A. Definition and Concept of Taxation

Commissioner of Internal Revenue vs. Algue Inc.GR No. L-28896 | Feb. 17, 1988

Facts: Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income taxes from 1958-1959, amtg to P83,183.85 A letter of protest or reconsideration was filed by Algue Inc on Jan 18 On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty. Guevara, who refused to receive it on the ground of the pending protest Since the protest was not found on the records, a file copy from the corp was produced and given to BIR Agent Reyes, who deferred service of the warrant On April 7, Atty. Guevara was informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served On April 23, Algue filed a petition for review of the decision of the CIR with the Court of Tax Appeals CIR contentions:- the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense- payments are fictitious because most of the payees are members of the same family in control of Algue and that there is not enough substantiation of such payments CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by Algue as legitimate business expenses in its income tax returns

Ruling: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance, made in accordance with law. RA 1125: the appeal may be made within thirty days after receipt of the decision or ruling challenged During the intervening period, the warrant was premature and could therefore not be served. Originally, CIR claimed that the 75K promotional fees to be personal holding company income, but later on conformed to the decision of CTA There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. CTA also found, after examining the evidence, that no distribution of dividends was involved CIR suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction Algue Inc. was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. This arrangement was understandable in view of the close relationship among the persons in the family corporation The amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to Algue Inc. was P125K. After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. Sec. 30 of the Tax Code: allowed deductions in the net income Expenses - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered xxx the burden is on the taxpayer to prove the validity of the claimed deduction In this case, Algue Inc. has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. Taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values Taxation must be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor

Algue Inc.s appeal from the decision of the CIR was filed on time with the CTA in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by Algue Inc. was permitted under the Internal Revenue Code and should therefore not have been disallowed by the CIR

NPC vs. City of Cabanatuan

FACTS:NAPOCOR, the petitioner, is a government-owed and controlled corporation created under Commonwealth Act 120. It is tasked to undertake the development of hydroelectric generations of power and the production of electricity from nuclear, geothermal, and other sources, as well as, the transmission of electric power on a nationwide basis.

For many years now, NAPOCOR sells electric power to the resident Cabanatuan City, posting a gross income of P107,814,187.96 in 1992. Pursuant to Sec. 37 of Ordinance No. 165-92, the respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the formers gross receipts for the preceding year.

Petitioner, whose capital stock was subscribed and wholly paid by the Philippine Government, refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contend that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees in accordance with Sec. 13 of RA 6395, as amended.

The respondent filed a collection suit in the RTC of Cabanatuan City, demanding that petitioner pay the assessed tax, plus surcharge equivalent to 25% of the amount of tax and 2% monthly interest. Respondent alleged that petitioners exemption from local taxes has been repealed by Sec. 193 of RA 7160 (Local Government Code). The trial court issued an order dismissing the case. On appeal, the Court of Appeals reversed the decision of the RTC and ordered the petitioner to pay the city government the tax assessment.

ISSUES:(1) Is the NAPOCOR excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government and its charter characterized is as a non-profit organization?

(2) Is the NAPOCORs exemption from all forms of taxes repealed by the provisions of the Local Government Code (LGC)?

HELD:(1) NO. To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name, and can exercise all the powers of a corporation under the Corporation Code.

To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is no engage din business.

(2) YES. One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the National Government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e. when specific provisions of the LGC authorize the LGUs to impose taxes, fees, or charges on the aforementioned entities. The legislative purpose to withdraw tax privileges enjoyed under existing laws or charter is clearly manifested by the language used on Sec. 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used.

B. Theory and Basis of Taxation

North Camarines Lumber Co., Inc. vs. CIR

FACTS: Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest of whom is Atty. Manuel Pineda. Estate proceedings were had in Court so that the estate was divided among and awarded to the heirs. Atty Pineda's share amounted to about P2,500.00. After the estate proceedings were closed, the BIR investigated the income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue filed said returns for the estate issued an assessment and charged the full amount to the inheritance due to Atty. Pineda who argued that he is liable only to extent of his proportional share in the inheritance.

ISSUE: Can BIR collect the full amount of estate taxes from an heir's inheritance.

HELD: Yes. The Government can require Atty. Pineda to pay the full amount of the taxes assessed.The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid income taxes for which said estate is liable. By virtue of such lien, the Government has the right to subject the property in Pineda's possession to satisfy the income tax assessment. After such payment, Pineda will have a right of contribution from his co-heirs, to achieve an adjustment of the proper share of each heir in the distributable estate. All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received; and second, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due. This second remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt and certain availability is an imperious need.

Phil. Guaranty Co., Inc. vs. Commissioner of Internal Revenue

FACTS: The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts with foreign insurance companies not doing business in the country, thereby ceding to foreign reinsurers a portion of the premiums on insurance it has originally underwritten in the Philippines. The premiums paid by such companies were excluded by the petitioner from its gross income when it file its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, the CIR assessed against the petitioner withholding taxes on the ceded reinsurance premiums to which the latter protested the assessment on the ground that the premiums are not subject to tax for the premiums did not constitute income from sources within the Philippines because the foreign reinsurers did not engage in business in the Philippines, and CIR's previous rulings did not require insurance companies to withhold income tax due from foreign companies.

ISSUE: Are insurance companies not required to withhold tax on reinsurance premiums ceded to foreign insurance companies, which deprives the government from collecting the tax due from them?

HELD: No. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the state. The petitioner's defense of reliance of good faith on rulings of the CIR requiring no withholding of tax due on reinsurance premiums may free the taxpayer from the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents.

C. Double Taxation

City of Manila vs. Coca-Cola Bottlers Philippines, Inc.

FACTS:Respondent paid the local business tax only as manufacturers as it was expressly exempted from the business tax under a different section and which applied to businesses subject to excise, VAT or percentage tax under the Tax Code. The City of Manila subsequently amended the ordinance by deleting the provision exempting businesses under the latter section if they have already paid taxes under a different section in the ordinance. This amending ordinance was later declared by the Supreme Court null and void. Respondent then filed a protest on the ground of double taxation. RTC decided in favor of Respondent and the decision was received by Petitioner on April 20, 2007. On May 4, 2007, Petitioner filed with the CTA a Motion for Extension of Time to File Petition for Review asking for a 15-day extension or until May 20, 2007 within which to file its Petition. A second Motion for Extension was filed on May 18, 2007, this time asking for a 10-day extension to file the Petition. Petitioner finally filed the Petition on May 30, 2007 even if the CTA had earlier issued a resolution dismissing the case for failure to timely file the Petition.

ISSUE

Does the enforcement of the latter section of the tax ordinance constitute double taxation?

HELD:

YES. There is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21 of the tax ordinance since these are being imposed: (1) on the same subject matter the privilege of doing business in the City of Manila; (2) for the same purpose to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority petitioner City of Manila; (4) within the same taxing jurisdiction within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods per calendar year; and (6) of the same kind or character a local business tax imposed on gross sales or receipts of the business.

D. License versus Tax; LGUs Power to Tax

Saldaa vs. City of Iloilo

Facts: In 1946, the City of Iloilo promulgated Ordinance 28, which strictly prohibits the transport of food supply and labor animals outside Iloilo without first obtaining the necessary license permit from the mayor. Under the ordinance, Serafin Saldana had been paying, under protest, so-called fees on fish bought in Iloilo and sent to Manila from 16 September to 6 December 1946.

Issue: Whether the license fee was validly imposed.

Held: A license fee represents the permission conceded to do an act is in the main purpose of police power, and is not supposed to be imposed for revenue. A property tax, on the other hand, is a tax in the ordinary sense, assessing according to the value of property. Judging from the amount of fees fixed in the ordinance, the so-called fees were in reality taxes for city revenue. As such, they are unauthorized by the law or the City Charter, and are alson in contravention of Sections 2287 and 2629 of the Revised Administrative Code. The prohibition against taking animals and articles outside Iloilo without mayors permit is in restraint of trade and a curtailment of the rights of the owners of said animals and articles to freely sell and of prospective purchasers to buy and dispose of them without the city limits in the ordinary course of commerce and trade. The ordinance is ultra vires and, thus, is null and void.