SCHOOL OF EDUCATION, ARTS and SCIENCES

Second Semester
A.Y. 2021-2022

CORRESPONDENCE LEARNING MODULE

TAXN 1013 - Taxation

Prepared by:

CYREANE FAITH N. CARAG, MAEd

Course Instructor

Reviewed by:

RENZ MARION C. GAVINO, MP

General Education Coordinator

Recommended by:

VENUS I. GUYOS, Ph.D.

Academic Dean

Approved by:

EMMANUEL JAMES P. PATTAGUAN, Ph.D.

Vice President for Academics

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TAXN 1013 – Taxation (Module 3)| 1

 UNIVERSITY PRAYER

O God, wellspring of goodness and blessings, we give you thanks and praise as one Louisian
community. The graces You incessantly grant upon us and Your divine providence have sustained
our beloved University throughout the years of mission and excellence.

Having been founded by the Congregation of the Immaculate Heart of Mary, we pray that You keep
us committed and dedicated to our mission and identity to serve the Church and the society as we
become living witnesses to the Gospel values proclaimed by Jesus. For if we are steadfast in our
good and beautiful mission, our works will bring success not only to ourselves but also to those
whom we are bound to love and serve.

Inspired by St. Louis our Patron Saint, who was filled with a noble spirit that stirred him to love You
above all things, may we also live believing that we are born for a greater purpose and mission as
we dwell in Your presence all the days of our life.

Grant all these supplications through the intercession of

Mother Mary and through Christ our Lord. Amen.

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Academic Intellectual Property Rights: This module and the materials posted over NEO-LMS
are the properties of USL and the Facilitators. Students are not allowed to share it to any third-
party individuals not part of the class without any permission from the owners
CORRESPONDENCE LEARNING MODULE
TAXN 1013 - Taxation
AY 2021-2022

Lesson 1: General Principles of Taxation

Topics:  Impact and Incidence of Taxation (Direct and Indirect

Taxes)
 Inherent Limitations on the Power of Taxation
 Constitutional Limitations on the Power of Taxation

Learning Outcomes: At the end of this module, you are expected to:

At the end of this learning module, the student is expected to:

a. Define Impact and Incidence of Taxation;
b. differentiate Direct from Indirect Taxes;
c. identify the limitations on the power of taxation;
d. enumerate the constitutional provisions that limit the power of taxation; and
e. apply the kinds of taxes, and their constitutional provisions.

Weekly Timetable
Date Topic Activities or Tasks

• Impact and Incidence Peruse on the readings/modules assigned

of Taxation (Direct and
February 7 – Indirect Taxes)
11, 2022 Discussion

• Inherent Limitations on Completion of learning tasks

the Power of Taxation
Run-through on the case digests
• Constitutional
Limitations on the
Power of Taxation

Impact and Incidence of Taxation (Direct and Indirect Taxes)

 Impact of taxation: point where the tax is originally imposed or the one on whom the
tax is formally assessed (the statutory taxpayer in most cases)
 Incidence of taxation: point on whom the tax burden finally rests
 It is essential to know where the impact of taxation lies because it generally determines:
o The proper party to claim a refund of erroneously imposed indirect taxes, and
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 o Whether the indirect taxes can be passed on to an exempt buyer.
 Based on the possibility of shifting the incidence of taxation taxes may be classified into
direct and indirect taxes. (CIR v. PLDR, G.R.No.140230, December 15,2005)
o Direct taxes are those that are exacted from the very person who, it is intended
or desired, should pay them.
 They are impositions for which a taxpayer is directly liable on the
transaction or business he is engaged in.
 Example: income tax, transfer taxes (estate tax and donor’s tax),
residence tax(cedula)
o Indirect taxes are those that are demanded, in the first instance, from, or are
paid by, one person in the expectation and intention that he can shift the burden
to someone else.
 Indirect taxes are taxes wherein the liability for the payment of the tax
falls on one person but the burden thereof can be shifted or passed on to
another person, such as when the tax is imposed upon goods before
reaching the consumer who ultimately pays for it.
 When the seller passes on the tax to his buyer, he, in effect, shifts the tax
burden, not the liability to pay it, to the purchase as part of the price of
goods sold or services rendered.
 Hence, the tax-exempt status of a buyer will not affect the liability of a
seller for the indirect tax as the seller is the taxpayer statutory liable for
the payment of the tax.
 Example: VAT, percentage taxes

Inherent Limitations on the Power of Taxation

 While the power taxation is inherent to a State, such power is still subject to limitations.
If no limitations were imposed on the power, then the State would be dangerous,
rampant in wielding such power. Let’s begin with the inherent limitations on the power
of taxation.

1. Taxes must be exacted for a PUBLIC PURPOSE.

 Money raised by taxation can be expended only for public purposes and not for the
advantage pf private individuals. (Pascual v. Secretary of Public Works, G.R. No. L-10405,
December 29,1960)
 Public purpose may legally exist even if the motive which impelled the legislature to
impose the tax was to favor one industry over another. (Tio v. Video gram Regulatory
Board, G.R. No.75697, June 19,1987, where the favored industry was the video industry.

2. The power to tax in INHERENTLY LEGISLATIVE in nature.

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  General rule: The power to tax is purely legislative and cannot be delegated to
other branches of the government. (Pepsi-Cola Bottling Company municipality of
Tanauan, G.R. No. L-31156, February 27,1976.

o EXCEPT
 Delegation to local governments (as local governments are granted the
autonomous authority to create their own sources of revenue and levy
taxes)
 Delegation to the President (such as the grant to the President to impose
tariff rates within the bounds sanctioned by the Customs and Tariffs
Modernization Act)
 Delegation to administrative authorities (such as the authority to fix rates
within limits specified by the law)
3. GOVERNMENT entities, agencies, and instrumentalities are generally exempt for
taxation.
 There is no point in national and local government taxing each other, unless a
sound and compelling policy requires such transfer of public funds from one
government pocket to another.
o Note, however, that while government instrumentalities are exempt
from real property taxes, government-owned or controlled corporations
are not exempt from real property taxes. (Manila International Airport
Authority v. City of Paranaque, G.R. No.15560, July 20,2006, where the
MIAA was considered a government instrumentality and thus exempt
from the payment of real property taxes imposed by Paranaque)

4. INTERNATIONAL COMITY
 Tax treaties are entered into to minimize the harshness of international double
taxation.
o Laws and issuances must ensure that the reliefs granted under tax
treaties are accorded to the parties entitled thereto.
 The obligation to comply with a tax treaty must take precedence over an
administrative issuance. An administrative issuance such as a Revenue
Memorandum Order should not operate to divest entitlement to a relief granted
by a tax treaty.
o The denial of a relief based on a tax treaty due to the failure of a taxpayer
to comply with a RMO would impair the value of the tax treaty and the
State’s duty to comply in good faith with the tax treaty. (Deutsche Bank
AG Manila v. CIR, G.R.No.188550, August 19,2013, where the SC held that
the non-compliance of the taxpayer of a period prescribed by the RMO
should not divest it of its relief based on the RP- Germany Tax Treaty;
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 reiterated in CBK Power Company Limited v. CIR G.R. No. 193383, January
14,2015)
 However, tax exemptions based on international agreements are still subject to
the rule, “laws granting tax exemption are construed strictissimi juris against the
taxpayer.”
(Sea-Land Services, Inc. court of Appeals, G.R. No.122605, April 30,2001, where
the Court held that the transport of household goods of US military personnel
was not included in the tax exemptions granted by the RP-US Military Base
Agreement)
 An Exchange of Notes is considered an executive agreement binding on states.
Hence, an Exchange of Notes between the Philippines and Japan which states
that the Philippine Government will assume taxes initially to be paid by Japanese
firms should be respected. (Mitsubishi Corporation- Manila Branch v.CIR, G.R.
No. 175772, June 5,2017)

5. Taxes are limited to the State’s TERRITORIAL JURISDICTION

 The power to tax is limited to the territorial jurisdiction of the State.
o EXCEPT where privity of relationship exists between the State and the
taxpayer. In these cases, the State can exercise its taxing powers over the
taxpayer even outside its territory (such as the taxation of resident
citizens for income from sources worldwide.)
 As the State can exercise its power to tax within its territorial jurisdiction, it can
tax sales within foreign military zones as these military zones are not considered
foreign territory. (Reagan v. CIR, G.R.No. L-26379, December 27,1969)
 The State can tax a transaction if substantial elements of the contract are
situated in the Philippines. (Manila Electric Company v. Yatco, G.R. No.45697,
November 1,1939)
 In CIR v. Marubeni (G.R. No. 137377, December 18,2001), involved were turnkey
contracts relating to the installation of a wharf complex and an ammonia storage
complex in Leyte. Marubeni Corporation was a resident foreign corporation. The
Supreme Court held that the turnkey contracts were actually divisible contracts
which each had different stages, with each stage having a different tax
implication.
o For the stages involving the design, engineering, and procurement of
equipment and supplies, these were considered outside the hands of the
Philippine taxing authority as these were all done in Japan.
o For the stages involving the actual installation and construction, these
were all considered within the jurisdiction of the Philippine taxing
authority as the construction and installation of works were done within
the Philippines.
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 o The implication here is that if you can argue that the contract is divisible,
you can also argue that some stages of the contract were not sourced
here in the Philippines, and thus beyond the taxing jurisdiction of the
Philippines.
o This would be huge, considering that if the contract were considered
indivisible, then everything would be considered situated here in the
Philippines, and thus the whole contract would be fully taxed.

Constitutional Limitations on the Power of Taxation

 The State’s power of taxation is also limited by the Constitution.

Let’s go through the limitations one by one.

1. Due Process

Article III, 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.

 Tax laws and their enforcement must comply with substantive and procedural due process.
o Substantive: the law must be reasonable and must be for a public purpose
o Procedural: there must be no arbitrariness in the assessment and collection; the
prescribed rules must be followed before assessment and collection

2. Equal Protection of Laws

 There is valid discrimination when the classification:
o Rests on substantial distinctions;
o Is germane to the purpose of the law;
o Not limited to existing conditions only; and
o Applies equally to all members of the same class.
 Equal protection guarantee does not require territorial uniformity of laws. As long as
there are actual and material differences between territories, there is no violation of the
constitutional clause. (Tiu v. Court of Appeals, G.R.No.127410, January 20,1999, where
the Court said that there are substantial differences between businesses located within
a fenced -in area of special economic zone and those located without)
 Tax exemptions have never violated the equal protection clause, as the Legislature has
the inherent power not only to select the subjects of taxation but to grants exemptions.
(CIR v. Lingayen Gulf Electric Power Co., Inc., G.R.No. L-23771, August 4,1988)

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 3. Religious Freedom

Article III, 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.

 The constitutional guaranty of the free exercise and enjoyment of religious profession
and worship carries with it the right to disseminate religious information.
o Any restaurant of such right can only be justified like other restraints of freedom
of expression on the grounds that there is a clear and present danger of any
substantive evil which the State has the right to prevent.
o Hence, a tax imposed on the distribution and sale of bibles and other religious
literature is invalid. (American Bible Society v. City of Manila, G.R. No. L-9637,
April 30,1957)
 Note, however, that under Section 30, NIRC, income of religious organizations from
activities conducted for profit or from ant of their property (regardless of disposition of
such income) is subject to income tax.
4. Non-impairment of Contracts

Article III, Section 10. No law impairing the obligation of contracts shall be passed.

 The tax exemptions protected by the non-impairment clause are contractual tax
exemptions, not those granted by franchises or licenses.
o A license conferring a tax exemption can be revoked at any time since it does not
confer an absolute right, even if these were granted as inducements to invest in
the country. (Republic v. Caguioa, G.R. No. 168584, October 15,2007)
o A franchise is likewise subject to amendment, alteration, or repeal by Congress
when the public interest so requires; hence, any exemption based on a franchise
is not protected by non-impairment clause. (Cagayan Electric Power and Light
Co., Inc. v. CIR, G.R.No. L-60126, September 25,1985)
 Contractual tax exemptions are:
o Those entered into by the taxing authority,
o Lawfully entered into them under enabling laws,
o Wherein the government acts in its private capacity and sheds its cloak of
authority and immunity. (Manila Electric Co.v. Province of Laguna,
G.R.No.131359, May 5,1999)
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  Examples of contractual tax exemptions which are protected by the non-impairment
clause.
o Government bonds or debentures
o Perfected mining concession granted by the Spanish Government (Casanova v.
Hord, G.R.No.3473, March 22,1907)
5. Prohibition against Imprisonment for Non-payment of Poll Tax

Article III, Section 20. No person shall be imprisoned for debt or non-payment of a poll taxes.

 In the Philippines, poll tax refers to the cedula or residence tax.

o The Constitutional protection only applies to poll taxes; hence, people can still be
imprisoned for non-payment of other kind of taxes where the law so expressly
provides (like for tax evasion cases)
6. Uniformity and Equality of Taxation and Progressive System of Taxation

Article VI, Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation.

 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. (City of Baguio v. de Leon, G.R.No. L-
24756, October 31,1968)
o Uniformity does not call for perfect uniformity or perfect equality; reasonable
classifications do not violate the uniformity and equality of taxation. (Sison v.
Ancheta, G.R.No. L-59431, July 25,1984)
o The Constitution is also not violated when a certain tax is not imposed in other
jurisdiction, for the Constitution does not require that taxes for same purpose
should be imposed in different territorial subdivision at the same time.
(Villanueva v. City of Iloilo, G.R. No. L-26521, December 28,1968)
o Congress is free to determine the subjects of taxation; hence, the tax still valid
when some classes are subject to tax while some are not subject to tax. (Eastern
Theatrical v. Alfonso, G.R.No. L-1104, May 31,1949)
 However, the classification must still be valid and reasonable according to
the rules on equal protection. If the classification is unreasonable, then
the rule on uniformity will be violated. (Pepsi-Cola Bottling v. City of
Butuan, G.R.No. L-22814, August 28,1968)

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 A BIR issuance which unwittingly imposes different tax rates to the same
class of products violates the rule of uniformity. (CIR v. Fortune Tobacco
Corporation, G.R.No.180006, September 28,2011).
 Note: a classification freeze provision which imposes a different tax base depending on
the date of introduction of a product in the market has been held to be valid because it
simplified tax administration and eliminated potential abuse and corruption in tax
collection. (British American Tobacco v. Camacho, G.R.No. 163583, April 15,2009)
 Taxation is progressive when its rate goes up depending on the resources of the person
affected.
o VAT is admittedly regressive, because it is imposed on persons regardless of
income. However, it is still valid as the Constitution’s mandate is simply to evolve
a progressive system of taxation. In any case, the VAT system minimize the
regressive effects by providing zero- rated transactions. (Abakada Guro Party List
v. Ermita, G.R.No.168056 September 1,2005)
7. Delegated Authority to the President to Impose Tariff Rates

Article VI, Section 28. (2) The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts within the framework of national
development program of the Government.

8. Prohibition against Taxation of Real Property of Charitable Institutions, Churches,

Parsonages or Convents, Mosques and Non -Profit Cemeteries.

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

 The exemption only applies to real property tax. (Lladoc v. CIR, G.R.No. l-19201,
June 16,1965)
 “Actual, direct and exclusive use of the property” is the direct and immediate
and actual application of the property itself to the purposes for which the
institution is organized.
(Lung Center v. Quezon City, G.R No.144104, June 29,2004)

o “Exclusive” is defined as possessed and enjoyed to the exclusion of others;

debarred from participation or enjoyment; and “exclusively” is defined “in a
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 manner to exclude; as enjoying a privilege exclusively.” If real property is used
for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. (Lung Center v. Quezon City, G.R No.144104,
June 29,2004)
o It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes; it is the actual use of the
property.
 Hence, when portions of a hospital and portions of the land are leased to
private entities, those portions are no longer exempt from real property
taxes as the actual use of the property is no longer for charitable
purposes. (Lung Center v. Quezon City, G.R. No 144104, June 29,2004)
 Before the 1973 and 1987 Constitutions, the phrase did not include “actual” and
“direct”; the mere qualification was for “exclusive” use. Hence, cases stated that the
exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of said purposes. (Herrera Quezon City Board of Assessment Appeals,
G.R.No. L-15270, September 30,1961)
o Hence, a hospital, a school devoted to the hospital, and garage necessary for the
school were considered exempt from real property tax. (Herrera v. Quezon City
Board of Assessment Appeals, G.R.No. L15270, September 30,1961)
o A lodging house for people who participate in religious activities and a vegetable
garden used by a priest, both of which were adjacent to a church were held to be
incidental and necessary for religious purposes and were considered exempt
from real property tax. (Bishop of Nueva Segovia v. Provincial Board of Ilocos
Norte, G.R.No. L-27588, December 31,1927)
o The use by the Director of school of a floor for residential purposes was held as
incidental to educational purposes. (Abra Valley College, Inc. Aquino, G.R.No. L-
39086, June 15,1988)
 However, the lease of a floor of a school to a marketing company was not
incidental to educational purposes and thus, not exempt from real
property tax. (Abra Valley College, Inc. Aquino, G.R.No. L-39086, June
15,1988)
 Note, however, that the Herrera, Nueva Segovia and Abra cases were not
decide under more restrictive wording of the 1973 and 1987
Constitutions. Abra v. Hernando (G.R.No. L-49336, August 31,1981)
clarified that there must now be proof actual and direct use of the land,
buildings, and improvements for religious, charitable, or educational
purposes. This was reiterated by Justice Callejo in the Lung Center case.
9. Prohibition against Taxation of Non-stock, Non-profit Educational Institution

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

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

 The constitutional provision covers non-stock, non-profit educational institutions and

exempts them from income tax, real property tax, donor’s tax, and customs duties
because the provision speaks of “all revenues and assets.”
 Revenues consist of the amounts earned from the conduct of business operations.
o Revenue is the component of the tax base in income tax, VAT, and local business
tax. (CIR V. DLSU, G.R.No.196596, November 8,2016)
 Assets are tangible and intangible properties of the taxpayer.
o The FMV of real property is the tax base for real property tax. (CIR V. DLSU)
 The revenues and the assets must be used actually, directly, and exclusively for
educational purposes.
o The test to determine exemption is the use of both the revenues and asset.
o Hence, when the revenues are actually, directly, and exclusively used for
educational purposes, the NSNP educational institution shall be exempt from
income tax, VAT, and local business tax. (CIR v. DLSU)
o And when the assets are actually, directly, and exclusively used for educational
purposes, the NSNP educational institution shall be exempt from real property
tax. (CIR v. DLSU), WHERE THE Court said that if a university leases a portion of a
school building to a bookstore or canteen, the leased portion is no longer used
for educational purposes and thus subject to real property tax, even if it caters to
students. I don’t agree and would argue that a bookstore and canteen are
reasonably covered under a school’s “educational purpose”.
o Income from cafeterias, canteens and bookstores are also exempt if they are
owned and operated by the educational institution and are located within the
school premises. (RMC76-2003)
 Distinguish from tax treatment of:
o Proprietary educational institutions (10% under Section 27[B], NIRC)
o Government educational institutions (Exempt under Section 30, NIRC)
10. Majority Vote of Congress for Grants of Tax Exemptions

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 Article VI, Section 28. (4) No law granting any tax exemption shall be passed without the concurrence
of a majority of all the Members of the Congress.

 Hence, an exemption granted by a Presidential Proclamation and not by law is invalid.

(John Hay Peoples Alternative Coalition v. Lim, G.R.No.119775, October 24,2003)
 This includes the grant of tax amnesties.
o A tax amnesty, being a general pardon or intentional overlooking by the State of
its authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law, partakes of an absolute forgiveness or waiver
by the Government of its right to collect what otherwise would be due it, and in
this sense, prejudicial thereto, particularly to give tax evaders, who wish to
relent and are willing to reform a chance to do so and thereby become a part of
the new society with a clean slate. (Republic v. Intermediate Appellate Court,
G.R.No. L-69344, April 26,1991)

11. Prohibition on Use of Tax Levied for Special Purpose

Article VI, Section 29. (3) All money collected on any tax levied for a special purpose shall be treated as
a special fund and paid out for such purpose only. If the purpose for which a special fund was created
has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the
Government.

12. Tax Bills Should Originate Exclusively in the House of Representative

Article VI, Section 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.

13. President’s Veto Power on Appropriation, Revenue, and Tariff Bills

Article VI, Section 27. (2) 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 or items to which he does not
object.

 The President has the power to “item-veto” when it comes to appropriation,

revenue, or tariff bills.

14. Judicial Power to Review Legality of Tax

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 Article VIII Section 5. The Supreme Court shall have the following powers:

(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court
may provide, final judgements and orders of lower courts in:

(b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in
relation thereto.

15. Grant of Power to the Local Government Units to Create its Own Sources of Revenue

Article X, Section 5. 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.

 Note that the power of local government units is subject to limitations as

Congress may provide, i.e., the Local Government Code

REFERENCES:

Books:

Ingles, M.D. (2018), Tax Made Less Taxing: A Reviewer with Codals and Cases, Rex Book
Store, Manila PH

Dimaampao, J. (2011), Tax Principles and Remedies, Rex Book Store, Manila PH

Online References (on Jurisprudence):

https://www.chanrobles.com/

https://central.com.ph/escra/

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