Taxation

A. Definition and Nature 1. Definition a. Taxation Taxation is

the method by which enforced proportional contributions are exacted. the power by which the sovereign, through its lawmaking body, raises revenue to defray the necessary expenses of government. a way of apportioning the costs of government among those who in some measure are privileged to enjoy its benefits and must bear its burden. a Symbiotic relationship, whereby in exchange for the protection that the citizens get from the government, taxes are paid.

b. Taxes Taxes are 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 government and for public needs. (Cooley, Taxation, 4th edition, Section 1) Distinction with license fees. The term tax applies generally speaking to all kinds of exactions which become public funds. The term is often loosely used to include levies for revenue as well as levies for regulatory purposes. Thus license fees are commonly called taxes. Legally speaking, however, license fee is a legal concept quite distinct from tax; the former is imposed in the exercise of police power for purposes of regulation, while the latter is imposed under the taxing power for the purpose of raising revenues (MacQuillin, Municipal Corporations, Vol. 9, 3rd Edition, p. 26). Distinction with special assessments. While the word tax in its broad meaning, includes both general taxes and special assessments, and in a general sense a tax is an assessment, and an assessment is a tax, yet there is a recognized distinction between them in that assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with reference to special benefits to the property assessed. The differences between a special assessment and a tax are that (1) a special assessment can be levied only on land; (2) a special assessment cannot (at least in most states) be made a personal liability of the person assessed; (3) a special assessment is based wholly on benefits; and (4) a special assessment is exceptional both as to time and locality. The imposition of a charge on all property, real and personal, in a prescribed area, is a tax and not an assessment, although the purpose is to make a local improvement on a street or highway. A charge imposed only on property owners benefited is a special assessment rather than a tax notwithstanding the statute calls it a tax. (Apostolic

Prefect of the Mountain Province vs. the Treasurer of Baguio City [GR 47252, 18 April 1941]; citing Cooley) 2. Attributes / Characteristics of taxation 1. A forced charge, imposition or contribution and as such it operates in invitum. (Rochester vs. Bloss, 175 NY 42, 27 NE 794, 61 LRA [NS] Ann 7, Cas. 15) Taxes are not in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required (Republic vs. Mambulao Lumber [GR L-17725, 28 February 1962]). 2. It is a pecuniary burden payable in money, but such a tax is not necessarily confined to those payable in money (1 Cooley 3). 3. It is levied by the legislative body of the State because the taxing power is pecuniary and exclusively legislative in character. (51 Am. Jr. 71) 4. It is assessed in accordance with some reasonable rule of apportionment, conformably with the constitutional mandate on progressivity of a taxing system. (Article VI, Section 28[1], 1987 Constitution). 5. It reaches even the citizen abroad and his income earned from sources outside his State; as well as all income earned in the taxing State, whether by citizens or aliens, and all immovable and tangible personal properties found in its territory, as well as tangible personal property owned by persons domiciled therein, are subject to its taxing power (Justice Cruz, Constitutional Law, 2000 edition, 86) 6. A tax is levied for a public purpose as taxation itself involves a burden to provide revenue for public purposes of a general nature. 3. Nature of taxing power

Inherent. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. Taxes being the lifeblood of the government, their prompt and certain availability is of the essence. (Sison v. Ancheta [GR L-59431, 25 July 1984]) High prerogative of sovereignty. As the power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any reduction or diminution thereof with respect to its mode or its rate, must be strictly construed, and the same must be coached in clear and unmistakable terms in order that it may be applied. (84 C.J.S. pp. 659-800) Legislative. Taxing power is peculiarly and exclusively legislative in character and remains undiminished in the legislative in character and remains undiminished in the legislature in the absence of an express surrender thereof, clear and explicit in its terms. (51 Am. Jur. 71-73) Constitutionally limited. The power to tax is an attribute of sovereignty. It is the strongest of all the powers of government. For all its plenitude, the power to tax has restrictions. The Constitution sets forth such limits. Adversely affecting as it does property rights, both the due process and equal protection clauses may properly be

invoked to invalidate in appropriate cases a revenue measure. (Sison v. Ancheta [GR L-59431, 25 July 1984]) B. Purpose Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Despite the natural reluctance to surrender part of ones hard-earned income to the taxing authorities, 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 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. (Commissioner of Internal Revenue v. Algue [GR L-28896, 17 February 1988]) 1. Revenue: 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. 7173) Raising of revenues is the principal object of taxation. (Bagatsing vs. Ramirez [GR L-41631, 17 December 1976]) 2. Non-Revenue: a. Regulation: Taxes may also be imposed for a regulatory purpose as for example, in the promotion, rehabilitation and stabilization of industry which is affected with public interest. (See Lutz vs. Araneta [GR L-7859, 22 December 1955] , and Caltex Philippines vs. Commission on Audit [GR 92585, 8 May 1992]) b. Promotion of general welfare: If objective and methods are alike constitutionally valid, no reason is seen why the state may not be levy taxes to raise funds for their prosecution and attainment. Taxation may be made to implement the states police power. (Lutz V. Araneta, 98 Phil. 148 [1955]; citing Great Atlantic & Pacific Tea Co. v. Grosjean, 301 U.S. 412, 81 L. Ed. 1193; U.S. v. Butler, 297 U.S. 1, 80 L. Ed. 477; MCulloch v. Maryland, 4 Wheat, 316, 4 L. Ed. 579. ) c. Reduction of social inequality: Made possible through the progressive system of taxation where the objective is to prevent the undue concentration of wealth in the hands of a few individuals. (Aban, Benjamin. Law of Basic Taxation in the Philippines, Second Edition 1994, page 6). d. Encourage economic growth: In the realm of tax exemptions and tax reliefs, the purpose of taxation (the power to tax being the power also not to tax. Ed.) is to grant incentives or exemptions in order to encourage investments and thereby promote the countrys economic growth. (Ibid.) e. Protectionism: In some important sectors of the economy, taxes sometimes provide protection to local industries like protective tariffs and customs duties. (Ibid.) !!! Case(s)

52. CIR vs. Algue, Inc., 158 SCRA 9 (1988) 53. Commissioner vs. Makasiar, 177 SCRA 27 (1989) C. Scope (The power to tax is the power to destroy) Philippine internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. As a matter of fact, income tax returns were filed during that period and income tax payment were effected and considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy. (Hilado vs. CIR [GR. L-9408, 31 October 1956.]) So pervasive is the power of taxation that it reaches even the citizen abroad and his income earned from sources outside his State. In other cases, all income earned in the taxing State, whether by citizens or aliens, and all immovable and tangible personal properties found in its territory, as well as tangible personal property owned by persons domiciled therein, are subject to its taxing power (Justice Cruz, Constitutional Law, 2000 edition, 86) Tariff and customs duties are taxes constituting a significant portion of the public revenue which are the lifeblood that enables the government to carry out functions it has been instituted to perform. (Commissioner of Customs v. Makasiar [GR 79307, 29 August 1989]) Legislative taxing power or discretion extends to the following: 1. 2. 3. 4. 5. 6. Subjects and objects of tax Amount and rate of tax Purpose for which taxes are to be levied Apportionment of the tax ( general, limited to a particular locality, or mixed) Situs of taxation Manner and mode of enforcement and collection

(Aban, Benjamin. Law of Basic Taxation in the Philippines, Second Edition 1994, page 8). The taxing authority can select the subjects of taxation (Gomez vs. Palomar (GR L-23645, 29 October 1988). The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Where the differentiation conforms to the practical dictates of justice and equity, it is not discriminatory within the meaning of this clause and is therefore uniform. There is quite a similarity then to the standard of equal protection for all that is required is that the tax applies equally to all persons, firms and corporations placed in similar situation. Taxpayers may be classified into different categories. It is enough that the classification must rest upon substantial distinctions that make real differences. (Sison v. Ancheta [GR L-59431, 25 July 1984]) Thus, a classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are substantially identical to those of the present; (4) the classification applies only to those who belong to the same class (Felwa v. Salas [GR L-26511, 29 Oct 1966]). Still, the classification, to be reasonable, should be in

terms applicable to future conditions as well. (Ormoc Sugar Company vs. Treasurer of Ormoc City [GR L-23794, 17 February 1968]) That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create; that there is a plain repugnance in conferring on one government a power to control the constitutional measures of another, which other, with respect to those very measures, is declared to be supreme over that which exerts the control, are propositions not to be denied. But all inconsistencies are to be reconciled by the magic of the word confidence. Taxation, it is said, does not necessarily and unavoidably destroy. To carry it to the excess of destruction, would be an abuse, to presume which, would banish that confidence which is essential to all government. (Chief Justice Marshall, McCulloch vs. Maryland, 17 US 316 [1819]) In those days (the case of McCullough vs. Maryland [1819] Ed.) it was not recognized as it is today that most of the distinctions of the law are distinctions of degree. If the States had any power it was assumed that they had all power, and that the necessary alternative was to deny it altogether. But this Court which so often has defeated the attempt to tax in certain ways can defeat an attempt to discriminate or otherwise go too far without wholly abolishing the power to tax. The power to tax is not the power to destroy while this Court sits. The power to fix rates is the power to destroy if unlimited, but this Court while it endeavors to prevent confiscation does not prevent the fixing of rates. (Dissenting opinion of Justice Holmes, Panhandle Oil Co. vs. State of Mississippi Ex Rel. Knox, 277 US 218 [1928]). Construing the power to tax is the power to destroy, it merely describes not the purposes for which the tax may be used bt the degree of vigor with which the taxing power may be employed in order to raise revenue (1 Cooley 179-181). D. Who exercises the power? 1. In general Taxing power is peculiarly and exclusively legislative in character and remains undiminished in the legislative in character and remains undiminished in the legislature in the absence of an express surrender thereof, clear and explicit in its terms. (51 Am. Jur. 7173) It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251). Still, tax collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. 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. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be

stopped in his tracks if the taxpayer can demonstrate that the law has not been observed. (Commissioner of Internal Revenue v. Algue [GR L-28896, 17 February 1988]) 2. Local Government Units Previously, a municipal corporation has no inherent power of taxation. To enact a valid ordinance, the City must find in its charter the power to do so, for said power cannot be assumed. A municipal corporation, unlike a sovereign state, is clothed with no inherent power of taxation. Its charter must plainly show an intent to confer that power or the corporation cannot assume it. And the power when granted is to be construed strictissimi juris. Any doubt or ambiguity arising out of the term used must be resolved against the municipal corporation. (Santos Lumber Co. vs. City of Cebu, et al., 102 Phil., 870; See also Arong vs. Raffian, 98 Phil., 422). Now, direct authority has been conferred to local government units by the 1987 Constitution, specifically Section 5, Article X thereof, which provides that Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. Except as otherwise provided in the Local Government Code (RA 7160), the province may levy only the taxes, fees, and charges as provided in Article I, Chapter II, Title I, Book II; such the Tax on Transfer of Real Property Ownership; Tax on Business of Printing and Publication; Franchise Tax; Tax on Sand, Gravel and Other Quarry Resources; Professional Tax; Amusement Tax; Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in, Certain Products (Section 134). Further, municipalities may levy taxes, fees, and charges not otherwise levied by provinces (Section 142). Furthermore, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of the Local Government Code, and Provided further that the rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than 50% except the rates of professional and amusement taxes (Section 151). Section 130 of the Local Government Code provides for fundamental principles that shall govern the exercise of the taxing and other revenue-raising powers of local government units, that is, (a) Taxation shall be uniform in each local government unit; (b) Taxes, fees, charges and other impositions shall: (1) be equitable and based as far as practicable on the taxpayers ability to pay; (2) be levied and collected only for public purposes; (3) not be unjust, excessive, oppressive, or confiscatory; (4) not be contrary to law, public policy, national economic policy, or in the restraint of trade; (c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; (d) The revenue collected pursuant to the provisions of the Local Government Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, (e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

Art. VI Sec. 28 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. Art. XIV, Sec. 4 (3) Section 4. xxx 3. All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Art. X, Sec. 5 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. Tax Exemptions 1. Nature Tax exemptions are either constitutional or statutory. Exemption is granted religious and charitable institutions because they give considerable assistance to the State in the improvement of the morality of the people and the care of the indigent and the handicapped. (Justice Cruz, Constitutional Law, 2000 Edition, 92-93) Statutory exceptions are granted in the discretion of the legislature, but such law should be passed with the concurrence of a majority of all the Members of Congress. Where the taxation is granted gratuitously, it may be validly revoked at will, with or without cause. However, if the

exemption is granted for valuable consideration it is deemed to partake of the nature of a contract and the obligation thereof is protected against impairment (Ibid., 94-95) By its very nature, the law that exempts one from tax must be clearly expressed because the exemption cannot be created by implication. Exemption from taxation are highly disfavored in law; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implication. (Asiatic Petroleum Co. vs. Llanes, 49 Phil., 466; See also House vs. Posadas, 53 Phil., 338.) The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution (Apostolic Prefect of the Mountain Province vs. the Treasurer of Baguio City [GR 47252, 18 April 1941]). The phrase exempt from taxation, as employed in the Constitution should not be interpreted to mean exemption from all kinds of taxes. The exemption from the payment of taxes assessed on such properties enumerated in the Constitution are property taxes, as contra-distinguished from excise taxes. A donees gift tax is not a property tax but an excise tax imposed on the transfer of property by way of gift inter vivos. Its assessment was not on the property themselves. It does not rest upon general ownership, but an excise upon the use made of the properties, upon the exercise of the privilege of receiving the properties. The imposition of such excise tax on property used for religious purposes do not constitute an impairment of the Constitution. (Lladoc v. Commissioner of Internal Revenue [GR L-19201, 16 June 1965]) As to franchise grantees and other entities specifically granted exemption by the legislature, tax exemption must be strictly construed and that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention of the parties. (Philippine Acetylene vs. CIR [GR L-19707, 17 August 1967] 2. Burden of Proof The cardinal rule in taxation is that exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right thereto by the clearest grant of organic or statute law. (Wonder Mechanical Engineering vs. CTA [GR L22805 & L-27858, 30 June 1975]) The burden is on the taxpayer to prove the validity of the claimed deduction. It is the universal rule that he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be mistaken. (Statutory Construction by Francisco, citing Government of Philippine Islands vs. Monte de Piedad, 25 Phil. 42.) It is axiomatic that when public property is involved, exemption is the rule and taxation, the exception. (SSS vs. Bacolod City [GR L-35726, 21 July 1982]) !!! Case(s)

54. YMCA vs. CIR, 33 Phil. 217 (1916) 55. Bishop of Nueva Segovia vs. Provincial Board, 51 Phil. 352 (1927) 56. Lladoc vs. CIR, 14 SCRA 292 (1965) 57. Province of Abra vs. Hernando, 107 SCRA 104 (1981) 58. Abra Valley College vs. Aquino , 162 SCRA 106 (1988) 59. American Bible Society vs. City of Manila, 101 Phil. 386 (1957) Double Taxation There is double taxation when additional taxes are laid on the same subject by the same taxing jurisdiction during the same taxing period and for the same purpose. (Cooley on Taxation, Vol. I, 4th ed., p. 48) Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579, Manuf. Life Ins. Co. vs. Meer, 89 Phil. 357). National vis-a-vis local. Where one tax is imposed by the state and the other is imposed by the city, the argument against double taxation may not be invoked, as 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. (Punsalan v. Municipal Board of Manila [GR L-4817, 26 May 1954]) Possibly both local, Tax and license fee. Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article, this not being in violation of the rule against double taxation (Compania General de Tabacos de Filipinas vs. Manila [GR L-16619, 29 June 1963]; citing Bentley Gray Dry Goods Co., vs. City of Tampa 137 Fla. 641, 188 SO. 758; MacQuillin, Municipal Corporations, Vol. 9, 3rd Edition, p. 83). National vis-a-vis another country. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579, Manuf. Life Ins. Co. vs. Meer, 89 Phil. 357). Where the taxpayers would have to pay two taxes on the same income (one in the Philippines and one in the United States, for example), the Philippine government only receives the proceeds of one tax. As between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United States, where that income was not earned and where the taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United States, and not from the Philippines, since the formers right to burden the taxpayer is solely predicated on his citizenship, without contributing to the production of the wealth that is being taxed. (CIR vs. Lednicky [GR L-18169, L-18286, & L-21434; 31 July 1964.]) !!! Case(s) 60. Punzalan vs. Municipal Board of Manila, 95 Phil.46 (1954) License Fees

There are three kinds of licenses recognized by law: (1) licenses for the regulation of useful occupations; (2) licenses for the regulation or restriction of non-useful occupations or enterprises; and (3) licenses for revenue only. Non-payment of a license fee for a business makes the business illegal unlike tax. The amount of the fee or charge is properly considered in determining whether it is a tax or an exercise of the police power. The amount may be so large as to itself show that the purpose was to raise revenue and not to regulate, but in regard to this matter there is a marked distinction between license fees imposed upon useful and beneficial occupations which the sovereign wishes to regulate but not restrict, and those which are inimical and dangerous to public health, morals or safety. In the latter case the fee may be very large without necessarily being a tax. (Cooley on Taxation, Vol. IV, pp. 3516-17) The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. Fees for purely regulatory purposes may only be of sufficient amount to include the expenses of issuing the license and the cost of the necessary inspection or police surveillance, taking into account not only the expense of direct regulation but also incidental expenses. (Cu Unjieng vs. Patstone, 42 Phil. 818) The regulatory fee must be no more than sufficient to cover the actual cost of inspection or examination as nearly as the same can be estimated. If it were possible to prove in advance the exact cost, that would be the limit of the fee (Manila Electric Co. vs. Auditor General, 73 Phil. 129-135). !!! Case(s) 61. Physical Therapy Org. vs. Mun. Board of Manila, G.R. 10448, August 30, 1957