Denial of Due Process Tax

7/27/2019 Denial of Due Process Tax

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Denial of due process by: Maria Noeli V. FranciscoIt is unmistakable that the state has the inherent power of taxation, which has been defined as thepower by which the state raises revenue necessary to defray the expenses of the government.

Indeed, it is recognized that this power is borne out of necessity: the governmenthas to function and provide for the various needs of the nation.

However, just like the police power and power of eminent domain, theConstitution has provided for limitations to lessen incidences of abuse and toserve as protection for the citizenry.

One of the limitations to the exercise of the power of taxation provided by theConstitution is the observance of due process of law, substantive or procedural.

Under this limitation, one is given the right to be notified and be heard regardinga particular issue. In tax practice, it becomes all the more significant in cases ofassessments against taxpayers. Thus, in a recent case decided by the Court of

Tax Appeals (CTA), it was stressed that the non-observance of the proceduraldue process in the service and issuance of the assessment notices, PreliminaryAssessment Notice (PAN) and Final Assessment Notice (FAN), has the effect ofrendering them void ab initio. There being no valid assessment, whenprescription sets in, taxpayers can no longer be held liable for the allegeddiscrepancies found for the tax period stated therein.

In the said case, the Bureau of Internal Revenue (BIR) alleged that the FAN hadbeen validly served to petitionerby registered mail to the taxpayers previousaddress as appearing in its Income Tax Return for the tax period covered by theassessment notice.

In rebuttal, the petitioner denied having received the FAN by proving that it hadnot in fact been served and received and that the BIR officials had actualknowledge of the change of its business address.

In resolving the issue, the CTA ruled that in case a taxpayer denies receiving anassessment from the BIR, the latter has the burden of proving that indeed a copyof the assessment was sent to the taxpayer. In support of this ruling, the CTAcited the case of Barcelon, Roxas, Inc. vs. Commissioner of Internal Revenue(G.R. No. 157064, August 7, 2006), where the Supreme Court (SC) explainedthat in case the taxpayer denies ever having received an assessment from the

BIR, it is incumbent upon the latter to prove by competent evidence that suchnotice was indeed received by the addressee. The onus probandiwas shifted tothe respondent to prove by contrary evidence that the petitioner received theassessment by mail.

The SC has consistently held that while a mailed letter is deemed received by theaddressee in the course of mail, this is merely a disputable presumption subjectto controversion and a direct denial thereof shifts the burden to the party favored


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by the presumption to prove that the mailed letter was indeed received by theaddressee.

Based on this, the CTA found that the respondent failed to discharge the duty ofproving the receipt of the assessment by the petitioner. It was clear that the

petitioner had not been served a copy of the FAN, despite the fact that therespondent had been informed that the petitioner has yet to receive a copy of theFAN. Likewise, the respondent was actually informed of the new address of thepetitioner, not only through the returns bearing the new address but also due tothe fact that the respondents officers had actually visited the new office of thepetitioner. Therefore, no FAN was validly served on the petitioner.

The issue on the denial of procedural process, which renders the FAN void abinitio, was emphasized more clearly by the fact that the FAN was issued on thesame date that the PAN was served upon the petitioner. The CTA agreed withthe petitioner and explained that in order for an assessment to be valid, the

procedural requirements provided under Section 228 of the National InternalRevenue Code (NIRC) of 1997 (Protesting an Assessment), as amended, andRevenue Regulations Nos. 12-85 (Section 3. Time to Reply) and 12-99 (Section3. Due Process Requirement in the Issuance of Deficiency Tax Assessment),and Revenue Memorandum Order No. 37-94 (C. Review of Reports ofInvestigation and Service of Pre-assessment Notices) must be complied with.The cited provisions of law and regulations clearly illustrate the process to befollowed in assessment cases in order for the taxpayer to be afforded dueprocess.

In summary, after the Revenue Officer conducts a re-investigation, the taxpayershall be notified in writing of the purposes of the Informal Conference. If there issufficient basis for the assessment, a PAN shall be issued and sent to thetaxpayer, who is then given 15 days to make a reply and is also permitted toexamine the records and present his arguments in writing. In case of failure torespond to the PAN, the taxpayer shall be sent a FAN, which shall state the factsand the law on which the assessment is based. The taxpayer may file a protestbased on the FAN within 30 days and then submit the relevant supportingdocuments within 60 days. Otherwise, the assessment shall become final.

By serving the PAN and issuing the FAN on the same date, the respondentpatently violated the above-cited provisions and therefore denied the petitionersright to due process. Citing BPI Data Systems Corporation vs. Commissioner ofInternal Revenue(CTA Case No. 4530, January 12, 1994), the CTA stated thatdue to the failure of the respondent to strictly comply with the procedureprescribed by law and the failure of the petitioner to receive a copy of the allegedassessment, the latter was not afforded its right to be heard for it was denied the


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opportunity to protest or dispute the alleged assessment. The CTA went on tosay that it cannot bestow the presumption of correctness on the assessment inthe absence of any showing that administrative remedies granted by law havebeen properly exhausted or that petitioner has failed to file a protest on theassessment within the prescribed period despite receipt thereof.

Thus, since petitioner was not sent a FAN, the assessment is void. To proceedheedlessly with tax collection without first establishing a valid assessment isevidently violative of the cardinal principle in administrative investigations: thattaxpayer should be able to present their case and adduce supportingevidence (Commissioner of Internal Revenue vs. Azucena T. Reyes, G.R. Nos.159694 and 163581, January 27, 2006).

Interestingly, the CTA has ruled in Direct Container Lines vs. CIR (CTA CaseNo. 7616, September 10, 2009) that the issuance of the PAN may be dispensedwith without having violated due process of law where the taxpayer, afterprotesting to the Post Reporting Notice, subsequently received a FAN. It is to bestressed, however, that in the case at bar the BIR had already issued the PANand, therefore, the taxpayer should have been given the opportunity to presentits case through the observance of the procedural due process provided underexisting tax laws rules and regulations. Thus, the taxpayer should have had theopportunity to reply to the PAN within the reglementary period of 15 days beforea FAN was issued. Failing to do so, the respondent is deemed to have violated

the taxpayers right to due process of law.

http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/DC988F_17-11-10

It is contended that the ordinance Nos. 38 and 46 in question are unfair, unjust,

arbitrary and violate the principle on uniformity of taxation, the amount of tax or

license free to be collected not being based on the value but on the weight of the

product. Such tax or license fee becomes uniform by making the weight the basis

thereof as provided for in the ordinances in question. A P0.05 tax or license fee for

100 kilos of fraction thereof per month is not arbitrary but reasonable. The tax or

license fee provided for in the ordinance in question is imposed on every person,

firm, or corporation engage in the City of Cebu in business of buying and selling

and storing copra in his or its warehouse located within the city. It, as well as the
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exemption,1 applies equally to all persons, firm and corporations place in similar

situation. Market fluctuation in the value of price of the merchandise, article, or

good subject to tax or license fee does not make ununiform the rate of such tax or

license fee. The fact that the price of copra has been steadily going down, whereas

that of going up, does not render the tax arbitrary. Precisely, the tax or license fee

provided for in the ordinances in question based on the weight regardless of value

is what makes the tax or fee uniform. The tax or license fee does not deprive the

owner of the copra and of the warehouse of this property without due process of

law, because it is reasonable tax or fee and it does not deprive the dealer of his

copra and the owner of the warehouse where it is kept of his property. If the copra

dealer does not want to pay the city tax or fee, he may buy and sell the store the

copra elsewhere. It is not a tax on export because it is imposed not only upon copra

to exorted but also upon copra sold and to used for domestic purposes, if stored in

any warehouse in the City of Cebu and the weight thereof is 100 kilos or more. The

tax or license fee in question is not among those prohibited or beyond the power of

the municipal councils and municipal districts council to impose, as provided for in

section 3, Commonwealth Act No. 472. Besides Commonwealth Act No. 472 applies

only to municipal council and municipal district council and not to cities Like the City

of Cebu which has it own charter.

G.R. No. L-4887

UY MATIAO & CO., INC., plaintiff-appellee,vs.

THE CITY OF CEBU, MIGUEL RAFFIAN, as MAYOR; ANATOLIO YNCLINO, asCity Treasurer and JESUS E. ZABATE,

MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is

unconstitutional because it is highly oppressive, arbitrary and confiscatory which

amounts to deprivation of property without due process of law. It explains that


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gross income as defined under said provision only considers the cost of goods sold

and other direct expenses; other major expenditures, such as administrative and

interest expenses which are equally necessary to produce gross income, were not

taken into account.[31] Thus, pegging the tax base of the MCIT to a corporations

gross income is tantamount to a confiscation of capital because gross income,

unlike net income, is not realized gain.[32]

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government

can neither exist nor endure. The exercise of taxing power derives its source from

the very existence of the State whose social contract with its citizens obliges it to

promote public interest and the common good.[33]

Taxation is an inherent attribute of sovereignty.[34] It is a power that is

purely legislative.[35] Essentially, this means that in the legislature primarily lies

the discretion to determine the nature (kind), object (purpose), extent (rate),

coverage (subjects) and situs (place) of taxation.[36] It has the authority to prescribe

a certain tax at a specific rate for a particular public purpose on persons or things

within its jurisdiction. In other words, the legislature wields the power to define

what tax shall be imposed, why it should be imposed, how much tax shall be

imposed, against whom (or what) it shall be imposed and where it shall be

imposed.
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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.[37]Nevertheless, it is circumscribed by

constitutional limitations. At the same time, like any other statute, tax legislation

carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat [no]

person shall be deprived of life, liberty or property without due process of

law. In Sison, Jr. v. Ancheta, et al.,[38]we held that the due process clause may

properly be invoked to invalidate, in appropriate cases, a revenue measure[39]when

it amounts to a confiscation of property.[40] But in the same case, we also

explained that we will not strike down a revenue measure as unconstitutional (for

being violative of the due process clause) on the mere allegation of arbitrariness by

the taxpayer.[41]There must be a factual foundation to such an unconstitutional

taint.[42]This merely adheres to the authoritative doctrine that, where the due

process clause is invoked, considering that it is not a fixed rule but rather a broad

standard, there is a need for proof of such persuasive character.

[43]

Petitioner is correct in saying that income is distinct from capital.[44] Income

means all the wealth which flows into the taxpayer other than a mere return on

capital. Capital is a fund or property existing at one distinct point in time while
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income denotes a flow of wealth during a definite period of time.[45] Income is

gain derived and severed from capital.[46] For income to be taxable, the following

requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from

taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because

capital is not income. In other words, it is income, not capital, which is subject to

income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the

capital spent by a corporation in the sale of its goods, i.e., the cost of goods[48]and

other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in

lieuofthe normal net income tax, and only if the normal income tax is

suspiciously low. The MCIT merely approximates the amount of net income tax

due from a corporation, pegging the rate at a very much reduced 2% and uses as

the base the corporations gross income.

CHAMBER OF REAL G.R. No. 160756

ESTATE AND BUILDERS
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ASSOCIATIONS, INC.,v.

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,

At any rate, we see nothing of consequence in drawing any distinct between the

operation and effect of the due-process clause as it applies to the individual

states and to the national government of the United States. The question here

involved is essentially not one of due-process, but of the power of the Philippine

Government to tax. If that power be conceded, the guaranty of due process

cannot certainly be invoked to frustrate it, unless the law involved is challenged,

which is not, on considerations repugnant to such guaranty of due process of thatof the equal protection of the laws, as, when the law is alleged to be arbitrary,

oppressive or discriminatory.

G.R. No. L-46720 June 28, 1940

WELLS FARGO BANK & UNION TRUST COMPANY, petitioner-appellant,vs.THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness.A mere allegation, as here. does not suffice. There must be a factual foundationof such unconstitutional taint. Considering that petitioner here would condemnsuch a provision as void or its face, he has not made out a case. This is merelyto adhere to the authoritative doctrine that were the due process and equalprotection clauses are invoked, considering that they arc not fixed rules but

rather broad standards, there is a need for of such persuasive character aswould lead to such a conclusion. Absent such a showing, the presumption ofvalidity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxingstatute is so arbitrary that it finds no support in the Constitution. An obviousexample is where it can be shown to amount to the confiscation of property. Thatwould be a clear abuse of power. It then becomes the duty of this Court to say


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that such an arbitrary act amounted to the exercise of an authority not conferred.That properly calls for the application of the Holmes dictum. It has also been heldthat where the assailed tax measure is beyond the jurisdiction of the state, or isnot for a public purpose, or, in case of a retroactive statute is so harsh andunreasonable, it is subject to attack on due process grounds. 19

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,vs.RUBEN B. ANCHETA,

a. Due process of law. As provided for, no person shall be deprived of life,liberty or property without due process of law. This covers two types:

substantive, and procedural. Substantive due process relates to the

circumstances and procedures in the passage of tax laws and ordinances,

while the other relates to the procedural aspects in the implementation of

the tax laws and ordinances. Applied to taxation, due process mandates

that there should be a valid law imposing a tax to a particular taxpayer, and

should the taxpayer failed to pay the same, it must be given each and

every opportunity to explain itself and justify. No law imposing a tax, then

the taxpayer shall not be collected such tax. On the other hand, granting

that the taxpayer failed to pay in full but was not issued as assessment

notice informing the facts and the law of the assessment, still, the taxpayer

could not be held to pay. These are the essence of due process. The

taxing authority, while implementing the necessary mandates of its office

must give due respect to the established procedures the way it works in an

organized society.

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2. To repeat the challenged ordinance cannot be considered ultra vires as thereis more than ample statutory authority for the enactment thereof. Nonetheless, itsvalidity on constitutional grounds is challenged because of the allegation that itimposed double taxation, which is repugnant to the due process clause, and thatit violated the requirement of uniformity. We do not view the matter thus.
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As to why double taxation is not violative of due process, Justice Holmes madeclear in this language: "The objection to the taxation as double may be laid downon one side. ... The 14th Amendment [the due process clause] no more forbidsdouble taxation than it does doubling the amount of a tax, short of confiscation orproceedings unconstitutional on other grounds."8With that decision rendered at a

time when American sovereignty in the Philippines was recognized, it possessesmore than just a persuasive effect. To some, it delivered the coup de grace to thebogey of double taxation as a constitutional bar to the exercise of the taxingpower. It would seem though that in the United States, as with us, its ghost asnoted by an eminent critic, still stalks the juridical state. In a 1947 decision,however,9 we quoted with approval this excerpt from a leading Americandecision:10 "Where, as here, Congress has clearly expressed its intention, thestatute must be sustained even though double taxation results."

G.R. No. L-24756 October 31, 1968

CITY OF BAGUIO, plaintiff-appellee,vs.FORTUNATO DE LEON, defendant-appellant.

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. Cooley, The Law of Taxation, Vol. 1, Fourth

Edition, 149-150.

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Denial of Due Process Tax