GENERAL PRINCIPLES OF TAXATION

Compiled by AttyNeri B. Yu

T A X A T I O N L A W GENERAL PRINCIPLESPOWER OF TAXATIONTAXATION power by which the sovereign through its law-making body raises revenue to defray the necessary expenses of the government. It is a way of apportioning the costs of the government among those who in some measure are privileged to enjoy its benefits and must bear its burden.BASIS OF TAXATION (Lifeblood Theory) The power of taxation is essential because the government can neither exist nor endure without taxation. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. (Bull vs. United States) The collection of taxes must be made without hindrance if the state is to maintain its orderly existence.Government projects and infrastructures are made possible through the availability of funds provided through taxation. The governments ability to serve and protect the people depends largely upon taxes. Taxes are what we pay for a civilized society. (CIR Algue, 158 SCRA 9)LIFEBLOOD Theory

The CTA ordered CIR to refund to CEPOC overpayments made by the latter of ad valorem taxes on cement sold by it.The CIR opposed the ruling, claiming that it had a right to apply the overpayment to another tax liability of CEPOC-sales tax on a, manufactured product (the cement). CEPOC opposed the CIR, claiming that the overpayment must be refunded pending the determination of whether the assessed sales tax was proper. CEPOC claims that the cement cannot be considered a manufactured product and is instead a mineral product exempt from sales tax.

ISSUE: Whether the CIR must refund the overpayment of the ad valorem tax.HELD: No, the CIR has the right to apply the overpayment to CEFCCs sales tax deficiency.

It is well settled that cement is a manufactured product. There was some confusion because in a previous case, it was said that cement was subject to sales tax prior to the effectivity of RA 1299, which introduced the definitions of "mineral" and "manufactured." However, the decision cannot be taken to have meant that cement was no longer a manufactured product because such determination was not at issue. The assessment of sales tax is enforceable despite its being contested because of the urgency to collect the taxes as the lifeblood of the government, If the payment of taxes could be postponed by questioning their validity, the government would be paralyzed, The Tax Code provides that no court shall have authority to grant an injunction or restrain the collection of taxes, except when in the opinion of the CTA, the collection by the EIR or the Bureau of Customs may jeopardize the interest of the Government and/or the taxpayer. In such a case, the Court, at any stage of the proceeding may suspend the collection and require the taxpayer to either deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. The exception does not apply in this case.

To require the CIR to refund the overpayment, which he later would have to collect anyway for application to the sales tax assessment, is an idle ritual.Commissioner Internal Revenue vs. Cebu Portland Cement Co. GR L29059 December 15, 1987

I-Fundamental Principles of Taxation: Meaning of Taxation

Revenue laws are not intended to be liberally construed. Considering that taxes are the lifeblood of the government and in Holmes's memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented.Commissioner of Internal Revenue vs. Rosemarie Acosta, G.R. No. 154068, August 3, 2007Antero M. Sison Jr. vs Ruben Ancheta 136 SCRA 654

THEORIES ON TAXATION

1. Necessity TheoryTaxes proceed upon the theory that the existence of the government is a necessity; that it cannot continue without the means to pay its expenses; and that for those means, it has a right to compel all citizens and property within its limits to contribute. The power to tax is an attribute of sovereignty emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide. (Phil. Guaranty Co., Inc. vs. CIR)

2. Benefits-Protection/Reciprocity TheoryThe power of the State to demand and receive taxes is based on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society. This theory spawned the Doctrine of Symbiotic Relationship Every person who is able must contribute his share in the burden of running the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values. (C I R vs. Algue)

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.Commissioner of Internal Revenue, et al. vs. Court of Appeals, et al., G.R. No. 119322, June 4, 1996

COMMISSIONER OF INTERNAL REVENUE vs. ALGUE, INC., and THE COURT OF TAX APPEALS, [G.R. No. L-28896. February 17, 1988.]SYLLABUS1.TAXATION; NATIONAL INTERNAL REVENUE CODE; DEFICIENCY INCOME TAXES; PERIOD TO APPEAL ASSESSMENT, SUSPENDED BY FILING OF PROTEST. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged. It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" and "renders hopeless a request for reconsideration," being "tantamount to an outright denial thereof and makes the said request deemed rejected." But there is a special circumstance in the case at bar that prevents application of this accepted doctrine. The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served. As the Court of Tax Appeals correctly noted, the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.2.ID.; ID.; INCOME TAX; DEDUCTION FROM GROSS INCOME; P75,000.00 PROMOTIONAL FEES; FOUND NECESSARY AND REASONABLE IN CASE AT BAR. We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos.D E C I S I O NTaxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law.We deal first with the procedural question.The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. On January 18, 1965, Algue filed a letter of protest or request for reconsideration, which letter was stamp-received on the same day in the office of the petitioner. On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged. It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" and "renders hopeless a request for reconsideration," being "tantamount to an outright denial thereof and makes the said request deemed rejected." But there is a special circumstance in the case at bar that prevents application of this accepted doctrine.The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served.As the Court of Tax Appeals correctly noted, the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.Now for the substantive question.The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary, reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company.Parenthetically, it may be observed that the petitioner had originally claimed these promotional fees to be personal holding company income but later conformed to the decision of the respondent court rejecting this assertion. In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed. It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith O'Farell, and Pablo Sanchez worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. For this sale, Algue received as agent a commission of P125,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved. The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation.We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties.This finding of the respondent court is in accord with the following provision of the Tax Code:"SEC. 30.Deductions from gross income. In computing net income there shall be allowed as deduction (a)Expenses:(1)In general. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; . . ." and Revenue Regulations No. 2, Section 70 (1), reading as follows:"SEC. 70.Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows:"Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . ." (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.SO ORDERED.

Claim of tax deductionsThe Phil. Sugar Estate Development Company (PSEDC) appointed Algue,Inc.,a family corporation, as its agent, authorizing it to sell its land, factories, and oil manufacturing process. Pursuant to this authority, five members of the family corporation formed the Vegetable Oil Investment Corp. and induced other persons to invest in it. The newly formed corporation then purchased the PSEDC properties. For this sale, PSEDC gave Algue, Inc. a commission of P125,000. From this amount, Algue Inc. paid the five family members P75,000 as promotional fees. Algue, Inc. declared this P75,000 as a deduction from its income tax as a legitimate business expense. The CIR questioned the deduction, claiming that it was not an ordinary, reasonable, or necessary expense and was merely an attempt to evade payment of taxes.ISSUE: Whether the P75,000 is taxdeductible as a legitimate businessexpense of Algue, Inc.HELD: Yes, the P75,000 promotional fee is tax-deductible. Sec. 30 of the Tax Code provides that ordinary and necessary expenses incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered are tax-deductible. However, the burden in proving the validity of a claimed deduction belongs to the taxpayer. In this case, the burden has been satisfactorily discharged by the taxpayer Algue, Inc. Algue, Inc. was able to prove that the promotional fees were not fictitious and were in fact paid periodically to the five family members. Moreover, the amount of the promotional fees was reasonable, considering that the five payees actually performed a service for Algue, Inc. by making the sale of the properties of PSEDC possible. As a result of this sale, Algue, Inc. earned a net commission of P50,000.Commissioner of Internal Revenue v. Algue GR L28896 February 17, 1988

Symbiotic relationship between government and people is the rationale of taxation.It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. Every person who is able to must contribute his share in the running of the government. It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. Commissioner of Internal Revenue vs. Algue, Inc., et al., G.R. No. L-28896, February 17, 1988

Lifeblood TheoryPrinciple of estoppel does not operate against the government for neglect or omission of its officials tasked to collect taxes. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. Upon taxation depends the Government's ability to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affair. This should not hold true to government officials with respect to matters not of their own personal concern. This is the philosophy behind the government's exception, as a general rule, from the operation of the principle of estoppel.Misael P. Vera, et al. vs. Jose F. Fernandez, et al., G.R. No. L-31364, March 30, 1979

Obligation to pay taxes rests upon the necessity of money for the support of the state.The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government, but upon the necessity of money for the support of the state. For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. While courts will not enlarge, by construction, the government's power of taxation, they also will not place upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distinctions. When proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.Pablo Lorenzo vs. Juan Posadas, Jr., G.R. No. 43082, June 18, 1937

NATURE OF THE TAXING POWER1. It is an inherent attribute of sovereignty- the power of taxation is inherent in sovereignty as an incident or attribute thereof, being essential to the existence of every government. It exists apart from constitutions and without being expressly conferred by the people. 2. It is legislative in character - such power is exclusively vested in the legislature except when the Constitution provides otherwise. This is based upon the principle that "taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must be exercised (Cooley)

SCOPE OF LEGISLATIVE TAXING POWER1. Person, property, occupation, excises or privileges to be taxed provided they are within the taxing jurisdiction2. Amount or rate of tax 3. Purposes for which taxes shall be levied provided they are for public purposes4. Kind of tax to be collected5. Apportionment of the tax (whether the tax shall be general or limited to a particular locality or partly general and partly local)6. Situs of taxation7. Method of collection

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide.Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22074, April 30, 1965

IS THE POWER TO TAX THE POWER TO DESTROY? - Marshall laid down the rule that the "Power to tax is the power to destroy".According to Cooley, this is because such power includes the power to regulate- even to the extent of prohibition or destruction. Cooley also emphasized that this should be used to describe not the purposes for which the taxing. Power may be utilized but the degree of vigor with which the taxing power may be employed in order to raise revenue. According to Justice Cruz, the power to tax includes the power to destroy if it is usedvalidly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare. But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy. According to Holmes the Power to tax is not the power to destroy while the Supreme Court sits because of the constitutional restraints placed on a taxing power that violates fundamental rights. Although the power to tax is almost unlimited, it must not be exercised in an arbitrary manner. If the abuse is so great so as to destroy the natural and fundamental rights of people, it is the duty- of the judiciary to hold such an act as unconstitutional.

The power to tax is not the power to destroy.Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is progressive when its rate goes up depending on the resources of the person affected. The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for all its plenitude, the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes' pen, thus: "The power to tax is not the power to destroy while this Court sits." "So it is in the Philippines."Antero M. Sison, Jr. vs. Ruben B. Ancheta, G.R..L-59431, July 25, 1984 130 SCRA 654

POWER OF JUDICIAL REVIEW IN TAXATIONAs long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or restrictions, it is not within the province of the courts to inquire into the wisdom or policy of the exaction, the motives behind it, the amount to be raised or the persons, property or other privileges to be taxed. The courts power in taxation is limited only to the application and interpretation of the law.

ASPECTS OF TAXATION _1. Levy or imposition of the tax (tax legislation) - enactment of tax laws orstatutes, includes the determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes. 2. Enforcement or tax administration (tax administration) -collection of taxes already levied and implemented by law.

PURPOSES AND OBJECTIVES OF TAXATION1. Revenue to raise funds or property to enable the state to promote the general welfare and protection of its citizens. 2. Non-Revenue a. Promotion of general welfare .b. Regulationc. Reduction of social inequality -possible through progressive system of taxation where the object is to prevent the undue concentration of wealth in the hands of a few individualsd. Encourage economic growth by granting incentives or exemptions inorder to encourage investmentse. Protectionism taxes sometimes provide protection to local industrieslike protective tariffs and customs duties

Non-Revenue purposePres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund (OPSF), which was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from exchange rate adjustments and from increases in the world market prices of crude oil. A portion of the OPSF was taken from collections of ad valorem taxes levied on oil companies,Subsequently, the OPSF was reclassified into a trust liability account and ordered released from the National Treasury to the Ministry of Energy. The EO authorized the investment of the fund in government securities, with the earnings accruing to the fund. Petitioner alleges that the creation of the trust fund violates the Constitution since the money collected pursuant to PD 1956 is a special fund, and under the Constitution, if a special tax is collected for a specific purpose, the revenue generated there from shall be treated as a special fund to be used only for the purpose indicated, and not channeled to another government objective.

ISSUE: Whether the creation of the trust fund is violative of the Constitution.

HELD: No, The creation of the trust fund was valid, In order for the funds to fall under the prohibition, it must be shown that they were collected as taxes as a form of revenue. In this case, while the funds were referred to as taxes they were exacted not under the power of taxation, but in the exercise of the police power of the State. The main objective was not revenue but to stabilize the price of oil and petroleum products. The OPSF is actually a special fund. It is segregated from the general fund; and while it is placed in what the law refers to as a trust liability account," the fund nonetheless remain subject to the scrutiny EDC review of the COA. These measures comply with the constitutional description of a "special fund.John Osmena v. Secretary Oscar Orbos GR L99886 March 31, 1993

Non-revenue PurposeFACTS: Petitioners are drugstores assailing the constitutionality of Sec. 4 (a) of R.A. No. 9257 (Expanded Senior Citizens Act of 2003). They assert that the law constitutes deprivation of private property as it compels drugstore owners and establishments to grant discounts to senior citizens. They allege that this will result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. ISSUE: Is Sec. 4 (a) of R.A. No. 9257 unconstitutional?RULING: No. One of the policies of R.A. No. 9257 is "to recognize the important role of the private sector in the improvement of the welfare of senior citizens and to actively seek their partnership." To implement this policy, the law grants a 20% discount to senior citizens for purchases of their medicines, among others. As a form of reimbursement, the law provides that business establishments extending the 20% discount to senior citizens may claim the discount as a tax deduction. Based on the July 10, 2004 DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a just compensation. However, a tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just compensation.The law is a legitimate exercise of police power which has general welfare for its object. Thus, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare. Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for the protection of property, various laws and jurisprudence, continuously serve as a reminder that the right to property can be relinquished upon the command of the State for the promotion of public good. The success of the senior citizens program rests largely on the support imparted by petitioners and the other private establishments concerned. This being the case, the means employed in invoking the active participation of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related.Carlos Superdrug Corp., et al. vs. DSWD, et al., G.R. No. 166494, June 29, 2007

BASIC PRINCIPLES OF A SOUND TAX SYSTEM (FAT)1. Fiscal Adequacy - sources of government revenue must be sufficient to meet government expenditures and other public needs. 2. Administrative Feasibility - tax laws must be capable of effective and efficient enforcement. 3.Theoretical Justice - a sound tax system must take into consideration the taxpayers ability to pay (Ability to pay theory). Our laws mandate that taxes must be reasonable, fair, just and conscionable. The Constitution provides that taxation must be uniform and equitable and the State shall evolve a progressive system of taxation.

DISTINCTIONS

TAXATIONPOLICE POWEREMINENT DOMAIN

1.Purpose

To raise revenueTo promote public purpose through regulationsTo facilitate the States need of property for public use

2.Amount of Exaction

No limitLimited to the cost of regulation, issuance of the license or surveillanceNo exaction; but private property is taken by the State for public purpose

3.Benefits Received

No special or direct benefit is received by the taxpayer; merely general benefit of protectionNo direct benefit is received; a healthy economic standard of society is attainedA direct benefit results in the form of just compensation to the property owner

4. Non-impairment of Contracts

Contracts may not be impairedContracts may be impairedContract may be impaired

5. Transfer of Property Rights

Taxes paid become part of public fundsNo transfer but only restraint in its exerciseTransfer is effected in favor of the State

6. Scope

All persons, property and exercisesAll persons, property, rights and privileges Only upon a particular property

TAXES - enforced proportional contributions from the persons and property levied by the law-making body of the State by virtue of its sovereignty in support of government and for public needs.

ESSENTIAL CHARACTERISTICS OF A TAX1. It is an enforced contribution - not dependent on the will of the person taxed, not a contract but a positive act of the government 2. It is generally payable in money 3. It is proportionate in character taxes must be based on ability to pay in accordance with the constitutional mandate to Congress to evolve a progressive system of taxation 4. It is levied on persons, on rights and on property5. It is levied by the state which has jurisdiction over the person or property 6. It is levied by the law making body of the state7. It is levied for public purpose/s

REQUISITES OFAVALID TAX 1. Should be for a public purpose 2. The rule of taxation shall be uniform 3. That either the person or property taxed should be within the jurisdiction of the taxing authority 4. That the assessment and collection of certain kinds of taxes guarantees against injustice to individuals, especially by way of notice and opportunity for hearing is provided5. The tax must not impinge on the inherent and Constitutional limitations on the power of taxation

CLASSIFICATION OF TAXES

1. As to subject matter or object:a. Personal, poll or capitation - tax of a fixed amount imposed upon personsresiding within a specified territory, whether citizens or not, without regard to their property, occupation or business in which they may be engaged (ex. Community tax).b. Property tax imposed on property, whether real or personal, in proportion either to its value or some other reasonable rule of apportionment (ex. Real estate tax).c. Excise or Privilege-charge imposed upon the performance of an act, theenjoyment of a privilege or engaging in an occupation, profession or business (ex. Donors tax).

2. As to who bears the burden:a. Direct tax which is demanded from the person who also shoulders theburden of the tax; the taxpayer is directly or primarily liable which he cannot shift to another (ex. Income tax); b. indirect tax wherein the incidence or liability for the payment falls on one person but the burden can be shifted or passed on to another (ex. VAT).

3. As to purpose:a. General, fiscal or revenue - tax is imposed for the general purposes of the Government, to raise revenue for governmental needs. (ex.- income Tax)b. Special or regulatory- tax imposed to achieve some social or economic ends irrespective of whether revenue is actually raised or not ( customs duties)

4. As to determination of amount:a. Specific- tax of a fixed amount imposed by head or number or bystandard of weight or measurement, it requires no valuation other than a listing or classification of the objects to be taxed.b. Ad Valorem (Value) tax of a fixed portion of the value of the propertywith respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount of tax due from each taxpayer can be determined.

5. As to taxing authority:a. National levied by the National Government b. Local levied by the local government

6. As to rate:a. Progressive or graduated tax the rate of which increases as the tax base or bracket increases.b. Regressive - tax the rate of which decreases as the tax base increases. c. Proportional - based on a fixed percentage of the amount of the property, receipts or other basis to be taxed.

COMPENSATION OR SET OFF OF TAXESGeneral Rule: Taxes cannot be the subject of compensation or set-off because the government and the taxpayer are not creditors and debtors of each other. Obligations in the nature of debts are due to the government inits corporate capacity while taxes are due to the government in its sovereign capacity. (Philex Mining vs. CIR GR125704 August 28,1998)

Exceptions: 1. Solutioindebiti - Compensation takes place by operation of law, where the government and the taxpayer are in their own right reciprocally debtors and creditors of each other, and that the debts are both already due and demandable. This is in consequence of Articles 1278 and 1279 of the Civil Code. (Domingo vs. Garlitos 8 SCRA 443)2. If the case involves local government taxes. PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents. [G.R. No. 125704. August 28, 1998.]SYLLABUS1.CIVIL LAW; EXTINGUISHMENT OF OBLIGATIONS; COMPENSATION; TAXES CANNOT BE SUBJECT TO LEGAL COMPENSATION. In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction. Prescinding from this premise, in Francia vs. Intermediate Appellate Court, we categorically held that taxes cannot be subject to set-off or compensation, thus: "We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government." The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. vs. Commission on Audit, which reiterated that: ". . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off." Further, Philex's reliance on our holding in Commissioner of Internal Revenue vs. Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, is no longer without any support in statutory law. It is important to note that the premise of our ruling in the aforementioned case was anchored on Section 51(d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex. 2.TAXATION; NATIONAL INTERNAL REVENUE CODE; A TAXPAYER CANNOT REFUSE TO PAY HIS TAXES WHEN THEY FALL DUE SIMPLY BECAUSE HE HAS A CLAIM AGAINST THE GOVERNMENT OR THAT THE COLLECTION OF THE TAX IS CONTINGENT ON THE RESULT OF THE LAWSUIT IT FILED AGAINST THE GOVERNMENT. We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities.3.ID.; ID.; PENALTIES; PAYMENT OF SURCHARGE IS MANDATORY; THE BUREAU OF INTERNAL REVENUE IS NOT VESTED WITH ANY AUTHORITY TO WAIVE THE COLLECTION THEREOF. The fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. The same cannot be condoned for flimsy reasons, similar to the one advanced by Philex in justifying its non-payment of its tax liabilities. Finally, Philex asserts that the BIR violated Section 106(e) of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days, when it took five years for the latter to grant its tax claim for VAT input credit/refund.4.ID.; ID.; THE BUREAU OF INTERNAL REVENUE VIOLATED SECTION 106(e) OF THE NATIONAL INTERNAL REVENUE CODE REQUIRING REFUND OF INPUT TAXES WITHIN 60 DAYS FROM THE DATE OF THE APPLICATION FOR REFUND WAS FILED. In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund, however, once the claimant has submitted all the required documents, it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honesty to government it is but just that government render fair service to the taxpayers. In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas vs. Court of Tax Appeals: "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the golden egg.' And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously." Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. Again, while we understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax liabilities. 5.ID.; ID.; ID.; REMEDIES OF AGGRIEVED TAXPAYER FOR OFFICIAL INACTION, WILLFUL NEGLECT AND UNREASONABLE DELAY IN THE PERFORMANCE OF OFFICIAL DUTIES. This is not to state that the taxpayer is devoid of remedy against public servants or employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of. Article 27 of the Civil Code provides: "Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken." More importantly, Section 269(c) of the National Internal Revenue Act of 1997 states: ". . . (c) wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform, any other duties enjoined by law." Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official duties. In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong. In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action. D E C I S I O NPetitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No. 36975 affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977. The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821,982.52 computed as follows:PERIOD COVEREDBASIC TAX25% SURCHARGEINTERESTTOTAL EXCISETAX DUE2nd Qtr., 199112,911,124.603,227,781.153,378,116.1619,517,021.913rd Qtr., 199114,994,749.213,748,687.302,978,409.0921,721,845.604th Qtr.,19,406,480.134,851,620.032,631,837.7226,889,937.8847,312,353.9411,828,088.488,988,362.9768,128,805.391st Qtr., 199223,341,849.945,835,462.491,710,669.8230,887,982.252nd Qtr., 199219,671,691.764,917,922.94215,580.1824,805,194.8843,013,541.7010,753,385.431,926,250.0055,693,177.1390,325,895.6422,581,473.9110,914,612.97123,821,982.52 ============================================In a letter dated August 20, 1992, Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore, these claims for tax credit/refund should be applied against the tax liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines. Inc. In reply, the BIR, in a letter dated September 7, 1992, found no merit in Philex's position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter.In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit: "Thus, for legal compensation to take place, both obligations must be liquidated and demandable. 'Liquidated' debts are those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34)" Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract." The dispositive portion of the CTA decision provides:"In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended."Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-G.R. CV No. 36975. Nonetheless, on April 8, 1996, the Court of Appeals affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: "WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED."Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996. However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows: Period Covered Tax CreditDateBy Claims ForCertificateofVAT refund/creditNumberIssueAmount1994 (2nd Quarter)00773011 July 1996P25,317,534.011994 (4th Quarter)00773111 July 1996P21,791,020.61198900773211 July 1996P37,322,799.191990-199100775116 July 1996P84,662,787.461992 (1st-3rd Quarter)00775523 July 1996P36,501,147.95In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax liabilities since both had already become "due and demandable, as well as fully liquidated;" hence, legal compensation can properly take place.We see no merit in this contention.In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction.Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes cannot be subject to set-off or compensation, thus: "We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government."The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, which reiterated that:". . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines. Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, is no longer without any support in statutory law.It is important to note that the premise of our ruling in the aforementioned case was anchored on Section 51(d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of surcharge and interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence.To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities. Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. The same cannot be condoned for flimsy reasons, similar to the one advanced by Philex in justifying its non-payment of its tax liabilities.Finally, Philex asserts that the BIR violated Section 106(e) of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days, when it took five years for the latter to grant its tax claim for VAT input credit/refund. In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund, however, once the claimant has submitted all the required documents, it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honesty to government it is but just that government render fair service to the taxpayers. In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals: "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the golden egg.' And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously."Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. Again, while we understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax liabilities.To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of.Article 27 of the Civil Code provides:"Art. 27.Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken."More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:"xxx xxx xxx(c)wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform any other duties enjoined by law." Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay m the performance of official duties. In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action.WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED. SO ORDERED.FOOTNOTES: Period within which refund of input taxes may be made by the Commissioner. The Commissioner shall refund input taxes within 60 days from the date the application for refund was filed with him or his duly authorized representative. No refund of input taxes shall be allowed unless the VAT-registered person files an application for refund within the period prescribed in paragraphs (a), (b) and (c) as the case may be.This provision has been amended by Section 112 (D) of Republic Act 8424 entitled the "National Internal Revenue Act of 1997.""(D)Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof.In case of full of partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals."

Doctrine of Equitable Recoupment where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred by prescription, any tax presently being assessed against a taxpayer may be recouped or set-off against the tax whose refund is now barred by prescription. (UST vs. Collector) The doctrine is NOT followed in the Philippines because of the lifeblood theory.

TAXPAYERS SUITA case where the act complained of directly involves the illegal disbursement of public funds derived from taxation (Justice Melo, dissenting in Kilosbayan, Inc vs. Guingona, Jr 232 SCRA 110) - Taxpayers have locus standi for they are parties in interest to be prejudiced or benefited by the avails of the suit but not if executive acts do not involve the use of public funds. (Gonzales vs. Marcos)

REQUISITES FOR TAXPAYERS SUIT1. _The tax money is being extracted and spent in violation of specific constitutional protections against abuses of legislative power.2. That public money is being deflected to any improper purpose (Pascualvs.Secretary of Public Works GR 110405 December 29, 1960)3. That the petitioner seeks to restrain respondents from wasting public funds through the enforcement of an invalid or unconstitutional law.

TAXES DISTINGUISHED FROM OTHER IMPOSITIONS

Tax and Special Assessment

Imposed on persons, property and exerciseLevied only on hand

Personal liability attaches on the person assessed in case of non-paymentCannot be made a personal liability of the person assessed

Not based on any special or direct benefitBased wholly on benefit

Levied and paid annuallyExceptional both as to time and locality

Exemption granted by Art. VI, Sec 28 (3) OF THE 1987 Constitution is applicableExemption does not apply. N.B. If property is exempt from Special Assessment

Tax and License Fee

Based on the power of taxationEmanates from police power

The purpose is to generate revenueThe purpose is regulatory

Amount is unlimitedAmount is limited to the cost of(1) issuing the license, and (2) inspection and surveillance

Normally paid after the start of a business Normally paid before commencement of business

Taxes, being the lifeblood of the State, cannot be surrendered except for lawful considerationLicense fee may be with or without consideration

Non-payment does not make the business illegal but maybe a ground for criminal prosecutionNon-payment makes the business illegal

Tax and Debt

An obligation imposed by lawCreated by contract

Due to the government in its sovereign capacity May be due to the government but in its corporate capacity

Payable in moneyPayable in money, property or service

Does not draw interest except in case of delinquencyDraws interest if stipulated or delayed

Not assignableAssignable

Not subject to compensation or set-offSubject to compensation or set-off

Non-payment is punished by imprisonment except in poll taxNo imprisonment in case of non-payment (Art.III, Sec. 20,1987 Constitution

Imposed only by public authorityCan be imposed by private individual

Tax and Toll

Enforced proportional contributions from persons and propertyA sum money for the use a something, a consideration which is paid for the use of a property which is of a public nature; e.g. road, bridge

A demand of sovereigntyA demand of proprietorship

No limit as to the amount of taxAmount of toll depends upon the cost of construction or maintenance of the public improvement used

Non -Revenue PurposeThe Philippine Sugar Institute (Philsugin), a semi-public corporation, was created for the purpose conducting research in and advancing the sugar industry in the country. To carry out these objectives, the charter of Philsugin authorized the levy of ten centavos per picul of sugar for five years to be collected from sugar cane planters in the country. The proceeds of this levy would go to a special fund to be used exclusively by Philsugin. Philsugin then purchased the insular Sugar Refinery using money from this special fund. Several years later, insular Sugar Refinery had accumulated tremendous losses. Three sugar centrals refused to continue paying their contributions to the fund on the ground that the purchase of the Insular Sugar Refinery by Philsugin was not authorized by its charter and that the continued operation of the refinery was inimical to their interests. They contended that their obligation to pay their contributions subsisted only to the limit and extent that they were benefited by the contributions, since the levy was merely e special assessment and not a tax.

ISSUE: Whether the levy is a special assessment or a revenue measure.

HELD: It is neither. The levy for the Philsugin Fund is not so much an exercise of the power of taxation nor the imposition of a special assessment, but the exercise of the police power for the general welfare of the entire country. It is therefore an exercise of a sovereign power, which no private citizen may lawfully resist.

The decision cited the case of Lutz v. Araneta in which the Court held that since sugar production is one of the leading industries of our nation, its promotion, protection, and advancement redound greatly to the general welfare. Hence, the Legislature found it in the interest of the general welfare to stabilize the sugar industry with the help of the power of taxation.Republic v. Bacolod-Murcia Milling Co.

II A- Inherent limitations

LIMITATIONS ON THE TAXING POWER

A. INHERENT LIMITATIONS ( KEY: PENIS ) These proceed from the very nature of the taxing power itself. These are:a. public purposeb. tax exemptions of the government c. non delegability of the taxing powerd. international comity and e. territoriality or situs of taxation, _

PUBLIC OR GOVERNMENTAL PURPOSEThe term public purpose is synonymous with "governmental purpose" It means a purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals and is designed to support the services of government for some of the recognized objects of the country. The tax must be used: 1. for the support of the government; 2. for any of the recognized objects of government; or 3. to promote the welfare of the community.The reason for this rule is that a tax levied for a private purpose constitutes taking of property without due process of law as it is beyond the power of the government to impose. Also, since the government is established for public purpose - the promotion of the general welfare, therefore public money can only be spent for the same purpose. Thus, time limitation of public purpose is implied in the Constitution.

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner and appellant, vs. THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents and appellees. [G.R. No. L-10405. December 29, 1960.]SYLLABUS1.CONSTITUTIONAL LAW; LEGISLATIVE POWERS; APPROPRIATION OF PUBLIC REVENUES ONLY FOR PUBLIC PURPOSES; WHAT DETERMINES VALIDITY OF A PUBLIC EXPENDITURE. "It is a general rule that the legislature is without power to appropriate public revenues for anything but a public purpose. . . . It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion. Incidental advantage to the public or to the state, which results from the promotion of private interests, and the prosperity of private enterprises or business, does not justify their aid by the use of public money." (23 R. L. C. pp. 398-450).2.ID.; ID.; ID.; UNDERLYING REASON FOR THE RULE. Generally, under the express or implied provisions of the constitution, public funds may be used only for a public purpose. The right of the legislature to appropriate public funds is correlative with its right to tax, and, under constitutional provisions against taxation except for public purposes and prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose, no appropriate of state funds can be made for other than a public purpose. (81 C.J.S. p. 1147).3.ID.; ID.; ID.; TEST OF CONSTITUTIONALITY. The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public interests, as opposed to the furtherance of the advantage of individuals, although such advantage to individuals might incidentally serve the public. (81 C.J.S. p. 1147).4.ID.; ID.; ID.; ID.; POWERS OF CONGRESS AT THE TIME OF PASSAGE OF A STATUTE SHOULD BE CONSIDERED. The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter consist of an amendment of the organic law, removing, with retrospective operation, the constitutional limitation infringed by said statute.5.ID.; ID.; ID.; APPROPRIATION FOR A PRIVATE PURPOSE NULL AND VOID; SUBSEQUENT DONATION TO GOVERNMENT NOT CURATIVE OF DEFECT. Where the land on which projected feeder roads are to be constructed belongs to a private person, an appropriation made by Congress for that purpose is null and void, and a donation to the Government, made over five (5) months after the approval and effectivity of the Act for the purpose of giving a "semblance of legality" to the appropriation, does not cure the basic defect. Consequently, a judicial nullification of said donation need not precede the declaration of unconstitutionality of said appropriation.6.ID.; ID.; ID.; ID.; RIGHT OF TAXPAYERS TO CONTEST CONSTITUTIONALITY OF A LEGISLATION. The relation between the people of the Philippines and its taxpayers, on the one hand, and the Republic of the Philippines, on the other, is not identical to that obtaining between the people and taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that existing between the people and taxpayers of each state and the government thereof, except that the authority of the Republic of the Philippines over the people of the Philippines is more fully direct than that of the states of the Union, insofar as the simple and unitary type of our national government is not subject to limitations analogous to those imposed by the Federal Constitution upon the states of the Union, and those imposed upon the Federal Government in the interest of the states of the Union. For this reason, the rule recognizing the right of taxpayers to assailed the constitutionality of a legislation appropriating local or state public funds - which has been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) - has greater application in the Philippines than that adopted with respect to acts of Congress of the United States appropriating federal funds.7.CONTRACTS; DEFENSE OF ILLEGALITY; EXCEPTIONS TO ARTICLE 1421 OF THE CIVIL CODE. Article 1421 of the Civil Code is subject to exceptions. For instance, the creditors of a party to an illegal contract may, under the conditions set forth in Article 1177 of said Code, exercise the rights and actions of the latter, except only those which are inherent in his person, including his right to the annulment of said contract, even though such creditors are not affected by the same, except indirectly, in the manner indicated in said legal provision.D E C I S I O NAppeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal, dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued, without costs.On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this action for declaratory relief, with injunction upon the ground that Republic Act No. 920, entitled An Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a) thereof, an item (43[h]) of P85,000.00, "for the construction, reconstruction, repair, extension and improvement" of "Pasig feeder road terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen. Capinpin Gen. Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at the time of the passage and approval of said Act, the aforementioned feeder roads were "nothing but projected and planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to the tracings attached to the petition as Annexes A and B, near Shaw Boulevard, nor far away from the intersection between the latter and Highway 54), which projected feeder roads "do not connect any government property or any important premises to the main highway"; that the aforementioned Antonio Subdivision (as well as the lands on which said feeder roads were to be constructed) were private respondent Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a member of the Senate of the Philippines; that on May 29, 1953, respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to donate said projected feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the council, subject to the condition "that the donor would submit a plan of the said roads and agree to change the names of two of them"; that no deed of donation in favor of the municipality of Pasig was, however, executed; that on July 10, 1953, respondent Zulueta wrote another letter to said council, calling attention to the approval of Republic Act No. 920, and the sum of P85,000.00 appropriated therein for the construction of the projected feeder reads in question; that the municipal council of Pasig endorsed said letter of respondent Zulueta to the District Engineer of Rizal, who, up to the present "has not made any endorsement thereon"; that inasmuch as the projected feeder roads in question were private property at the time of the passage and approval of Republic Act No. 920, the appropriation of P85,000.00 therein made, for the construction, reconstruction, repair, extension and improvement of said projected feeder roads, was "illegal and, therefore, void ab initio"; that said appropriation of P85,000.00 was made by Congress because its members were made to believe that the projected feeder roads in question were "public roads and not private streets of a private subdivision"; that, "in order to give a semblance of legality, when there is absolutely none, to the aforementioned appropriation", respondent Zulueta executed, on December 12, 1953, while he was a member of the Senate of the Philippines, an alleged deed of donation copy of which is annexed to the petition of the four (4) parcels of land constituting said project feeder roads, in favor of the Government of the Republic of the Philippines; that said alleged deed of donation was on the same date, accepted by the ten Executive Secretary; that being subject to an onerous condition, said donation partook of the nature of a contract; that, such, said donation violated the provision of our fundamental law prohibition members of Congress from being directly or indirectly financially interested in any contract with the Government, and, hence, is unconstitutional, as well as null and void ab initio, for the construction of the projected feeder roads in question with public funds would greatly enhance or increase the value of the aforementioned subdivision of respondent Zulueta, "aside from relieving him from the burden of constructing his subdivision streets or roads at his own expense"; that the construction of said projected feeder roads was then being undertaken by the Bureau of Public Highways; and that, unless restrained by the court, the respondents would continue to execute, comply with, follow and implement the aforementioned illegal provision of law, "to the irreparable damage, detriment and prejudice not only to the petitioner but to the Filipino nation."Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and void; that the alleged deed of donation of the feeder roads in question be "declared unconstitutional and, therefore, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works and Communications, the Director of the Bureau of Public Works, the Commissioner of the Bureau of Public Highways and Jose C. Zulueta from ordering or allowing the continuance of the above-mentioned feeder roads project, and from making and securing any new and further releases on the aforementioned item of Republic Act No. 926 and the disbursing officers of the Department of Public Works and Communications, the Bureau of Public Works and the Bureau of Public Highways from making any further payments out of said funds provided for in Republic Act No. 920; and that pending final hearing on the merits, a writ of preliminary injunction be issued enjoining the aforementioned parties respondent from making and securing any new and further releases on the aforesaid item of Republic Act No. 920 and from making any further payments out of said illegally appropriated funds.Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to sue", and that the petition did "not state a cause of action". In support to this motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent the Province Administrative Code; that said respondent "not aware of any law which makes illegal the appropriation of public funds for the improvement of . . . private proper"; and that, the constitutional provision invoked by petitioner inapplicable to the donation in question, the same being a pure act of liberality, not a contract. The other respondents, in turn, maintained that petitioner could not assail the appropriation in question because "there is no actual bona fide case . . . in which the validity of Republic Act No. 920 is necessarily involved and petitioner "has not shown that he has a personal and substantial interest" in said Act "and that its enforcement has caused or will cause him a direct injury".Acting upon said motion to dismiss, the lower court rendered the aforementioned decision, dated October 29, 1953, holding that, since public interest is involved in this case, the Provincial Governor of Rizal and the provincial fiscal thereof who represents him therein, "have the requisite personalities" to question the constitutionality of the disputed item of Republic Act No. 920; that "the legislature is without power to appropriate public revenues for anything but a public purpose", that the construction and improvement of the feeder roads in question, if such roads were private property, would not be a public purpose; that, being subject to the following condition:"The within donation is hereby made upon the condition that the Government of the Republic of the Philippines will use the parcels of land hereby donated for street purposes only and for no other purposes whatsoever; it being expressly understood that should the Government of the Republic of the Philippines violate the condition hereby imposed upon it, the title to the land hereby donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C. ZULUETA." which is onerous, the donation in question is a contract; that said donation or contract is "absolutely forbidden by the Constitution" and consequently illegal", for Article 1409 of the Civil Code of the Philippines, declares in existent and void from the very beginning contracts "whose cause, object or purpose is contrary to law, morals . . . or public policy"; that the legality of said donation may not be contested, however, by petitioner herein, because his "interests are not directly affected" thereby; and that, accordingly, the appropriation in question "should be upheld" and the case dismissed.At the outset, it should be noted that we are concerned with a decision granting the aforementioned motions to dismiss, which as such, are deemed to have admitted hypothetically the allegations of fact made in the petition of appellant herein. According to said petition, respondent Zulueta is the owner of several parcels of residential land, situated in Pasig Rizal, and known as the Antonio Subdivision, certain portions of which had been reserved for the projected feeder roads aforementioned, which, admittedly, were private property of said respondent when Republic Act No. 920, appropriating P85,000.00 for the "construction, reconstruction, repair, extension and improvement" of said roads, was passed by Congress, as well as when it was approved by the President on June 20, 1953. The petition further alleges that the construction of said feeder roads, to be undertaken with the aforementioned appropriation of P85,000.00, would have the effect of relieving respondent Zulueta of th