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II. Fundamental Powers of Government

Inherent in the State (Exercised even without need of express constitutional grant) Necessary and indispensable (State cannot be effective without them)

Method by which state interferes with private property Presuppose equivalent compensation

Exercised primarily by the legislature

POLICE POWER EMINENT DOMAIN TAXATION

Meaning •It is the inherent and plenary power of the state which enables it to prohibit all that is hurtful to the comfort, safety and welfare of society.

[Ermita-Malate Hotel and Motel Operators Association, Inc. v. Mayor of Manila (1967)]

The power of eminent domain is the inherent right of the State to condemn private property to public use upon payment of just compensation. It is also known as the power of expropriation.

It is the enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty, for the support of the government and for all public needs. It is as broad as the purpose for which it is given.

Compensation None

(The altruistic feeling that one has contributed to the public good

[NACHURA])

Just compensation

(Full and fair equivalent of the property taken) required.

None

(The protection given and public improvements instituted by the State because of these taxes [NACHURA])

Use of

Property Not appropriated for public use Appropriated for public use Use taxing power as an implement for the attainment of a legitimate police objective— to regulate a business or trade

Objective Property taken for public use;

it is not necessarily noxious Earn government revenue for the Coverage Liberty and Property Property rights only Property rights only

A. Police Power General Coverage

 "The police power of the State," one court has said, "is a power coextensive with self-protection, and is not inaptly termed the 'law of overruling necessity.' [Rubi v. Provincial Board (1919)]

 The state, in order to promote the general welfare, may interfere with personal liberty, with property, and with business and occupations. Persons may be subjected to all kinds of restraints and burdens, in order to secure the general comfort health and prosperity of the state and to this fundamental aim of our Government, the rights of the individual are subordinated. [Ortigas and Co., Limited Partnership v. Feati Bank and Trust Co. (1979)]

 has been properly characterized as the most essential, insistent and the least limitable of powers, [Ermita-Malate Hotel and Motel Operators Assoc. v. Mayor of Manila (1967) Cf. Ichong v. Hernandez, (1957)] extending as it does "to all the great public needs."[Noble State Bank v. Haskell, 219 U.S. 412]

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 Police Power cannot be bargained away through treaty or contract. [Ichong v. Hernandez (1957)] Specific Coverage (1) Public Health (2) Public Morals (3) Public Safety (4) Public Welfare

Test of Reasonability/ Validity of Exercise of Police Power (1) Lawful subject

 Interest of the general public (as distinguished from a particular class required exercise). This means that the activity or property sought to be regulated affects the general welfare. [Taxicab Operators v. Board of Transportation (1982)] (2) Lawful means

 Means employed are reasonably necessary for the accomplishment of the purpose, and are not unduly oppressive. [Tablarin v. Gutierrez (1987)]

(3) Least restrictions of individual right

 It must also be evident that no other alternative for the accomplishment of the purpose less intrusive of private rights can work. [White Light Corporation, et al v. City of Manila (2009)]

Limitations

 The limit to police power is reasonability. The Court looks at the test of reasonability to decide whether it encroaches on the right of an individual. So long as legitimate means can reasonably lead to create that end, it is reasonable. [Morfe v. Mutuc (1968)]

 The legislative determination “as to what is a proper exercise of its police powers is not final or conclusive, but is subject to the supervision of the court.”[US v. Toribio (1910) citing Mr. Justice Brown in his opinion in the case of Lawton v. Steele (152 U.S., 133, 136)]

 The SC upheld the validity of Administrative Orders which converted existing mine leases and other mining agreements into production-sharing agreements within one year from its effectivity. The subject sought to be governed by the AOs are germane to the object and purpose of E.O. 279 and that mining leases or agreements granted by the State are subject to alterations through a reasonable exercise of police power of the State. [Miners Association of the Philippines v. Factoran (1995)]

Limitations when police power is delegated

(1) Express grant by law [e.g. Secs. 16, 391, 447, 458 and 468, R.A. 7160, for LGUs] (2) Limited within its territorial jurisdiction [for local government units]

(3) Must not be contrary to law.

History of Police Power, Dissenting Opinion of Chief Justice Puno in Lim v. Pacquing, 240 SCRA 649:

“Former Chief Justice Puno in his Dissenting Opinion in this 1995 case said that the exercise of police power is not without limit. He said that while it is the “prerogative of the State to promote the general welfare of the people thru the use of police power; on the opposite end is the right of an entity to have its property protected against unreasonable impairment by the State. Courts accord the State wide latitude in the exercise of its police power to bring about the greatest good of the greatest number. But when its purpose is putrefied by private interest, the use of police

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power becomes a farce and must be struck down just as every arbitrary exercise of government power should be stamped out.”

LIM vs. PACQUING CASE DIGEST G.R. 115044, January 27, 1995 Facts:

Respondent Side: On 15 September 1994, respondent Associated Development Corporation (ADC) filed a petition for prohibition seeking to prevent GAB from withdrawing the provisional authority that had been granted them to operate jai-alai. ADC's franchise was invalidated by PD No.771, which expressly revoked all existing franchises to operate all forms of gambling facilities issued by local governments. Respondent contends that Ordinance No. 7065 authorized the Mayor to allow ADC to operate Jai-Alai in the City of Manila. ADC also assails the constitutionality of PD No. 771 as violation of the equal protection and non-impairment clauses of the Constitution.

ADC contends that Republic Act N. 409 (Manila Chapter) gives legislative powers to the Municipal Board to grant franchises, and since Republic Act No. 954 does not specifically qualify the word "legislative" as referring exclusively to Congress, then Rep. Act No. 954 did not remove the power of the Municipal Board under Section 18(jj) of Republic Act No. 409 and consequently it was within the power of the City of Manila to allow ADC to operate the jai-alai in the City of Manila.

Petitioner’s Side: Petitioners in G.R. No. 117263 argue that Republic Act No. 954 effectively removed the power of the Municipal Board of Manila to grant franchises for gambling operations. It is argued that the term "legislative franchise" in Rep. Act No. 954 is used to refer to franchises issued by Congress.

Issue: Whether or not ADC has a valid franchise to operate the Jai-Alai de Manila. Held:

PD No. 771 is a valid exercise of the inherent Police power of the State. Gambling is essentially antagonistic and self-reliance. It breeds indolence and erodes the value of good, honest and hard work. It is, as very aptly stated by PD No. 771, a vice and a social ill which government must minimize (if not eradicate) in pursuit of social and economic development. Jai-alai is not a mere economic activity which the law seeks to regulate. It is essentially gambling and whether it should be permitted and, if so, under what conditions are questions primarily for the lawmaking authority to determine, taking into account national and local interests. Here, it is the police power of the State that is paramount. On the alleged violation of the non-impairment and equal protection clauses of the Constitution, it should be remembered that a franchise is not in the strict sense a simple contract but rather it is more importantly, a mere privilege specially in matters which are within the government's power to regulate and even prohibit through the exercise of the police power. Thus, a gambling franchise is always subject to the exercise of police power for the public welfare.

ADC has no franchise from Congress to operate the jai-alai therefore, it may not operate even if it has a license from the Mayor to operate the jai-alai in the City of Manila

When exercise of police power may be questioned?

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exercise police power. The Court said: “Clearly, the MMDA is not a political unit of government. The power delegated to the MMDA is that given to the Metro Manila Council to promulgate administrative rules and regulations in the implementation of the MMDA’s functions. There is no grant of authority to enact ordinances and regulations for the general welfare of the inhabitants of the metropolis.”

MMDA vs Bel-Air Village Assoc. Case Digest Facts:

 MMDA is a government agency tasked with the delivery of basic services in Metro Manila.

 Bel-Air is a non-stock, non-profit corporation whose members are homeowners of Bel-Air Villagee in Makati City. Bel-Air is the registered owner of the Neptune Street, a road inside Bel-Air Village.

 December 30, 1995 Bel-Air received a notice from MMDA requesting Bel-Air to open Neptune St. to public vehicular traffic. On the same day, MMDA apprised that the perimeter wall separating the subdivision from the adjacent Kalayaan Avenue would be demolished.

Respondent’s Side

 January 2, 1996, MMDA instituted a case for injunction against Bel-Air; and prayed for a TRO and preliminary injunction enjoining Neptune St. and prohibiting the demolition of the perimeter wall. Court issued a TRO the next day. After due hearing, RTC denied the issuance of a preliminary injunction.

 Respondent questioned the denial before the Court of Appeals in CA-G.R. SP No. 39549. The appellate court conducted an ocular inspection of Neptune Street and on February 13, 1996, it issued a writ of preliminary injunction enjoining the implementation of the MMDA’s proposed action.

Petitioner side:

 Petitioner MMDA claims that it has the authority to open Neptune Street to public traffic because it is an agent of the state endowed with police power in the delivery of basic services in Metro Manila. One of these basic services is traffic management which involves the regulation of the use of thoroughfares to insure the safety, convenience and welfare of the general public. It is alleged that the police power of MMDA was affirmed by this Court in the consolidated cases of Sangalang v. Intermediate Appellate Court.

 ]From the premise that it has police power, it is now urged that there is no need for the City of Makati to enact an ordinance opening Neptune street to the public

 MMDA question the denial and appealed to the CA. CA conducted an ocular inspection of Neptune St. then issued a writ of preliminary injunction enjoining the MMDA proposed action.

On January 27, 1997, appellate court rendered a decision finding MMDA no authority to order the opening of Neptune St. It held that the authority is in the City Council of Makati by ordinance.

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Issues:

(1) MMDA has the authority to mandate the opening of Neptune St. to public traffic pursuant to its regulatory and police powers?

(2) Is passage of an ordinance a condition precedent before the MMDA may order the opening of subdividion roads to public traffic?

(3) Is Bel-Air estopped from denying the authority of MMDA?

(4)Was Bel-Air denied of due process despite the several meetings held between MMDA and Bel-Air? (5) Has Bel-Air come to court with unclean hands?

MMDA: it has the authority to open Neptune St. because it is an agent of the Government endowed with police power in the delivery of basic services in Metro Manila. From the premise of police powers, it follows then that it need not for an ordinance to be enacted first.

**Police power is an inherent attribute of sovereignty. Police power is lodged primarily in the National Legislature, which the latter can delegate to the President and administrative boards, LGU or other lawmaking bodies.

**LGU is a political subdivision for local affairs. Which has a legislative body empowered to enact ordinances, approved resolutions and appropriate funds for the general welfare of the province/city/municipality.

**Metro Manila is declared as a special development and administrative region in 1995. And the administration of metro-wide basic services is under the MMDA .Which includes, transport and traffice management. It should be noted that MMDA are limited to the acts: formulation, coordination, regulation, implementation, preparation, management, monitoring, setting of policies and installation of a system and administration. MMDA was not granted with legislative power.

Ruling: Petition Denied. PUNO, J.:

Not infrequently, the government is tempted to take legal shortcuts to solve urgent problems of the people. But even when government is armed with the best of intention, we cannot allow it to run roughshod over the rule of law. Again, we let the hammer fall and fall hard on the illegal attempt of the MMDA to open for public use a private road in a private subdivision. While we hold that the general welfare should be promoted, we stress that it should not be achieved at the expense of the rule of law.

It will be noted that the powers of the MMDA are limited to the following acts: formulation, coordination, regulation, implementation, preparation, management, monitoring, setting of policies, installation of a system and administration. There is no syllable in R. A. No. 7924 that grants the MMDA police power, let alone legislative power. Even the Metro Manila Council has not been delegated any legislative power. Unlike the legislative bodies of the local government units, there is no provision in R. A. No. 7924 that empowers the MMDA or its Council to "enact ordinances, approve resolutions and appropriate funds for the general welfare" of the inhabitants of Metro Manila. The MMDA is, as termed in the charter itself, a "development authority."[30] It is an agency created for the purpose of laying down policies and coordinating with the various national government agencies, people’s organizations, non-governmental organizations and the private sector for the efficient and expeditious delivery of basic services in the vast

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metropolitan area. All its functions are administrative in nature and these are actually summed up in the charter itself,

(1) The basis for the proposed opening of Neptune Street is contained in the notice of December 22, 1995 sent by petitioner to respondent BAVA, through its president. The notice does not cite any ordinance or law, either by the Sangguniang Panlungsod of Makati City or by the MMDA, as the legal basis for the proposed opening of Neptune St. (2) The MMDA is not the same entity as the MMC in Sangalang. Although the MMC is the forerunner of the present MMDA, an examination of Presidential Decree (P. D.) No. 824 the charter of the MMC shows that the latter possessed greater powers which were not bestowed on the present MMDA.

(3) Under the 1987 Constitution, the local government units became primarily responsible for the governance of their respective political subdivisions. The MMA's jurisdiction was limited to addressing common problems involving basic services that transcended local boundaries. It did not have legislative power.

B. POWER OF EMINENT DOMAIN Definition and Scope

The power of eminent domain is the inherent right of the State to condemn private property to public use upon payment of just compensation.

It is also known as the power of expropriation.

 It is well settled that eminent domain is an inherent power of the state that need not be granted even by the fundamental law.

Sec. 9, Art. III merely imposes a limit on the government’s exercise of this power. [Republic v Tagle (1998)].

Who may exercise the power? Congress and

by delegation:

the President

administrative bodies local government units,

 and even private enterprises performing public services may exercise the power of eminent domain

Application: When is there taking in the constitutional case?

When the owner is deprived of his proprietary rights there is taking of private property. It may include

o (1) Diminution or reduction in value; o (2) Prevention of ordinary use; o (3) Deprivation of beneficial use.

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Examples were:

(a) trespass without actual eviction; (b) material impairment of the value;

(c) prevention of the ordinary uses (e.g. easement).

But anything taken by virtue of police power is not compensable (e.g. abatement of a nuisance), as usually property condemned under police power is harmful or noxious [DESAMA v. Gozun (2006)]

Examples from Jurisprudence:

(1) The imposition of an aerial easement of right-of-way was held to be taking. The exercise of the power of eminent domain does not always result in the taking or appropriation of title to the expropriated property; it may also result in the imposition of a burden upon the owner of the condemned property, without loss of title or possession. [NPC v. Gutierrez (1991)]

(2) May include trespass without actual eviction of the owner, material impairment of the value of the property or prevention of the ordinary uses for which the property was intended. [Ayala de Roxas v. City of Manila (1907)]

(3) A municipal ordinance prohibiting a building which ould impair the view of the plaza from the highway was likewise considered taking. [People v. Fajardo (1958)]

When the State exercises the power of eminent domain in the implementation of its agrarian reform program, the constitutional provision which governs is Section 4, Article XIII of the Constitution. Notably, this provision also imposes upon the State the obligation of paying the landowner compensation for the land taken, even if it is for the government’s agrarian reform purposes. [Land Bank of the Philippines v. Honeycomb Farms Corporation (2012)]

Requisites of Application of Eminent Domain (1) Private property

(2) Genuine necessity - inherent/presumed in legislation, but when the power is delegated (e.g. local government units), necessity must be proven.

(3) For public use - Court has adopted a broad definition of “public use,” following the U.S. trend (4) Payment of just compensation

(5) Due process [Manapat v. CA (2007)] Moday v. C. A. 268 SCRA 586

The Court reiterated the limitations on the power of eminent domain are that the use must be public, compensation must be made and due process of law must be observed. The Supreme Court, taking cognizance of such issues as the adequacy of compensation, necessity of the taking and the public use character or the purpose of the taking, has ruled that the necessity of exercising eminent domain must be genuine and of a public character. Government may not capriciously choose what private property should be taken.

Moday v. C. A. CASE DIGEST

Petitioners: Percival Moday, Zotico Moday and Leonora Moday

Respondents: CA, Judge Evangelista Yuipco, and Municipality of Bunawan Ponente: Romero

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Facts:

Petition for review of a decision of the CA.

The Sangguniang Bayan of the Municipality of Bunawan in Agusan del Sur passed Resolution No. 43-89, "Authorizing the Municipal Mayor to Initiate the Petition for Expropriation of a One (1) Hectare Portion of Lot No. 6138-Pls-4 Along the National Highway Owned by Percival Moday for the Site of Bunawan Farmers Center and Other Government Sports Facilities."

The Resolution was approved by Mayor Anuncio Bustillo and was transmitted to the Sangguniang Panlalawigan for its approval. The Sangguniang Panlalawigan disapproved said Resolution and returned it with the comment that "expropriation is unnecessary considering that there are still available lots in Bunawan for the establishment of the government center."

Respondent’s side; The Sangguniang Bayan of the Municipality of Bunawan passed a resolution authorizing the municipal mayor to initiate the petition for expropriation of a parcel of land, belonging to the petitioners. The Sangguniang Panlalawigan disapproved said resolution and returned it with the comment that expropriation is unnecessary considering that there are still other lots available.

The municipality filed a petition for eminent domain against Percival Moday before the RTC. The municipality then filed a motion to take or enter upon the possession of the land upon deposit with the municipal treasurer of the required amount. The RTC granted the motion. It ruled that the Sangguniang Panlalawigan's failure to declare the resolution invalid leaves it effective. It added that the duty of the Sangguniang Panlalawigan is merely to review the ordinances and resolutions passed by the Sangguniang Bayan under Section 208 (1) of B.P. Blg.337, old Local Government Code and that the exercise of eminent domain is not one of the acts enumerated in Section 19 requiring the approval of the Sangguniang Panlalawigan.

Petitioner’s side: Petitioners elevated the case in a petition for certiorari before the CA. The CA held that the public purpose for the expropriation is clear from Resolution No. 43-89 and that since the Sangguniang Panlalawigan of Agusan del Sur did not declare Resolution No. 43-89 invalid, expropriation of petitioners' property could proceed.

In the instant petition for review, petitioner seeks the reversal of the decision and resolution of the CA and a declaration that Resolution No. 43-89 of the Municipality of Bunawanis null and void.

Meanwhile, the Municipality had erected three buildings on the subject property: the Association of Barangay Councils (ABC) Hall, the Municipal Motorpool, both wooden structures, and the Bunawan Municipal Gymnasium, which is made of concrete.

Issue: WON a municipality may expropriate private property by virtue of a municipal resolution which was disapproved by the Sangguniang Panlalawigan.

Held:Yes Ratio:

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The Court finds no merit in the petition and affirms the decision of the CA. Eminent domain is a fundamental State power that is inseparable from sovereignty. It is government's right to appropriate in the nature of a compulsory sale to the State, private property for public use or purpose. Inherently possessed by the national legislature, the power of eminent domain may be validly delegated to local governments, other public entities and public utilities. For the taking of private property by the government to be valid, the taking must be for public use and there must be just compensation. The Sangguniang Panlalawigan's disapproval does not render said resolution null and void. Their power to declare a municipal resolution invalid is on the sole ground that it is beyond the power of the Sangguniang Bayan or the mayor to issue. Said resolution is valid and binding and could be used as lawful authority to petition for the condemnation of petitioner's property. The limitations on the power of eminent domain are that the use must be public, compensation must be made and due process of law must be observed. The necessity of exercising eminent domain must be genuine and of a public character. Government may not capriciously choose what private property should be taken. Instant petition is DENIED. The questioned decision and resolution of the CA are affirmed. TRO is lifted

The Municipality's power to exercise the right of eminent domain is not disputed as it is expressly provided for BP 337, the local Government Code in force at the time expropriation proceedings were initiated. What petitioners question is the lack of authority of the municipality to exercise this right since the Sangguniang Panlalawigan disapproved Resolution No. 43-89. The Sangguniang Panlalawigan's disapproval of Resolution No. 43-89 is an infirm action which does not render said resolution null and void. The law, Section 153 of B.P. Blg. 337, grants the Sangguniang Panlalawigan the power to declare a municipal resolution invalid on the sole ground that it is beyond the power of the Sangguniang Bayan or the Mayor to issue.

Land Bank of the Philippines v. Yatco Agricultural Enterprises, G.R. No. 172551, January 15, 2014.

The determination of just compensation is fundamentally a judicial function. In the exercise of the Court’s essentially judicial function of determining just compensation, the RTCSACs are not granted unlimited discretion and must consider and apply the enumerated factors in R.A. No. 6657 and the DAR formula (in AO 5-98) that reflect these factors. Courts may, in the exercise of their discretion, relax the formula’s application to fit the factual situations before them. They must, however, clearly explain the reason for any deviation from the factors and formula that the law and the rules have provided.

Land Bank of the Philippines v. Yatco Case Digest

Facts:

Petitioner’s side:

The LBP argues in the present petition that the CA erred when it affirmed the RTC-SAC’s ruling that fixed the just compensation for the property based on the valuation set by Branches 35 and 36.22 The LBP pointed out that the property in the present case was expropriated pursuant to its agrarian reform program; in contrast, the land subject of the civil cases was expropriated by the National Power Corporation (NAPOCOR) for industrial purposes.

The LBP added that in adopting the valuation fixed by Branches 35 and 36, the RTC-SAC completely disregarded the factors enumerated in Section 17 of R.A. No. 6657 and the guidelines and procedure laid out in DAR AO 5-98.

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Finally, the LBP maintains that it did not encroach on the RTC-SAC’s prerogative when it fixed the valuation for the property as it only followed Section 17 of R.A. No. 6657 and DAR AO 5-98, and merely discharged its mandate under E.O. No. 405

Respondent’s side:

Yatco argues that the RTC-SAC correctly fixed the just compensation for its property at P200.00 per square meter.23 It points to several reasons for its position. First, the RTC-SAC’s valuation was not only based on the valuation fixed by Branch 36 (as adopted by Branch 35); it was also based on the property’s market value as stated in the current tax declaration that it presented in evidence before the RTC-SAC. Second, the RTC-SAC considered the evidence of both parties; unfortunately for the LBP, the RTC-SAC found its evidence wanting and in total disregard of the factors enumerated in Section 17 of R.A. No. 6657. And third, the RTC-SAC considered all of the factors enumerated in Section 17 when it set the property’s value at P200.00 per square meter. Procedurally, Yatco claims that the present petition’s issues and arguments are purely factual and they are not allowed in a petition for review on certiorari and the LBP did not point to any specific error that the CA committed when it affirmed the RTC-SAC’s decision.

The Issue

Whether or not the RTC-SAC’s determination of just compensation for the property was proper Ruling:

The LBP essentially questions in the present petition the RTC- SAC’s adoption of the evaluation made

by Branch 36 in fixing the just compensation for the property. The LBP asks the question: was the just

compensation fixed by the RTC-SAC for the property, which was based solely on Branch 36’s evaluation,

determined in accordance with law? We find the presented issue clearly one of law. Resolution of this

question can be made by mere inquiry into the law and jurisprudence on the matter, and does not require

a review of the parties’ evidence.

We, therefore, disagree with Yatco on this point as we find the present petition compliant with the

Rule45 requirement. The determination of just compensation is essentially a judicial function that the

Judiciary exercises within the parameters of the law

Just Compensation. The determination of just compensation is fundamentally a judicial function. In the exercise of the Court’s essentially judicial function of determining just compensation, the RTC -SACs are not granted unlimited discretion and must consider and apply the enumerated factors in R.A. No. 6657 and the DAR formula (in AO 5-98) that reflect these factors. These factors and formula provide the uniform framework or structure for the computation of the just compensation for a property subject to agrarian reform. When acting within the parameters set by the law itself, the RTC-SACs, however, are not strictly bound to apply the DAR formula to its minute detail, particularly when faced with situations that do not warrant the formula’s strict application; they may, in the exercise of their discretion, relax the formula’s application to f it the factual situations before them. They must, however, clearly explain the reason for any deviation from the factors and formula that the law and the rules have provided.

The “time of taking” refers to that time when the State deprived the landowner of the use and benefit of his property, as when the State acquires title to the property or as of the filing of the complaint, per Section 4, Rule 67 of the Rules of Court.

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Expropriation is one of the harshest proceedings which the state has against a private party because it deprives the party of perpetual use of his property; requisites, how just compensation is determined; relate to the Bill of Rights. (1). The size of the property and the seeming limited sector would benefit out of the expropriation proceeding will not overcome the PUBLIC PURPOSE for which the private property is being acquired. (On the acquisition of the 492 square meter property in Taguig where the founder of the INC was born.

(2). The private property owner may file a suit for reconveyance of property if government does not use the property expropriated for a substantial period of time. (On the failure of the government agency to implement the expansion of the Cebu airport after a lapse of more than 10 years.

(3). Where the subject property sought to be acquired is covered by CARP, just compensation is based at the time of taking. (On the determination at what price Land Bank would pay the landowner)

(4)The determination of just compensation is left to the sound discretion of the Court and it will not be bound by the Commissioners it appointed to assess the property and recommend just compensation.

C. POWER OF TAXATION

 It is the enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty, for the support of the government and for all public needs.

 It is as broad as the purpose for which it is given.

 Treated as a special fund and paid out for such purpose only; when purpose is fulfilled, the balance, if any shall be transferred to the general funds of the Government. [See: Osmena v. Orbos (1993)]

Equal protection clause: taxes should be uniform (persons or things belonging to the same class shall be taxed at the same rate) and equitable (taxes should be apportioned among the people according to their ability to pay)

Progressive system of taxation: The rate increases as the tax base increases, with basis as social justice. Taxation as an instrument for a more equitable distribution of wealth

Delegated tax legislation: Congress may delegate lawmaking authority when the Constitution itself specifically authorizes it.

Purpose:

(1) To raise revenue (2) Tool for regulation

(3) Protection/power to keep alive Tax for special purpose [Sec. 29 (3), Art. VI]: General Limitations

(1) Power to the general welfare tax exists for; should be exercised only for a public purpose

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(3) Tax should not be confiscatory: If a tax measure is so unconscionable as to amount to confiscation of property, the Court will invalidate it. But invalidating a tax measure must be exercised with utmost caution,otherwise, the State’s power to legislate for the public welfare might be seriously curtailed

(4) Taxes should be uniform and equitable [Sec. 28(1), Art. VI] RULE ON TAXATION!!!!

 simply geographical uniformity, meaning it operates with the same force and effect in every place where the subject of it is found

Judicial review for unconscionable and unjust tax amounting to confiscation of property

The legislature has discretion to determine the nature, object, extent, coverage, and situs of taxation. But where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for despite all its plenitude, the power to tax cannot override constitutional prescriptions. [Tan v. del Rosario (1994)]

Specific Limitations (1) Uniformity of taxation

Exception: Rule does not prohibit classification for Purposes of taxation, provided the ff requisites are met: (SNAGAE)

(a) standards used are Substantial and Not Arbitrary

(b) if the classification is Germane to achieve the legislative purpose

(c) if that classification Applies to both present and future conditions, other circumstances being equal

(d) applies Equally to members of the same class. [Pepsi Cola v. City of Butuan (1968)]. (2) Tax Exemptions

 No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of Congress [Sec. 28 (4), Art. VI]

 A corollary power but must be for a public purpose, uniform and equitable and in conformity with the equal protection clause

 Tax exemptions are granted gratuitously and may be revoked at will, except when it was granted for valuable consideration.

 May either be constitutional or statutory.

If statutory, it has to have been passed by majority of all the members of Congress [Sec. 28 (4), Art. VI] Constitutional exemptions [sec. 28(3), Art. VI]

Requisite: Exclusive Use

(a) Educational institutions (both profit and non-profit used actually, directly and exclusively for educational purposes): Benefits redound to students, but only applied to property taxes and not excise taxes

(b) Charitable institutions: Religious and charitable institutions give considerable assistance to the State in the improvement of the morality of the people and the care of the indigent and the handicapped

(c) Religious property: Charitable Institutions, churches, and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements, actually, directly and exclusively used for religious, charitable or educational purposes

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Com. of Internal Revenue v. S. C. Johnson & Son, Inc., 309 SCRA 87.

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital.

The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation.

CIR VS SC JOHNSON & SON, INCS AND CA Facts:

Respondent, JOHNSON AND SON, INC., a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America(USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance inmanagement, marketing and production from SC Johnson and Son, U. S. A.The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Te chnology Transfer under Certificate of Registration No. 8064 . For the use of the trademark or technology, SCJOHNSON AND SON, INC was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993.00 On October 29,1993, SC JOHNSON AND SON, USA filed with the International Tax Affairs Division (ITAD) of the BIR aclaim for refund of overpaid withholding tax on royalties arguing that, since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. Respondent submits that royalties paid to SC Johnson and Son, USA is only subject to 10%withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty in relation to theRP-West Germany Tax Treaty. The Internal Tax Affairs Division of the BIR ruled against SC Johnson andSon, Inc. and an appeal was filed by the former to the Court of tax appeals. The CTA ruled against CIR and ordered that a tax credit be issued in favor of SC Johnson and Son, Inc. Unpleased with the decision, the CIR filed an appeal to the CA which subsequently affirmed in to the decision of the CTA. Hence, an appeal on certiorari was filed to the SC.

ISSUE:

WON SC JOHNSON AND SON,USA IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10%ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.

The concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty could not apply totaxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed under the two tax treaties are not paid under similar circumstances, they are not containing similar provisions on tax crediting.

The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted the royalties, with a restraint on the tax that may be collected by the state of source. Furthermore, the method employed to give relief from double taxation

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is the allowance of a tax credit to citizens or residents of the United States against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. The Philippines may impose one of three rates- 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state.

At the same time, the intention behind the adoption of the provision on relief from double taxation in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause.

What is the most favored nation clause?

The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the “most favored” among other countries. It is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable.

The RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

TAXATION RELATED TOPICS: What is the purpose of a tax treaty?

The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions.

The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investorwould remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country.

What is international double taxation and the rationale for doing away with it?

International juridical double taxation is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods; The apparent rationale for doing away

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with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies.

When is there double taxation?

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

What are the methods of eliminating double taxation?

 First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited.

 The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation.

What are the methods of relief under the second method?

There are two methods of relief—the exemption method and the credit method.

 Exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer’s remaining income or capital.

 Credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter.

The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax.

What is the rationale of reducing tax rates in negotiating tax treaties?

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the

Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country.

What are tax refunds?

Tax refunds are in the nature of tax exemptions, and as such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption.

Who has the burden of proof in tax exemption?

The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law.

References

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