I.

GENERAL PRINCIPLES OF TAXATION

A. Taxation
a. Definition i. It is the power by which the sovereign raises revenue to defray the expenses of the government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burden.

b. Nature of the Power of Taxation i. The power to tax is an attribute of sovereignty. It is inherent in the State. As an incident of sovereignty, the power to tax has been described as 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. (MCIAA v. Marcos) ii. Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good. (CREBA v. Romulo) iii. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. (Pepsi Cola v. Municipality of Tanauan) iv. It is legislative in character (Scope of Legislative Taxing Power) y y y y y y y Determination of the Purpose Determination of the Subjects and Objects of Taxation Determination of the Amount and Rate of Tax Determination of the Kind of Tax to be Collected Determination of the Apportionment of Tax Determination of the Manner and Mode of Enforcement and Collection Determination of the Situs of Taxation y y

Pepsi Cola v. Municipality of Tanauan: Legislative powers may be delegated to local governments in respect of matters of local concern. This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax. Quezon City v. ABS-CBN: Municipal Corporation has a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for the statutory grant for these powers. The taxing power of the local government is limited in the sense that Congress can enact legislation granting exemptions. When allowed by the Constitution Under the Constitution, Congress may expressly 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. (Sec 28[2], Art. VI, Constitution) When delegation merely relates to the administrative implementation or implied from the policy and purpose of the Act

c. Theory or Underlying Basis i. Necessity The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for these means it has a right to compel all its citizens and property within its limits to contribute. (71 Am. Jur. 2d 346) Theory/Compensation Life-Blood Theory/Necessity Theory/Governmental

ii. Benefits Received Theory/Symbiotic Relationship Theory y

v. It is subject to constitutional and inherent limitations vi. It is generally not delegated to the executive or judicial department. EXCEPTIONS: y Local Governments Sec. 5, Art. X, Constitution: 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 governments. y

According to this theory, the State demands and receive taxes from the subjects of taxation within its jurisdiction so that it may be enabled to carry its mandate into effect and perform the functions of the government, and the citizen pays from his property the portion demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of organized society. (51 Am Jur. 42-43) Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of their hard earned income to the government, every person who is able to must contribute his share in the running of the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and

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material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. (CIR v. Algue) The legislature, in adopting such measures in our tax laws, only wanted to be assured that taxes are paid and collected without delay. For taxes are the lifeblood of government. Also such measures tend to prevent collusion between the taxpayer and the tax collector. By questioning a tax s legality without first paying it, a taxpayer, in collusion with Bureau of Internal Revenue officials, can unduly delay, if not totally evade, the payment of such tax. (Phil Guaranty Co. v. CIR) The power to tax is the most potent instrument to raise the needed revenues to finance and support myriad activities of the local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. (FELS Energy, Inc. v. Province of Batangas)

Promotion of General Welfare. Taxation may be used as an implement of the police power in order to promote the general welfare of the people. Thus, in the case of Lutz v. Aranea, the SC upheld the validity of the Sugar Adjustment Act, which imposed a tax on milled sugar since the purpose of the law was to strengthen an industry that is so undeniably vital to the economy the sugar industry. Reduction of Social Inequality. This is made possible throught the progressive system of taxation where the object is to prevent the undue concentration of wealth in the hands of a few individuals. Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger portion of the tax burden. Encouragement of Economic Growth. Taxation does not only raise public revenue, but in the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the country s economic growth.

d. Objectives i. Revenue Basically, the purpose of taxation is to provide funds or property with which the State promotes the general welfare and protection of its citizens. (51 Am. Jur. 71-73) The conservative and pivotal distinction between police power and power of taxation rests in the purpose for which the charge is made. If generation 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 revenue is incidentally raised does not make the imposition a tax. (Gerochi v. DOE) While it is true that the power of taxation can be used as an implement of police power, the primary purpose of levy is revenue generation. 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. (Planters Products, Inc. v. Fertiphil Corporation) It is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The tax imposed by the decree was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. And while it was also an objective of the decree to protect the movie industry, the tax remains a valid imposition. (Tio v. Videogram) ii. Non-Revenue y Regulation. Taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation of a threatened industry which is affected with public interest, like the oil industry. (Caltex Phils. V. COA)

e. Aspects of Taxation i. Levy Levy is the imposition of the tax which is a legislative act. It involves the determination of the persons, property or excises to be taxes, the sums to be raised. ii. Assessment This involves the process where the tax one is obligated to pay is being computed. iii. Collection This consists of the manner of enforcement of the obligation on the part of those who are taxed. Levy is taxation, strictly speaking, while the second and third aspects may be referred to as tax administration. These aspects together constitute the taxation system.

B.

Taxes
a. Definition

Taxes are the enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of the State and for all public needs.

b. Nature of Taxes i. It is a forced charge, imposition or burden. As such, taxes operate in invitum, which means that it is in no way dependent on the will or contractual assent, express or implied, of the person taxed. They are not contracts but positive acts of the government. ii. It is based on the taxpayer s ability to pay. It is assessed in accordance with some reasonable rule of apportionment, which means that conformably with the constitutional mandate on

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progressivity of a taxing system (Sec 28[2], Art. VI, 1987 Constitution), taxes must be based on ability to pay. iii. It is generally payable in money. Unless qualified by law (e.g. backpay certificates under Sec. 2, RA No. 304, as amended), the term taxes or tax is usually understood to be a pecuniary burden an exaction to be discharged alone in the form of money which must be in legal tender. A taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be 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 judgmenst as is allowed to be set off. (Caltex Phils. v. COA) 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 a debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. (Philex Mining Corp. v. CIR) 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. (Francia v. IAC) 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 of any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. The genereal rule base on grounds of public policy is well settled that no set-off admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of 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. (Republic v. Mambulao Lumber Co.) iv. It is imposed by the State on persons, property or exercises within its territorial jurisdiction applying the principles of territoriality. The object to be taxed must be subject to the jurisdiction of the taxing state. This is necessary in order that the tax can be enforced. It s laws may as to some persons found within its territory no longer control. Nor does the matter end there. It is not precluded from allowing another power to participate in the exercise of jurisdictional right over certain portions of its territory. If it does so, it by no means follows that such areas become impressed with an alien character. They retain their status as native soil. They are still subject to its authority. Its jurisdiction may be diminished, but it does not disappear. So it is with the bases under lease to the American armed forces by virtue of the military bases agreement of 1947. They are not and cannot be foreign territory. (Reagan v. CIR)

v. It is levied by the lawmaking body. The power to tax is a legislative power which under the Constitution only Congress can exercise through the enactment of tax statutes. Sec. 28, Art. VI, 1987 Constitution: Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. (2) The Congress may, by law, authorize the President to fix within 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. (3) 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. (4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. vi. It is levied for a public purpose. Taxation involves, and a tax constitutes, a charge or burden imposed to provide income for public purposes the support of the government, the administration of the law, or the payment of public expenses. For this reason, revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. The term public purpose is not defined. Xxx Jurisprudence states that public purpose should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. While the categories of what may constitute a public purpose are continually expanding in light of the expansion of government functions, the inherent requirement that taxes can only be exacted for public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of public purpose. (Planters Products v. Fertiphil Corporation) The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public interest, public benefit, public welfare and public convenience. The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. (CIR v. Central Luzon Drug Corp.)

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Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern, it follows that the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. (Lutz v. Araneta) vii. It is personal to the taxpayer.

Failure to pay a license fee makes the act or business illegal while failure to pay a tax does not necessarily make the act or business illegal but may be a ground for prosecution. iv. Tax v. Special Assessment

y c. Tax distinguished from other fees/charges i. Tax v. Debt y y y y y A debt is generally based on contract, express or implied, while a tax is based on law; A debt is assignable, while a tax cannot generally be assigned; A debt may be paid in kind, while a tax is generally payable in money; A debt may be the subject of set-off or compensation, while a tax is generally not; A person cannot be imprisoned for non-payment of debt (except when it arises from a crime), while imprisonment is a sanction for non-payment of tax (except poll tax); A debt is governed by the ordinary periods of prescription, while a tax is governed by the special prescriptive periods provided for in the Tax Code; and A debt draws interest when it is so stipulated or when there is default, while a tax does not draw interest except only when delinquent. A tax, however, like a debt, is a liability or obligation. ii. Tax v. Toll y y y A toll is a demand of proprietorship, while a tax is a demand of sovereignty; A toll is paid for the use of another s property, while a tax is paid for the support of the government; The amount of toll depends upon the cost of construction or maintenance of the public improvement used, while there is generally no limit on the amount of tax that may be imposed; and A toll may be imposed by the government or private individuals or entities, while a tax may be imposed only by the government. iii. Tax v. License Fee y y License or permit fee is a charge imposed under the police power for purposes of regulation. License fee is the legal compensation or reward of an officer for specified services, while tax is an enforced contribution assessed by sovereign authority to defray public expenses. It is imposed for regulation, while a tax is levied for revenue; Its amount should be limited to the necessary expenses of inspection and regulation, while there is generally no limit on the amount of tax that may be imposed; It is imposed on the right to exercise a privilege, while a tax is imposed also on persons and property; and

y y y y

Special assessment is an enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements. A special assessment is levied only on land; It is not a personal liability of the person assessed, i.e., his liability is limited only to the land involved; It is based wholly on benefits (not necessity); and It is exceptional both as to the time and place. A tax, on the other hand, has general application.

v. Tax v. Penalty y Penalty is any sanction imposed as a punishment for violation of law or acts deemed injurious. Thus, the violation of tax laws may give rise to imposition of penalty. A penalty is designed to regulate conduct, while a tax is generally intended to raise revenue; and A penalty may be imposed by the government or private individuals or entities, while a tax may be imposed only by government.

y y

C.

INHERENT POWERS OF THE STATE, distinctions

As to Purpose. Taxation is levied for the purpose of raising revenue; police power is exercised to promote public welfare through regulations. As to Amount of Exaction. In taxation there is no limit; in police power, the exaction should only be such as to cover the cost of regulation, issuance of the license or surveillance. As to Benefits Received. In taxation, no special or direct benefit is received by the taxpayer other than the fact that the Government only secures to the citizen that general benefit resulting from the protection of his person and property and welfare of all. As to police power, however, while no direct benefits are received, a healthy economic standard of society known as damnum absque injuria is attained. As to Non-Impairment of Contracts. In taxation, the nonimpairment of contracts rule subsist. In the exercise of police power, however, this limitation does not apply. As to Transfer of Property Rights. In taxation, taxes paid become part of the public funds; in police power, no transfer, but only restraint on the exercise, of property rights exists.

y y

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ii. Taxation v. Eminent Domain As to Nature of the Power Exercised. Taxation is exercised in order to raise public revenue; eminent domain or expropriation is the taking of private property for public use. As to Compensation Received. In taxation, payment of taxes results in the general benefit of all citizens and inhabitants of a State; in eminent domain, a direct benefit results in the form of just compensation to the property owner. As to Non-Impairment of Contracts. In taxation, a contract may not be impaired; this is not so in eminent domain. As to Persons Affected. Taxation applies to all persons, property and excises that may be subject thereto; in eminent domain, only a particular property is comprehended.

E.

INHERENT AND CONSTITUTIONAL LIMITATIONS

a. Inherent Limitations So called because they proceed from the very nature of the taxing power itself. i. Public Purpose One test of determining the public purpose in a tax is whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State, as a government, to provide. Another test is whether the proceeds of the tax will directly promote the welfare of the community in equal measure. There is no power to tax an object which is not within the purposes for which governments are established. Such purpose also includes the promotion of social justice because it is the duty of the State to protect those less in life; thus fulfilling the public purpose requirement. The term public purpose is not defined. Xxx It does not only pertain to those purposes which are traditionally viewed as essentially governmental functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. (Planters Products v. Fertiphil Corp.) The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote public interest, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public. (Pasucal v. Sec. of Public Works) ii. Non Delegation of the Legislative Power to Tax

D.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

The sources of government revenue must be sufficient to meet government expenditures and other public needs. This is essential in order to avoid budgetary defisits and to minimize foreign and local borrowings. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenue must be adequate to meet government expenditures and their variations. (Chavez v. Ongpin)

b. Theoretical Justice or Equality A good tax system must be based on the taxpayer s ability to pay. This suggests that taxation must be progressive conformably with the constitutional mandate that Congress shall evolve a progressive system of taxation. (Sec. 28[1], Art. VI, 1987 Constitution) It holds that similarly situated taxpayers should pay equal taxes, while those who have more should pay more.

The power of taxation is exclusively legislative. Consequently, the taxing power as a general rule may not be delegated. Exceptions: 1. Delegation to the President. Under the Constitution, Congress may expressly 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. (Sec. 28[2], Art. VI, 1987 Constitution) Delegation to Local Governments. 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 governments. (Sec. 5, Art. X, 1987 Constitution) Delegation to Administrative Agencies. Administrative agencies like the BIR and Bureau of Customs may be delegated with respect to administrative purposes that is, only for tax collection.

c. Administrative Feasibility It means that tax laws should be capable of convenient, just and effective administration or enforcement at a reasonable cost.

2.

d. Economic Efficiency The system or power of collecting taxes should not exceed the amount of tax collected.

3.

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Iii. Exemption of Government Entities As a matter of public policy, property of the State and of its municipal subdivisions devoted to government uses and purposes is generally deemed to be exempt from taxation although no express provision in the law is made therefor. Such exemption is upheld as long as the said property is devoted to government uses and purposes. Further, it may be said that it is absurd to tax entities which is actually funded by the revenues raised through taxation. GOCCs are exempted unless they are performing proprietary functions in which case such income derived therefrom should be properly subjected to tax. Exempt Entities: PHIC, SSS, GSIS, PNR iv. International Comity The property of a foreign state or government may not be taxed by another under the principle of sovereign equality among states by virtue of which one state cannot exercise its sovereign powers over another. v. Territorial Jurisdiction However broad the power of taxation may be as to its character and no matter how searching it is in its extent, such power is necessarily limited only to persons, property or businesses within its jurisdiction.

Rest on substantial distinctions Germane to the purposes of the law Not be limited to existing conditions only Equally apply to all members of the same class

The State has the inherent power to select the subject of taxation ad inequalities which result from the singling out of one particular class for taxation or tax exemption infringe no constitutional limitation. (Sison v. Ancheta) iii. Rule of Uniformity and Equity in Taxation Uniformity in taxation means that all taxable articles or properties of the same class shall be taxed at the same rate. This means that there must be equality in burden and not necessarily equality in amount. It does not signify an intrinsic, but simply a geographic, uniformity. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It does not signify an intrinsic but simply geographic uniformity. A levy of tax is not unconstitutional because it is not intrinsically equal and uniform in its operation. The uniformity rule does not prohibit classification for purposes of taxation. (British American Tobacco v. Camacho) Equity in taxation involves the application of the ability to pay principle. The concept of equity in taxation requires that such apportionment be more or less just in the light of the taxpayer s ability to shoulder the tax burden (usually measured in terms of the size of wealth or property and income, gross or net) and, if warranted, on the basis of the benefits he receives from the government. Taxation may be uniform but inequitable when the amount of tax imposed is excessive or unreasonable. To insure and enhance the equity objective, the Constitution enjoins Congress to evolve a progressive system of taxation. This means that tax laws shall place emphasis on direct rather than indirect taxation, with ability to pay as the principal criterion. On the basis of the foregoing discussions, it can safely be said that while equal protection refers more to like treatment of persons in like circumstances, uniformity and equity refers to the proper relative treatment for tax purposes of persons in unlike circumstances. Absolute or perfect equality or uniformity and equity is, of course, hardly attainable, if not impossible. No system has ever been devised which has produced perfect equality and uniformity of taxation as between persons or corporations or different classes of property and such a result cannot reasonably be expected. (First Nat. Bank v. Holmes, 92 N.E. 893.) Approximation to it is all that can be had. iv. contracts The above proceeds from the constitutional provision that No law impairing the obligation of contracts shall be passed. (Sec. 10, Art. III) Prohibition against impairment of obligation of

b. Constitutional Limitations i. Due Process of Law Sec. 1, Art. III of the Constitution provides in part that (n)o person shall be deprived of life, liberty or property without due process of law. Substantive Requirement. The tax law should be valid; should not be harsh, oppressive or confiscatory; must be for a public purpose and imposed within territorial jurisdiction. Procedural Requirement. This involves the compliance with the fair and reasonable methods of procedure prescribed by law. There must be no arbitrariness in assessment and collection and that the taxpayer is entitled to right to notice and hearing. ii. Equal Protection of Laws All persons subject to legislation shall be treated alike under like circumstances and conditions both in the privileges conferred and obligations imposed. The Constitution prohibits class legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for so doing, Congress may, therefore, group the persons or properties to be taxed and it is sufficient if all of the same class are subject to the same rate and the tax is administered impartially upon them. Classification to be valid must:

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The obligation of a contract is impaired when its terms or conditions are changed by law or by a party without the consent of the other, thereby weakening the position or rights of the latter. An exemption of impairment by law is when a tax exemption based on a contract is revoked by a later taxing statute. Note that when the government is a party to the contract granting exemption, it cannot be withdrawn without violating the nonimpairment clause. However, non-impairment may not be invoked in the case of a public utility franchise grantee; the legislature can impair a grantee s franchise since a franchise is granted under the Constitutional condition that it shall be subject to amendment, alteration or repeal by Congress when the public interest so requires. (See Sec. 11, Art. XII) Thus in the case of PPI v. Chato, the SC said that since the law granted the press a privilege, the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative. Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been subject. In Tolentino v. Sec. of Finance, CREBA, one of the petitioners, alleged that the imposition of the VAT on sales and leases of real estate by virtue of contracts entered into prior to the effectivity of the law would violate the non-impairment of contracts rule. The Court ruled that it is not enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. v. Prohibition against imprisonment for non-payment of poll tax This principle is based on the provision of the Constitution that No person shall be imprisoned for debt or non-payment of a poll tax. (Sec. 20, Art. III) A poll tax refers to a personal or capitation tax; it is a tax of a fixed amount on individuals residing within a specified territory, whether citizen or not, without regard to their property or occupation. Applying the said provision, no one may be sent to prison for failure to pay the community tax. One should not be punished on account of his poverty. Under the LGC, the only penalty for delinquency is the payment of a surcharge in the form of interest at the rate of 24% per annum which shall be added to the unpaid amount, from the due date until it is paid. vi. Non-infringement of Religious Freedom Sec. 5, Art. III of the Constitution provides that (n)o 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 general rule is that activities simply, purely and for propagation of faith are exempt, as well as sales of bibles and religious articles not for purposes of profit by a non-stock, non-profit organization. However, as an exception, the Constitution does not prohibit the imposition of a generally applicable tax on the sale of religious materials when done by proprietary institution. A municipal license tax on the sale of bibles and religious articles by a non-stock, non-profit missionary organization at a little profit constitutes curtailment of religious freedom and worship which is guaranteed by the Constitution. The license tax is actually in the nature of a condition or permit for the exercise of the right. (American Bible Society v. City of Manila) vii. purposes Sec. 29(2) of Art. VI of the Constitution provides that (n)o public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister or other religious teacher or dignitary as such, except when such priest, preacher, minister or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. The above limitation is based on the requirement that taxes can only be levied for a public purpose. Note that what the Constitution prohibits is the use of public money or property for the benefit of any priest, etc. as such. When so employed in the armed forces, any penal institution, or government orphanage or leprosarium, they may receive their corresponding compensations for services rendered in their non-religious capacity without violating the constitutional prohibition. viii. Exemption of religious, charitable and educational entities, non-profit cemeteries, and churches from property taxation Sec. 28(3), Art. VI of the Constitution provides: 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. Note that the exemption covers only property taxes and not other taxes. (LLadoc v. CIR) The test of exemption is the use of the property and not ownership. Thus, a property leased by the owner to another who uses it exclusively for religious purposes is exempt from property tax but the owner is subject to income tax on rents received. Likewise, that if a property, although actually owned by a religious, charitable or educational institution, is actually used for a non-exempt purpose, the exemption from tax vanishes. The use of the word exclusively means primary rather than solely. Such that the exemption is not wholly or partly lost because on certain occasions the property exempted or part of it is used for social purposes or let out to others for entertainment. Prohibition against appropriation for religious

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What is exempted is not the institution itself, those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. Portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. (Lung Center of the Phils. v. Quezon City) ix. Origin of Appropriation, Revenue and Tariff Bills Sec. 24, Art. VI of the Constitution provides that (a)ll appropriation, revenue or tariff bills, bills authorizing the 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. In the Tolentino E-VAT case, the SC said that (A) bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute and not only the bill which initiated the legislative process culminating in the enactment of the law must be substantially be the same as the House bill would be to deny the Senate s power not only to only concur with amendments but also to propose amendments. It would be to violate the co-equality of legislative power of the two houses of Congress and in fact make the House superior to the Senate. x. Exemption of Non-stock, non-profit educational institutions from taxation The exemption covers (1) income tax, (2) property tax, (3) donor s taxes, and (4) custom duties. To be exempt from tax or duty, the revenue, assets, property or donations must be used actually, directly and exclusively for educational purposes. In the case of religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax. Congress is authorized to grant similar exemption to proprietary (for profit) educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment. The restrictions are designed to insure that the tax exemption benefits are used for educational purposes. Lands, buildings, and improvements actually, directly, and exclusively used for educational purposes are exempt from property tax whether the educational institution is proprietary or non-profit. Canteens and bookstores inside schools are exempt from income tax as long as it operates within the school and is primarily used by the school even if it caters to outsiders. xi. Concurrence by a majority of all the members of Congress for the passage of a law granting tax exemption The requirement is obviously intended to prevent indiscriminate grant of tax exemptions. The phrase a majority of all

the members of the Congress means at least one-half plus one of all the members thereof voting separately. Such rule also applies to a law authorizing refund of a tax already collected. xii. Power of the President to veto any particular item or items in a revenue or tariff bill As a general rule, under the Constitution, the President may not veto a bill in part and approve it in part. The exception lies in the case of revenue or tariff bills whereby the vetoed items shall simply be not given effect. xiii. Non-impairment of the jurisdiction of the Supreme Court in tax cases The Constitution prohibits Congress from taking away the jurisdiction of the SC as the final arbiter of tax cases.

F.

DOUBLE TAXATION
a. Prohibited sense v. Broad sense (1) In its strict sense (referred to as direct duplicate taxation or direct double taxation), double taxation means y taxing twice, y by the same taxing authority, y within the same jurisdiction or taxing district, y for the same purpose y in the same year (or taxing period), y for some of the property in the territory. Both taxes must be imposed on the same property or subject matter. (2) In its broad sense (referred to as indirect duplicate taxation or indirect double taxation), double taxation is taxation other than duplicate. It extends to all cases in which there is a burden of two or more pecuniary impositions. In other words, any of the elements in the prohibited sense of double taxation is missing.

b. Concept applicable in this jurisdiction There is no constitutional prohibition against double taxation in the Philippines. It is something not favored but nevertheless permissible. Such taxation should, whenever possible, be avoided and prevented. Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer. The reason obviously is to avoid injustice or unfairness. When double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee.

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G. EXEMPTION FROM TAXATION

provisions of a contract of exemption from taxation are contained in the charter of the corporation (law under which is organized) to which the exemption is granted. (2) Public Policy. It may be based on some ground of public policy, such as, for example to encourage new and necessary industries or to foster charitable and other benevolent institutions. In this case, the government need not receive any consideration in return for the tax exemption. (3) Reciprocity. It may be created in a treaty on grounds of reciprocity, or to lessen the rigors of international double or multiple taxation which occurs where there are many taxing jurisdictions.

b. Nature of Exemption e. Construction and Interpretation (1) An exemption from taxation is a mere personal privilege of the grantee. Thus, an exemption granted to a corporation does not apply to its stockholders, the former being considered as a legal entity with a personality separate and distinct from the latter. Being personal in nature, a tax exemption cannot be assigned or transferred by the person to whom it is granted without the consent of the legislature. (2) It is generally revocable by the government unless the exemption is founded on a contract which is protected from impairment. An exemption provided for in a franchise, however, may be repealed or amended pursuant to the Constitution. (3) It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and, in this sense, is prejudicial thereto. Hence, it exists only by virtue of an express grant and must be strictly construed. (4) It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis. Where, however, no valid distinction exists, the exemption may be challenged as violative of the equal protection guarantee or the uniformity rule. i. General Rule In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer. An exemption from the common burden cannot be permitted to exist upon vague implication or inference. Taxation is the rule and exemption is the exception. Therefore, he who claims must be able to justify his claim or right thereto, by a grant expressed in terms too plain to be mistaken and too categorical to be misinterpreted. ii. Exceptions In the following cases, however, the exemption statutes are liberally construed: (1) When the law itself expressly provides for a liberal construction; (2) When the exemption is in favor of the government itself or its agencies; (3) When the exemption is in favor of religious, charitable and educational institutions because the general rule is that they are exempt from tax.

c. Nature of power to grant exemption (1) National Government. Like the inherent power to tax, the power to exempt from taxation is an attribute of sovereignty for the power to prescribe who or what property shall be taxed implies the power to prescribe who or what property shall not be taxed. Unless restricted by the Constitution, the legislative power to exempt is as broad as its power to tax. (2) Local Governments. Municipal corporations, however, unlike a sovereign state, are clothed with no inherent power to tax. Hence, they have also no inherent power to exempt from taxation. But the moment the power to impose particular tax is granted, they have also the power to grant exemption therefrom unless forbidden by some provision of the Constitution or law.

H.

CONSTRUCTION OF TAX LAWS

Tax laws are civil in nature. Not political. Hence, even during the period of enemy occupation (such as, for instance, during the Japanese occupation of the Philippines in World War II), tax laws are continually enforced as they are deemed to be the laws of the occupied territory and not of the occupying power. Neither are tax laws penal in nature. Not being penal in character, the rule in the Constitution against the passage of ex post facto laws cannot be invoked. The constitutional prohibition applies only to criminal or penal matters, and not to laws which concern civil matters or proceedings generally, or which affect or regulate civil or private rights.

d. Grounds (1) Contract. Tax exemption may be based on contract in which case the public represented by the government is supposed to receive a full equivalent therefor. Ordinarily, the

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b. Statutes imposing taxes are construed against the gov t No person or property is subject to taxation unless within the terms or plain import of a taxing statute. In every case of doubt, tax statutes are construed strictly against the government and liberally in favor of the taxpayer. The rule of strict construction as against the government is not applicable where the language of the statute is plain and there is no doubt as to the legislative intent. In such case, the words employed are to be given their ordinary meaning.

existing law and no publication is required for its validity. In one case, a BIR Memorandum Circular was ruled as one which is only for the internal administration of the BIR and not a regulation within the contemplation of Sec. 245 of the Tax Code, and therefore, needs no publication in the Official Gazette. (La Suerte Cigar v. CTA)

f. Special laws prevail over general laws Tax laws are special laws. The tax code, as a special law, prevails over a general law such as the Civil Code. But in case the provisions of a special law are found to be deficient in a particular situation, the Civil code shall apply. (See Art. 18, NCC)

c. Construction of Statute by Predecessors is not binding on the Successors The Secretary of Finance has the power to revoke, repeal or abrogate the acts or previous rulings of his predecessors in office. The reason for this is that the construction of the statute by those administering it is not binding on their successors if thereafter the latter becomes satisfied that a different construction should be given. (Hilado v. Collector)

I.

TAX EVASION v. TAX AVOIDANCE

Tax evasion is a term that connotes fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes. (Yutivo Sons Hardware v. CTA) It is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is also known as tax dodging . It is punishable by a law, subjecting the taxpayer to civil and criminal liabilities. Some tax evasion devices include the deliberate failure to report taxable income or property and the deliberate reduction of income that has been received. Tax evasion connotes the integration of 3 factors: The end to be achieved, i.e., payment of less than that known by the taxpayer to be legally due, or in paying no tax when it is shown that a tax is due; An accompanying state of mind which is described as being evil, in bad faith, willful or deliberate and not accidental; A course of action (or failure of action) which is unlawful.

d. Tax statutes must be applied prospectively i. General Rule The general rule is that tax laws or amendments thereof are prospective in operation. The reason is that the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time of the transaction which the law seeks to tax was completed. ii. Exception A statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent. As such, increasing taxes on income already earned is not invalid. iii. Exception to the Exception A tax law should be given retroactive application when it would be harsh and oppressive, for in such case, the constitutional limitation on due process would be violated. Where the increase is made to apply to income earned long before the enactment of the law, the proper tax of which has already been paid, such increase is a violation of due process.

b. Tax Avoidance Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. (CIR v. The Estate of Toda) Tax avoidance, often called tax planning or tax minimization, is the use by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability. The term may be extended to include situations where a person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental taxation or to lower his tax bracket for a taxable year. Thus, a man may change his residence to

e. Publication Not all sources of tax laws require publication as required in Art. 2 of the Civil Code. Interpretative regulations and those which are merely internal in nature, i.e., those which regulate only the personnel of the administrative agency and not the public, need not be published. When an administrative agency renders an opinion by means of a circular or memorandum it merely interprets a pre-

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avoid taxation or change the form of his property by putting his money into non-taxable securities. Where the tax evader breaks the law, the tax avoider sidesteps it.

References: Law of Basic Taxation by Aban The Fundamentals of Taxation by De Leon Atty. Bathan s Taxation Reviewer on General Principles of Taxation Notes from Previous Batches based on Atty. Tiu s Syllabus

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