D. International Comity

Property of a foreign State of government may not be taxed by another.

This is based on the following— o Sovereign equality among states by virtue of which

one state cannot exercise its sovereign powers over another

o Usage among states

o Foreign government may not be sued without its consent. Note that what is important is the property and not the owner.

Art. XI, Section 2

o The President, the Vice-President, the Members of the Supreme Court, the Members of the Constitutional Commissions, and the Ombudsman may be removed from office on impeachment for, and conviction of, culpable violation of the Constitution, treason, bribery, graft and corruption, other high crimes, or betrayal of public trust. All other public officers and employees may be removed from office as provided by law, but not by impeachment.

Tanada vs. Angara

On April 15, 1994, the Philippine Government represented by its Secretary of the Department of Trade and Industry signed the Final Act binding the Philippine Government to submit to its respective competent authorities the WTO (World Trade Organization) Agreements to seek approval for such. On December 14, 1994, Resolution No. 97 was adopted by the Philippine Senate to ratify the WTO Agreement.

This is a petition assailing the constitutionality of the WTO agreement as it violates Sec 19, Article II, providing for the development of a self reliant and independent national economy, and Sections 10 and 12, Article XII, providing for the “Filipino first” policy.

Issue: Whether or not the Resolution No. 97 ratifying the WTO Agreement is unconstitutional

Ruling: The Supreme Court ruled the Resolution No. 97 is not unconstitutional. While the constitution mandates a bias in favor of Filipino goods, services, labor and enterprises, at the same time, it recognizes the need for business exchange with the rest of the world on the bases of equality and reciprocity and limits protection of Filipino interests only against foreign competition and trade practices that are unfair. In other words, the Constitution did not intend to pursue an isolationalist policy. Furthermore, the constitutional policy of a “self-reliant and independent national economy” does not necessarily rule out the entry of foreign investments, goods and services. It contemplates neither “economic seclusion” nor “mendicancy in the international community.”

The Senate, after deliberation and voting, gave its consent to the WTO Agreement thereby making it “a part of the law of the land”. The Supreme Court gave due respect to an equal department in government. It presumes its actions as regular and done in good faith unless there is convincing proof and persuasive agreements to the contrary. As a result, the ratification of the WTO Agreement limits or restricts the absoluteness of sovereignty. A treaty engagement is not a mere obligation but creates a legally binding obligation on the parties. A state which has contracted valid international obligations is bound to make its legislations such modifications as may be necessary to ensure the fulfillment of the obligations undertaken.

MITSUBISHI CORPORATION - MANILA BRANCH vs. COMMISSIONER OFINTERNAL REVENUE,

Facts: Petitioner is the Philippine Branch of Mitsubishi Corporation, a corporation duly organized and existing under the laws of Japan. Through an Exchange of Notes between the Government of Japan and the Government of the Philippines, it was agreed that a loan amounting to Forty Billion Four Hundred Million Japanese Yen (Y40,400,000,000) will be extended to the Republic of the Philippines by the then Overseas Economic Cooperation Fund. The Government of the Republic of the Philippines, will, itself or through its instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and /or in connection with any income that may accrue from the supply of products of Japan and services of Japanese nationals to be provided under the Loan.

On June 21, 1991, the National Power Corporation (hereinafter, "NPC") and Mitsubishi Corporation, petitioner's head office in Japan, entered into a

contract for the engineering, supply, construction, installation, testing and commissioning of one (1) x300 MW Batangas Coal-Fired Thermal Power Project II at Calaca, Batangas. The Calaca II Project was completed by the petitioner on December 2, 1995 but was only accepted by NPC on January 31, 1998.On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year ended March 31, 1998 with the Bureau of Internal In the return, petitioner (being the Manila Branch of Mitsubishi Corporation) reported an income tax due of P90,481,711.00.

On September 7, 1998, the respondent issued Bureau of Internal Revenue Ruling No. DA-407-98 (Exhibit K) where it held that "Mitsubishi has no liability for income tax and other taxes and fiscal levies since the said taxes were assumed by the Philippine Government."On June 30, 2000, petitioner filed an administrative claim for refund and/or tax credit with respondent in the amount of P52,612,812.00, representing its erroneously paid income taxes in the amount of P44,288,712 and erroneously paid branch profit remittance tax in the amount of P8,324,100.00 corresponding to the OECF-funded portion of its Calaca II Project. On July 13, 2000, petitioner, in order to suspend the running of the two-year period within which to file a judicial claim for refund, filed the instant petition for review pursuant to Section 229 of the Tax Code.

ISSUE: Whether or not Mitsubishi is entitled to tax refunds.

Ruling: YES. There was an erroneous payment of the subject taxes by petitioner for the reason that said taxes are to be assumed by the Government of the Philippines through its executing agency, the NPC. As defined in Black's Law Dictionary, 6th Edition, the word "assume" means "to take on, become bound, or put oneself in place of another as to an obligation or liability". As can be gleaned from the definition, the Government of the Philippines, through NPC, binds itself to shoulder the tax obligations and liabilities of petitioner. Therefore, the income tax and BPRT payments made by petitioner to respondent when such payments should have been made by the NPC, undoubtedly, put petitioner's case in the operation of Section 229 of the Tax Code as one involving erroneous payment. A careful reading of the provisions of the Exchange of Notes will show that it is the intention of the two governments not to use the proceeds of the loan in the payment of all fiscal levies or taxes imposed by the Philippines. In view thereof, we believe that to deny petitioner's claim for refund would violate the covenant that the funded amount should not be subject to any taxes.

E. Exemption of Government Entities, Agencies and Instrumentalities

Sec. 27(C), NIRC - Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity.

Sec. 30, NIRC - The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws.

EO 93 (Dec. 1986) - POWERS OF THE FISCAL INCENTIVES REVIEW BOARD AND FOR OTHER PURPOSES

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment of government and private entities with certain exceptions, in order that the requirements of national economic development, in terms of fiscal and other resources, may be met more adequately;

WHEREAS, both issuances provided for a review by the Fiscal Incentives Review Board (FIRB) of petitions initiated by affected entities for restoration of withdrawn tax and duty exemption privileges either on a total or partial basis;

WHEREAS, a number of affected entities, government and private were able to get back their tax and duty exemption privileges through the review mechanism implemented by the Fiscal Incentives Review Board (FIRB);

WHEREAS, in addition to those whose tax and duty exemption privileges were restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and private, had their tax and duty exemption privileges restored granted by Presidential action without benefit of review by the Fiscal Incentives Review Board (FIRB);

WHEREAS, the continued enjoyment of these tax and duty exemption privileges has resulted in serious tax base erosion and considerable distortions in the tax treatment of similarly situated entities;

WHEREAS, these privileges have become convenient opportunities for tax manipulation or avoidance, especially in case of interrelated entities;

WHEREAS, the availability of such privileges makes more difficult the attainment of the overall program for national economic development, considering government's fiscal exigencies;

WHEREAS, private entities whose tax and duty exemption privileges are to be withdrawn may still remain competitive by improving on their operational specialty and competence, rather than by relying on fiscal incentives which create distortions in the overall pricing and market systems;

WHEREAS, assistance to government and private entities may be better provided where necessary by explicit subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the fiscal monitoring aspects of government operations;

NOW, THEREFORE, I, CORAZON C. AQUINO, President of the Philippines, do hereby order:

Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective international agreements to which the Government of the Republic of the Philippines is a signatory;

c) those enjoyed by enterprises registered with:

(i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended;

(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended;

(iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, as amended;

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and average of tax and/or duty exemption that may be restored;

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption;

e) formulate and submit to the President for approval, a complete system for the grant of subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions or preferential treatment in taxation, indicating the source of therefore, eligible beneficiaries and the terms and conditions for the grant thereof taking into consideration the international commitments of the Philippines and the necessary precautions such that the grant of subsidies does not become the basis for countervailing action.

Sec. 3. In the discharge of its authority hereunder the Fiscal Incentives Review Board shall take into account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged; and

d) in general, the greater national interest to be served.

Sec. 4. The Ministry of Finance shall promulgate the necessary rules and regulations and shall establish and maintain a Secretariat for the Fiscal Incentives Review Board to effectively implement the provisions of this Executive Order.

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this Executive Order are hereby repealed or modified accordingly.

Sec. 6. This Executive Order shall take effect upon the promulgation of the rules and regulations stated in Section 4.

Done in the City of Manila, this 17th day of December in the year of Our Lord, nineteen hundred and eighty-six.

PD 1931 - POWERS OF THE FISCAL INCENTIVES REVIEW BOARD AND FOR OTHER PURPOSES

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment of government and private entities with certain exceptions, in order that the requirements of national economic development, in terms of fiscal and other resources, may be met more adequately;

WHEREAS, both issuances provided for a review by the Fiscal Incentives Review Board (FIRB) of petitions initiated by affected entities for restoration of withdrawn tax and duty exemption privileges either on a total or partial basis;

WHEREAS, a number of affected entities, government and private were able to get back their tax and duty exemption privileges through the review mechanism implemented by the Fiscal Incentives Review Board (FIRB);

WHEREAS, in addition to those whose tax and duty exemption privileges were restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and private, had their tax and duty exemption privileges restored granted by Presidential action without benefit of review by the Fiscal Incentives Review Board (FIRB);

WHEREAS, the continued enjoyment of these tax and duty exemption privileges has resulted in serious tax base erosion and considerable distortions in the tax treatment of similarly situated entities;

WHEREAS, these privileges have become convenient opportunities for tax manipulation or avoidance, especially in case of interrelated entities;

WHEREAS, the availability of such privileges makes more difficult the attainment of the overall program for national economic development, considering government's fiscal exigencies;

WHEREAS, private entities whose tax and duty exemption privileges are to be withdrawn may still remain competitive by improving on their operational specialty and competence, rather than by relying on fiscal incentives which create distortions in the overall pricing and market systems;

WHEREAS, assistance to government and private entities may be better provided where necessary by explicit subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the fiscal monitoring aspects of government operations;

NOW, THEREFORE, I, CORAZON C. AQUINO, President of the Philippines, do hereby order:

Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective international agreements to which the Government of the Republic of the Philippines is a signatory;

c) those enjoyed by enterprises registered with:

(i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended;

(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended;

(iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, as amended;

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and average of tax and/or duty exemption that may be restored;

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption;

e) formulate and submit to the President for approval, a complete system for the grant of subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions or preferential treatment in taxation, indicating the source of therefore, eligible beneficiaries and the terms and conditions for the grant thereof taking into consideration the international commitments of the Philippines and the necessary precautions such that the grant of subsidies does not become the basis for countervailing action.

Sec. 3. In the discharge of its authority hereunder the Fiscal Incentives Review Board shall take into account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged; and

d) in general, the greater national interest to be served.

Sec. 4. The Ministry of Finance shall promulgate the necessary rules and regulations and shall establish and maintain a Secretariat for the Fiscal Incentives Review Board to effectively implement the provisions of this Executive Order.

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this Executive Order are hereby repealed or modified accordingly.

Sec. 6. This Executive Order shall take effect upon the promulgation of the rules and regulations stated in Section 4.

Done in the City of Manila, this 17th day of December in the year of Our Lord, nineteen hundred and eighty-six.

Ernesto M. Maceda, vs. Hon. Catalino Macaraig, Jr.,

Commonwealth Act 120 created NAPOCOR as a public corporation to undertake the development of hydraulic power and the production of power from other sources. RA 358 (1949) granted NAPOCOR tax and duty exemption privileges. RA 6395 (1971) revised the charter of the NAPOCOR, tasking it to carry out the policy of the national electrification, and provided in detail NAPOCOR’s tax exceptions.

PD 380 (1974) specified that NAPOCOR’s exemption includes all taxes, etc. imposed ―directly or indirectly. PD 938 integrated the exemptions in favor of GOCCs including their subsidiaries; however, empowering the President or the Minister of Finance, upon recommendation of the Fiscal Incentives Review Board (FIRB) to restore, partially or completely, the exemptions withdrawn or revised. The FIRB issued Resolution10-85 (7 February 1985) restoring the duty and tax exemptions privileges of NAPOCOR for period 11 June 1984- 30 June 1985. Resolution 1-86 (1 January 1986) restored such exemption indefinitely effective 1 July 1985. EO 93 (1987) again withdrew the exemption. FIRB issued Resolution 17-87 (24 June 1987) restoring NAPOCOR’s exemption, which was approved by the President on 5 October 1987.

Since 1976, oil firms never paid excise or specific and ad valorem taxes for petroleum products sold and delivered to NAPOCOR. Oil companies started to pay specific and ad valorem taxes on their sales of oil products to NAPOCOR only in 1984. NAPOCOR claimed for a refund (P468.58 million). Only portion thereof, corresponding to Caltex, was approved and released by way of a tax credit memo. The claim for refund of taxes paid by Petro Phil, Shell and Caltex amounting to P410.58million was denied. NAPOCOR moved for reconsideration, starting that all deliveries of petroleum products to NAPOCOR are tax exempt, regardless of the period of delivery.

ISSUE: Whether or not NPC is exempted from paying indirect tax.

Ruling: The NPC is exempted to pay indirect taxes. The court distinguish direct tax from indirect tax.

a. Direct Tax — that where the person supposed to pay the tax really paysit. WITHOUT transferring the burden to someone else.

b. Indirect Tax — that where the tax is imposed upon goods

BEFORE reaching the consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.

The main thrust of the petition is that under the latest amendment to the NPC charter by Presidential Decree No. 938, the exemption of NPC from indirect taxation was revoked and repealed. The exemption of NPC from payment of taxes under PD 938 was expressed in general term ―ALL FORMS OF TAXES. Wherein there is a deletion of the phrases "directly or indirectly" which is stated under Presidential Decree No. 380 that is repealed and amended by PD 938.The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit public corporation created for the general good and welfare wholly owned by the government of the Republic of the Philippines the NPC "shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion to enable the Corporation to pay the indebtedness and obligations amounting to P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total foreign loans at any one time, as of PD 938. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved.

Mactan Cebu International Airport Authority vs. Marcos

Petitioner was created by virtue of RA6958, mandated to "principally

undertake the economical, efficient and effective control, management and

supervision of the Mactan International Airport in the Province of Cebu and

the Lahug Airport in Cebu City.

Under Section 1: The authority shall be exempt from realty taxes imposed by

the National Government or any of its political subdivisions, agencies and

instrumentalities.

However, the Officer of the Treasurer of Cebu City demanded payment for

realty taxes on parcels of land belonging to petitioner. Petitioner objected

invoking its tax exemption. It also asserted that it is an instrumentality of the

government performing governmental functions, citing section 133 of the

Local Government Code which puts limitations on the taxing powers of

LGUs. The city refused insisting that petitioner is a Government Owned and

Controlled Corporation performing proprietary functions whose tax exemption

was withdrawn by Sections 193 and 234 of the Local Government Code.

Petitioner filed a declaratory relief before the Regional Trial Court. The trial

court dismissed the petitioner ruling that the Local Government Code

withdrew the tax exemption granted the Government Owned and Controlled

Corporations.

Issue: WON the City of Cebu has the power to impose taxes on petitioner.

RULING: Yes. As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. Since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor of the taxing authority.

A claim of exemption from tax payment must be clearly shown and based on language in the law too plain to be mistaken. There can be no question that under Section 14 RA 6958 the petitioner is exempt from the payment of realty taxes imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption is the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority.

The Local Government Code, enacted pursuant to Section 3, Article X of the Constitution provides for the exercise by Local Government Units of their power to tax, the scope thereof or its limitations, and the exemption from taxation. Section 133 of the Local Government Code prescribes the common limitations on the taxing powers of Local Government Units. As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including government-owned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to local water districts, cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer to Section 234, which enumerates the properties exempt from real property tax.

But the last paragraph of Section 234 further qualifies the retention of the exemption in so far as the real property taxes are concerned by limiting the retention only to those enumerated there-in; all others not included in the enumeration lost the privilege upon the effectivity of the LGC.

BIR Ruling No. 013-2004

3. CONSTITUTIONAL LIMITATIONS

1. Provisions directly affecting taxation a. Prohibition against imprisonment for non-payment of

poll tax i. Section 20, Art. III, 1987 Constitution. No

person shall be imprisoned for debt or non-payment of a poll tax.

ii. Can still be made to pay fines and penalties for non-payment.

iii. Taxpayer may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides.

b. Uniformity and Equality of Taxation i. Uniform: all articles or properties of the

same class taxed at the same rate ii. Equity: apportionment must be more or less

just iii. The equal protection clause refers more to

like treatment in like circumstances iv. The uniformity and equity clause refers to

the proper relative treatment for tax purposes of persons in unlike circumstances

v. Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere, with all people and at all times. Taxes are uniform when it operates with the same form and effect in every place where the subject of it is found.

vi. The constitution requires that taxes should be UNIFORM, NOT EQUAL. The imposition of a single tax on persons, properties or transactions would result in inequality. Equality is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon those similarly situated or of like character.

vii. Uniformity requires that all taxable property shall be alike subjected to tax. This is violated if particular kinds, species, or items of property are selected to bear the whole burden of the tax, while others which should be equally subject to it are left untaxed.

Pepsi Cola vs Butuan

Facts: Ordinance 110 was enacted by the City of Butuan imposing a tax of P0.10 per case of 24 bottles of softdrinks or carbonated drinks. The tax was imposed upon dealers engaged in selling softdrinks or carbonated drinks. When Ordinance 110, the tax was imposed upon an agent or consignee of any person, association, partnership, company or corporation engaged in selling softdrinks or carbonated drinks, with “agent or consignee” being particularly defined on the inserted provision Section 3-A. In effect, merchants engaged in the sale of softdrinks, etc. are not subject to the tax unless they are agents or consignees of another dealer who must be one engaged in business outside the City. Pepsi-Cola Bottling Co. filed suit to

recover sums paid by it to the city pursuant to the Ordinance, which it claims to be null and void.

Issue: Whether the Ordinance is discriminatory.

Held: The Ordinance, as amended, is discriminatory since only sales by “agents or consignees” of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales, and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the city, would be exempt from the tax. The classification made in the exercise of the authority to tax, to be valid must be reasonable, which would be satisfied if the classification is based upon substantial distinctions which makes real differences; these are germane to the purpose of legislation or ordinance; the classification applies not only to present conditions but also to future conditions substantially identical to those of the present; and the classification applies equally to all those who belong to the same class. These conditions are not fully met by the ordinance in question.

Manila Racehorse vs. Dela Fuente

First, it is maintained that the ordinance under consideration is a tax on race horses as distinct from boarding stables. It is argued that by section 2 the basis of the license fees "is the number of race horses kept or maintained in the boarding stables to be paid by the maintainers at the rate of P10.00 a year for each race horse;" that "the fee is increased correspondingly P10 for each additional race horse maintained or fed in the stable;" and that "by the same token, an empty stable for race horse pays no license fee at all."

HELD: The spirit, rather than the letter, of an ordinance determines the construction thereof, and the court looks less to its words and more to the context, subject matter, consequence and effect. Accordingly, what is within the spirit is within the ordinance although it is not within the letter thereof, while that which is in the letter, although not within the spirit, is not within the ordinance. (62 C. J. S., 845.)

From the context of Ordinance No. 3065, the intent to tax or license stables and not horses is clearly manifest. The tax is assessed not on the owners of the horses but on the owners of the stables, as counsel admit in their brief, although there is nothing, of course, to stop stable owners from shifting the tax to the horse owners in the form of increased rents or fees, which is generally the case.

It is also plain from the text of the whole ordinance that the number of horses is used in the assessment purely as a method of fixing an equitable and practical distribution of the burden imposed by the measure. Far from being obnoxious, the method is fair and just. It is but fair and just that for a boarding stable where only one horse is maintained proportionately less amount should be exacted than for a stable where more horses are kept and from which greater income is derived.

We do not share plaintiff's opinion, apropos the second proposition, that the ordinance in question is discriminatory and savors of class legislation. In taxing only boarding stables for race horses, we do not believe that the ordinance, makes arbitrary classification. In the case of Eastern Theatrical Co. Inc., vs. Alfonso, 46 Off. Gaz. Supp. to No. 11, p. 303,* it was said there is equality and uniformity in taxation if all articles or kinds of property of the same class are taxed at the same rate. Thus, it was held in that case, that "the fact that some places of amusement are not taxed while others, such as cinematographs, theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other kinds of amusements or places of amusement are taxed, is not argument at all against the equality and uniformity of tax imposition."

Applying this criterion to the present case, there would be discrimination if some boarding stables of the same class used for the same number of horses were not taxed or were made to pay less or more than others. From the viewpoint of economics and public policy the taxing of boarding stables for race horses to the exclusion of boarding stables for horses dedicated to other purposes is not indefensible. The owners of boarding stables for race horses and, for that matter, the race horse owners themselves, who in the scheme of shifting may carry the taxation burden, are a class by themselves and appropriately taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in taxation is generally conceived in terms of ability to pay in relation to the benefits received by the taxpayer and by the public from the business or property taxed.

Race horses are devoted to gambling if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision. Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution.

Sison vs. Ancheta

On the issue of uniformity, this is met when it operates with the same force and effect in every place where the subject may be found. The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable. 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. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation.

Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it is enough that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them.

Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

Tolentino vs. Secretary of Finance

This is a case concerning the unconstitutionality of the Expanded VAT Law. There were alleged violations of the due process, equal protection and contract clauses and the rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

HELD: Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra).

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original VAT Law was questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383

(1988) on grounds similar to those made in these cases, namely, that the law was "oppressive, discriminatory, unjust and regressive in violation of Art. VI, 28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public.

(The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the mandate of Congress to provide for a progressive system of taxation because the law imposes a flat rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to pay. The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress is

not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII, 17(1) of the 1973 Constitution from which the present Art. VI, 28(1) was taken.

Sales taxes are also regressive. Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4, amending 103 of the NIRC). Thus, the following transactions involving basic and essential goods and services are exempted from the VAT:

(a) Goods for consumption or use which are in their original state (agricultural, marine and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance agriculture (milling of palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of citizens returning to the Philippines) and or professional use, like professional instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of petroleum products subject to excise tax and services subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself. (f) Transactions exempted under special laws, or international

agreements. (g) Export-sales by persons not VAT-registered. (h) Goods or services with gross annual sale or receipt not exceeding

P500,000.00.

On the other hand, the transactions which are subject to the VAT are those which involve goods and services which are used or availed of mainly by higher income groups. These include real properties held primarily for sale to customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, copyright, and other similar property or right, the right or privilege to use industrial, commercial or scientific equipment, motion picture films, tapes and discs, radio, television, satellite transmission and cable television time, hotels, restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services of franchise grantees of telephone and telegraph. The problem with CREBA's petition is that it presents broad claims of constitutional violations by tendering issues not at retail but at wholesale and in the abstract. There is no fully developed record which can impart to adjudication the impact of actuality. There is no factual foundation to show in the concrete the application of the law to actual contracts and exemplify its effect on property rights. For the fact is that petitioner's members have not even been assessed the VAT. Petitioner's case is not made concrete by a series of hypothetical questions asked which are no different from those dealt with in advisory opinions. The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here, does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void on its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.

Adjudication of these broad claims must await the development of a concrete case. It may be that postponement of adjudication would result in a multiplicity of suits. This need not be the case, however. Enforcement of the law may give rise to such a case. A test case, provided it is an actual case and not an abstract or hypothetical one, may thus be presented. Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.

F. Grant by Congress of Authority of the President to impose Tariff Rates

Includes import and export quotas, tonnage and wharfage dues aside from tariff rates

Delegated by Congress; Through a law; the Tariff and Customs

Code has provided for what has been� termed as � the flexible

tariff � clause� authorizing the President to modify import duties

[Sec. 401, TCC]

Subject to Congressional limits and restrictions within the framework of national development Program.

Lladoc vs. CIR

Facts: In 1957, the MB Estate Inc. of Bacolod City donated P10,000 in cash to the parish priest of Victorias, Negros Occidental; the amount spent for the construction of a new Catholic Church in the locality as intended. In 1958, MB Estate filed the donor’s gift tax return. In 1960, the Commissioner issued an assessment for donee’s gift tax against the parish. The priest lodged a protest to the assessment and requested the withdrawal thereof.

Issue: Whether the Catholic Parish is tax exempt.

Held: The phrase “exempt from taxation” should not be interpreted to mean exemption from all kinds of taxes. The exemption is only from the payment of taxes assessed on such properties as property taxes as contradistinguished from excise taxes. A donee’s gift tax is not a property tax but an excise tax imposed on the transfer of property by way of gift inter vivos. It does not rest upon general ownership, but an excise upon the use made of the properties, upon the exercise of the privilege of receiving the properties. The imposition of such excise tax on property used for religious purpose does not constitute an impairment of the Constitution. The tax exemption of the parish, thus, does not extend to excise taxes.

Abra vs Hernando

Facts: The provincial assessor made a tax assessment on the properties of the Roman Catholic Bishop of Bangued. The bishop claims tax exemption from real estate tax, through an action for declaratory relief. A summary judgment was made granting the exemption without hearing the side of the Province of Abra.

Issue: Whether the properties of the Bishop of Bangued are tax-exempt.

Held: The 1935 and the 1973 Constitutions differ in language as to the exemption of religious property from taxes as they should not only be “exclusively” but also “actually” and “directly” used for religious purposes. Herein, the judge accepted at its face the allegation of the Bishop instead of demonstrating that there is compliance with the constitutional provision that allows an exemption. There was an allegation of lack of jurisdiction and of lack of cause of action, which should have compelled the judge to accord a hearing to the province rather than deciding the case immediately in favor of the Bishop. Exemption from taxation is not favored and is never presumed, so that if granted, it must be strictly construed against the taxpayer. There must be proof of the actual and direct use of the lands, buildings, and improvements for religious (or charitable) purposes to be exempted from taxation. The case was remanded to the lower court for a trial on merits.

Abra Valley College vs Aquino

Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange Commission in 1948, filed a complaint to annul and declare void the “Notice of Seizure’ and the “Notice of Sale” of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said “Notice of Seizure” by respondents Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon.

The parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned decision. The trial court ruled for the government, holding that the second floor of the building is being used by the director for residential purposes and that the ground floor used and rented by Northern Marketing Corporation, a commercial establishment, and thus the property is not being used exclusively for educational purposes. Instead of perfecting an appeal, petitioner availed of the instant petition for review on certiorari with prayer for preliminary injunction before the Supreme Court, by filing said petition on 17 August 1974.

Issue: Whether or not the lot and building are used exclusively for educational purposes

Held: Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, expressly grants exemption from realty taxes for cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or educational purposes. Reasonable emphasis has always been made that the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. The use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. In the case at bar, the lease of the first floor of the building to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution.

The decision of the CFI Abra (Branch I) is affirmed subject to the modification that half of the assessed tax be returned to the petitioner. The modification is derived from the fact that the ground floor is being used for commercial purposes (leased) and the second floor being used as incidental to education (residence of the director).

G. Prohibition against taxation of non-stock, non-profit educational institutes

Exempts from taxes all revenues and assets of nonstock, non-profit educational institutions used ACTUALLY, DIRECTLY AND EXCLUSIVELY for educational purposes.

Income exempt provided it is used for maintenance or improvement of institution (indispensable or essential).

The exemption is strictly personal, thus it is non-transferrable.

It must be distinguished from tax treatments of proprietary educational institutions (Preferential Tax: 10%)

Government educational institutions, such as University of the Philippines, are exempt.

Sec. 4(3) Art. XIV (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 the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Sec. 28(3)Art. VI - 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.

DOF Order 137-87

DOF Order 149-95

BIR RMC No. 76-2003

BIR RMC No. 49-95

BIR Revenue Regulations No. 13-98

H. Majority Vote of Congress for Grant of Tax Exemption

No law granting any tax exemption shall be passed without the

concurrence of a majority of all members of the Congress. (Sec.

28(4), Art. VI)

However, in cases of withdrawal of tax exemptions, a majority

vote is sufficient.

Tax amnesties, tax condonations and tax refunds are in the

nature of tax exemptions, thus the law granting such requires the

absolute majority of vote of Members of the Congress.

A constitutional grant of exemption may either be self-executing

or may require an act of Congress.

o If it is constitutional, Congress may only prescribe a

procedure to determine whether or not the claimant is

entitled to the constitutional exemption.

If the Congress shall be the one to grant exemptions, it must be

within constitutional limits.

Tolentino v. Secretary of Finance

Facts: The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. RA 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. There are various suits challenging the constitutionality of RA 7716 on various grounds.

One contention is that RA 7716 did not originate exclusively in the House of Representatives as required by Art. VI, Sec. 24 of the Constitution, because it is in fact the result of the consolidation of 2 distinct bills, H. No. 11197 and S. No. 1630. There is also a contention that S. No. 1630 did not pass 3 readings as required by the Constitution.

Issue: Whether or not EVAT originated in the House of Representatives

Held: Yes. The argument that RA 7716 did not originate exclusively in the House of Representatives as required by Art. VI, Sec. 24 of the Constitution will not bear analysis. To begin with, it is not the law but the revenue bill which is required by the Constitution to originate exclusively in the House of Representatives. To insist that a revenue statute and not only the bill which initiated the legislative process culminating in the enactment of the law must substantially be the same as the House bill would be to deny the Senate’s power not only to concur with amendments but also to propose amendments. Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt,

private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House bill.

The next argument of the petitioners was that S. No. 1630 did not pass 3 readings on separate days as required by the Constitution because the second and third readings were done on the same day. But this was because the President had certified S. No. 1630 as urgent. The presidential certification dispensed with the requirement not only of printing but also that of reading the bill on separate days. That upon the certification of a bill by the President the requirement of 3 readings on separate days and of printing and distribution can be dispensed with is supported by the weight of legislative practice.

I. Prohibition on Use of Tax Levied for a special purpose

Sec. 29(3), Art VI provides that “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 Government.”

Revenues derived for a special fund shall be administered for the

purpose intended only.

J. President’s Veto Power on Appropriation, Revue, and Tariff Bills

The president shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill but the veto shall not affect the item(s) to which he does not object. (Sec 27(2), Art VI)

K. Non-impairment of SC jurisdiction

The Supreme Court has the power to review, revise, reverse, modify or affirm, on appeal or certiorari, 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.

L. The grant of power to local government units to create its own sources of revenue

Sec. 5, Art. X provides that “each local government unit shall have the power to create its own sources 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 government.

M. Flexible Tariff Clause

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 development program of the Government.

N. Exemption from Real Property Taxes

Charitable institutions, churches and personages 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.

O. No appropriation or use of public money for religious purposes

Section 5. No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.

American Bible Society vs. City of Manila

Facts: American Bible Society is a foreign, non-stock, non-profit, religious, missionary corporation duly registered and doing business in the Philippines through its Philippine agency established in Manila in November, 1898. City of Manila is a municipal corporation with powers that are to be exercised in conformity with the provisions of Republic Act No. 409, known as the Revised Charter of the City of Manila.

American Bible Society has been distributing and selling bibles and/or gospel portions throughout the Philippines and translating the same into several Philippine dialect. City Treasurer of Manila informed American Bible Society that it was violating several Ordinances for operating without the necessary permit and license, thereby requiring the corporation to secure the permit and license fees covering the period from 4Q 1945-2Q 1953

To avoid closing of its business, American Bible Society paid the City of Manila its permit and license fees under protest. American Bible filed a complaint, questioning the constitutionality and legality of the Ordinances 2529 and 3000, and prayed for a refund of the payment made to the City of Manila.

Issue: WON American Bible Society liable to pay sales tax for the distribution and sale of bibles

Ruling: NO. Under Sec. 1 of Ordinance 3000, one of the ordinance in question, person or entity engaged in any of the business, trades or occupation enumerated under Sec. 3 must obtain a Mayor’s permit and license from the City Treasurer. American Bible Society’s business is not among those enumerated. However, item 79 of Sec. 3 of the Ordinance provides that all other businesses, trade or occupation not mentioned, except those upon which the City is not empowered to license or to tax P5.00. Therefore, the necessity of the permit is made to depend upon the power of the City to license or tax said business, trade or occupation.

a. Chapter 60 of the Revised Administrative Code, the Municipal Board of the City of Manila is empowered to tax and fix the license fees on retail dealers engaged in the sale of books

b. Sec. 18(o) of RA 409: to tax and fix the license fee on dealers in general merchandise, including importers and indentors, except those dealers who may be expressly subject to the payment of some other municipal tax. Further, Dealers in general merchandise shall be classified as (a) wholesale dealers and (b) retail dealers. For purposes of the tax on retail dealers, general merchandise shall be classified into four main classes: namely (1) luxury articles, (2) semi-luxury articles, (3) essential commodities, and (4) miscellaneous articles. A separate license shall be prescribed for each class but where commodities of different classes are sold in the same establishment, it shall not be compulsory for the owner to secure more than one license if he pays the higher or highest rate of tax prescribed by ordinance. Wholesale dealers shall pay the license tax as such, as may be provided by ordinance

The only difference between the 2 provisions is the limitation as to the amount of tax or license fee that a retail dealer has to pay per annum

Under Sec. 27(e) of Commonwealth Act No. 466 or the National Internal Revenue Code, Corporations or associations organized and operated exclusively for religious, charitable, . . . or educational purposes, . . .: Provided, however, That the income of whatever kind and character from any of its properties, real or personal, or from any activity conducted for profit, regardless of the disposition made of such income, shall be liable to the tax imposed under this Code shall not be taxed

The price asked for the bibles and other religious pamphlets was in some instances a little bit higher than the actual cost of the same but this cannot mean that American Bible Society was engaged in the business or occupation of selling said "merchandise" for profit. Therefore, the Ordinance cannot be applied for in doing so it would impair American Bible Society’s free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs.

Provisions Indirectly Affecting Taxation

1. Due Process

Section 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.

Commissioner of Customs vs CTA and Campos Rueda

Campos Rueda imported 46 cartons or 27,000 pieces of Tungsol flashers. Before the goods arrived at the port of Manila, Campos Rueda filed with the Collector of Customs of Manila a request for value information for the declaration of the imported flashers under Tariff Heading No. 85.09 of the Tariff and Customs Code at 30% ad valorem duty, for classification purpose. The Customs appraiser however, re-classified the goods under Tariff Heading No. 85.19 of the Tariff and Customs Code at 50% ad valorem.

When the goods arrived at the port of Manila, Campos Rueda immediately filed a Customs Import Entry and Internal Revenue Declaration under Tariff Heading No. 85.19 of the Tariff and Customs Code at 50% ad valorem but, under protest and paid duties and taxes on the goods, also under protest. It

then filed a timely protest against the reclassification resulting in the payment of additional customs duty and advance sales tax and prayed for the refund of the said.

The Collector of Customs dismissed the protest. Campos Rueda appealed to the Commissioner but was denied, and then appealed to CTA which modified the Commissioner’s decision by ordering the refund to Campos Rueda of the sum of the additional customs duty but not the advance sales tax. The Commissioner now appeals via petition for review the said decision.

Issue: W/N Campos Rueda should pay 30% or 50% ad valorem duty

Held: 30%. TH No 85.09 of the Tariff and Customs Code provides:

85.09. Electrical lighting and signalling equipment and electrical windscreen wipers, defrosters and demisters, for cycles or motor vehicles ad val. 30%.

On the other hand, the same Code provides under TH No. 85.19:

85.19. Electrical apparatus for making and breaking electrical circuits, for the protection of electrical circuits, or for making connections to or in electric circuits (for example, switches, relays, fuses, lighting arresters, surge suppressors, plugs, lamp-holders and junction boxes); resistors, fixed or variable (including potentiometers), other than heating resistors, printed circuits, switch boards (other than telephone switchboards) and control panels:

In finding for Campos Rueda, CTA found that it has adduced sufficient evidence to establish the general purpose or predominating use to which flashers are applied, and for which petitioner imported them, is precisely as electrical equipment for signalling purposes for motor vehicles; that is, to signal or indicate a right or left hand turn by means of electrical flashes in front and at the rear of motor vehicles and not merely as electrical apparatus as the Commissioner claims.

It is the predominating use to which articles are generally applied or used that determines their character for the purpose of fixing the duty, and not the specific or special use which any particular importer may make of the articles imported.

Parts of machines, apparatus of appliances which are suitable for use solely or principally with a particular kind of machine or with a number of machines falling within a specific heading, as a rule, are to be classified with the machines in the same heading. Also, the law does not provide that an article imported for electrical lighting and signalling equipment for motor vehicles falling under Tariff Heading No. 85.09, if imported alone, shall be classified under Tariff Heading No. 85.19 as ‘electrical apparatus for making and breaking electrical circuits that provision should not be read into the law per the circular of the former Acting Customs Collector. Petition denied. CTA decision affirmed.

Phil Bank of Commerce vs CIR (No Digest)

Sison vs. Ancheta (Again)

2. Equal Protection

Section 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.

Ormoc Sugar Co. vs Treasurer of Ormoc

In 1964, Ormoc City passed a bill which read: “There shall be paid to the City Treasurer on any and all productions of centrifugal sugar milled at the Ormoc Sugar Company Incorporated, in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the United States of America and other foreign countries.” Though referred to as a “production tax”, the imposition actually amounts to a tax on the export of centrifugal sugar produced at Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the only time the tax applies is when the sugar produced is exported. Ormoc Sugar paid the tax (P7,087.50) in protest averring that the same is violative of Sec 2287 of the Revised Administrative Code which provides: “It shall not be in the power of the municipal council to impose a tax in any form whatever, upon goods and merchandise carried into the municipality, or out of the same, and any attempt to impose an import or export tax upon such goods in the guise of an unreasonable charge for wharfage, use of bridges or otherwise, shall be void.” And that the ordinance is violative to equal protection as it singled out Ormoc Sugar As being liable for such tax impost for no other sugar mill is found in the city.

ISSUE: Whether or not there has been a violation of equal protection.

HELD: The SC held in favor of Ormoc Sugar. The SC noted that even if Sec 2287 of the RAC had already been repealed by a latter statute (Sec 2 RA 2264) which effectively authorized LGUs to tax goods and merchandise carried in and out of their turf, the act of Ormoc City is still violative of equal

protection. The ordinance is discriminatory for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing ordinance’s enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, from the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc Sugar Company, Inc. as the entity to be levied upon.

Villegas vs. Hsui Chiong Tsai Pao

Facts: The Municipal Board of Manila enacted Ordinance 6537 requiring aliens (except those employed in the diplomatic and consular missions of foreign countries, in technical assistance programs of the government and another country, and members of religious orders or congregations) to procure the requisite mayor’s permit so as to be employed or engage in trade in the City of Manila. The permit fee is P50, and the penalty for the violation of the ordinance is 3 to 6 months imprisonment or a fine of P100 to P200, or both.

Issue: Whether the ordinance imposes a regulatory fee or a tax.

Held: The ordinance’s purpose is clearly to raise money under the guise of regulation by exacting P50 from aliens who have been cleared for employment. The amount is unreasonable and excessive because it fails to consider difference in situation among aliens required to pay it, i.e. being casual, permanent, part-time, rank-and-file or executive.

[ The Ordinance was declared invalid as it is arbitrary, oppressive and unreasonable, being applied only to aliens who are thus deprived of their rights to life, liberty and property and therefore violates the due process and equal protection clauses of the Constitution. Further, the ordinance does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion, thus conferring upon the mayor arbitrary and unrestricted powers.

Shell Co. vs Vano

In 1946, the municipal council of Cordova, Cebu issued an ordinance which imposed, among others, an annual tax of P150.00 upon the occupation or the exercise of the privilege of an “installation manager”.

Shell Company assailed the validity of the said ordinance on the ground that it violates the equal protection clause. It appears that only Shell had, at that time, an installation manager. In short, there is only one installation manager in Cordova, Cebu. So Shell felt like the tax ordinance was merely targeting Shell. Shell now wants the Treasurer of Cordova, E.E. Vaño to be enjoined from implementing the law.

ISSUE: Whether or not the tax ordinance is not valid for being violative of the equal protection clause.

HELD: No. The fact that there is no other person or company with a position for an installation manager does not make the ordinance discriminatory. The law is and will be applicable to any person or firm who exercises such calling or occupation named or designated as “installation manager”. In short, the law is applicable to present and future conditions.

Note again the requisites for a valid classification (not mentioned in this particular case but mentioned in other relevant cases):

1. must rest on substantial distinctions; 2. must be germane to the purposes of the law; 3. must not be limited to existing conditions only; and 4. must apply equally to all members of the same class.

Tiu vs. CA

The constitutionality and validity of EO 97-A, that provides that the grant and enjoyment of the tax and duty incentives authorized under RA 7227 were limited to the business enterprises and residents within the fenced-in area of the Subic Special Economic Zone (SSEZ), was questioned.

Nature of the case: A petition for review to reverse the decision of the Court of Appeals which upheld the constitutionality and validity of the E.O. 97-A.

Facts of the case: The petitioners assail the constitutionality of the said Order claiming that they are excluded from the benefits provided by RA 7227 without any reasonable standards and thus violated the equal protection clause of the Constitution. The Court of Appeals upheld the validity and constitutionality and denied the motion for reconsideration. Hence, this petition was filed.

Issue: WON E.O. 97-A violates the equal protection clause of the Constitution

Arguments: Petitioners contend that the SSEZ encompasses (1) the City of Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval Base. However, EO 97-A, according to them, narrowed down the area within which the special privileges granted to the entire zone would apply to the present “fenced-in former Subic Naval Base” only. It has thereby excluded the residents of the first two components of the zone from enjoying the benefits granted by the law. It has effectively discriminated against them, without reasonable or valid standards, in contravention of the equal protection guarantee.

The solicitor general defends the validity of EO 97-A, arguing that Section 12 of RA 7227 clearly vests in the President the authority to delineate the metes and bounds of the SSEZ. He adds that the issuance fully complies with the requirements of a valid classification.

Decision: Panganiban J., The Court held that the classification was based on valid and reasonable standards and does not violate the equal protection clause.

The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class.

Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the same class.

Tan vs. Del Rosario

Petitioners challenge the constitutionality of RA 7496 or the simplified income taxation scheme (SNIT) under Arts (26) and (28) and III (1). The SNIT contained changes in the tax schedules and different treatment in the professionals which petitioners assail as unconstitutional for being isolative of the equal protection clause in the constitution.

Issue: Is the contention meritorious?

Ruling: No. uniformity of taxation, like the hindered concept of equal protection, merely require that all subjects or objects of taxation similarly situated are to be treated alike both privileges and liabilities. Uniformity, does not offend classification as long as it rest on substantial distinctions, it is germane to the purpose of the law. It is not limited to existing only and must apply equally to all members of the same class. The legislative intent is to increasingly shift the income tax system towards the scheduled approach in taxation of individual taxpayers and maintain the present global treatment on taxable corporations. This classification is neither arbitrary nor inappropriate.

Phil. Rural Electric vs. Secretary

On May 23, 2003, a class suit was filed by petitioners in their own behalf and in behalf of other electric cooperatives organized and existing under PD 269 which are members of petitioner Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA). The other petitioners, electric cooperatives of Agusan del Norte (ANECO), Iloilo 1 (ILECO 1) and Isabela 1 (ISELCO 1) are non-stock, non-profit electric cooperatives organized and existing under PD 269, as amended, and registered with the National Electrification Administration (NEA).

Under Sec. 39 of PD 269 electric cooperatives shall be exempt from the payment of all National Government, local government, and municipal taxes and fee, including franchise, fling recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court or administrative proceedings in which it may be party.

From 1971to 1978, in order to finance the electrification projects envisioned by PD 269, as amended, the Philippine Government, acting through the National Economic council (now National Economic Development Authority) and the NEA, entered into six loan agreements with the government of the United States of America, through the United States Agency for International Development (USAID) with electric cooperatives as beneficiaries. The loan agreements contain similarly worded provisions on the tax application of the loan and any property or commodity acquired through the proceeds of the loan. Petitioners allege that with the passage of the Local Government Code their tax exemptions have been validly withdrawn. Particularly, petitioners assail the validity of Sec. 193 and 234 of the said code. Sec. 193 provides for the withdrawal of tax exemption privileges granted to all persons, whether natural or juridical, except cooperatives duly registered under RA 6938, while Sec. 234 exempts the same cooperatives from payment of real property tax. Issue: (1) Does the Local Government Code (under Sec. 193 and 234) violate the equal protection clause since the provisions unduly discriminate

against petitioners who are duly registered cooperatives under PD 269, as amended, and no under RA 6938 or the Cooperatives Code of the Philippines?

(2) Is there an impairment of the obligations of contract under the loan entered into between the Philippine and the US Governments?

Held: (1) No. The guaranty of the equal protection clause is not violated by a law based on a reasonable classification. Classification, to be reasonable must (a) rest on substantial classifications; (b) germane to the purpose of the law; (c) not limited to the existing conditions only; and (d) apply equally to all members of the same class. We hold that there is reasonable classification under the Local Government Code to justify the different tax treatment between electric cooperatives covered by PD 269 and electric cooperatives under RA 6938.

First, substantial distinctions exist between cooperatives under PD 269 and those under RA 6938. In the former, the government is the one that funds those so-called electric cooperatives, while in the latter, the members make equitable contribution as source of funds.

Capital Contributions by Members – Nowhere in PD 269 doe sit require cooperatives to make equitable contributions to capital. Petitioners themselves admit that to qualify as a member of an electric cooperative under PD 269, only the payment of a P5.00 membership fee is required which is even refundable the moment the member is no longer interested in getting electric service from the cooperative or will transfer to another place outside the area covered by the cooperative. However, under the Cooperative Code, the articles of cooperation of a cooperative applying for registration must be accompanied with the bonds of the accountable officers and a sworn statement of the treasurer elected by the subscribers showing that at least 25% of the authorized share capital has been subscribed and at least 25% of the total subscription has been paid and in no case shall the paid-up share capital be less than P2,000.00. b. Extent of Government Control over Cooperatives – The extent of government control over electric cooperatives covered by PD 269 is largely a function of the role of the NEA as a primary source of funds of these electric cooperatives. It is crystal clear that NEA incurred loans from various sources to finance the development and operations of these electric cooperatives. Consequently, amendments were primarily geared to expand the powers of NEA over the electric cooperatives o ensure that loans granted to them would be repaid to the government. In contrast, cooperatives under RA 6938 are envisioned to be self-sufficient and independent organizations with minimal government intervention or regulation. Second, the classification of tax-exempt entities in the Local Government Code is germane to the purpose of the law. The Constitutional mandate that “every local government unit shall enjoy local autonomy,” does not mean that the exercise of the power by the local governments is beyond the regulation of Congress. Sec. 193 of the LGC is indicative of the legislative intent to vet broad taxing powers upon the local government units and to limit exemptions from local taxation to entities specifically provided therein. Finally, Sec. 193 and 234 of the LGC permit reasonable classification as these exemptions are not limited to existing conditions and apply equally to all members of the same class. (2) No. It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligations of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change must not only impair the obligation of the existing contract, but the impairment must be substantial. Moreover, to constitute impairment, the law must affect a change in the rights of the parties with reference to each other and not with respect to non-parties. The quoted provision under the loan agreement does not purport to grant any tax exemption in favor of any party to the contract, including the beneficiaries thereof. The provisions simply shift the tax burden, if any, on the transactions under the loan agreements to the borrower and/or beneficiary of the loan. Thus, the withdrawal by the Local Government Code under Sec. 193 and 234 of the tax exemptions previously enjoyed by petitioners does not impair the obligation of the borrower, the lender or the beneficiary under the loan agreements as, in fact, no tax exemption is granted therein.

3. Religious Freedom

The Constitutional guarantee of the free exercise and enjoyment of religious freedom and worship carries with it the right to disseminate religious information. Activities simply and purely for the propagation of faith are exempt from taxes.

Taxes are unconstitutional if it operates as prior restraint on exercise of religion or favors a certain religion (non-establishment of religion. Income of religious organizations from any activity conducted for profit or from any of their property, real or personal, regardless of disposition of such income, is taxable

4. Non-impairment of Obligations and Contracts

Section 10. No law impairing the obligation of contracts shall be passed. Applies only when government is party to the contract granting exemption, EXCEPT if Franchise tax-exemption. The Constitution provides that franchise is subject to amendment, alteration, or repeal by Congress

CIR vs Lingayen Gulf Electric Co

The respondent taxpayer operates an electric power plant serving the adjoining municipalities of Lingayen and Binmaley, both in the province of Pangasinan, pursuant to the municipal franchise granted it by their respective municipal councils, under Resolution Nos. 14 and 25 of June 29 and July 2, 1946, respectively. Bureau of Internal Revenue (BIR) assessed against and demanded from the private respondent deficiency franchise taxes and surcharges for the years 1946 to 1954 applying the franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954 as prescribed in Section 259 of the National Internal Revenue Code, instead of the lower rates as provided in the municipal franchises. Respondent submits that R.A. No. 3843 is unconstitutional insofar as it provides for the payment by the private respondent of a franchise tax of 2% of its gross receipts, while other taxpayers similarly situated were subject to the 5% franchise tax imposed in Section 259 of the Tax Code, thereby discriminatory and violative of the rule on uniformity and equality of taxation. Court of tax Appeals ruled in favor of respondent.

ISSUE: Whether or not Section 4 of R.A. No. 3843, assuming it is valid, could be given retroactive effect so as to render uncollected taxes in question which were assessed before its enactment.

HELD: YES. Appealed decision was affirmed. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. Uniformity means that all property belonging to the same class shall be taxed alike The Legislature has the inherent power not only to select the subjects of taxation but to grant exemptions. Tax exemptions have never been deemed violative of the equal protection clause. It is true that the private respondents municipal franchises were obtained under Act No. 667 of the Philippine Commission, but these original franchises have been replaced by a new legislative franchise, i.e. R.A. No. 3843.

Given the validity of said law, it should be applied retroactively so as to render uncollectible the taxes in question which were assessed before its enactment. The question of whether a statute operates retrospectively or only prospectively depends on the legislative intent. In the instant case, Act No. 3843 provides that “effective … upon the date the original franchise was granted, no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts … shall be collected, any provision to the contrary notwithstanding.” Republic Act No. 3843 therefore specifically provided for the retroactive effect of the law

Misamis Oriental vs Cepalco

Facts: CEPALCO was granted a franchise which imposes upon it a franchise tax of 3% of the gross earnings in lieu of all taxes. Pursuant to the Local Tax Code, the Province of Misamis enacted an ordinance imposing a franchise tax of ½ of 1% of CEPALCO’s gross annual receipts for the preceding calendar year. It demanded payment from CEPALCO, which paid under protest.

Issue: Whether a corporation whose franchise expressly provides that the payment of the “franchise tax of 3% of the gross earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee” is exempt from paying a provincial franchise tax. Held: No. There is no provision in the Local Tax Code, expressly or impliedly amending or repealing the tax exemption granted to CEPALCO . The rule is that a special and local statute applicable to a particular case is not repealed by a later statute which is general in its terms, provisions and application even if the terms of the general act are broad enough to include the cases in the special law unless there is manifest intent to repeal or alter the special law. The franchise of CEPALCO expressly exempts it from payment of “all taxes of whatever authority” except the 3% tax on its gross earnings. Such exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the grantee.

Phil Rural Electricity vs. Secretary, supra

Stages of Taxation

1. Levy - Refers to the enactment of a law by Congress, imposing a tax.

2. Assessment and Collection - The act of administration and implementation of the tax law by the executive department through the administrative agencies

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

4. Refund - Recovery of any tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively, or in any manner wrongfully, collected.

Definition, Nature and Characteristics of Taxes

Definition: A tax is a burden, charge, exaction, imposition or contribution assessed in accordance with some reasonable rule of apportionment by authority of the sovereign state upon the persons or property within its jurisdiction, to provide public revenue for the support of the government, the administration of law, or the payment of public expenses.

It can also be defined as a payment exacted by State or its municipal subdivisions as a contribution toward the cost of maintaining governmental functions, where the special benefits derived from the performance is merged with the general benefit.

Taxes operate in INVITUM and are in no way dependent upon will or contractual assent, express or implied, of the person taxed.

Characteristics:

1. Enforced; 2. Proportional; 3. Pecuniary Contributions 4. May be from persons or property; 5. Levied by a law-making body; 6. The State having jurisdiction over the subject of the burden; 7. For the support of the government and all its public needs.

Requisites for a Valid Tax

a. Must be for a public purpose

b. It should be uniform and equitable

c. That either the person or property taxed is within the

jurisdiction of the taxing authority

d. That it complies with the requirements of due process

e. That it does not infringe any constitutional limitations

Tax vs. Other Forms of Exactions

1. Tax vs. Tariff and Customs Duties

Tax Tariff

Coverage More comprehensive than customs duty

Kind of Tax

Object Persons, property, etc Goods imported or exported

2. Tax vs Tolls

Tax Toll

Kind of Demand Demand of sovereignty

Demand of ownership

Purpose support of government

Collection for the use of property

Amount No limit. Depends

on need of the government

Fair return of the cost of the property or improvement

Diaz vs Secretary of Finance

71 Am Jur 351

3. Tax vs License Fees

Tax License

Source Exercise of Taxing power

Police power

Purpose Raise revenue Regulation

Object Persons, property and privilege

The right to exercise a privilege

Amount No limit Only when necessary

Progressive Development Corporation vs Quezon City

Facts: The City Council of QC passed an ordinance known as the Market Code of QC, which imposed a 5% supervision fee on gross receipts on rentals or lease of privately-owned market spaces in QC. In case of failure of the owners of the market spaces to pay the tax for three consecutive months, the City shall revoke the permit of the privately-owned market to operate.

Progressive Development Corp, owner and operator of Farmer’s Market, filed a petition for prohibition against QC on the ground that the tax imposed by the Market Code was in reality a tax on income, which the municipal corporation was prohibited by law to impose.

Issue: Whether or not the supervision fee is an income tax or a license fee. Held: It is a license fee. A LICENSE FEE is imposed in the exercise of the police power primarily for purposes of regulation, while TAX is imposed under the taxing power primarily for purposes of raising revenues. If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally, revenue is also obtained does not make the imposition a tax.

To be considered a license fee, the imposition must relate to an occupation or activity that so engages the public interest in health, morals, safety, and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its incidental consequences. In this case, the Farmers’ Market is a privately-owned market established for the rendition of service to the general public. It warrants close supervision and control by the City for the protection of the health of the public by insuring the maintenance of sanitary conditions, prevention of fraud upon the buying public, etc.

Since the purpose of the ordinance is primarily regulation and not revenue generation, the tax is a license fee. The use of the gross amount of stall rentals as basis for determining the collectible amount of license tax does not, by itself, convert the license tax into a prohibited tax on income. Such basis actually has a reasonable relationship to the probable costs of regulation and supervision of Progressive’s kind of business, since ordinarily, the higher the amount of rentals, the higher the volume of items sold. The higher the volume of goods sold, the greater the extent and frequency of supervision and inspection may be required in the interest of the buying public.

PHILIPPINE AIRLINES, INC. v. EDU

G.R. No. L- 41383, August 15, 1988

The Philippine Airlines (PAL) is a corporation engaged in the air transportation business under a legislative franchise, Act No. 42739. Under its franchise, PAL is exempt from the payment of taxes. Sometime in 1971, however, Land Transportation Commissioner Romeo F. Elevate (Elevate) issued a regulation pursuant to Section 8, Republic Act 4136, otherwise known as the Land and Transportation and Traffic Code, requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, Elevate refused to register PAL's motor vehicles unless the amounts imposed under Republic Act 4136 were paid. PAL thus paid, under protest, registration fees of its motor vehicles. After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Land Transportation Commissioner Romeo Edu (Edu) demanding a refund of the amounts paid. Edu denied the request for refund. Hence, PAL filed a complaint against Edu and National Treasurer Ubaldo Carbonell (Carbonell).

ISSUE: Whether or not motor vehicle registration fees are considered as taxes.

RULING: Yes. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The motor vehicle registration fees are actually taxes intended for additional revenues of the government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program.

Esso vs CIR

ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. The Commissioner disallowed the claim on the ground that the expenses should be capitalized and might be written off as a loss only when a “dry hole” should result. Hence, ESSO filed an amended return where it asked for the refund of P323,270 by reason of its abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary and necessary expenses in the same return amount representing margin fees it had paid to the Central Bank on its profit remittances to its New York Office.

ISSUE: Whether the margin fees may be considered ordinary and necessary expenses when paid.

HELD: For an item to be deductible as a business expense, the expense must be ordinary and necessary; it must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade or business. In addition, the taxpayer must substantially prove by evidence or records the deductions claimed under law, otherwise, the same will be disallowed. There has been no attempt to define “ordinary and necessary” with precision. However, as guiding principle in the proper adjudication of conflicting claims, an expenses is considered necessary where the expenditure is appropriate and helpful in the development of the taxpayer’s business. It is ordinary when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer’s business; the expenditure, to be an allowable deduction as a business expense, must be determined from the nature of the expenditure itself, and on the extent and permanency of the work accomplished by the expenditure. Herein, ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations.

4. Tax vs Special Assessments

Tax Special Assessments

Imposed On Persons, properties,

etc.

Only on land

Why Imposed Regardless of public

Improvement

Public improvement that benefits the land

Purpose Support of government Contribution to cost of public improvement

When Imposed Regular exaction Exceptional as to time and locality

Basis Necessity Benefits obtained

Apostolic Prefect vs Baguio

In 1937, an ordinance (Ord. 137) was passed in the City of Baguio. The said ordinance sought to assess properties of property owners within the defined city limits. APMP, on the other hand, is a religious corporation duly established under Philippine laws. Pursuant to the ordinance, it contributed a total amount of P1,019.37. It filed the said contribution in protest.

APMP later averred that it should be exempt from the said special contribution since as a religious institution, it has a constitutionally guaranteed right not to be taxed including its properties.

ISSUE: Whether or not APMP is exempt from taxes

HELD: The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. Based on Justice Cooley’s words: "While the word 'tax' in its broad meaning, includes both general taxes and special assessments, and in a general sense a tax is an assessment, and an assessment is a tax, yet there is a recognized distinction between them in that assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with reference to special benefits to the property assessed.

The differences between a special assessment and a tax are that (1) a special assessment can be levied only on land; (2) a special assessment cannot (at least in most states) be made a personal liability of the person assessed; (3) a special assessment is based wholly on benefits; and (4) a special assessment is exceptional both as to time and locality.

The 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 a local improvement on a street or highway.

A charge imposed only on property owners benefited is a special assessment rather than a tax notwithstanding the statute calls it a tax." In the case at bar, the Prefect cannot claim exemption because the assessment is not taxation per se but rather a system for the benefits of the inhabitants of the city.

5. Tax vs Debt

Tax Debt

Source Law; legal obligation Based on contract

Nature Personal Assignable

Right to Set-Off General rule: Not subject to set-off

May be the subject of compensation or set-off

Effect Imprisonment No imprisonment

Caltex vs COA

Facts: In 1989, COA sent a letter to Caltex, directing it to remit its collection to the Oil Price Stabilization Fund (OPSF), excluding that unremitted for 1986 and 188 of the additional tax on petroleum products authorized under Section 8 of PD 1956; and that pending such remittance, all its claims for reimbursement from the OPSF shall be held in abeyance. Caltex requested COA, notwithstanding an early release of its reimbursement certificates from the OPSF, which COA denied. On 31 May 1989, Caltex submitted a proposal to COA for the payment and the recovery of claims. COA approved the proposal but prohibited Caltex from further offseting remittances and reimbursements for the current and ensuing years. Caltex moved for reconsideration.

Issue: Whether the amounts due from Caltex to the OPSF may be offsetted against Caltex’ outstanding claims from said funds.

Held: Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. PD 1956, as amended by EO 137, explicitly provides that the source of OPSF is taxation. 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.

Francia vs. Intermediate Appellate Court

Facts: Engracio Francia was the registered owner of a house and lot located in Pasay City. A portion of such property was expropriated by the Republic of the Philippines in 1977. It appeared that Francia did not pay his real estate taxes from 1963 to 1977. Thus, his property was sold in a public auction by the City Treasurer of Pasay City.

Issue: Whether the expropriation payment may compensate for the real estate taxes due.

Held: 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. Internal revenue taxes cannot be the subject of compensation. The Government and the taxpayer are not mutually creditors and debtors of each other under Article 1278 of the Civil Code and a claim of taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

RP vs Ericta and Sampaguita Pictures

FACTS:

This has something to do with back pay certificates. The law enacting these generally recognized the right of persons who at the outbreak of war were employed in the classified and non-classified civil service as well as in government-controlled or owned corporations, and those who had served in the free local governments organized for the purposes of resistance against the invaders, to salaries, wages, emoluments, per deims, not received by them by reason of the war.

It appears that in relation to the production of movies, came to incur tax obligations. To satisfy these, tendered and delivered back pay certificates of indebtedness. However, these were denied receipt. In reply, it was mentioned that back pay certificates weren’t valid tax payments and payments should be made in cash.

HELD: The taxes sought to be collected by the Republic were still unpaid, hence it ought properly to be sentenced to pay the taxes. It also ruled that even assuming the contrary, the legal compensation as a mode of extinguishing an obligation to pay taxes was nonetheless availing against the government. On the other hand, 10 years have transpired from the date when the certificates are redeemable, the obligation thereby was evidenced was undeniably already due and payable. Hence, Sampaguita was entitled to payment against the government. They are both liable with respect one another.

Republic vs Mambulo Lumber Company

Facts: Mambulao Lumber Company paid the Government a total of P9,127.50 as reforestation charges. Having found liable for an aggregate amount of P4,802.37 for forest charges, it contended that since the Republic (Government) has not made use of the reforestation charges for reforesting the denuded area of the land covered by the company’s license, the Republic should refund said amount or, if it cannot be refunded, at least the company should be compensated with what it owed the Republic for reforestation charges.

Issue: Whether taxes may be subject of set-off or compensation.

Held: Internal revenue taxes, such as forest charges, cannot be the subject of set-off or compensation. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the State or municipality to one who is liable to the State or municipality for taxes. Neither are they subject of recoupment since they do not arise out of the contract or transaction sued on. Taxes are not in the nature of contracts between the parties but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required.

Philex Mining vs CIR

BIR asked Philex to pay tax for 1991-1992 in the total amount of P 123,821,982.52. Philex refused 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 asking for an off-set, Philex filed a case with the CTA.

Philex was able to obtain its VAT input credit/refund notonly for the taxable year 1989 to 1991 but also for 1992and 1994. In 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.

ISSUE: WON there should be an offset?

HELD: NO. “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.DE BTS are due to the Government in its corporate capacity, while TAXES are due to the Government in its sovereign capacity.” Philex’s claim 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.

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. 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.

Domingo vs Carlitos

Facts: In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final and executory the order of the Court of First Instance of Leyte for the payment of estate and inheritance taxes, charges and penalties amounting to P40,058.55 by the Estate of the late Walter Scott Price. The petition for execution filed by the fiscal, however, was denied by the lower court. The Court held that the execution is unjustified as the Government itself is indebted to the Estate for 262,200; and ordered the amount of inheritance taxes be deducted from the Government’s indebtedness to the Estate.

Issue: Whether a tax and a debt may be compensated.

Held: The court having jurisdiction of the Estate had found that the claim of the Estate against the Government has been recognized and an amount of P262,200 has already been appropriated by a corresponding law (RA 2700). Under the circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with Article 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount.

Kinds of Taxes

1. As to Object a. Personal, capitation or poll taxes

i. It has a fixed amount; ii. It affects individuals residing within a

specified territory; iii. Without any regard to their property,

occupation or businesses iv. Example: Cedula

b. Property Tax i. Imposed on real or personal property; ii. It is in proportion to its value, or other

reasonable methods of apportionment iii. Example: Real estate taxes

c. Privilege tax i. It is imposed upon performances of an act,

the enjoyment of a privilege or the engaging in an occupation, profession or business.

2. As to burden or incidence a. Direct

i. This is a tax for which a taxpayer is directly liable on the transaction or business he engages in.

ii. Example: Customs duties b. Indirect

i. This is primarily paid by persons who can shift the burden upon someone else.

ii. If the taxes can be shifted, then it is indirect tax.

iii. These are taxes that are demanded from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else.

iv. It is important to determine if the tax exemption granted to a taxpayer specifically includes the indirect tax shifted to him as a part of the purchase price.

1. There is always an assumption that the tax exemption embraces only those taxes for which the taxpayer is directly liable for.

v. Examples: Excise taxes, VAT 3. As to Tax Rates

a. Specific i. This is imposed based on the weight or

volume capacity or any other physical unit of measurement

b. Ad valorem i. Based on selling price or other specified

value of the goods. c. Mixed

4. As to purposes a. General or fiscal

i. A general tax is imposed solely to raise revenue for the government

b. Special, regulatory or sumptuary i. Imposed and collected to achieve a

particular legitimate object of the government.

5. As to scope or authority to impose a. National

i. Imposed by the national government b. Local

i. Imposed by the local government 6. As to Graduation

a. Progressive i. One whereby the rate increases as the tax

base increases. b. Regressive

i. One where the tax rate decreases as the tax base increases.

c. Proportionate