Taxation Reviewer

PART 1 - Inherent to National Govt not to LGUs

GENERAL PRINCIPLES OF (grant through Constitution or Laws)
2. Legislative in character
TAXATION
- Inherent in the State
- Such power is exclusively vested in the
A. DEFINITION, CONCEPT AND PURPOSE OF
Legislature
TAXATION
- Scope:
Discretion as to:
Taxation an inherent sovereign power, which
Amount or Rate
interferes with the personal and property rights
Subjects of Taxation
of the people and takes from them a portion of
Purpose for levying taxes
their property for the support of the
Apportionment
government
Situs
Manner of collection
2 Concepts
Grant tax exemption/condonation
1. Power to tax
Specify administrative and judicial
2. Act or process by which the taxing power is
remedies
exercised
- Power to tax is plenary and unlimited in
its range; principal check against is
Purposes
abuse is to be found only in the
1. Revenue-raising finance govt
responsibility of the legislature to its
2. Non-revenue raising
constituents who are to pay it
a. General Welfare (tax vis--vis police
- Power to destroy
power)
1st View (Marshall): It is destructive
b. Regulation (discourage certain
because it interferes with the
business/use of certain products)
personal and property rights of the
c. Reduce social inequality (equal
people and takes from them a
distribution of wealth)
portion of their property to support
d. Encourage economic growth
the govt (if validly exercised)
(preferential tax treatment: PEZA,
2nd View (Holmes): It is not the
SBMA, etc.)
power to destroy while the SC sits
e. Protectionism (tariffs to protect local
(if invalidly exercised)
products)
- Judicial Review: Subject to judicial
review when it VIOLATES its INHERENT
B. NATURE AND CHARACTERISTICS OF
and CONSTITUTIONAL limitations
TAXATION
- Extent of Taxing Power:
Comprehensive: covers all subjects
Nature
(persons, businesses, activities, etc.)
1. Inherent attribute of sovereignty
Unlimited: does not cease to be
- No need for constitutional conferment
valid merely because it regulates,
for its exercise
discourages, or deters (courts will
- Constitutional provisions of taxation
not restrict it except when there is
serve only as limitations to this
GAODALEJ)
invincible power
Plenary: complete

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 Taxation Reviewer
Supreme: it is supreme in the
selection of the subject of taxation
3. Non-delegable (general rule; Exception:
LGUs and the President [tariff])
4. Subject to Constitutional and inherent
limitations
Not political in nature
Continues to be in force despite enemy
occupation. Tax laws of the occupied territory
remain effective, not the tax laws of the
occupying enemy
C. POWER OF TAXATION VS. POLICE POWER
AND EMINENT DOMAIN
Taxation
1. Purpose: Raise revenue
2. Amount exacted: No limit (but as much as
possible commensurate with government
needs in order to avoid deficit; balanced
with the capacity of the tax payers [egg
layers])
3. Benefit: No special benefit (general benefit
of protection and welfare for all)
4. Transfer of property rights: taxes paid
become public funds
5. Scope: all persons, property, activities, etc.
6. Who exercises: Govt and political
subdivisions
Police Power
1. Purpose: Public welfare
2. Amount exacted: Cost of regulation,
issuance of permits; non-useful occupation
may be exacted a large amount
3. Benefit: No special benefit (healthy
economic standard of society)
4. Transfer of property rights: no transfer, only
restraint of exercise of property rights
5. Scope: all persons, property, activities, etc.
6. Who exercises: Govt and political
subdivisions
2
Eminent Domain
1. Purpose: take private property for private
use
2. Amount exacted: No amount imposed (just
compensation is paid to the owner of the
expropriated property)
3. Benefit: Direct benefit in the form of JC
4. Transfer of property rights: Transfer of
property in favor of the State
5. Scope: Particular property
6. Who exercises: Govt and political
subdivisions, or public service companies or
public utilities
PP as an implement of TP
PP may not be exercised by itself to raise
revenue; Joint PP and TP for raising revenue
PT as an implement to PP (regulatory)
PT may be used to regulate or discourage
certain subjects
PT as an implement to PED
20% Senior Citizen Discounts: establishments
who are obliged to give discount are entitled to
compensation of revenues lost due to such
discount (full compensation [ruling that Senior
Discount was PP was abandoned])
D. THEORY AND BASIS OF A TAXATION
Life Blood Theory
Taxes are the lifeblood of the State through
which the government and its agencies
continue to operate and with which the state
effects its functions for the welfare of its
constituents.
Injunction does not lie against collection of
taxes
State not estopped from collecting taxes by
mistakes of its agents
Tax exemptions: strictly construed against
those claiming them
 Taxation Reviewer
Necessity Theory
Because the existence of the government is a
necessity, taxes must be imposed so that the
government can continue to exist.
Benefits-Protection/Reciprocity/ Symbiotic
Relationship
Taxes are paid for the enjoyment of the benefits
of an organized society. Such enjoyment as well
extends to those members of a State who do
not pay taxes because they are unable to do so.
A person cannot resist paying taxes just because
he cannot see a direct benefit to him
Jurisdiction
Taxation may only be imposed on persons or
territory under the jurisdiction of a taxing
authority.
E. PRINCIPLES OF A SOUND TAX SYSTEM
FAT
Fiscal adequacy
Sources of revenue must be adequate to meet
the needs of the government
Administrative feasibility
The tax system should be capable of being
effectively administered with least
inconvenience to the taxpayer
Theoretical justice
It must be fair to the average tax payer and
based upon ability to pay.
F. SCOPE AND LIMITATIONS OF TAXATION
Inherent Limitations SPINE1
1
SB Memo Aid, 17
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Situs (Territoriality)
- GR: limited to territorial jurisdiction
- Except: when there is SUBSTANTIAL PRIVITY
between the State and the taxpayer
Foreign military zones are not foreign
territory (sales in there are taxable)
Substantial elements of a contract are
situated in the Philippines
Turnkey contracts (divisible contracts
that have different stages): stages done
in the Philippines are taxable, as the
case may be
Public Purpose
Money raised by taxation can be used only for
public purposes and not for advantage of
private individuals
- Public purpose may still legally exist even if
the motive which impelled the legislature to
impose a tax was to favor one industry over
the other (especially when the favored
industry is recognized as an industry of such
importance that it is crucial for economic
development)
International Comity
Observe international laws which limit the
power to tax
- Examples:
Treaties to minimize harshness of tax
due to double taxation
Rules on foreign sovereigns (par in
parem non habet imperium)
Non-delegation (Legislative Nature of Taxation)
GR: Delegata potestas non potest delegari
Exceptions:
1. President Tariff and Emergency powers
2. Administrative agencies (subject to
Completeness and Sufficient Standard
Tests)
 Taxation Reviewer
3. Local Government Constitutional grant
Exemption of the Government
1. Entities: taking money from ones own
pocket
2. Agencies: departments or bureaus
- Govt functions: exempt unless taxed
- Proprietary functions: taxed unless
exempted
3. Instrumentality: not integrated within the
departmental framework, vested with
special functions and jurisdictions by law,
endowed with some corporate powers
GOCCs:
- GR: Taxable
- Excpet: GSIS, SSS, PhilHealth, PCSO
Constitutional Limitations
1. General/Indirect Limitations2
Due Process
- Substantial DP: Taxation must be fair, just,
and reasonable; within the limits of the
legislative power
- Procedural DP: Notice, hearing, or at least
opportunity to be heared
- Requires: Public purpose, Territorial
jurisdiction, not arbitrary and oppressive in
assessment or collection
Equal Protection
- Absolute Equality NOT required
- Valid classification:
Substantial distinctions
Germane to the purpose of law
Apply to present and future conditions
Apply equally to all members of the
same class
- Vertical Equity: different treatment
between those who are well-off and those
who have relatively less
2
SB Memo Aide, 20
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- Horizontal Equity: Similar situation = similar
treatment
Freedom of the SEP
- Prior restraint
- Suppression
Religious Freedom
- Sale of Bibles by NSNP missionary
organization at minimal profit = curtail
religious freedom (right to disseminate
religious information)
- Income from activities:
GR: Exempt from taxation if: (1) NS
corporation, (2) ORGANIZED and
OPERATED exclusively for RCSACSW,
and (3) no part of income inures to the
benefit of any member, organizer, or
specific person
Exception: Taxable regardless of
disposition made if from: (1) productive
use of real property, or (2) profitable
business pursuits
Just Compensation
Non-Impairment of Contracts
- License with tax exemption: can be revoked
any time since it does not confer any
absolute rights, even if it were granted as
inducement to invest in the country
- Franchise: subject to amendment,
alteration, or repeal by congress when
public interest requires
- Contractual tax exemptions
Entered into by the taxing authority
Lawfully entered into under enabling
laws
Government acts in a private capacity
Law-making Process
- Requisites:
One subject expressed in the title
3 readings on 3 separate days
Printed copies in final form distributed
three days before passage
Presidential Power to Grant Reprieves
 Taxation Reviewer
2. Specific/Direct Limitations
Uniform and Equitable
- Uniform: When it operates with the same
force and effect in ever place where the
subject may be found; applies equally to all
persons, firms, and corporations in similar
situations
- Equitable: When it is based on ability to
pay; Higher income = greater burden
Progressive Taxation System
- As the resources of a person become
higher, his tax rate likewise increases
- Regressive taxes: NOT PROHIBITED but
merely discouraged; progressive tax is a
mere directive, not a justiciable right
Non-imprisonment for non-payment of poll tax
- Poll tax (personal/capitation tax): tax of a
fixed amount on individuals residing within
a specified territory, whether citizens or
not, without regard to their property or
occupation; poll taxes are not mandatory,
thus, thus no imprisonment
- But a person can be imprisoned for non-
payment of other kinds of taxes where the
law expressly provides
House of Origin
- Appropriation, revenue or tariff BILLS must
originate exclusively from the HoR, but the
Senate may concur or propose
amendments
- It is not the law but the bill that must
originate from HoR: A bill may undergo such
change in the Senate the result may be
rewriting of the whole, but this is not
unconstitutional if the bill itself originated
from the HoR
Veto power of the President
- Item veto in an 1) Appropriation bill; 2)
Revenue bill; an 3) Tariff bill: item veto does
not affect the item/s to which the President
does not object
Delegated authority of the President to impose
tariff rates, import and export quotas, and
tonnage and wharfage dues
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- Flexible tariff rates:
Tax exemptions of RCE Entities
- Real property owned by religious
institutions ADE used for RCE purposes
(Test: USE of property and NOT ownership)
The use of the real property itself, not
the use of income from real property,
which determines whether or not the
property is tax exempt
Incidental use for other purposes will
not affect exemption as long as there is
no proprietary motive
Voting requirement for tax exemption
- Tax exemption may only be granted by law
- No law granting tax exemption shall be
passed without the concurrence of a
majority of all the members of Congress
(withdrawal: relative majority)
Non-use of Public Money or Property for
Religious Purposes
- Exception: Priests, religious ministers
assigned to the armed forces, penal
institutions, government orphanages,
leprosarium
Prohibition on use of tax levied for special
purposes or special assessments
- All money collected on any tax levied for a
special purpose -> special fund -> used only
for the purpose for which it was intended
- Fulfillment of purpose for special fund =
transferred to the general funds of the
Government
SCs power to review judgments of lower courts
- Legality of tax, impost or toll
- Legality of penalty imposed in relation to
tax, impost, or toll
- Judicial Non-interference: the courts cannot
inquire into the wisdom of a taxing act
unless there is a violation of constitutional
limitations or restrictions (Constitutional
supremacy)
Grant of taxing power to LGUs
- Each LGU shall have the power to create its
own sources of revenues and to levy taxes,
 Taxation Reviewer
fees, and charges subject to guidelines and
limitations imposed by Congress
Tax exemption granted to NSNP Educational
Institutions
- All revenues and assets of NSNP
educational institutions used ADE for
educational purposes
- NSNP: (1) incorporated as non-stock entity;
(2) pay no dividends; (3) governed by
trustees who receive no compensation as
such; and (4) Devotes all its income to the
accomplishment of the purposes
enumerated in the AoI
- RPT, Income Tax, Donors Tax
- Dormitories, canteens, bookstores owned
by NSNP Educational Institutions: tax
exempt ONLY IF: (1) owned and operated as
ancillary activities; and (2) located within
school premises
- School canteen operated by a
concessionaire: still exempt if: (1)
concession fees are comingled with funds
that make up educational income; and (2)
they are used for school operations
- Interest income: ADE used for educational
purposes: exempt from 20% and 7.5% tax
under the EFDCS as long as INCLUDED in the
annual information return and duly audited
financial statements: Certification from
depositary bank as to the amount of income
earned, certification of ADE use for
educational purposes, Board Resolution on
proposed projects to be funded out of the
money deposited
- Donation: tax exempt from donors tax if
ADE used for educational purposes,
provided that not more than 30% of the
donation, bequests, and devises or legacies
shall be used for administration purposes
- Proprietary Educational Institutions:
Prior legislative implementation
Taxability of income: 10% on taxable
income; if gross income for unrelated
trade or business exceed 50% of the
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total gross income derived by such
institution, entire table income subject
to 30% tax
20% on interest income from currency
bank deposits
7.5% on interest income under FCDS
- Government Educational Institutions:
exempt from: RPT, Income Tax, Donors Tax
G. STAGES OR ASPECTS OF TAXATION
(LAPaR)
Levy (Tax Legislation): Enactment of a law by
Congress authorizing the imposition of tax on
person, property, or exercises. It includes:
1. Determination of subject and purpose
2. Fixing of the rate
3. Discretion as to the manner, means,
and agencies of collection
Administration: Implementation of tax law by
the Executive through administrative agencies
(Assessment and Collection)
1. Tax law must designate which agency
will collect taxes
2. Circulars and regulations must be in
accordance with the tax measures
imposed by Congress
Payment: act of compliance by the taxpayer,
including remedial measures which he can
resort to
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 any sum to
have been excessively or wrongfully collected
H. DEFINITION, CHARACTERISTICS, AND
NATURE OF TAXES
Taxes: Enforced proportional contributions
from persons and property levied by the law-
making body of the State by virtue of its
sovereignty for the support off the government
and public needs
 Taxation Reviewer
Essential Characteristics SLEP6
1. Imposed by the STATE which has
jurisdiction over the subject
2. Levied by the LEGISLATIVE body
3. ENFORCED contribution: does not depend
on the will of the person taxed (not a
contract but a positive act of Govt)
4. PAYABLE in money
5. PROPORTIONATE in character: ability to pay
basis; progressive
6. PERSONS, property, exercise
7. PUBLIC purpose
8. Paid in PERIODS or intervals
9. PERSONAL to the tax payer
a. BUT: Stockholders may be held liable
for unpaid taxes of a dissolved company
if it appears assets have passed into his
hands
b. BUT: Stockholders who have unpaid
subscriptions can be made liable to the
extent of their unpaid subscriptions
I. REQUISITES OF A VALID TAX
(JAPUL)
Jurisdiction: subject must be within jurisdiction
of the taxing authority
Assessment and collection: must be with notice
and opportunity for hearing to prevent injustice
Public Purpose
Uniform
Limitations: must be in accordance with the
inherent and Constitutional limitations
J. TAXES AS DISTINGUISHED FROM OTHER
KINDS OF EXACTIONS
(See San Beda Reviewer)
K. KINDS OF TAXES
As to subject matter
1. Personal, poll or capitation
- Fixed amount
- Imposed upon persons residing in a
specified territory, citizens or not,
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without regard to occupation or
business
2. Property
- Tax imposed on property, real or
personal
- In proportion to their value or some
other reasonable rule of apportionment
3. Excise or Privilege
- Imposed upon the performance of an
act, or enjoyment of a privilege or
engaging in an occupation, profession,
or business
As to who bears the burden
1. Direct
- Exacted from the very person who, it is
intended or desired, should pay them
- Incidence and impact falls on the same
person
2. Indirect
- Incidence or liability for payment falls
on one person but the burden may be
shifted or passed to another not as tax
but as part of the purchase price
As to purpose
1. General, fiscal or revenue
- Imposed for the ordinary purposes of
government
- To raise revenue for governmental
needs
2. Special, regulatory, sumptuary
- Tax imposed for special purposes
- Money collected through special tax
may only be used for the purpose for
which it was levied
- If special purpose is abandoned or
fulfilled, balance will be transferred to
general funds of the government
As to how amount is determined
1. Specific
 Taxation Reviewer
- Fixed amount imposed by number,
head, or by some standard of weight
or measurement
2. Ad valorem
- Tax based upon the value of the
articles subject to ta
- Requires intervention of assessors or
appraisers
3. Mixed
- Having characteristics of both specific and
ad valorem
As to taxing authority
1. National
2. Local or municipal
As to rate
1. Progressive or graduated
2. Regressive
3. Proportionate
L. Situs of Taxation
- GR: limited to territorial jurisdiction
- Except: when there is SUBSTANTIAL PRIVITY
between the State and the taxpayer
Foreign military zones are not foreign
territory (sales in there are taxable)
Substantial elements of a contract are
situated in the Philippines
Turnkey contracts (divisible contracts
that have different stages): stages done
in the Philippines are taxable, as the
case may be
- Other exceptions:
Tax laws operate outside territorial
jurisdiction: resident citizens, domestic
corporations who derive income
outside the Philippines
Tax laws do not operate within
territorial jurisdiction: treaty
exemptions, international comity
Situs of Subjects of Tax:
1. Persons: poll, capitation, community taxes
are based upon RESIDENCE of the taxpayer,
regardless of source of income or location
of property
2. Property:
a. Real: lex rei sitae
b. Tangible personal: where it is physically
located
c. Intangible personal: domicile of the
owner
i. Exceptions: acquired business situs
in another jurisdiction, when law
provides for the situs
d. Income: determined by citizenship and
residence, or source
e. Exercise of privilege: depends upon the
place where the act is performed or
occupation engaged
Rule on situs of business tax
1. Sale of real property
- Where property is located
2. Sale of personal property
- Where the sale is perfected
3. VAT
- Where transaction was made
Gratuitous transfer
State where the transferor was a citizen or
resident, or where the property is located
M. CONSTRUCTION AND INTERPRETATION