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(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
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This is the first installment of my two-part reviewer on taxation. This covers two topics: (1) General Principles of Taxation; and (2) Income Tax. It is a consolidated and updated version of my reviewers in Tax 1 and Taxation Law Review. This reviewer is based on notes from Atty. Montero and Assoc. Dean Gruba and the books and reviewers of Atty. Mamalateo and Atty. Domondon. I also added some stuff from Atty. Mickey Ingles’ reviewer and Justice Dimaampao. References have also been made to the 2013 Bedan Red Book and the 2012 UP Tax Reviewer.
Further, I added the recent and relevant revenue regulations and other BIR issuances (especially those issued in 2012) and the latest SC and CTA jurisprudence (as of January 31, 2013). Most of the digests were sourced from Du Baladad and Associates (BDB Law) and from Baniqued & Baniqued. The reviewer will make reference to codal provisions. Thus, I recommend that you read this with a copy of the NIRC and other Laws Codal ( edition) by Atty. Sacadalan-Casasola
Possessors may reproduce and distribute my reviewer provided my name remains clearly associated with my work and no alterations in the form and content of my reviewer are made. If you find this reviewer useful, please share it to others.
May this reviewer prove useful to you. If it does, please share it to others. Happy studying!
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TABLE OF CONTENTS
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I. General Principles of Taxation .................... 1 II. NIRC A. Income Tax .............................................. 45
I. GENERAL PRINCIPLES OF TAXATION
A. Definition and Concept of Taxation
Q: Define taxation
Taxation is the inherent power of the sovereign exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. It is the mode of raising revenue for public purposes.
It is the power by which the sovereign raises revenue to defray the expenses of 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 Taxation
Q: What is the nature of the power of
taxation?
The nature of the power of taxation is two-fold. It is both an inherent power and a legislative power.
1. An inherent power
The power of taxation is inherent in the State, being an attribute of sovereignty. The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY VS. MARCOS [261 SCRA 667]. This is so because the very existence of the State is dependent on taxes.
2. Legislative in character
The power of taxation is essentially a legislative function. Taxation is an attribute of sovereignty. It is the strongest of all powers of the government. There is a presumption in favor of legislative determination. Public policy decrees that since upon the prompt collection of revenue depends the very existence of government itself, whatever determination shall be arrived at by the legislature should not be interfered with, unless there be a clear violation of some constitutional inhibition. [SARASOLA VS. TRINIDAD [ PHIL. 252]
It is a legislative power because it involves the promulgation of rules. The Constitution has allocated to the legislative department the enactment of law
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Q: May the legislature enact a law to raise
revenues even in the absence of a
constitutional provision granting the said
body the power to tax?
Yes. The power to tax can be exercised by the government even if the Constitution is entirely silent on the subject. There is no need for a constitutional grant for the State to exercise this power. The power to tax is inherent in the State, being an attribute of sovereignty. This is so because the State can neither exist nor endure without taxes.
It must be noted that Constitutional provisions relating to the power of taxation do not operate as grants of power to the Government, but instead merely constitute as limitations upon a power which would otherwise be practically without limit
Q: Why is the power to tax considered inherent in sovereignty?
It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity. No sovereign State can continue to exist without the means to pay its expenses, and, for those means, it has the right to compel all citizens and properly within its limits to contribute; hence, the emergence of the power to tax.
C. Characteristics of Taxation
Note: This should properly refer to Characteristics or Elements of a Tax, not Characteristics of Taxation. In the event the question is asked, answer as if the question refers to characteristics of a tax. See Chapter 1, K. Characteristic of Tax. With reservations, however, as to the source, the 2013 Beda tax reviewer enumerates as characteristic of taxation the following: (1) Comprehensive (2) Unlimited (3) Plenary and (4) Supreme. It is submitted that the proper answer would make reference to the inherent limitations to the power of taxation. Atty. Domondon states that the inherent limitations on the power of taxation is also known as the elements, tenets or characteristics of taxation.
D. Power of Taxation compared with other
powers
Q: Differentiate the power of taxation from
police power and the power of eminent
domain.
See table below.
TAXATION EMINENT
DOMAIN
POLICE
POWER
Authorit y who exercise s the power
Only by the government or its political subdivisions
May be exercised by (1) government or political subdivisions OR (2) granted to public utilities
Only by government or its political subdivisions
Purpose The property is taken for the support of the government
The property is taken for public use and must be compensated
The use of the property is regulated for promoting the general welfare and is not compensable
Persons affected
Operates on a community or class of individuals
Operates on an individual as owner of a particular property
Operates on a community or class of individuals
Effect The money contributed becomes part of the public funds
There is a transfer of the right to property
There is no transfer of title. At most, there is restraint on the injurious use of property
Benefits received
It is assumed that the
He receives the market value of the
The person affected receives
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for a lawful economic activity have a right to maintain a legitimate business. Hence, HMOs should not be arbitrarily and unjustly included in the DST coverage.
In TIO VS. VIDEOGRAM REGULATORY BOARD [ SCRA 208] , the Supreme Court held that the levy of 30% tax on videogram operators was imposed primarily to answer the need for regulating the video industry, particularly rampant film piracy and flagrant violation of intellectual property rights.
Q: May a tax be validly imposed in the
exercise of police power and not of the
power to tax?
Yes. The power of taxation may be used as an implement of police power of the State with the end in view of regulating a particular activity.
Note: Some authors and jurisprudence still refer to the imposition levied for the purpose of regulation as a tax. This is inaccurate and adds to confusion. The proper term, as used by the Supreme Court in numerous decisions should be “regulatory fee” or “fee”. In earlier cases, they were referred to as “license fees.” It is submitted that the use of the term “tax” should only be used to refer to an imposition for the purposes of revenue while the term “fee” is used for an imposition for purposes of regulation. As you will see later, the distinction between a “tax” and a “fee” is relevant as certain inherent and constitutional limitations apply only to one and no to the other. It is also important for purposes of tax exemptions.
Q: How do you determine if an imposition is
a tax or a (regulatory) fee?
In determining whether an imposition is a tax or a regulatory fee, one must inquire into the following:
- The purpose of the imposition
- The amount of the exaction
- The designation
Note: The criteria is based on Atty. Montero’s lecture. This is particularly useful in analyzing whether an imposition is a tax or a fee.
The purpose of the imposition
Q: How do you distinguish a tax from a
regulatory fee in terms of its purpose?
The distinction made by the Supreme Court in PROGRESSIVE DEVELOPMENT CORPORATION V. QUEZON CITY [172 SCRA 629] is particularly instructive. The Court stated that: If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if the regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax
Thus, a (regulatory) fee is imposed for purposes of regulation (in exercise of police power) while a tax is imposed for revenue generation purpose (the power of taxation).
Q: When an exaction is imposed to
discourage certain businesses, is the
exaction a tax?
No, it is a regulatory fee. In COMPANIA GENERAL DE TABACOS DE FILIPINAS V. CITY OF MANILA [8 SCRA 367] , the Supreme Court held that the municipal license fees for the privilege to engage in the business of selling liquor or alcoholic beverages were imposed for regulatory purposes as such products are potentially harmful to public health and morals.
Q: When an exaction is imposed to provide
means for the rehabilitation and stabilization
of a threatened industry, is the exaction a
tax?
No. Jurisprudence provides that such exactions are considered regulatory fees in light of their purpose.
Some cases:
In OSMENA V. ORBOS [220 SCRA 703] , in determining whether the taxes collected for the Oil Price Stabilization Fund are taxes or regulatory fees, the Supreme Court stated that while the funds were referred to as taxes, they were exacted not under the power of taxation, but in the exercise of the police power of the State. The main objective was not revenue but to stabilize the price of oil and petroleum products. . In REPUBLIC V. BACOLOD-MURCIA MILLING [17 SCRA 632], in determining whether the levy for the Philippine Sugar Institute Fund is a fee or a tax, the Supreme Court held that such levy was not so much
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
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an exercise of the power of taxation but an exercise of the police power to aid and support the sugar industry.
Q: When the exaction is imposed to make a
private company viable, is it a fee or a tax?
The exaction should be considered a tax. In PLANTERS PRODUCT V. FERTIPHIL CORPORATION [ SCRA 485] , an Letter of Instruction was issue imposing a capital recovery component on the domestic sales of all fertilizer grades and such exaction shall be collected until adequate capital was raised to make Planters Product, a private company, viable. The Supreme Court held that the levy was invalid for not serving a public purpose as the ultimate beneficiary was a private company. Hence, the primary purpose was for revenue generation.
Q: Are royalty fees (on a per liter basis)
imposed on the movement of petroleum fuel
to and from special economic zones a tax or
a fee?
The royalty fees imposed on the movement of petroleum fuel are regulatory fees. As held in CHEVRON PHILIPPINES V. BCDA [SEPTEMBER 15, 2010] , the royalty fees were exacted on a per liter basis because the higher the volume of fuel entering the special economic zone, the greater the extent and frequency of supervision and inspection required to ensure safety, security and order within the zone.
Q: Should margin fees be considered a tax
or a fee?
Margin fees are regulatory fees. In ESSO STANDARD EASTERN V. CIR [175 SCRA 149], the company sought to deduct the margin fees it paid from its gross income. The Supreme Court held that the margin fees cannot be deducted as they are not taxes. Margin fees are imposed to curb excessive demand upon the international reserves in order to stabilize the currency. It is applied to strengthen the country’s international reserves and is not imposed for revenue purposes. Hence, as they are not taxes, they cannot be considered as a deductible business expense.
Q: Should universal charges (for electricity
end-users) be considered a tax or a fee?
Universal charges are regulatory fees. In GEROCHI V. DOE [G.R. NO. 159796, JULY 17, 2007] , in determining whether the Universal Charge imposed on electricity end-users by distributors is a tax, the Supreme Court held in the negative and stated that the universal charge is a regulatory fee levied to ensure the viability of the country’s electric power industry
The amount of the exaction
Q: How do you distinguish a tax from a
regulatory fee in terms of the amount of the
exaction?
If the amount levied is too high and/or if the amount levied is not related to costs of regulation, the exaction should be considered a tax as it is levied for revenue purposes. Some cases:
In VILLEGAS V. HIU CHIONG TSAI PAO HO [86 SCRA 270] , in determining whether the exaction of P50. from aliens securing an employment permit (from the Mayor of Manila) is a fee or a tax, the Supreme Court held that the amount was too excessive and that there was no logic or justification in the exaction from aliens who have been cleared for employment. The Court opined that it was obvious that the purpose of the exaction is to raise money under the guise of regulation.
In PLANTERS PRODUCT V. FERTIPHIL CORPORATION [548 SCRA 485] , the Supreme Court held that the amount collected from the imposition on the domestic sales of fertilizer grades was too excessive to serve a mere regulatory purpose.
In AMERICAN MAIL LINE V. CITY OF BASILAN [2 SCRA 309] , the Supreme Court stated that for fees to be regulatory in nature, the same must be no more than sufficient to cover the actual cost of inspection or examination.
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exercise of the power of eminent domain. It noted that the tax credit granted to private establishments giving senior citizen discounts can be deemed as their just compensation for private property taken by the State for public use.
F. Principles of a sound tax system
1. Fiscal Adequacy
2. Administrative Feasibility
3. Theoretical Justice
Q: What the basic principles of a sound tax
system?
The basic principles are the following:
- Fiscal Adequacy – The source of government revenue must be sufficient to meet governmental expenditures and other public needs
- Theoretical Justice – a good tax system must be based on the taxpayer’s ability to pay
- Administrative feasibility – taxes should be capable of being effectively enforced.
In CHAVEZ V. ONGPIN [186 SCRA 331] , at issue was the validity of the increase, via an Executive Order, of the property values for purposes of real property taxes. The Supreme Court held that such was valid. One of the justifications was based on fiscal adequacy. The Court stated that fiscal adequacy requires that the sources of revenue must be adequate to meet government expenditures. To continue collecting at valuations arrived at several years ago is not in consonance with a sound tax system. Note : The basic principles of a sound tax system are also known as the Canons of Taxation.
Q: Will a violation of the abovementioned
principles render a tax law unconstitutional?
It depends. This was settled in the case of DIAZ V. SEC. OF FINANCE [JULY 19, 2011]. One of the grounds raised in assailing the validity of the imposition of VAT on the collection of toll way operators was that it violated the principle of administrative feasibility. Particularly, the petitioner
asserted that the substantiation requirements for claiming the input VAT were impractical and incapable of implementation as in order to claim input VAT, the name, address and TIN of the toll way user must be indicated in the VAT receipt or invoice. In addition, the rounding off of the toll rate and putting the excess collection in an escrow is illegal while the giving of the change to meet the exact toll rate would be a logistical nightmare. The Supreme Court held that while administrative feasibility is a canon of a sound tax system, the non-observance thereof will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired.
Note : J. Dimaampao is of the view that if the tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. It is submitted that this should be qualified. As to a violation of the principle of theoretical justice on the basis of uniformity, I submit that it would amount to a violation of the Constitution, specifically the equal protection clause. However, as to a violation of the principle of theoretical justice on the basis of equity, it is submitted that such would not be constitutionally infirm. The basis of this view can be found in the case of TOLENTINO VS. SECRETARY OF FINANCE [249 SCRA 628] which held that the system of taxation need not be always progressive.
G. Theory and Basis of Taxation
1. Lifeblood Theory
2. Necessity Theory
3. Benefits-Protection Theory (Symbiotic
relationship)
4. Jurisdiction over subject and objects
Note : As explained by Atty. Domondon, the theory of taxation and the basis or rationale for taxation are two different concepts. The theory of taxation explains why there is a need to impose taxes while the basis or rationale for taxation explains the reason why a State may impose taxes. The theory of taxation refers to the lifeblood theory (and the necessity theory which is but an extension of the lifeblood theory). The basis or rationale of taxation refers to (1) the symbiotic relationship and (2) jurisdiction by the state over persons and property within its territory.
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
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1. Lifeblood Theory
Q: What is the lifeblood theory?
As stated in the case of CIR vs. Algue [158 SCRA 9] , the existence of government is a necessity; it cannot exist nor endure without the means to pay its expenses; and for those means, the government has the right to compel all its citizens and property within its limits to contribute in the form of taxes.
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. CIR vs. Algue [158 SCRA 9]
The lifeblood theory states that an assessment of a tax is enforceable despite it being contested because of the urgency to collect taxes, this being the government’s primary source of revenue. CIR v. Cebu Portland [156 SCRA 535]
The lifeblood theory can be manifested in
the following cases:
- The prohibition against set-off of taxes [ see Section 204(C), NIRC ]
- The prohibition against the issuance of an injunction to restrain the collection of taxes
- Presumption of correctness of assessments
Illustrative cases:
In CIR v. Cebu Portland [156 SCRA 535], the taxpayer argued that that the deficiency assessment cannot be enforced because it is still being contested. The Supreme Court held that this argument loses sight of the urgency of the need to collect taxes as the lifeblood of the government. If the payment of taxes could be postponed by simply questioning heir validity, the machinery of the state would grind to a halt and all government functions would be paralyzed.
In PHILIPPINE GUARANTY V. CIR [13 SCRA 775] , the Supreme Court stated that the requirement that the withholding agent should withhold the tax before addressing a query to the Commissioner of Internal Revenue is not without meaning for it is in keeping with the general operation of our tax laws: payment precedes defense. Likewise, validity of a tax cannot be assailed until after the taxpayer has paid the tax under protest. By questioning a tax’s legality without first paying it, a taxpayer, in collusion with BIR officials, can unduly delay, if not totally evade, the payment of such tax.
In CIR v. CTA [234 SCRA 348] , the Supreme Court held that government cannot and must not be stopped in matters involving taxes as “they are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents.
In PHILIPPINE NATIONAL OIL COMPANY VS. CA [ SCRA 32] , the Supreme Court held that the Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents. Upon taxation depends the Government’s ability to serve the people for whose benefit the taxes are collected. Neglect or omission of government officials entrusted to collect taxes should not be allowed to bring harm or detriment to the people.
In SEC. OF FINANCE VS. ORO MAURA SHIPPING LINES [593 SCRA 14] , the Supreme Court opined that assuming further that MARINA merely committed a mistake in approving the vessel’s proposed cost and that the Collector of the Port of Manila similarly erred, we reiterate the legal principle that estoppel generally finds no application against the State when it acts to rectify mistakes, errors, irregularities, or illegal acts of its officials and agents irrespective of rank. The rule holds true even if the rectification prejudices parties who had meanwhile received benefits.
Q: What is the exception to the prohibition
on the issuance of an injunction to restrain
the collection of taxes?
An injunction may be issued to restrain the collection of taxes “ when in the opinion of the Court the collection may jeopardize the interest of the
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
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the Government this power must be used justly and not treacherously. ROXAS VS. CTA [23 SCRA 276]; REYES V. ALMANZOR [196 SCRA 322]; CIR V. TOKYO SHIPPING [244 SCRA 332]
Q: Justice Marshall said that “the power to
tax involves the power to destroy.” On the
other hand, Justice Holmes stated later that
“the power to tax is not the power to destroy
while the court sits.” Reconcile the
apparently inconsistent statements.
The two statements can be reconciled on three levels. First , the imposition of a valid tax could not be judicially restrained merely because it would prejudice the taxpayer’s property. Second, an illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer’s property. Third , J. Marshall’s view refers to a valid tax while J. Holmes view refers to an invalid tax.
H. Doctrines in Taxation
1. Prospectivity of tax laws
2. Imprescriptibility
3. Double Taxation
4. Escape from Taxation
5. Exemption from Taxation
6. Compensation and Set-off
7. Compromise
8. Tax Amnesty
9. Construction and Interpretation
1. Prospectivity of tax laws
Q: Are tax statutes prospective in its
application?
Yes. As held in CEBU PORTLAND V. COLLECTOR [G.R. NO. 18649, FEBRUARY 27, 1965] , the general rule under the Civil Code that laws shall have prospective application applies to tax laws.
Q: Can tax statutes be applied retroactively?
Yes. While, as a general rule , taxes must only be imposed prospectively, taxes, as an exception , may
be imposed retroactively if the law expressly provides and if it will not amount to a denial of due process.
Hence, in resolving the issue of whether a statute favorable to a taxpayer-heir can be given retroactive effect, the Supreme Court held in LORENZO VS. POSADAS [64 PHIL. 353] that inheritance taxation is governed by the statute in force at the time of the death of the decedent, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect which is not the case. And such Revenue laws are not to be classed penal laws, so even if favorable, should not be given retroactive effect.
2. Imprescriptibility
Q: Are taxes imprescriptible?
As a general rule , taxes are imprescriptible. However, as an exception , the tax law may provide otherwise. In particular, the NIRC and LGC provides for prescriptive periods for assessment and collection of taxes.
Q: What is the rationale behind providing for
a statute of limitations in the collection of
taxes?
As held in the case of REPUBLIC VS. ABLAZA [ PHIL 1105 , the law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens.
In CIR V. B.F. GOODRICH PHILS [FEBRUARY 24, 1999], the Supreme Court noted that our tax laws provides for a statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment.
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Q: How should said statute of limitations in
taxation be construed?
The law on prescription being a remedial measure should be liberally construed in order to afford protection. On the other hand, the exceptions to the law on prescription should be strictly construed. Thus, in the case of CIR VS. PHILIPPINE NATIONAL BANK [G.R. No. 161997, October 25, 2005] , the Court held that even if the 2-year prescriptive period for a claim for tax refund has already lapsed, the same may be suspended for equity and special circumstances.
3. Double Taxation
a) Strict sense
b) Broad sense
c) Constitutionality of double taxation
d) Modes of eliminating double taxation
Q: What is double taxation?
Double taxation is defined as taxing the same property twice when it should be taxed but once. It has also been defined as taxing the same person twice by the same jurisdiction over the same thing. It is sometimes known as “duplicate taxation.”
Q: What are the two types of double
taxation?
Double taxation may be direct (strict sense) or indirect (broad sense).
In the strict sense , double taxation means direct double taxation. This means that the same property is taxed twice when it should be taxed only once and that both taxes are imposed on the same subject matter for the same purpose, by the same taxing authority within the same jurisdiction during the same taxing period and covering the same kind of tax.
In the broad sense , double taxation means indirect double taxation. Double taxation is indirect where some elements of direct double taxation are absent. It applies to all cases in which there are two or more pecuniary impositions.
Q: Is double taxation prohibited under the
Constitution?
It depends. The Constitution does not prohibit the imposition of double taxation in the broad sense. However, if double taxation amounts to a direct double taxation, then it becomes legally objectionable for being oppressive and inequitable. It violates the equal protection and uniformity clauses of the Constitution.
Q: What are the elements of (direct) double
taxation?
There is direct double taxation if the two taxes are imposed:
- On the same subject matter
- For the same purpose
- By the same taxing authority
- Within the same jurisdiction
- During the same taxing period 6. The taxes must be of the same kind or character PEPSI-COLA BOTTLING COMPANY V. MUN. OF TANAUAN [69 SCRA 460]
Q: Bank A’s gross receipts from passive
income is subject to 20% final withholding
tax. At the same time, the total gross receipt
of Bank A is subject to 5% gross receipts
tax (GRT). Is the imposition of the FWT and
GRT a form of double taxation?
No. First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to
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impositions are of a different character. The first is a license fee for the privilege of engaging in the sale of liquor in the exercise of police power while the other is imposed for revenue purposes based on the sales made.
Q: Company A, engaged in the manufacture
of tobacco, is subject to the payment of
tobacco inspection fees aside from other
taxes it pays to the national government. Is
there double taxation?
No. Tobacco Inspection fees are undoubtedly National Internal Revenue taxes, they being one of the miscellaneous taxes provided for under the Tax Code. The Code specifically provides for the collection and manner of payment of the said inspection fees. Tobacco inspection fees are levied and collected for purposes of regulation and control. Tobacco inspection fees are of a different kind and character from other taxes imposed. ( LA SUERTE VS. CTA [134 SCRA 36] )
Q: A city ordinance imposed a license fee
on any person, firm, entity or corporation
doing business in the City. A contends that
the ordinance constitutes double taxation as
he already pays taxes imposed by the
national government. Is A correct?
No. It has been expressly affirmed by the Supreme Court that such an argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and the political subdivisions thereof. ( CITY OF BAGUIO VS. DE LEON [25 SCRA 938] )
Q: A local government unit wishes to levy
excise taxes on quarry resources found
within its jurisdiction. The national
government argues that it may not do so as
such articles are already taxed by the NIRC.
Decide.
The local government unit may levy a tax on quarry resources extracted from public lands but not from private lands. In PROVINCE OF BULACAN V. CA [
SCRA 442], the Supreme Court stated that the NIRC levies a tax on all quarry resources whether extracted from public or private land. Thus, the local government unit cannot impose taxes on quarry resources as they are already taxed under the NIRC. However, by express provision in the Local Government Code, the LGU may levy on quarry resources extracted from public land.
Q: What are the modes of elimination double
taxation?
The usual methods of avoiding the occurrence of double taxation are:
- Allowing reciprocal exemption either by law or by treaty
- Allowance of tax credit for foreign taxes paid
- Allowance of deduction for foreign taxes paid; and
- Reduction of the Philippine tax rate
4. Escape from Taxation
a) Shifting of tax burden
b) Tax Avoidance
c) Tax Evasion
a) Shifting of tax burden
Q: What is meant by “shifting the tax
burden”?
Shifting of tax burden is the process by which the burden of a tax is transferred from the statutory taxpayer or the one whom the tax was assessed or imposed to another without violating the law.
Q: What is the meaning of impact and
incidence of taxation?
Impact of taxation and incidence of taxation are two different concepts.
Impact of taxation (liability) is the point on which a tax is originally imposed while incidence of taxation (burden) is that point on which the tax burden finally rests or settles down.
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Q: Enumerate the ways of shifting the tax
burden and define each.
- Forward shifting - When the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer.
- Backward shifting – When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factors of production.^2
- Onward shifting – When the tax is shifted two or more times either forward or backward.^3
Q: What taxes can be shifted?
Only indirect taxes may be shifted.
Q: How do you determine if a tax is direct or
indirect?
Direct taxes are taxes wherein the impact or liability for the payment of the tax as well as the incidence or burden of the tax falls on the same person. On the other hand, indirect tax are taxes wherein the impact or the tax liability for the payment of the tax falls on one person but the incidence or burden thereof can be shifted or passed to another.
In CIR v. PLDT [478 SCRA 61]) , the Supreme Court distinguished direct taxes from indirect taxes by stating that direct taxes are those that are extracted from the very person who, it is intended or desired, should pay them while 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.
Q: In the refund of indirect taxes, who is the
proper party to claim the said refund?
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(^2) As an example, the purchaser may shift the tax to the producer
by purchasing only when the price is reduced. 3 As an example, the producer/manufacturer may pass the tax burden to the retailer/seller of the goods who in turn will pass the tax burden to the purchaser.
In the refund of indirect taxes, the statutory taxpayer is the proper party who can claim the refund ( SILKAIR VS. CIR [FEBRUARY 25, 2010] )
As held in the case of EXXONMOBIL V. CIR [G.R. NO. 180909, JANUARY 19, 2011] , in the case of indirect taxes, it is the manufacturer of the goods who is entitled to claim any refund thereof. Indirect taxes paid by the manufacturers or producers of the goods cannot be refunded to the purchasers of the goods because the purchasers are not the taxpayers. CONTEX CORPORATION VS. CIR [433 SCRA 577]
The liability for the payment of the indirect tax lies only with the seller of the goods or services, not in the buyer thereof. In indirect taxes, when the seller passes on the tax to his buyer, he, in effect, shifts the burden, not the liability to pay it, to the purchaser as part of the price of goods sold or rendered. CIR v. PLDT [478 SCRA 61]
DIAGEO PHILIPPINES V. CIR [G.R. NO. 183553,
NOVEMBER 12, 2012]
DOCTRINE: The claimant for the refund of excise taxes related to exported products shall be the same person who paid the taxes.
FACTS : Diageo Philippines, Inc. purchased raw alcohol from its supplier for use in the manufacture of its beverage and liquor products. The supplier imported the raw alcohol and paid the related excise taxes thereon before the same were sold to the petitioner. The purchase price for the raw alcohol included, among others, the excise taxes paid by the supplier. Subsequently, petitioner exported its locally manufactured liquor products and received the corresponding foreign currency proceeds of such export sales. Petitioner then filed applications for tax refund/ issuance of tax credit certificates corresponding to the excise taxes which its supplier paid but passed on to it as part of the purchase price of the subject raw alcohol invoking Section130(D) of the Tax Code.
HELD : The Court ruled that “the right to claim a refund or be credited with the excise taxes belongs to its supplier.” Any excise tax paid thereon shall be credited or refunded” requires that the claimant be the same person who paid the excise tax.
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
PIERRE MARTIN DE LEON REYES Page 16 of 158
of the First Division.
HELD : The Supreme Court held that both the earlier amendment in the 1977 Tax Code and the present Sec. 135 of the 1997 NIRC did not exempt the oil companies from the payment of excise tax on petroleum products manufactured and sold by them to international carriers.
Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no express grant under the NIRC of exemption from payment of excise tax to local manufacturers of petroleum products sold to international carriers, and absent any provision in the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec. 135 (a) should be construed as prohibiting the shifting of the burden of the excise tax to the international carriers who buys petroleum products from the local manufacturers. Said provision thus merely allows the international carriers to purchase petroleum products without the excise tax component as an added cost in the price fixed by the manufacturers or distributors/sellers. Consequently, the oil companies which sold such petroleum products to international carriers are not entitled to a refund of excise taxes previously paid on the goods.
The Supreme Court pointed out that the taxpayer’s failure to make a distinction on the exemption under Sections 134 and 135 of the Tax Code, apparently led it to mistakenly assume that the tax exemption under Sec. 135 (a) “attaches to the goods themselves” such that the excise tax should not have been paid in the first place. The exemption found in Sec. 134 makes reference to the nature and quality of the goods manufactured (domestic denatured alcohol) without regard to the tax status of the buyer of the said goods while Sec. 135 deals with the tax treatment of a specified article (petroleum products) in relation to its buyer or consumer.
Further, it held that Sec. 135 (a) in relation to the other provisions on excise tax and from the nature of indirect taxation, may only be construed as prohibiting the manufacturers-sellers of petroleum products from passing on the tax to international carriers by incorporating previously paid excise taxes into the selling price. In other words, the taxpayer cannot shift the tax burden to international carriers who are allowed to purchase its petroleum products without having to pay the added cost of the excise tax.
Furthermore, considering that the excise taxes attaches to petroleum products “as soon as they are in existence as such,” there can be no outright exemption from the payment of excise tax on petroleum products sold to international carriers. The sole basis then of the taxpayer’s claim for refund is the express grant of excise tax exemption in favor of international carriers under Sec. 135(a) for their purchases of locally manufactured petroleum products.
Citing its ruling in Philippine Acetylene , it held that a tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products under Sec. 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers.
Q: Distinguish indirect taxes from
withholding taxes.
See case digest below.
ASIA INTERNATIONAL AUCTIONEERS V. CIR [G.R.
179115, SEPT. 26, 2012]
DOCTRINE: See held.
FACTS : Asia International Auctioneers (AIA) received an assessment from the BIR for deficiency VAT. AIA availed of the tax amnesty program under RA 9480. The BIR contends that AIA is disqualified under RA 9480 which, among others, enumerates withholding agents as persons to whom the tax amnesty shall not extend to. The BIR argues that AIA is a withholding agent.
HELD : AIA is not a withholding agent. Indirect taxes, like VAT and excise tax, are different from withholding taxes. To distinguish, in indirect taxes, the incidence of taxation 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. On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government. Due to this difference, the deficiency VAT cannot be “deemed” as withholding taxes merely because they constitute indirect taxes. Moreover, records in this case support the conclusion that AIA was assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes.
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
PIERRE MARTIN DE LEON REYES Page 17 of 158
b) Tax Avoidance
c) Tax Evasion
Q: What is the difference between tax
avoidance and tax evasion?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. 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. Tax evasion , on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
Note : An example of tax avoidance is when a taxpayer avails of deductions allowed by law.
Q: What is the “substance over form”
doctrine?
The doctrine provides that taxability is determined by the reality of the transaction rather than the appearance which may be contrived.
Q: What are the three factors to be
considered in determining if a scheme is
designed to evade taxes?
The three factors to be considered are:
- The end to be achieved (which is payment of less taxes than that known by the taxpayer to be legally due or non-payment of a tax when it is shown that a tax is due);
- An evil or deliberate state of mind; and
- A course of action which is unlawful.
Q: Husband and wife own a lot of real
estate. Upon advice of their lawyer, they
decided to organize a corporation to take
control of their properties. The husband and
wife were issued 2,500 original unissued no
par value shares of stock in exchange for
their properties. Is the scheme designed to
avoid taxes or evade taxes?
This is only a case of tax avoidance. In DELPHER TRADES CORPORATION V. INTERMEDIATE APPELLATE COURT [157 SCRA 349] , the Supreme Court opined that there was nothing wrong or objectionable about the "estate planning" scheme resorted to by the taxpayers. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. In the said case, the taxpayers acquired 2,500 original unissued no par value shares of stocks of the corporation in exchange for their properties. By virtue of this exchange, the taxpayers became stockholders of the corporation by subscription. In effect, they changed the nature of their ownership from unincorporated to incorporated form by organizing the corporation to take control of properties and at the same save on inheritance taxes.^4
Q: ABC corporation sold its building to A,
who in turn, sold during the same day the
same property to XYZ Corporation. Is the
scheme designed to avoid taxes or evade
taxes?
This is a case of tax evasion. In CIR VS. THE ESTATE OF BENIGNO TODA, JR. [483 SCRA 293] , the Supreme Court held that the three factors in tax evasion were present. The two transfers were tainted with fraud since the intermediary transfer (from the corporation to a natural person) was prompted only by the desire to mitigate tax liabilities and not for any business purpose.
Q: ABC Corporation owns the ABC building.
It sold the said building to A, a close
business associate of ABC Corporation, on
30 August 1989. After a week, A sold the
same to XYZ Corporation. Is the scheme
designed to avoid taxes or evade taxes?
This is a case of tax evasion. The scheme sought to make it appear that there were two sales of the
(^4) If the properties were to be held by the spouses in the case, it would be tied to the succession proceedings and the consequential payment of estate taxes when the owner dies. On the other hand, a corporation does not die and can hold the property for a period of at least 50 years.
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
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As to source
Constitutional Exemption originates from the Constitution Statutory Emanating from legislation Contractual Based on contractual stipulation Treaty Based on treaty provisions Ordinance Based on an ordinance exempting payment of local government taxes.
As to manner of creation
Express Expressly granted by organic or statute law Implied Whenever particular persons, properties, or excises are deemed exempt as they fall outside the scope of the taxing provision.
As to scope of extent
Total When certain persons, property or transactions are exempted from all taxes Partial When certain persons, property or transactions are exempted from certain taxes
As to object
Personal Those granted directly in favor of such persons as are within the contemplation of the law granting the exemption Impersonal Those granted directly in favor of a certain class of property
d) Rationale/grounds for exemption
Note: The rationale for exemption and the grounds for exemption are two different things. The rationale asks the question why tax exemptions are given while the grounds tell us why the State can provide tax exemptions.
Q: What is the rationale behind tax
exemptions?
Tax exemptions are given because:
- Public interest will be served by the exemption allowed; and
- Such public benefit or interest is sufficient to offset the monetary loss entailed in the grant of the exemption
Q: What are the grounds of tax exemption?
Tax exemption may be based on:
- Contract;
- Some ground of public policy; and
- Treaty created on grounds of reciprocity or to lessen the rigors of international double or multiple taxation
Q: Can be there be a tax exemption on the
ground of equity?
No. The Supreme Court held in DAVAO GULF V. CIR [293 SCRA 76], that there is no tax exemption solely on the ground of equity.
e) Revocation of tax exemption
Q: May a tax exemption be revoked?
Yes. Since taxation is the rule and exemption therefrom is the exception, the exemption may be withdrawn at the pleasure of the taxing authority.
Hence, in MCIAA V. MARCOS [261 SCRA 667], the Supreme Court noted that Section 234 of the the Local Government Code unequivocally withdrew exemptions from payments of real property taxes granted to natural or juridical persons, including government-owned and control corporations. Since MCIAA is a GOCC, it follows that its exemption granted under a charter prior to the LGC has been withdrawn.
In SMART V. CITY OF DAVAO [565 SCRA 237], the Supreme Court noted that the “in lieu of all taxes” clause in its charter has become functus officio with
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
PIERRE MARTIN DE LEON REYES Page 20 of 158
the abolition of franchise tax on telecommunications companies in accordance with the VAT law.
in REPUBLIC V. CAGUIOA [536 SCRA 194] held that there is no vested right in a tax exemption and more so when the latest expression of legislative intent renders it continuance doubtful. In the said case, RA 7227 granted private domestic corporations doing business in the Subic SEZ tax exemptions on importations of general merchandise. However, RA 9334 withdrew the tax exemption on the importations of cigars, cigarettes, distilled spirits, fermented liquors and wines.
In NITAFAN V. CIR [152 SCRA 284] , the Supreme Court held that the salaries of members of the judiciary are subject to income tax as applied to all taxpayers. The payment of income tax by Justices and Judges do not fall within the constitutional protection against decrease of their salaries during their continuance in office.
Q: Is there an exception to the above
doctrine?
Yes. The exemption cannot be withdrawn if the exception was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and thus covered by the non-impairment clause of the Constitution ( MCIAA V. MARCOS [261 SCRA 667] ).
6. Compensation and set-off
Q: Can taxes be the subject of
compensation between the government and
the taxpayer?
No. As held in CALTEX VS. COA [208 SCRA 727] , taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. (see FRANCIA V. IAC [162 SCRA 753] )
There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay taxes on the ground that the government owes him an
amount equal or greater than the tax being collected ( PHILEX MINING V. CIR [294 SCRA 687] ).
Taxes cannot be the subject of set-off because they are not in the nature of contracts between parties but grow out of a duty to, and, are positive acts, of the Government, to the making and enforcing of which, the personal consent of the taxpayer is not required ( REPUBLIC V. MAMBULAO LUMBER [4 SCRA 622])
The erroneous payment of final withholding tax cannot be used to offset or be treated as advance tax payment, and cannot be used against the succeeding final withholding tax. COMMISSIONER OF INTERNAL REVENUE VS. GOULDS PUMPS (PHILS.) INCORPORATED, AUGUST 22, 2012
Note: In one case, DOMINGO V. GARLITOS [8 SCRA 443] , the Supreme Court allowed the set-off between taxes and debts. It opined that if the obligation to pay taxes and the taxpayer’s claim against the government are both overdue, demandable, as well as fully liquidated, compensation takes place by operation of law and both obligations are extinguished to their concurrent amounts. In the said case, the taxpayer who has been assessed municipal taxes was allowed to assign in favor of the municipality a final judgment obtained by him against the said municipality to cover the assessment. Atty. Domondon reconciled the rulings of the Supreme Court in DOMINGO V. GARLITOS [8 SCRA 443] and FRANCIA V. IAC [162 SCRA 753] by stating that in the former case, both claims being overdue, demandable, and fully liquidated while in the latter case, the claim against the government was not overdue and demandable as it was already settled. Atty. Domondon submits that when confronted with a bar problem, we follow the doctrine laid down in FRANCIA V. IAC [162 SCRA 753] unless the facts would involve the (1) the application of the principle of solutio indebiti or (2) it involves local government taxes.
Q: Is the civil concept of solutio indebiti
applicable to taxation?
Yes. In the case of FILINVEST DEVELOPMENT CORPORATION VS. CIR [529 SCRA 605] , the Court held that in the field of taxation where the State exacts strict compliance upon its citizens, the State must likewise deal with taxpayers with fairness and honesty. Hence, under the principle of solutio indebiti, the Government has to restore to petitioner the sums representing erroneous payments of taxes.
