Taxation I Midterm Reviewer under Atty. Ibanez Reference: Lim and Vitug, Acosta

CONCEPT, UNDERLYING BASIS AND PURPOSE

Concept:Taxation is a mode by which governments make exactions for revenue in order to support their existence and carry out their legitimate purpose.

Taxation is the inherent power of the State to demand enforced contributions upon its subjects and objects within its territorial jurisdiction for public purpose to support the gov’t.

Theory or Underlying Basis: Governmental necessity, without it, gov’t can neither

exist or endure; “Taxes are the lifeblood of the gov’t and their prompt

and certain availability are an imperious need.” (CIR vs. Pineda, 21 scra 105)

Taxation is the indispensable and inevitable price for civilized society (CIR vs. Algue, Inc. L-28896)

Grant of protection and benefits by the State to its citizens;

Without funds, the gov’t cannot continue to pay its expenses, support itself and deliver basic services to the people, because of this it has a right to compel all its citizens, residents and property within its limits to contribute.

PURPOSE OF TAXATION Revenues derived from taxes are intended to finance

the gov’t and its activities, and are exempt from execution (Mun. of Makati vs. CA 109 scra 206)

a) Primary- to raise or generate revenues and to mobilize resources

b) Secondary or Regulatory To regulate the conduct of business or

professions To achieve economic and social stability To protect local industries

c) Compensatory Reduces inequalities in wealth distribution Key instrument of social control Strengthens anemic enterprises Provides incentives Check inflation

a) Benefit-Received Theory- The gov’t and the people have the reciprocal duties of support and protection.

b) Lifeblood Doctrine- Taxes are the lifeblood of the gov’t without which it can neither exist nor endure.

Principles of a Sound Tax System1. Fiscal adequacy- the proceeds of the tax revenue should

coincide and approximate the needs of the gov’t expenditures.

2. Theoretical Justice- tax system be fair to the average taxpayer and based on his ability to pay.

3. Administrative Feasibility- tax system should be capable of being properly and efficiently administered by the gov’t with the least inconvenience with the taxpayer.

Sec. 28, Art. VI, Philippine Constitution:

(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

(2) The Congress may, by law, authorize the President to fix within the specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export q quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the gov’t.

(3) 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 shall be exempt from taxation.

(4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

SCOPE AND LIMITATION OF TAXATION

Inherent Limitations1. For public purpose

Support of the state For recognized objects of the gov’t or directly to

promote welfare of the community. Pascual vs. Sec of Public Works – SC held that legislature

is without the power to appropriate public revenues for anything other than public purpose.

Lutz vs. Araneta- taxation may be used to implement an object of police power, being a legitimate aim of gov’t.

Gomez vs. Palomar- tax proceeds for the support of public educational system

City of Baguio vs. Dela Rosa- tax proceeds for granting assistance to the Boys and Girls Scouts

Valentin tio vs. Videogram Regulatory Board- It is beyon serious question that a tax does not cease to be valid merely because it regulates, discourages or deters 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.

2. Inherently legislative Luzon Stevedoring vs. CTA- Along with police power

(for public good or welfare) and eminent domain (for public use), taxation (for revenue) is an inherent power of the sovereignty.

NPC vs. Province of Albay- Legislative in character and legislative in prerogative

Lozano vs. Energy Regulatory Board- the court sanctioned an imposition by the Board of an amount of petroleum products to augment the Oil Price Stabilization Fund under P.D. 1956 as not being an act of taxation.

Petro vs. Pililla- The legislative taxing power includes the authority:

To determine the nature (kind) Object (purpose) Extent (amount or rate) Coverage (subjects and objects) Situs (place) of tax imposition

Maceda vs. ERB- Justice Paras dissented and considered it a tax imposition which congress can validly impose

Victorias Milling vs. PPA- the court held that imposition of 10% on earnings of arrastre and stevedoring operators was more of a contractual compensation for the use of port facilities than a tax that can thus be made by the ports authority.

Delegatory Power of Taxationa) Legislative body of the gov’tb) To local government unitsc) President

LGU and President exercises power of delegation- a delegated power cannot be further delegated (DELEGATA POTESTAS NON POTEST DELEGARI)

3. Subject to international comity or treaty A state must recognize the generally accepted

principles of sovereign among states and of their freedom from suit without their consent, that limit the authority of a gov’t to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken, in that

capacity. Even where one enters the territory of another, there is an implied understanding that the former does not thereby submit itself to the authority and jurisdiction of the latter.

Pepsi-Cola vs. Municipality of Tanauan- SC has adopted the position that a violation thereof would contravene the general clause on due process, and any tax thereby levied shall amount to the taking of property without due process of law may not be passed over under the guise of the taxing powers, except when the taking of the property is in the lawful exercise of the taxing power, as when the tax is

1. For public purpose2. Observance of uniformity rule3. Person or property taxed is within the

jurisdiction of the taxing authority4. Assessment and collection of certain kinds

of taxes, notice and opportunity for hearing is provided

4. Exaction is payable in money5. Territorial May be exercised only within the territorial jurisdiction

of the taxing authority. Wells Fargo Bank vs. Union Trust; Meralco vs. Yatco - In

the selection of appropriate criteria, the taxing authority is given wide latitude; among the circumstances often considered are the nature of the tax, the extent of benefit that may be derived by the tax payer and equity principles.

CIR vs. Marubeni- petitioner CIR cannot collect because the contractor’s tax cannot be imposed on the offshore portion of the contract where the materials and equipment were all manufactured or done in Japan for lack of taxing power.

In fixing the tax situs: Poll taxes- tax situs is the residence of the taxpayer Property taxes- where the property is situated Excise taxes- where privilege is exercised, where

taxpayer is a national of, where he had his residence

Not absolute because its exercise is subject to constitutional limitations and inherent restrictions;

CONSTITUTIONAL LIMITATIONS1. Observance of due process of law

Instances of violation of due process: Tax being imposed amounts to confiscation; Tax law is in violation of requisite public

purpose;

Subject or object is outside the territorial jurisdiction of the taxing authority;

Taxpayer is not given an opportunity to be heard;

Tax law is applied retroactively;2. Equal protection of law- all persons subject to

legislation shall be treated alike;3. Uniformity- all taxable articles of the same class shall be

taxed at the same rate; Juan Luna Subdivision vs. Sarmiento- the term

uniformity requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing both in privileges and liabilities.

City of Baguio vs. de Leon- equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found.

CIR vs. Lingayen Gulf Electric- When tax laws applies equally well to all persons, firms, and corporations placed in similar situation, there is no infringement of the rule of equality. Inequality which results in singling out one particular class for taxation or exemption infringes no constitutional limitation.

Pepsi Cola vs. City of Butuan- Classification is permitted:1. Standards used are not arbitrary but

reasonable and substantial;2. Classification is germane to achieve the

purpose of legislation;3. Classification applies to both present and

future conditions, other circumstances being equal;

4. If classification applies equally to all those belonging to the same class.

Eastern Theatrical Co. vs. Alfonso- SC held to be absolutely without merit the contention that an ordinance which impose taxes on some places of amusement such as cinematographs, theaters, vauderville companies, theatrical shows, boxing exhibitions and other kinds of amusements or places of amusements, but not on “many more kinds of amusements” like “race tracks, cockpits, carabets, concert halls, circuses, and other places of amusements” is against the equality and uniformity of the tax imposition.

Basco vs. PAGCOR- Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.

Assoc. of Customs Brokers vs. Municipality of Manila- “There is no pretense that the ordinance equally applies to motor vehicles which come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public highways. The fact that they are benefited by their use corresponding burden. And yet such is not the case. This is an inequality which we find in the ordinance, and which renders it offensive to the constitution.

Shell Co. vs. Vano- But the fact that only one person is affected by a tax law or ordinance, which is otherwise of general application, does not render the law or ordinance invalid as being discriminatory.

Philtrust vs. Yatco- where the differentiation complained of conforms to the practical dictates of justice and equity, it is not discriminatory within the meaning of this clause and is therefore uniform. There is quite a similarity then to the standard of equal protection for all that is required is that the tax applies equally to all persons, firms, and corporations placed in similar situation.

4. Progressive scheme of taxation- based on the ability-to-pay principle

5. Non-imprisonment for non-payment of poll taxes6. Non-impairment of the obligation and contract rule7. Free-worship clause8. Religious entities selling or distributing religious

literature is subject to VAT-registration fee imposed on Non-VAT enterprises

9. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosque from property taxes

10. Exemption from taxes and revenues and assets on non-profit, non-stock educational institutions including grants, endowments, donations or contributions for educational purposes.

Art XIV, Sec 4 (3)- All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions including those cooperatively-owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment.

Secretary of Justice Opinion No. 130- The exemption does not cover revenues derived from, or assets used in, unrelated activities or enterprise. Similar tax exemption benefits may be extended to proprietary educational institutions by law subject to such limitations as it may provide.

11. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion, etc.

Art VI, Sec 28 (3)- Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.

Hodges vs. Municipal Board of Iloilo- The tax exemption covers property taxes only; accordingly, a conveyance of such exempt property can be subject to transfer taxes.

Apostolic Prefect vs. City Treasurer of Baguio- Special levies or assessments, not being taxes, are not covered by the exemption. The LGC, however, extends the exemption to special assessments.

Herrera vs. Q.C. Board of Assessment Appeals- The term “exclusively” means primarily, not solely. Thus, the admission of pay patients does not detract from the charitable character of a hospital, if all its funds are devoted exclusively to the maintenance of the institution as a “public charity”.

Praire Du Chian Sanitarium vs. City of Praire Du Chian- “where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character.”

Abra Valley College vs. Aquino- In exempting from the real property tax a portion of the school building which was being used for the residence of the school director and his family but subjecting to the tax another portion thereof which was being leased to a marketing firm for commercial purposes. The 1987 Constitution additionally requires that the property “actually” and “directly” used for religious, educational or charitable purposes.

Roman Catholic Church vs. Hastings- The issue of title or ownership is not relevant; accordingly, a piece of real property that is leased for a consideration by a religious entity, which is then used by the latter actually, directly, and exclusively for religious, educational or charitable purposes would be exempt from property taxes.

12. No money shall be paid out of the Treasury except in pursuance of an appropriate made by law.

13. Concurrence of a majority of ALL members of the Congress for the passage of a law granting tax exemption

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

Art VI, Sec 29 (3)- 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 gov’t

Gaston vs. Republic Planters Bank- The Court ruled that the “stabilization fees” collected by the State for the promotion of sugar industry were in the nature of taxes and no implied trust was created for the benefit of sugar producers. Thus, the revenues derived therefrom are to be treated as a special fund to be administered for the purpose intended. No part thereof may be used for the exclusive benefit of any private person or entity but for the benefit of the entire sugar industry. Once the purpose is achieved, the balance, if any remaining, is to be transferred to the general funds of the gov’t.

14. Non-diversification of tax collections15. Non-delegation of the power of taxation

Exceptions:a) Power to tax delegated to the President under

flexibility clause and Tariff and Customs Codeb) Delegated to the LGU under LGCc) Matters involving expedient and effective

administration and implementations of assessments and collection of taxes on certain aspects of taxing process that are not legislative in character

16. President shall have the power to veto any particular item in an appropriation, revenue or tariff, but veto shall not affect the items to which no objection has been made. Art 6, Sec 27 (2)

17. Non-impairment of the jurisdiction of the SC to review tax cases Art VII, Sec 5 (2)b- The Supreme Court shall have

the power to review, revise, reverse, modify or affirm on appeal or certiorari, as the law of the Rules of Court may provide, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto.

18. Appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives but the Senate may propose or concur with amendments

Art. VI, Sec 28 (2)- The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national dev’t program of the gov’t.

19. Each LGU shall exercise the power to create its own sources of revenue and shall have a just share in the national taxes.

Art X, Sec 5- Each local gov’t unit shall have the power to create its own resources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments.

Art X, Sec 6- Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them.

Provisions Indirectly Affecting Taxation1. Police Power and Eminent Domain

Taxation Police Power

Eminent Domain

Purpose Levied for the purpose of raising revenue;

Exercised to promote public welfare through regulations;

Taking of private property for public use;

Amount of Exaction

There is no limit;

Limited to cover the cost of regulation, issuance of the license or surveillance;

No exaction; compensation is paid by the gov’t;

Benefit No special or direct benefit is received;

No direct benefits are received; “damnum absque injuria”

Direct benefit results in the form of just compensation;

Non-impairment of contracts

The non-impairment rule subsists;

Contracts may be impaired;

Contracts may be impaired;

Transfer of property rights

Transfer paid becomes part of the public fund;

No transfer but only restraint on the exercise of property rights exist;

Property is taken by the gov’t for public use upon payment of just compensation;

Scope Affects all persons, property and excises;

Affects all persons, property, privileges, and even rights;

Necessity of the public for private property;

Similarities of three inherent powers of the gov’t1. Sovereignty, resting upon necessity;2. Inherent powers of the State;3. Legislative in nature;4. State interferes with private rights;5. Exist independently of the Constitution;6. Presupposes an equivalent compensation;7. Public purpose;8. Exercise of LGU may be limited by Nat’l legislation;

Garces vs. Estenzo- church-state separation; American Bible Society vs. City of Manila- The

constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraint of such right can only be justified, like other restraint of such right can only be justified, like other restraints of freedom or expression, on the ground that there is a clear and present danger of any substantive evil which the State has the right to prevent.

Grosjean vs. American Press Co.- It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax from him for the privilege of delivering a sermon.

Mandatory Character of Constitutional Provisions

When are provisions of revenue laws mandatory and directory?a) Mandatory- If they are intended for the security of the

citizens or to ensure equality in taxation as to the nature and amount of each person’s tax. Acts done in violation of such mandatory provisions are invalid.

b) Directory- If they are designed merely for the information and direction of the tax officers or to secure dispatch or methodical and systematic modes of proceedings. Non-compliance with directory laws does

not render ineffective acts performed by tax officials concerned.

Marcelino vs. Cruz- “the established rule is that constitutional provisions are to be considered as mandatory unless by express provision or by necessary implication, a different intention is manifest.” A directory provision is merely intended for expediency or convenience such that to have it enforced may cause harm than by disregarding it.

ASPECTS OF TAXATION (phases, processes, stages or steps)1. Levy- which is the act of imposition by the legislature

such as by its enactment of the law. Understood to include not only the mandate on when and how the tax is imposed, but also, whenever it may be appropriate the grant of tax exemptions, tax amnesties, or tax condonations.

CIR vs. Botelbo Shipping- Tax exemptions, like tax impositions, are themselves subject to due observance of the limitations of taxation.

2. Assessment and Collection- act of administration and implementation of the tax law by executive through its administrative agencies. “Assessment” means notice and demand for payment of tax liability, should not be confused with “assessment” relative to real property taxation, which refers to the listing and valuation of taxable real property.

3. Payment- act of compliance by the taxpayer, including such options, schemes or remedies as may be legally open or available to him.

CLASSIFICATION OF TAXES

a) As to purpose1. Fiscal (general or revenue)- they are levied without

a specific or pre-determined purpose2. Regulatory (special or sumptuary)- those intended

to achieve some social or economic goals. Calalang vs. Lorenzo- An imposition may partake the

nature of both a revenue measure and a regulatory fee. In such a case, the real intent and the primary and substantial purpose of the law must be inquired into from which it may be held to be one of the other depending on the statute’s predominant objective.

PAL vs. Edu- The Court held that since the fees imposed are mainly used for revenue and only a fifth thereof is retained by the LTO for regulation, the same should be considered as taxes rather than license fees.

Villegas vs. Hsiu- Only the portion of a permit fee in excess of the cost of regulation was held to be a tax.

Esso Standard Eastern vs. CIR- A margin levy on foreign exchange was held to be police power measure to strengthen the country’s international reserve rather than tax.

Lozano vs. Energy Regulatory Board- An amount imposed by the Energy Regulatory Board on petroleum products to augment the resources of the Price Stabilization Fund under P.D. 1956 was not considered, with Justice Paras dissenting, as an act of taxation.

b) As to subject matter1) Personal (poll or capitation)- does not consider the amount

of property, occupation or business of the taxpayer.2) Property tax- taxes assessed on things or property of a

certain class.3) Excise (privilege) tax- taxes on privilege, occupation or

business not falling within the classification of poll or property taxes. Ex. Internal revenue taxes, customs dutiesc) As to incidence (Who pays the burden of taxation?)

1. Direct tax- imposed on the person obliged to pay the same and this burden cannot be shifted or passed on to another. Example: income tax

2. Indirect tax- Payment is demanded from a person who is allowed to transfer the burden of taxation to another. Example: VAT

Maceda vs. Macaraig- A direct tax for which a taxpayer is directly liable on the transaction or business it engages it.

d) As to amount (Excise Tax)1. Specific tax- fixed amount based on volume,

weights, or quantity of good as measured by tools, instruments or standards. Requires no assessment.

Tan vs. Mun. of Pagbilao- Taxes imposed per head, unit or number, or by weight or volume beyond a listing require no assessment beyond a listing and classification of the subjects or articles to be taxed.

2. Ad Valorem Tax- Imposition is based on the value of the property subject to tax. Assessment is necessary.

e) As to rate 1. Proportion or flat rate- unitary of single rate.

Ex. 12% VAT2. Progressive or graduated tax- As tax base grows the

tax rate increases. Ex. Individual income tax 5%-32%3. Regressive tax- tax rate increases as the tax base

decreases4. Degressive tax- increase in tax rate is not

proportionate to the increase in tax base

5. Mixed tax- at certain point it is progressive, then regressive.

f) As to authority1. National tax- taxes imposed by nat’l gov’t2. Local tax- imposed by local gov’t

Meralco Securities vs. Central Board of Assessment Appeals- The real property tax under the then Property Tax Code is a national tax since tax always been imposed by the national gov’t and enforced through out the Philippines.

DISTINGUISHED FROM CERTAIN EXACTIONSTAX LICENSE

Purpose Revenue purposes Purposes of regulation

Source of power Taxing power of the gov’t

Police power of the gov’t

Amount No limit Has limit based on necessity to carry out regulation

Subject or object of imposition

Person, properties, business, rights, interests, privileges, acts and transactions

Required for commencement of business or profession or to exercise a right/privilege

Revocability Nature of permanence

Always revocable

Scope Power to tax includes the power to license

Does not include the power to tax

Basis of computation

Current data Preceding year’s quarter’s data. If new business, based on capitalization

Nature Self-assessing Not self-assessingLimitation Subject to

constitutional, Inherent and contractual limitations

Not subject to the 3 limitations because it is an exercise of police power to guard and safeguard the interest and welfare of the public;

When imposed Post-activity imposition

Pre-activity imposition

Exemption Exemption from tax does not include exemption from regulatory fees

Exemption from regulatory fees is not allowed.

Victorias Milling vs. PPA- An imposition by the ports authority of 10% gov’t share on earnings of arrastre and stevedoring operators was held to be a contractual compensation rather than tax.

Sambrano vs. CTA; Republic vs. Far East; CIR vs. Prieto- For certain purposes, tax may be considered debts, in the generic sense, such as their (taxes) collection being enforceable by court action in the application of certain statutes of limitation and in the matter of deductible items from gross income.

Factors that determine whether an imposition is a tax or a license:1. Amount of the imposition2. Intent of the imposition3. Effect of the imposition

Tax TollDemand of sovereignty Demand of proprietorshipOne’s support for the gov’t Compensation for the use of

somebody else’s propertyImposed only by the gov’t Imposed by gov’t or by private

individualsBased on governmental needs Determined by the cost of

property or improvement thereon

Tax DebtBased on law Based on contractNot assignable AssignableNon-payment covers imprisonment, except poll tax

No imprisonment for non-payment

Payable in money Payable in cash or kindNot subject to set-off Subject to set-offDoes not earn interest, except when delinquent

Draws interest when stipulated or in default

NIRC Civil Code or Rules of Court

When a tax is considered a debt?a) When secured by a bondb) When collection is enforced by court actionc) When tax is the subject of a compromise agreement

validly entered into between the gov’t and the taxpayerd) Interest on tax delinquency is considered as interest on

indebtedness.

Tax Special AssessmentLevied on business, interests, transactions, rights, persons, properties or privileges

Levied on land

May be made a personal liability of person assessed

Cannot be made the personal liability of the person assessed, because it is the land that answers for the liability

Based on necessity with no hope for direct or immediate benefit

Based wholly on benefits received

Power to tax carries with it right to levy special assessmentExemption does not include exemption from special assessments

Exemption is qualified

Imposition of a charge on all property, real and personal in a prescribed area is a tax and not an assessment, although the purpose is to make local improvement on a street or highway

Imposed by the nat’l or local gov’t

Is of general application Exceptional in application for the recovery of cost and/or maintenance of improvement

INTERPRETATION AND CONTRUCTION OF TAX STATUTES

CIR vs. Firemen’s Insurance Co.- the primordial consideration is, every time, is the legislative intent. But where doubts exists in determining that intent, the doubt must be resolved liberally in favor of taxpayers and strictly against the taxing authority.

CIR vs. Central Vegetable Manufacturing- Tax burdens are not to be imposed beyond what the statute expressedly and clearly imports, tax statutes being construed strictissimi juris against the gov’t.

Floro Cement vs. Gorospe- The exemptions (or equivalent provisions such as tax amnesties) are not presumed.

Luzon Stevedoring vs. CTA; People vs. Castaneda; CIR vs Mitsubishi; Republic vs IAC; CIR vs Guerrero - The exemptions when granted are strictly construed against the grantee.

Manila Electric Co vs. Vera- such provisions being highly disfavored and may almost be said “to be odious to the law”. Thus, a provision in a treaty (Mutual Defense Agreement) between the United States and the Philippines, stating that no tax of any kind or description will be levied on any material equipment or supplies which may be purchased or otherwise acquired in connection with a construction project, was held not

to exempt the oil used by private contractors of that project in the operation of their machines or other equipment in pursuance of their contracts.

CIR vs. J. Kiener Co, Ltd- “The exception contained in the tax statute must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions and that he who would seek to be, thus, privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.”

Luzon Stevedoring vs. CTA- An exemption from tax in the importation of engines and spare parts to be used by passenger or cargo vessels has been held not to include taxes on the importation of engines and parts used by tugboats which are neither passenger nor cargo vessels.

Wonder Mechanical vs. CTA- Neither does a grant of tax exemption for the manufacture and sale of certain type of machine include the manufacture and sale of articles produced by said machine. There is no way to dispute the cardinal rule in taxation that exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right. The exemption cannot be established by mere implication but it must be clearly expressed.

CIR vs Gotamco & Sons- Tax exemption of World Health Organization from direct to indirect taxes was held to preclude the imposition of the contractor’s tax on the construction of its building by an independent contractor since the burden of the tax, said the court, is invariably shifted to the owner.

CIR vs. CA, CTA & Ateneo- SC states “Petitioner CIR erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provisions. The Commissioner should have determined first if private respondent was covered by Sec. 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefor. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that statute will not be construed as imposing a tax unless it does so clearly, expressedly, and unambiguously. Tax cannot be imposed without clear and express words for that purpose accordingly. The general rule of requiring adherence to the letter in construing statutes applies

with peculiar strictness to tax laws and the provisions of taxing act are not be extended by application.

CLASSIFICATION OF TAX EXEMPTIONSA. Express (by exemption provisions in the Constitution,

statutes, treaties, franchises or similar legislative acts) NPC vs RIC- P.D. 1177 (confirmed by PD 1931) which

withdrew the exemption of government-owned or controlled corporations from “income tax, custom duties, and other taxes or fees as are imposed by revenue laws” was held to cover both national and local taxes.

B. Implied of by Omission SSS vs Bacolod City- There is no tax by silence but, but

where the law levies a tax, so also must the tax exemption be explicit in the law. While exemptions are not presumed, the gov’t however, unless otherwise expressed, is deemed not subject to a law imposing taxes.

Bisaya Land Transportation vs CIR- No prohibition against the gov’t taxing itself. There is no tax exemption solely on the ground of equity, but equity can be used as basis for a statutory exemption; thus, at times the law authorizes the condonation of taxes on equitable considerations.

C. Contractual- those agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws.

Cagayan Electric vs CIR; Prov. Of Mismis Oriental vs Cagayan- these exemptions must not be confused with tax exemptions granted under franchises which are not contracts within the purview of the non-impairment clause of the Constitution.

Casanova vs Hord- Contractual tax exemptions covering the matters that are not essentially government in nature, such as those contained in government bonds or debentures, unlike in franchises, may not be revoked without impairing the obligations of contracts.

CIR vs CTA- In the case of legislative franchises, the Court stated “ A legislative franchise partakes of the nature of a contract.”

Carcar Electric & Ice Plant vs CIR- “So was the exemption upheld in favor of Carcar Electric when it was required to pay the corporate franchise tax under Sec. 259 of the Internal Revenue Code, as amended by RA 39.

Penid vs Virata- “To sustain otherwise is to derogate from the basic tenet that statutes offering rewards must be liberally construed in favor of informers with

mere technicality yielding to the substantive purpose of the law.

D. Constitutional E. StatutoryF. Total G. Partial

CONSTRUCTION OF TAX LAWS Tax law must be strictly construed against the State,

liberally construed in favor of the tax payer. Tax exemption must be strictly construed against the

tax payer and liberally in favor of the gov’t.

Exceptions:1) Exemptions in favor of the gov’t2) Exemptions in favor of traditional exemptees3) When law itself provides4) Retirement laws

GROUND FOR TAX EXEMPTIONS1) May be taxed based on a contract2) May be based on the ground of public policy3) May be based on some ground to foster charitable and

other benevolent institutions4) May be created under a treaty on grounds of reciprocity5) May be created to lessen the rigors of International or

Multiple taxation.

Tax Amnesty- general pardon or intentional overlooking by the state of its authority to impose penalties on persons otherwise guilty of tax evasion or violation of a tax law.

Tax Exemption Tax AmnestyImmunity from tax Condonation from payment

of existing tax liabilityGrantee need not pay anything

Grantee pays a portion

Can be availed by any qualified taxpayer

Not always available

Prospective in application Retroactive in applicationLiability does not attach top one enjoying a privilege of tax exemption

Tax liability attaches to a taxpayer who wants to avail of tax amnesty

Immunity from civil liability only

Immunity from criminal, civl and administrative liability

Requires no payment of tax Requires the payment of certain percentage of unpaid taxes

CIR vs CA, ROH Auto Products- It should be understandable then that those who ultimately took

over the reigns of the gov’t following the successful revolution would promptly provide for a broad, and not a confined tax amnesty.

Banez, Jr. vs CA- To avail a tax amnesty granted by the gov’t, and to be immune from suit on its delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income.

People vs Castaneda- Tax amnesty, much like tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority.

Asia Int’l Auctioners vs CIR-The exclusion of withholding taxes for the tax benefit of the Tax Amnesty Program does not cover indirect taxes such as VAT and excise tax.

CERTAIN DOCTRINES IN TAXATION1) Prospectivity of Tax Laws-prospective in character and

in application Hyro Resources vs CA- Taxes may be imposed

retroactively by law but unless so expessed by such law, these taxes must only be imposed prospectively.

Hilado vs Collector- Tax laws are neither political nor penal in nature, and they are deemed laws o the occupied territory rather than the occupying enemy.

Central Azucarera de Don Pedro vs CTA- “ex post facto” rule, except for the penalty imposed (not the interest), would be inapplicable. A harsh retroactivity of the law, however, may make it inequitable and violative of the constitution; similarly, due process is violated if the tax is oppressive.

Fernandez vs Fernandez- Property taxes and benefits assessments on real estate, retroactively, are not open to the objection that they infringe upon the due process of law clause of the Constitution; that taxes on income are not subject to the constitutional objection because of their retroactivity.

2) Imprescriptibility of taxes- imprescriptible unless the law itself provides for prescription.

CIR vs Ayala Securities Corp- Unless otherwise provided by the tax law itself, taxes are imprescriptible. NIRC provides for statutes of limitation in the assessment and collection of taxes therein imposed.

Collector vs. Bisaya Land Transportation- prescriptive periods therein contained were considered to be applicable only to those taxes that were thereunder required to be reported or returned by the tax payer for

tax purposes. The Court thus held that the then 25% surtax imposed on unreasonably accumulated surplus profits of corporations is imprescriptible and there is no time limit on the right of the Commissioner to assess the same. Where, however, the taxpayer, although not required, files a return and declares his tax liability, then the prescriptive periods may become operative.

CIR vs CA- For the purpose of safeguarding taxpayers from any unreasonable examination, investigation, or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription; being a remedial measure, should be liberally construed in order to afford such protection.

3) Double Taxation- taxing the object/subject within the territorial jurisdiction twice, by the same taxing authority for the same period, purpose, and involving the same kind of tax.

Two kinds:1) Direct duplicate taxation- objectionable and

prohibited because it violates the constitutional provision on uniformity and equality. Same subject/object is taxed twice when it should be taxed once.

2) Indirect duplicate taxation- No constitutional violation. Such as: taxing the same property by 2 different taxing authorities.

Domestic Double Taxation- Subject matter of taxation is taxed by both the national and local gov’t at the same time within the same period.

REMEDIES/MEASURES AGAINST DOUBLE OR MULTIPLICITY OF TAXATION

a) Provision for tax exemptionb) Allowance of tax credit for foreign taxes paid;c) Allowance of deduction for foreign taxes paid;d) Application of Principle of Reciprocity;e) Enter into treaties and/or agreement with foreign

government;f) Allowance and/or application for tax incentives, andg) Reduction of Philippine Tax rate

Villanueva vs City of Iloilo- There would be no double taxation where a lessor of property has to reckon with and pays a real estate tax on the leased premises, a real estate dealer’s tax based on rental receipts, and an income on such rentals, these impositions of being of different character and purposes.

Proctor & Gamble, Phils vs Mun. of Jagna- There is also no double taxation when a tax is imposed on soap and other similar products of taxpayer and another tax on the storage of copra, a raw material for the the taxpayer’s product.

CIR vs Lednicky- Double Taxation is one of direct duplicate taxation when the levies are made by the same taxing authority; otherwise, the case is merely indirect duplicate taxation.

Pepsi Cola vs Tanauan- Standing alone and not being forbidden by our fundamental law, double taxation is not a valid defense against the validity of a tax measure. But from it might emanate such defenses aganst taxation as oppressiveness and inequality of the tax.

4) POWER TO TAX INVOLVES THE POWER TO DESTROY Sison vs Ancheta- “The power to tax is not the power to

destroy while this court sits”- Justice Holmes Roxas vs CTA- (a) The power to tax must be exercised

with caution to minimize injury to the proprietary rights of a taxpayer; but (b) if the tax is lawful and not violative of any of the inherent and constitutional limitations, the fact alone that it may destroy an activity or object of taxation will not entirely permit the courts to afford any relief; and (c) a subject or object that may not be destroyed by the taxing authority may not likewise be taxed. Thus, a tax may not be imposed on the exercise of a fundamental right since to otherwise permit it would amount to destroying that fundamental right.

McCulloch vs Maryland- The doctrine was used to support the holding that stats of the union are prohibited from taxing the U.S. Federal Government. It is from this latter context or, in general, when taxation disregards its own limitations that the phrase “the power to tax is not the power to destroy while the court sits.” Had perhaps correctly evolved (Panhandle Oil Co.vs. Mississippi).

CIR vs Tokyo Shipping- Where the SC remarked that after 15 long years and the expenses of litigation the money that will be finally refunded to the private respondent is just worth a damaged nickel.

Standard Oil vs Posadas- While ordinarily the gov’t does not tax its own political subdivisions or its other entities, it may, however do so by providing for it explicitly.

5) ESCAPE FROM TAXATION

TAX EVASION (tax dodging) TAX AVOIDANCE (tax minimization)

Scheme used outside those of lawful means to escape payment of taxes and when availed usually subjects taxpayer to penalties.

Tax saving device within means sanctioned by law. Not punishable.

Accomplished by breaking the law;

Accomplished by legal procedures and do not violate the letter of the law.

Connotes fraud, deceit and malice;

No fraud involved;

Elements of Tax Evasion:1. Payment of an amount of tax less than what is known to

be legally due;2. Accompanying state of mind, which is evil, bad faith,

deliberate, willful or intentional, and not merely incidental;

3. Cause of action or failure of action which is unlawful;

Tax Condonation- to remit or to desist or refrain from exacting or imposing a tax. It cannot extend to refund of taxes already paid when obtaining.

FORMS OR ESCAPE FROM TAXATION1) Shifting- process of transferring the tax burden from

statutory taxpayer to another without violating the law;2) Capitalization- Seller is willing to lower the price of

commodity provided the taxes will be shouldered by the buyer;

3) Transformation- Manufacturer absorbs the additional taxes imposed by the gov’t without passing it to the buyers for fear of lost of his market. Instead, he increases quantity of production, thereby turning their units of production at a lower cost resulting to the transformation of the tax into a gain through the medium of production.

Norton and Harrison vs CIR- The organization of a corporation prompted more on the mitigation of tax liabilities than for legitimate business purposes could, for example, constitute one of tax evasion.

Delpher Traders vs IAC- An “estate planning” within the means sanctioned by Sec 35 of the Tax Code hs been held to be one of tax avoidance.

6) DOCTRINE OF EQUITABLE RECOUPMENT- Refund of taxes are barred by prescription which can no longer be

claimed by taxpayer but there is a present tax being assessed against the said taxpayer, such present tax may be recoup or set-off against the tax, the refund of which has been barred. Collector vs UST- The SC altogether rejected the

doctrine, saying that it was not convinced of the wisdom and propriety thereof, and that it may work to tempt both the collecting agency and the taxpayer to delay and neglect their respective pursuits of legal action within the period set by law.

7) Set-off Taxes General Rule: Taxes are not subject to Set-off or Legal

Compensation because tax is not a debt. A tax is not a debt for the reason that a tax does not

depend upon the consent of the taxpayer and there is no express or implied contract to pay taxes.

Exceptions:1) Tax is secured by a bond2) Collection is enforced by court action3) Compromise agreement validly entered into between

the gov’t and the taxpayer4) Interest on tax delinquency is considered as interest on

indebtedness

Requisites of Set-Off1) Both obligations from the gov’t and the taxpayer are

due and demandable2) It is fully liquidated

Reasons why taxes are not subject to legal compensation:1) Lifeblood doctrine2) Gov’t and taxpayer are not creditor and debtor.3) Taxes are not in the nature of contracts.

Republic vs Mambulao Lumber- The SC enunciated the rule that taxes are not subject to set-off or legal compensation. (1) taxes are of distinct kind, essence and nature, and these impositions cannot be so classed in merely the same category as ordinary obligations; (2) the applicable laws and principles governing each are peculiar, not necessarily common to each; and (3) public policy is better subserved if the integrity and independence of taxes be maintained.

Domingo vs Garlitos- tribunal reversed itself when it ruled that where the taxes and the taxpayer’s claim are fully liquidated, due and demandable, legal compensation under Art. 1279 of the Civil Code can

take place by operation of law, and both debts are extinguished to the concurrent amount.

Francia vs IAC- Although legal compensation was clearly inapplicable since the tax sought to be the object of set-off was due to a city, whereas the other liability was the compensation due the taxpayer from the nat’l gov’t arising from the latter’s exercise of eminent domain, the Court nonetheless expressed that taxes are not subject to legal compensation in an apparent step to revert to the Mambulao Lumber doctrine.

Philex Mining Corp vs CIR- “We have consistently ruled that there can be no offsetting of taxes against the claims that the taxpayer may have against the gov’t. A person cannot refuse to pay tax on the ground that the gov’t owes him an amount equal to or greater than the tax being collected. The collection of tax cannot await the results of a lawsuit against the gov’t.

Republic vs Sampaguita Pictures- The SC allowed taxes due from the taxpayer to be considered paid through the delivery of negotiable certificate of indebtedness issued by the Philippine Gov’t which had theretofore already been presented and surrendered to the National Treasurer.

CIR vs Esso Standard Eastern- The SC affirmed the Tax Court’s decision applying a tax credit approved in 1964 for overpayment of Esso’s 1959 income tax to its 1960 deficiency income tax and, thus sanctioned the imposition of penalty interest only on the balance thereof. The obligation to return the excess, said the court, arose from he time of payment and not when the payee admitted the obligation. Any contrary rule would be unjust and absurd considering that the money overpaid was all the while with the gov’t.

8) TAXPAYER’S SUIT- Class suit brought by one or more taxpayerson behalf of themselves and as representation of a class of taxpayers situated within a taxing district and for the purpose of seeking relief from illegal or unauthorized acts of the gov’t or its tax officials which acts are injurious to their common interest as taxpayers.

REQUISITES OF TAXPAYER’S SUITa) Tax money is being exacted and spent in violation of

specific constitutional protections against abuses of legislative power;

b) Public money is being deflected to any improper purpose;

c) Petitioners seek to restrain the respondents from wasting public funds through an enforcement of an invalid or unconstitutional law;

Pascual vs Sec of Public Works- It is only when an act complained of, which may include a legislative enactment, directly involves the illegal disbursement of public funds derived from taxation that the “taxpayer’s suit” may be allowed.

Lozada and Igot vs Comelec- The suit would be improper to question the “inaction of the Commission on Elections to call a special election”.

Dumlao vs Comelec- The suit would be improper to stop said Commission from holding an exercise of suffrage.

Gonzales vs Marcos- The suit would be improper where the disbursement does not involve funds raised by taxation.

Maceda vs Macaraig Jr.- The petitioner alleged that he was instituting the suit in his capacity as a taxpayer and a duly-elected Senator of the Phils. Public respondent, on the other hand, argued that in a taxpayer’s suit, the petitioner must show that he had sustained direct injury as a result of the action and that it is not sufficient for him to have a mere general interest common to all members of the public. The Court disagreed and ruled that the petitioner could file the petition since it involves an issue on the legality of the tax refund to NPC by way of tax credit certificates and the use of said assigned tax credits by respondent oil companies to pay for their tax duty liabilities to the BIR and BOC or what could thus be a case of illegal expenditure of tax money.

9) DOCTRINE OF TRANSCENDAL IMPORTANCE- Ordinary citizens and/or taxpayers are allowed to sue or file a taxpayer’s suit even if the failed to show direct injury to them or the assailed irregular expenditure of public funds sourced from taxation provided they can show “paramount public interest” or the “far-reaching implications” of such disbursement.

TAX PAYER’S SUIT CITIZEN’S SUIT CLASS SUITComplainant or plaintiff is affected by the expenditure of public funds;

Complainant or plaintiff is a mere instrument of the public concern;

Complaint of a group of individuals with common concern against a respondent for an alleged violation of the group’s individual

rights;

10) COMPROMISES

Sec 204 NIRC. Authority of the Commissioner to Compromise, Abate and Refund Tax Credits- the Commissioner may (A) Compromise the payment of any internal revenue

tax, when:(1) a reasonable doubt as to the validity of the

claim against the taxpayer exists; or(2) The financial position of the taxpayer

demonstrates a clear inability to pay the assessed tax.

Art. 2034 NCC- There may be a compromise upon the civil liability arising from an offense; but such compromise shall not extinguish the public action for the imposition of the legal penalty.

Art 2035 NCC- No compromise upon the following questions shall be valid:(1) The civil status of persons;(2) The validity of marriage or a legal separation;(3) Any ground for legal separation;(4) Future support;(5) Jurisdiction of courts;(6) Future legitime;

Sec 709, TCC- The power to compromise in respect to customs duties is, at best, limited to cases where potestive authority is specifically granted such as in the remission of duties by the Collector of Customs.

Sec 216, TCC- Cases involving the imposition of fines, surcharges and forfeitures which may be compromised by Commissioner subject to the approval of the Secretary of Finance.

11) DOCTRINE OF PRIMARY JURISDICTION- It precludes a court from arrogating unto itself the authority to resolve a controversy the jurisdiction over which is initially lodged with an administrative body of special competence.

Where the determination requires expertise, specialized skills and knowledge of the proper administrative bodies because technical matter or intricate questions of fact are involved, the relief must first be obtained in an administrative proceeding before

a remedy will be supplied by the Court even though the matter is within the jurisdiction of a court.

This doctrine does not require the issuance of any warrant of arrest by the Courts but the person arrested should be brought before an official authorized to conduct preliminary investigation.

12) DOCTRINE OF JUDICIAL NON-INTERFERENCE- The courts cannot inquire into the wisdom of a taxing act or the advisability or expediency of a tax measure.

13) MOST FAVORED NATION CLAUSE- This concept is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy privileges accorded by either party to those of the most favored nation.

This will allow the taxpayer of one state to avail more liberal provisions granted in another tax treaty to which the country of residence or such taxpayer is also a party provided that the subject matter of taxation is the same as that in the tax treaty under which the taxpayer is liable.

14) DOCTRINE OF SOVEREIGN EQUALITY- This international rule maintains that the property or income of a foreign state or gov’t may not be the subject of taxation by another State.

If a tax law violates some international treaty, laws or convention, it is not only invalid but unconstitutional because the Constitution provides that: “Philippine adopts the generally accepted principles of international laws as part of the law of the land.”

15) DOCTRINE OF ESTOPPEL- In the performance of its governmental functions, the State cannot be estopped by the neglect, errors or mistakes of its agents or officers.

The erroneous application and enforcement of law by public officials do not block the subsequent correct application of the statutes.

BUREAU OF INTERNAL REVENUE

I. Powers and Duties of the BIR

1. Assessment and collection of taxes;2. Enforcement of all forfeitures, penalties, fines and

judgments in all cases decided in its favor by the Courts;

3. Giving effects to and administering the supervisory and police powers conferred to by the NIRC and/or other laws;

4. Assignment of internal revenue officers and other employees to other duties;

5. Provisions and distribution of proper officials of forms, receipts, certificates, stamps, etc.

6. Issuance of receipts and clearancs;7. Submits annual report, pertinent information to

Congress and reports to the Congressional Oversight Committee in matters of taxation.

8. Authority of the internal revenue officers to make arrest seizure;

9. Authority of the internal revenue to administer oath and take testimony;

10. Authority of the tax officials in searching taxable articles;

11. Remedy for enforcement of forfeiture;12. Authority to sell and/or destroy forfeited property.

Powers of the Commissioner of Internal Revenue1) Original and exclusive power to interpret the provisions

of the NIRC;2) To recommend the implementing guidelines of a tax

law to the Secretary of Finance;3) To decide cases relative to “DROP” (Sec.4)4) To obtain information and to summon, examine, and

take testimony of persons to effect tax collection;5) To make assessment;6) To make/amend a return for and in behalf of a

taxpayer; or to disregard one filed by a taxpayer;7) To change a tax period;8) To conduct inventory or surveillance;9) To prescribe presumptive gross sales/receipts;10) To prescribe real estate values;11) To accredit tax agents;12) To inquire into bank deposits under certain cases;13) To prescribe additional procedural or documentary

requirements for tax administration and enforcement;14) To delegate his powers to any subordinate officer with

rank equivalent to a division chief of an office;15) To compromise tax liabilities of taxpayers;16) To refund cost of IR taxes;17) To abate or cancel tax liabilities in certain cases;18) To examine tax returns and determine tax due thereon;19) To administer oaths and take testimony;20) To make arrest and seizure;21) To divide the Philippines into revenue districts for

administrative purposes upon approval of the Sec. of Finance;

22) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region concerning taxpayers;

Sy Po vs CTA- Assessements issued by the Commissioner are presumed to be correct and valid, and a taxpayer who disagrees not only must prove that the assessment is wrong but he must state the correct one.

Central Azucarerea de Don Pedro vs CTA- When a report required by law for the assessment of any internal revenue tax is not forthcoming or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.

Benepayo vs Collector- In order to pass the test of judicial scrutiny, the assessment must be based on actual facts and not itself, in turn, based on mere presumptions no matter how reasonable such presumptions appear to be.

Collector vs Bohol Land Transportation- Within the applicable statute of limitation, the Commission may re-examine or re-assess the taxpayer, the gov’t not being estopped by error or mistakes of its agents.

Meralco Securities vs Savellano- The Court ruled that the Commissioner may not be compelled by the courts through mandamus to impose tax assessment which he believes is not proper.

Samson vs Barrios- “If the law imposes a duty upon a public officer and gives him the right to decide how or when the duty shall be performed, such duty is discretionary and not ministerial. The duty is ministerial only when the discharge of the same requires neither the exercise of official discretion nor judgment.”

People vs Rubio- The SC ruled that a search warrant may not be used as a means of gaining access to a man’s house or office solely for the purpose of making a search to secure evidence to be used against him in a criminal or penal proceeding.

Molo vs Yatco- A warrant would be proper to search for and seize books of account, invoices and records when so used as instruments or agencies for perpetrating fraud upon the gov’t. Records in custodial egis cannot, however, be seized without leave of court.

Bache & Co vs Ruiz- An application for a search warrant stating that the person named therein has committed a violation of the Tax Code and Tariff and Customs Laws without specifying the offense, and seeking the seizure of all books of accounts and records, defeats the major objectives of eliminating general search warrants and

does not satisfy the constitutional requirements. Documents that are thereby illegally seized are inadmissible in evidence.

Frank Uyad Unifish Packing Corp vs BIR- Search warrant for seizure of book of accounts, invoices, receipt and other financial record may be done by the BIR with the Regional Trial Court but the article to be seized must be done with particularly.

Vera v Hon. Cuevas- As regards the exercise of its police powers the BIR may do so only in the enforcement of its tax collection duties and not for any other purpose such as that which entails promotion of health.

U.S. vs Viado- When making arrests and seizures, revenue agents assume the category of peace officers and they are in that capacity entitled to the privileges of such officers under penal and procedural laws.

Non-delegable powers of the CIRa) Power to recommend the promulgation of rules and

regulation to the Secretary of Finance;b) Power to issue rulings of first impression or to reverse,

revoke or modify any existing ruling of the Bureau;c) Power to compromise;d) To abate any tax liability;e) Power to assign and reassign internal revenue officers

to establishments where articles subject to excise tax and produced or kept;

Instances where authority to investigate is dispensed with:1) When taxpayer does not issue sales invoices or receipts;2) When taxpayer is found to keep private books of

accounts;3) When taxpayer is not provided with the necessary

privilege tax receipts;4) When taxpayer is in possession of unpaid tax articles

subject to excise tax;

Powers of Revenue Regional Directorsa) To implement tax laws, policies, plans, programs,

revenue regulations of the department or agencies in the regional areas;

b) Administer and enforce internal revenue laws, rules and regulations;

c) Enforce assessment and collection of internal revenue taxes, charges and fees;

d) Issue Letters of Authority for examination of taxpayer within the region;

e) Provide economical, efficient and effective service to the people in the area in matters of taxation;

f) Coordinate with regional offices or other departments, bureaus and agencies in the area;

g) Exercise control and supervision over its officers and employees; and

h) Perform other functions as may be provided by law or delegated to him by the CIR.

2 KINDS OF POWERS OF ADMINISTRATIVE AGENCIES:1) Quasi-Legislative or Rule Making Power- Power to

make rules and regulations which results in delegated legislation that is within the confines of the granting statute and the doctrine of non-delegability and separability of powers.

Includes issuance of the ff:a) Supplementary or detailed legislationb) Contingent legislation;c) Interpretative rule

2) Quasi-judicial or Administrative Adjudicatory Power- Power to adjudicate the rights of persons before it. It is the power to hear and determine questions of fact to which the legislative policy is to apply and to decide in accordance with the standards laid down by the law itself in enforcing and administering the same law. In the exercise of this authority due process must be afforded to concerned parties.

BIR RULES AND REGULATIONS1) Consistent and in harmony with law;2) Reasonable;3) Useful and necessary;4) Published in the Offical Gazette;

CIR vs CA, R.O.H. Auto Product & CTA- The authority of the Sec of Finance, in conjunction with the CIR, to promulgate all needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted.

Arches vs Bellosillo- A revenue regulation, the issuance of which is authorized by stature, has the force and effect of law.

CIR vs CA, CTA, and Fortune Tobacco Corp- Interpretative rule, one the 3 quasi-legislative or rule-making power of the an administrative agency refers to no single person or party in particular, but concerns all those belonging to the same class which may be covered by the said interpretative rule.

CIR vs Burroughs- Any revocation, modification or reversal of such rules or regulations, including rulings or

circulars of the Commissioner, shall not be given retroactive effect if the same would be prejudicial to the taxpayer, except in case of rulings:

a) where the taxpayer deliberately misstates or omits material facts;

b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or

c) where the taxpayer acted in bad faith; CIR vs Fortune Tobacco Corp- The due observance of

the requirements of notice, of hearing and publication should not have been ignored.

PBC vs CIR- It must be noted that a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer.

Princple of Strictissimi Juris- Tax exemptions must be strictly construed against the taxpayer and liberally in favor of the government. “Taxation is the Rule and Exemption is the Exception.”

FEATURES OF INCOME TAX LAW1) Progressive and based on Ability-to-Pay Principle2) Global tax system is applicable to taxable corporation,

whereas, the schedular tax system is applied to taxable individuals

3) Adopted the most comprehensive tax situs

Income tax- tax on all yearly profits, income, gains emoluments and the like of persons (individual and/or judicial) arising from property, profession, trades, offices and activities whether gross or depending on the class of taxpayer and the kind of income.

Taxable income- refers to gross income less allowable deductions and/or personal and additional exemptions and health/hospitalization premium allowances.

PURPOSE OF INCOME TAX To ease the impact of continuing rise in oil and food

prices on the people, and To provide relief and additional money to spend for

basic necessities especially for minimum wage earners; To simplify the application of the OSD beginning July 1,

2008;

Nature of Income Taxa) Self-assessing or self-computed;b) National tax;c) Regarded as an excise tax because it actually levies

upon the right to earn an income;

d) Direct tax;e) General tax;f) Not covered by the Principle of Territoriality;

Functions of Income Tax Provides large amounts of revenue for the support o

the gov’t; Offsets the regressive sales, consumption and estate

taxes; Mitigates the evil arising from the inequalities in the

distribution of income through the imposition of progressive, graduated income tax rates.

Progressive System of Taxation- Application of income tax rates to the taxable income of a taxpayer which much be proportionate in character and shall be used as an instrument to promote social justice to achieve social equity and must not be regressive

It is the constitutional mandate that will correct the inequalities in taxation by equitably distributing the tax burden based upon the Ability-to-Pay Principle

This has been introduced in our tax system as a measure of raising more revenues to meet adequately the increased needs of the Gov’t and at the same time to correct inequities in taxation by equitably distributing the tax burden based upon the principle of ability to pay.

2 SYSTEMS OF INCOME TAXATION1) Global System- taxpayer is required to report all

income earned during a taxable period in one income tax return, which income shall be taxed under the same rule of income taxation.

2) Schedular System- requires a separate return for each type of income and the tax is computed on per return or per schedule basis and it provides for different tax treatment of different types of income.

Global Income Taxation Schedular Income TaxationSystem that taxes all categories of income except certain passive income and capital gains.

System employed where the income tax treatment varies and is made to depend on the kind or category taxable income of the taxable. It has different rates

Taxpayer is required to report all income earned during a taxable period in one income tax return;

Taxpayer is required to file separate tax return for each type of income and the tax is computed on per return or per schedule basis.

Total allowable deductions personal and additional

Separate returns are filed by the recipient of the income

exemptions are deducted from the gross income.

except for passive income.

Based on the aggregate income from all sources that are not subject to final income tax.

Income from different sources are not globalized, they are treated separately and are subject to different sets of graduated or flat income tax rates;

Globalized income is subject to a unitary but progressive and graduated rate of 0% to 32%;

Itemizes the different incomes and provides for varied rate of taxes are applied thereto. It has different rates;

Corporate taxpayers adopt this system. All their income are globalized and taxed at 32%.

Individual taxpayers follow this system. Income from different sources are classified and treated differently;

No need to classify taxable income;

There is need to categorize income from different sources.

Semi-schedular or Semi-global tax system- It reduces the range of graduated tax rates applied on the net taxable income of self-employed and professional form 5% to 60% to 0% to 35%, the same set of tax rates applied on compensation income, but increased the preferential tax rates on capital gains and passive investment incomes.

2 Kinds of Income Tax under RA 8424a) Graduated income tax

1) Net income tax2) Gross income tax

b) Normal corporate income tax;c) Final withholding tax system on certain passive

investment income paid to residents;d) Final withholding tax on income payments made to

non-residents;e) Capital gains tax on sale or exchange of real property

classified as capital asset;f) Branch profit remittance tax;g) Tax on improperly accumulated earnings of

corporations;h) Fringe benefit tax;i) Preferential rates or special rates of income tax on

individuals or corporations;j) Minimum corporate income tax;k) Optional corporate income tax;

Gross Income- All income, gain or profit subject to tax, whether the same is realized from legal or illegal activities.

Net Income- Gross income less allowable deductions and exemptions.

Gross Income Taxation Net Income TaxationFixed or computed without allowable deductions;

Reduced by allowable deductions;

Applies to: (a) compensation income earners, (b) non-resident aliens not engaged in trade or business, (c) non-resident foreign corporations.

Applies to: (a) self-employed taxpayers in business or profession, (b) domestic corporations, (c) resident corporations, (d) special corporations;

A final tax is imposed on the gross amount of specific types of income, such as interest, royalties, prize, dividend and capital gains;

Certain deductions are allowed and subtracted from the aggregate income not to final tax and the tax is computed on the resulting net income therefrom.

Grants no exemptions; Exemptions are granted;Tax base is gross income; Tax base is net income;

Advantages of Gross Income Taxationa) Computation is simple;b) Does away with wastage and supplies and requires less

manpower;c) Less discretion is allowed the tax examiners;d) Less probability of connivance between taxpayer and

tax examiners;e) Substantial reduction in corruption and tax evasion;f) Examination and/or investigation of tax return can be

faster or even do away with;g) Favorable to the authorities because they may be able

to collect more taxes;h) Couple with an effective withholding tax system, gov’t is

assured to bigger revenue;

Disadvantages of Gross Income Taxationa) No deductions and exemptions are allowed;b) Taxpayer may derived gross income but suffers net loss;c) Susceptible to fraud in the absence of general audit;d) Rule on taxation may not be equitable and uniform;e) What could be taxed may not be income but mere

return of capital;f) This system may serve as a disincentive to further

production and distribution of essential commodities necessary for economic development;

g) Taxpayers may lose interest to each more by lessening their purchasing capacity;

h) Gov’t may end up collecting lesser taxes in the absence of audit, because the taxpayers may cheat on their sources of income;

Advantages of Net Income Taxationa) Fair and just due to grant of deductions;b) Presence of tax audit minimizes fraud;c) Provides equitable relief in the form of deductions,

exemptions and tax credits;

Disadvantages of Net Income Taxationa) Susceptible to corruption;b) Confusing and complex process of filing of income tax

returns;c) Costly and difficult to administer

Income- money earned without obligation to repay the same or any restrictions attached thereto as to its disposition. Includes earnings, lawfully or unlawfully acquired.

Imputed Income- income in kinds given to income earners as part of their compensation for services rendered, such as: meals rice subsidy, living quarters, etc.

Receipts- reference to all wealth that flows into the taxpayer which includes return of capital.

What are the inclusions into the gross income of a taxpayer? Compensation; Gross income derived from trade, business or

profession; Gains derived from dealings in property; Interest; Rents; Royalties; Annuities; Prizes and winnings; Pensions; Partner’s distributive share from net income;

Income CapitalFruit of capital, labor or both Tree or source of incomeAmount of money coming to a person or corporation within a specified time whether as payment for services, interests, or profits from investments;

Fund or tool for the production of health;

All wealth that flows into taxpayer other than mere return of capital which includes a result of wealth or as a substitute for money value for something

Statement of the money value of the property actually used by the enterprise, irrespective of the persons who may have contributed it;

permanently lost;Subject to income tax Not subject to income taxFlow of service rendered by capital or labor;

Capital is wealth;

Requisites of Income to be taxable There must be gain or profit; Gain must be realized or received; Gain must not be excluded or exempted by law or

treaty from income taxation;

INCOME TAXPAYERS1. Resident citizens

ARTICLE IVCITIZENSHIP

Section 1. The following are citizens of the Philippines:

1. Those who are citizens of the Philippines at the time of the adoption of this Constitution;

2. Those whose fathers or mothers are citizens of the Philippines;

3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine Citizenship upon reaching the age of majority; and

4. Those who are naturalized in the accordance with law.

Section 2. Natural-born citizens are those who are citizens of the Philippines from birth without having to perform any act to acquire or perfect their Philippine citizenship. Those who elect Philippine citizenship in accordance with paragraph (3), Section 1 hereof shall be deemed natural-born citizens.

Section 3. Philippine citizenship may be lost or reacquired in the manner provided by law.

Section 4. Citizens of the Philippines who marry aliens shall retain their citizenship, unless by their act or omission they are deemed, under the law to have renounced it.

Section 5. Dual allegiance of citizens is inimical to the national interest and shall be dealt with by law.

Resident Citizens- are individuals who are: Engaged in trade or business Exercise a profession; Employed, earning purely compensation income; Not engaged in business or profession but has

income; Mixed income

Non-resident citizens- are citizens of the Philippines:

Who establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite intention to reside therein;

Who leaves the Philippines during the taxable year to reside abroad, whether as an immigrant or for employment on a permanent basis;

Who works and derives income from abroad and whose employment threat requires him to be physically present abroad for at least 183 days during the taxable year;

Who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines.

3 types of Non-Resident Citizens1) Immigrants;2) Employees of a foreign entity on a permanent basis;3) OCW/Seamen

2. Overseas contract workers and seamen

An “OCW” is taxed only on his income earned in the Philippines;

A Filipino Seaman is considered an OCW if he receives compensation income for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade.

3. Resident aliens- individual whose residence is within the Philippines and who is not a citizen thereof.

4. Non-resident aliens engaged in trade or business- An alien whose aggregate period of stay in the Philippines is more than 180 days during any calendar year.

5. Non-resident alien not engaged in trade or business- An alien whose aggregate period of stay does not exceed 180 days during a calendar year.

6. Special aliens- alien individuals employed by: Regional headquarters of Multinational

Corporations; Offshore banking units; Foreign service contractors;

7. Estates under judicial settlement8. Irrevocable trust9. Co-ownership

Taxpayer- any natural or artificial person subject to tax

Different tax base and tax rates applicable to individual taxpayersIndividual Taxpayers

Tax Base Tax Rates

Resident citizen All income from whatever sources;

Taxable net income subject to graduated rate of 5-32%;

Non-resident citizen

Income derived from sources within the Philippines;

-do-

Overseas Contract Workers/ Seamen

Income derived within the Philippines only

-do-

Resident aliens -do- -do-(a) Aliens employed by regional or area headquarters of multinational corporations; (b) Aliens employed by Offshore Banking Units, (c) Aliens employed by petroleum service contractors and subcontractors, (d) Filipinos employed in Asian Dev’t Bank occupying managerial of technical positions and their alien counterparts;

Income derived from salaries, wages, annuities, compensation received from employer

15% tax on gross income

Non-resident aliens not engaged in business

Income derived within the Philippines only

25% tax on gross income

(a) Estate under judicial proceeding, (b) Irrevocable Trust

Income derived from whatever sources

Taxable net income subject to graduated rate of 5%-32%

Income Exempt from Income Tax:1) Income received but enumerated under the term

“exlusions”.2) Those considered mere return of capital;3) Those exempted under laws, special laws or treaties;4) Gains realized from the sale, exchange or retirement of

bonds with maturity of more than 5 years is exempt from income tax;

5) Those covered by Employer’s Convenience Rule

Employer’s Convenience Rule- Allowances in kind furnished to the employee for and as a necessary incident to the performance of his duties which directly benefits the employer more than it does the employee.

6) Those already subjected to the final withholding tax;