving the Government of an additional source of revenue. It is an end-user tax, imposed on retailers for every videogram they make available for public viewing. It is similar to the 30% amusement tax imposed or borne by the movie industry which the theater-owners pay to the government, but which is passed on to the entire cost of the admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that is imposed uniformly on all videogram operators.  The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. And while it was also an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.  The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation". Taxation has been made the implement of the state's police power.  At bottom, the rate of tax is a matter better addressed to the taxing legislature.. IX. ASPECT OF TAXATION i. Levy or Imposition (Legislation) refers to the enactment of a law by Congress, imposing a tax Need to determine who will be taxed, how much will be taxed, the manner of collecting the tax, who has the responsibility in the levy or imposition of the tax ii. Assessment applying the law passed by congress to the specific person, property or activity covered by it. Assess/compute how much is the tax iii. Collection  Agencies Involved: -. BIR. -. BOC. -. Provincial, City, and Municipal Assessor and Treasurers. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 9.

(10) Societas Spectra Legis Taxation Law 1 Compilation *In Assessment and Collection, it is considered the administration of tax wherein the administration and implementation of the tax law by the executive department through administrative agencies; assessment and collection. * Only Levy must be done by the legislative. The other may be delegated to others like BIR and Bureau of Customs. iv. Payment Taxpayer’s responsibility. X. BASIC PRINCIPLE OF A SOUND TAX SYSTEM (F-A-T-E) i. Fiscal Adequacy means that the sources of revenue, that is, receipts therefrom, taken as whole, should be sufficient to meet the demands of public expenditure. It means also that the revenues should be elastic or capable of expanding or contracting annually in response to variations in public expenditures. ii. Theoretical Justice or Equity – Ability to pay doctrine (Sec. 28(1), Art. VI, 1987 Consti) means that the tax burden should be distributed in proportion to the taxpayer’s ability to pay. Similarly situated taxpayers should pay equal taxes, while those who have more should pay more. Taxation should be uniform as well as equitable. Most important principle; if tax law does not adhere to theoretical justice it is defective and void; without fiscal adequacy, administrative feasibility and economic efficiency the tax law is merely defective but does not make it void. iii. Administrative Feasibility means that tax laws should be capable of conveniently, effectively enforced by the government a question of cost-benefit assessment and collection must not be more costly than what can be collected and assessed (i.e. if all taxpayer’s will be audited, it will be costly. Thus, taxpayer’s are grouped into big and (small) taxpayers; it is not feasible for the government to audit all taxpayers) iv. Economic Efficiency combination of fiscal adequacy and administrative feasibility to make sure that the economy will be stable.. XI. TAXATION DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN As to purpose. Taxation The property (generally money) is taken for the support of the government.. Eminent Domain The property is “taken” for public use; it must be compensated. -to raise revenue. -facilitate the state’s need for property for public purpose -none; there is just compensation. Amount of exaction. -unlimited. As to benefits. -direct/indirect benefit; tangible or intangible -cannot impair existing contracts. -there is direct benefit in the form of just compensation; - cannot impair existing contracts. It is assumed that the individual receives the equivalent of the tax in the form of protection and. He receives the market value of the property taken from him.. As to nonimpairment of contracts As to compensation (benefits). Police Power The use of the property is “regulated” for the purpose of promoting the general welfare; it is not compensable.. -limited to the cost of rendering the service (license-payment must only cover the cost) -GR:no direct benefit. -can impair existing contracts The person affected receives indirect benefits as may arise from the maintenance of a. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 10.

(11) Societas Spectra Legis Taxation Law 1 Compilation. As to persons affected. As to the authority which exercises the power. benefits he receives from the government. Operates upon (1) A community; or (2) Class of individuals. May be exercised only by the government or its political subdivisions.. As to the amount of imposition (amount of exaction). Generally, there is no limit on the amount of tax that may be imposed.. As to the relationship to the Constitution. Is subject to certain constitutional limitations. -inherent. Effect. Including the prohibition against impairment of the obligation of contracts.. Operates on an individual as the owner of a particular property. May be: (1) Exercised by the government or its political subdivisions; (2) Granted to public service companies or public utilities. No amount imposed but rather the owner is paid the market value of property taken. Inferior to the impairment prohibition; government cannot expropriate private property, which under a contract it had previously bound itself to purchase from the other contracting party. -inherent There is a transfer of the right to property.. healthy economic standard of society. Operates upon (1) A community; or (2)Class of individuals. May be exercised only by the government or its political subdivisions.. Amount imposed should not be more than sufficient to cover the cost of the license and necessary expenses. Relatively free from constitutional limitations. -inherent. Is superior to the impairment of contract provision.. Planters Products vs FertiPhil  The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest.  Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a public purpose. The levy was imposed to give undue benefit to PPI.  An inherent limitation on 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. 46 The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old United States case bluntly put it: "To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation."47  The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, lowcost housing and urban or agrarian reform. Atty. A: there is also a discussion here on the use of the power of taxation to implement the police power.  Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order 39 to promote the general welfare, while the power of taxation is the power to levy taxes to be used for public purpose. The University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 11.

(12) Societas Spectra Legis Taxation Law 1 Compilation main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful 40 subjects" and "lawful means" tests are used to determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.  We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is true that the power of taxation can be used as an implement of police power,41 the primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Atty. A: there is also a discussion here class on Motor Vehicle registration fee and chauffeur’s license fee. Pwede bya ni mugawas sa MCQ, dba?  Taxation may be made the implement of the state's police power. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs’ license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61. Atty. A: Motor vehicle registration fee and chauffeur’s license fee are power of taxation, whereas the special permit fee and additional fee for change of registration, because it’s just minimal, hence an example of exercise of police power. These are some things class that you have to remember. CIR vs Central Luzon  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.  The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public 78 interest, public benefit, public welfare, and public convenience. 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 not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when not done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs 79 to cope with the reduction in its revenues. 80  Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax measures are 81 82 but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." 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. Atty. A: who won in this case? Central Luzon. In short, Central Luzon was given the refund. Just a quick background, the last 3 cases— Central Luzon, Superdrug and Manila Memorial park—are inter-related cases. For the Central Luzon case, this happened when the Senior Citizens Act was not yet expanded and it provided that the discount can still be claimed as tax credit. But later on (referring to the 2 later cases), we will realize that Congress change it. Instead as tax credit, the tax deduction scheme is changed and the discount was deducted to the gross sales as part of the COS (Cost of Sales). In short, this case (Central Luzon) is already not controlling. Carlos Superdrug Corp. vs DSWD (expanded Seniors Citizen Act)  the law grants a twenty percent discount to senior citizens for medical and dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax deduction.  The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 12.

(13) Societas Spectra Legis Taxation Law 1 Compilation comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and 22 circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs." 23 It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, 24 and of the subjects of the same."  For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare.  The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business. While the Constitution protects property rights, petitioners must accept the realities of business and the State, in the exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the process. Atty. A: Ingun sila (Superdrug Corp.) nga alkansi mi because there is no just compensation of the discount we give to the senior’s citizen kay dili peso-to-peso deduction. But then in this case the SC declared that the basic reason of the passage of the Senior Citizens Act is social justice, general welfare of the senior citizens. And the power that is actually exercised is not the power of eminent domain but it’s the police power. But it was not reconciled in this case, conflicting ang decision sa Central Luzon and Superdrug. So take note ha? In the Central Luzon, it was declared eminent domain and the existing law there was tax credit pa tu. Here in this case, it was declared police power and the existing law is that the 20% discount will be deducted as part of the cost. Do you follow? So SC reconciled these 2 cases in Manila Memorial Park case. Manila Memorial Park vs Sec. of DSWD  A fair reading of Carlos Superdrug Corporation52 would show that we categorically ruled therein that the 20% discount is a valid exercise of police power. Thus, even if the current law, through its tax deduction scheme (which abandoned the tax credit scheme under the previous law), does not provide for a peso for peso reimbursement of the 20% discount given by private establishments, no constitutional infirmity obtains because, being a valid exercise of police power, payment of just compensation is not warranted.  In the exercise of police power (as distinguished from eminent domain), although the regulation affects the right of ownership, none of the bundle of rights which constitute ownership is appropriated for use by or for the benefit of the public. On the other hand, in the exercise of the power of eminent domain, property interests are appropriated and applied to some public purpose which necessitates the payment of just compensation therefor. Normally, the title to and possession of the property are transferred to the expropriating authority. Examples include the acquisition of lands for the construction of public highways as well as agricultural lands acquired by the government under the agrarian reform law for redistribution to qualified farmer beneficiaries.  We now look at the nature and effects of the 20% discount to determine if it constitutes an exercise of police power or eminent domain. The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may not be amiss to mention also that the discount serves to honor senior citizens who presumably spent the productive years of their lives on contributing to the development and progress of the nation. As to its nature and effects, the 20% discount is a regulation affecting the ability of private establishments to price their products and services relative to a special class of individuals, senior citizens, for which the Constitution affords preferential concern. 76  In turn, this affects the amount of profits or income/gross sales that a private establishment can derive from senior citizens. In other words, the subject regulation affects the pricing, and, hence, the profitability of a private establishment. However, it does not purport to appropriate or burden specific properties, used in the operation or conduct of the business of private establishments, for the use or benefit of the public, or senior citizens for that matter, but merely regulates the pricing of goods and services relative to, and the amount of profits or income/gross sales that such private establishments may derive from, senior citizens.  The 20% discount may be properly viewed as belonging to the category of price regulatory measures which affect the profitability of establishments subjected thereto. On its face, therefore, the subject regulation is a police power measure.  we find that there are at least two conceivable bases to sustain the subject regulation’s validity absent clear and convincing proof that it is unreasonable, oppressive or confiscatory. Congress may have legitimately concluded that business establishments have the capacity to absorb a decrease in profits or income/gross sales due to the 20% discount without substantially affecting the reasonable rate of return on their investments considering (1) not all customers of a business establishment are senior citizens and (2) the level of its profit margins on goods and services offered to the general public.  Concurrently, Congress may have, likewise, legitimately concluded that the establishments, which will be required to extend the 20% discount, have the capacity to revise their pricing strategy so that whatever reduction in profits or income/gross sales that they may sustain because of sales to senior citizens, can be recouped through higher mark-ups or from other products not subject of discounts. As a result, the discounts resulting from sales to senior citizens will not be confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug Corporation 88 that the 20% senior citizen discount and tax deduction scheme are valid exercises of police power of the State absent a clear showing that it is arbitrary, oppressive or confiscatory. Atty. A: How did SC settled the arguments of the petitioners? Nagpalaban lng ang SC sa nature of taxation that its plenary in nature. So the SC said that you cannot do anything about it because that’s the decision of the legislative in exercising the power of taxation. Such that, being plenary, they can decide what tax deduction scheme they want to adapt. Dba? And in this case, it was cleared out University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 13.

(14) Societas Spectra Legis Taxation Law 1 Compilation that the 20% senior citizen discount was an exercise of police power. Unsa pa man imu nakat-unan in this case? The central Luzon case was a mere obiter dictum.. XII. TAXES, DEFINED TAX enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of government and for all public needs. DIFFERENT KINDS OF TAXES i. INTERNAL REVENUE TAXES (provided under NIRC) Income tax Business tax Transfer tax Donors and estate tax Percentage tax Excise tax Documentary stampt tax ii. LOCAL/MUNICIPAL TAXES provided under the LGC iii. TARIFF AND CUSTOMS DUTIES provided under the TCC iv. TAXES AND TAX INCENTIVES UNDER SPECIAL LAWS common example: PEZA law which provides 5% tax in lieu of all taxed for businesses catered within its territory.. XIII. ESSENTIAL CHARACTERISTICS AND ATTRIBUTES OF TAXES (please memorize)  for a tax to be valid, it must have all these essential characteristics i. ENFORCED CONTRIBUTION A tax is not a voluntary payment or donation and its imposition is in no way dependent upon the will or assent, open or implied, or the person taxed. ii. GENERALLY PAYABLE IN MONEY  can you go the BIR and pay tax in kind? NO. GR: it must be payable in money. Exception: Backpay Certificate; Tax Credit Certificate iii. PROPORTIONATE IN CHARACTER Taxpayer’s ability to pay (the more you have, the more you should pay) Take note: proportionate is not progressive (we will discuss this later on) iv. LEVIED ON PERSON, PROPERTY OR THE EXERCISE OF A RIGHT OR PRIVILEGE v. LEVIED BY THE STATE WHICH HAS JURISDICTION OVER THE SUBJECT OR OBJECT OF TAXATION vi. LEVIED BY THE LAWMAKING BODY OF THE STATE vii. LEVIED FOR PUBLIC PURPOSE/S Requisites of a Valid tax (PUJ-DL / ang ma.jeep ma-dean’s lister) a) it must be for public purpose b) the rule on taxation should be uniform when we talk about uniform, it should be for the same tax, same subject or object, and should belong to the same class. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 14.

(15) Societas Spectra Legis Taxation Law 1 Compilation c) d) e). Either the person the property taxed must be within the jurisdiction of the taxing authority That the assessment and collection be in consonance with the due process clause The tax must not fringed the inherent and constitutional limitations of the power of taxation. XIV. CLASSIFICATION OF TAXES i. AS TO SUBJECT MATTER OR OBJECT 1) Personal, poll or Capitation tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation of business which they may be engaged. Being personal, you cannot shift the burden to another person. Ex. Community tax 2) Property Levied on the property. Ex. Real property tax 3) Excise A charge imposed upon the performance of an act for the enjoyment of the privilege or the engagement in an occupation. ii. AS TO WHO BEARS THE BURDEN 1) Direct tax for which the taxpayer is directly or primarily liable or which he cannot shift to another. 2) Indirect tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another iii. AS TO DETERMINATE OF AMOUNT 1) Specific tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement so long as the item falls within the classification being taxed then it is subject to that particular tax; no need for an appraisal 2) Ad valorem tax of a fixed proportion of the value of the property with respect to which the tax is assessed since this involves the value of the property, it needs an appraisal by appraisers iv. AS TO PURPOSE 1) General, fiscal or revenue tax imposed for the general purposes of the government and to raise revenue for governmental needs. 2) Specific or regulatory tax imposed for a special purpose. To achieve some social or economic and irrespective of whether revenue is actually generated raised or not. v. AS TO THE SCOPE OR AUTHORITY IMPOSING THE TAX 1) National Imposed by the national government. To be specific, it is imposed by the legislative department and implemented by the executive department through the BIR. 2) Municipal or local It must be provided in the LGC and is imposed by the local executive body, Sangguniang Panglungsod or Panlalawigan. vi. AS TO GRADUATE OR RATE 1) Proportion Tax is based on a fixed percentage of the amount of the property, receipts, or other basis to be taxed. Ex: real estate tax 2) Progressive The tax rate increases as the tax base or bracket increases 3) Regressive The tax rate decreases as the tax base or bracket increases. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 15.

(16) Societas Spectra Legis Taxation Law 1 Compilation XV. TAXES DISTINGUISHED FROM OTHER IMPOSITIONS (From Tiu Notes) i. LICENSE OR PERMIT FEE. Purpose Basis Amount. Time of payment Effect of nonpayment Surrender. Tax Imposed for revenue purposes Imposed under the power of taxation No limit as to the amount of tax. Normally paid after the start of business Failure to pay the tax does not make the business illegal. License Fee Imposed for regulatory purposes Imposed under the police power of the State Amount of license fee that can be collected is limited to the cost of the license and the expenses of police surveillance and regulation Normally paid before the commencement of the business Failure to pay a license fee makes the business illegal. Taxes, being the lifeblood of the State, cannot be surrendered excepts for lawful considerations. License fee may with or without consideration. Tax Enforced proportional contributions from persons and property. Toll A sum of money for the use of something, a consideration which is paid for the use of a property which is of a public nature; e.g., road, bridge A demand of proprietorship Amount of toll depends upon the cost of construction or maintenance of the public improvement used May be imposed by the government or private individuals or entities. ii. TOLL FEE. Definition. Basis Amount. A demand of sovereignty No limit as to the amount. Authority. May imposed only by the government. iii. COMPROMISE PENALTY. Definition. Purpose Authority. Tax Enforced proportional contributions from persons and property Intended to raise revenue May be imposed only by the government. Penalty Sanction imposed as a punishment for violation of a law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty Designed to regulate conduct May be imposed by: (a) Government; or (b) Private individuals or entities. iv. SPECIAL ASSESSMENT. Definition. Basis Subject. Tax Enforced proportional contributions from persons and property Based on necessity Levied on:. Special Assessment An enforced proportional contribution from owners of lands especially benefited by public improvements Based wholly on benefits Levied only on land. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 16.

(17) Societas Spectra Legis Taxation Law 1 Compilation. Scope. (a) Persons; (b) Property; or (c) Acts. Has general application. Person Liable. It is a personal liability of the taxpayer. It is exceptional both to the time and place Not a personal liability of the person assessed; his liability is limited only to the land involved. Republic vs Bacolod  The purpose of s special assessment is to finance the improvement of particular properties, with the benefits of the improvement accruing or inuring to the owners thereof who, after all, pay the assessment. The purpose of an ordinary tax, on the other hand, is to provide the Government with revenues needed for the financing of state affairs. Thus, while the refusal of a citizen to pay his ordinary taxes may not indeed be sanctioned because it would impair government functions, the same would not hold true in the case of a refusal to comply with a special assessment. v. DEBT. Basis Effect of nonpayment. Mode of payment Assignability. Interest Authority Prescription. Tax Based on law Taxpayer may be imprisoned for his failure to pay the tax (except poll tax) Generally payable in money Not assignable. Does not draw interest unless delinquent Imposed by public authority Prescriptive periods for tax are determined under the NIRC. Debt Based on contract or judgement No imprisonment for failure to pay a debt. May be payable in money, property or services Can be assigned (you can let the other person pay the debt on your behalf) Draws interest if stipulated or delayed Can be imposed by private individuals Civil code governs the prescriptive period of debts. vi. SUBSIDY A sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. a pecuniary aid or directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public. Tax, on the other hand, not given or granted by the government, rather, it is collected by the government form its inhabitants. vii. REVENUE refers to all the funds or income derived by the government, whether from tax or from whatever source and whatever manner viii. INTERNAL REVENUE taxes imposed by the legislature other than duties on imports and exports. ix. CUSTOMS DUTIES taxes imposed on goods exported from or imported into a country. x. TARIFF customs duties, toll, or tributes payable upon a merchandise to the government. Atty. A: what is important here, from no. 1 to no. 10, of the things enumerated is that all are not considered taxes. If they are not considered taxes then it is not a requirement that those enumerated should be for PUJ-DL (the requirements for a valid tax).. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 17.

(18) Societas Spectra Legis Taxation Law 1 Compilation XVI. LIMITATION OF THE POWER OF TAXATION i. INHERENT LIMITATIONS 1. Public purpose The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. Planters vs Fertiphil General rule, public money can only be spent for a public purpose. Although private individuals are directly benefited, the tax would still be valid provided that such benefit is only incidental. Pascual vs Sec. of Public Works Determination that tax is for a public purpose:  Proceeds of the tax must be use for the support of the government, specifically on its governmental function  Proceeds of the tax must be for any of the recognized objects of the government  Proceeds of the tax must be to promote the welfare of the community Atty. A: As long as there is still link to the public welfare, the purpose is still public. The test is not as to who receives the money but the character of the purpose of which it is expected and not the immediate result of the expenditure but rather the ultimate result. For you to determine if its public purpose, it must be reckoned on the date when the law is passed. CASES: (for public purpose although it is for a specific industry) Lutz vs Araneta  Analysis of the Act will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power.  sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our government. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain.  the protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power.  it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a 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 for taxation, or exemption infringe no constitutional limitation". Atty. A: Why only those people engaged in the sugar industry business will be the one to carry the burden of paying the tax? So long as there is valid classification, even if it would result to inequality to some people or affect individuals, the law cannot be considered invalid per se. These people in the sugar industry business are the ones who will directly benefit from the said imposition of tax. Ormoc Sugar Co. vs Conejos  The point remains to be determined, however, whether constitutional limits on the power of taxation, specifically the equal protection clause and rule of uniformity of taxation, were infringed.  The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of legislation, and a classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 18.

(19) Societas Spectra Legis Taxation Law 1 Compilation substantially identical to those of the present; (4) the classification applies only to those who belong to the same class.  A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon. Caltex vs COA  money due the government, either in the form of taxes or other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to the Oil Price Stabilization Fund (OPSF).  Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state.  There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for wage increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime concern which the state, via its police power, may properly address.  Also, a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. Atty. A: As a general rule, there can be no offsetting of tax payables, unlike debts. We will discuss this more as we go forward. Aside from this, the SC discussed whether OPSF is a public purpose or not, it ruled that it is still for public purpose (ang reason kay highlighted above). Lastly, you have to remember on the Consti provision Art. 6, Sec. 29(3). TAKE NOTE: Art. VI, Sec. 29 (3) of the Consti: All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government.. 1) 2) 3) 4). CONCEPTS RELATIVE TO PUBLIC PURPOSE Inequalities resulting from the singling out of one particular class for taxation or exemption must infringe no constitutional limitation An individual taxpayer need not derive direct benefits from tax Public purpose is continually expanding, areas formerly left to private initiative are now maybe undertaken by the government, if it is to meet the increasing social challenges of the time. Ex: Senior Citizens discount Public pupose is determined at the time of the enactment of the tax law and not at the time its implementation.. What is a TAXPAYER’S SUIT? Basically, you’re questioning whether the public money is used for public purpose or not. It’s a case where the act complained of is directly involved in the illegal disbursement of public funds. However, the public funds must be derived from taxation. Taxpayers have sufficient interest of preventing the illegal expenditures of money raised by taxation, although this does not apply to donations and contributions made by public individuals or private entities. A taxpayer is not relieved from the obligation of paying tax because for his belief that it is being misappropriated by certain officials. A taxpayer has no legal standing to question executive acts that do not involve the use of public funds. Gonzales vs Marcos Lozada vs COMELEC  As taxpayers, petitioners may not file the instant petition, for nowhere therein is it alleged that tax money is being illegally spent. The act complained of is the inaction of the COMELEC to call a special election, as is allegedly its ministerial duty under the constitutional provision above cited, and therefore, involves no expenditure of public funds. It is only when an act complained of, which may include a legislative enactment or statute, involves the illegal expenditure of public money that the so-called taxpayer suit may be allowed. Q: If the government receives a donation from Henry See and Henry See specified that his donation will be used for the University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS. Page 19.

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