Prelim 2 Columns Introduction to Taxation as per the 1987 Philippine Constitution PDF

INTRODUCTION TO TAXATION AS PER THE 1987 legislative policy and the circumstance PHILIPPINE CONSTITUTION under which it is to be pursued and implemented. STATE...

INTRODUCTION TO TAXATION AS PER THE 1987 legislative policy and the circumstance PHILIPPINE CONSTITUTION under which it is to be pursued and implemented. STATE AND ITS ELEMENTS INHERENT POWERS OF THE STATE STATE DEFINITION 1. Eminent Domain - the taking of private a community of persons more or less property for public use upon payment of just numerous permanently occupying a compensation. This is also known as the power definite portion of territory, having a of expropriation. government of their own to which the 2. Police Power - the power of the state to great body of inhabitants render promote public welfare by restraining and obedience, and enjoying freedom from regulating the use of liberty and property. It is external control. the most pervasive, the least limitable, and the a politically organized sovereign most demanding of the three fundamental community independent of outside powers of the State control bound by ties of nationhood, These extends to great public needs such as: legally supreme within its territory, a. Public health; acting through a government b. Public morals; functioning under a regime of law. c. Public safety; and d. Public welfare ELEMENTS OF STATE: 1. People – refers to the inhabitants of the state. REQUISITES FOR A VALID EXERCISE OF POLICE 2. Territory - a fix portion of surface of the earth. POWER 3. Government - An agency or instrumentality 1. Lawful Subject – The interests of the through which the will of the state is public generally, as distinguished from formulated, expressed and realized. those of a particular class, require the 4. Sovereignty - A supreme and uncontrollable exercise of the police power; and power inherent in the state to direct its 2. Lawful Means – The means employed relations with other states. are reasonably necessary for the KINDS OF SOVEREIGNTY: accomplishment of the purpose and not a. Internal sovereignty refers to the power of the unduly oppressive upon individuals state to control its domestic affairs. 3. Taxation - the power by which the sovereign, b. External sovereignty (independence) which is through its law-making body, raises revenue to the power of the state to direct its relations defray the necessary expenses of government. with other states. GENERAL PRINCIPLES OF TAXATION BASIC PRINCIPLES a. SEPARATION OF POWERS - Each department of TAXATION the government has exclusive cognizance of It is a mode by which governments matters within its jurisdiction, and is supreme make exactions for revenue in order to within its own sphere. support their existence and carry out b. CHECKS AND BALANCES - The Constitution has their legitimate objectives. provided for an elaborate system of checks and Taxation may refer to either or both the balances to secure coordination in the power to tax or the act or process by workings of the various departments of the which the taxing power is exercised. government. The term "taxation" is defined as the c. DELEGATION OF POWERS power by which the sovereign raises General Rule: Delegata potestas non potest revenue to defray the necessary delegari – what has been delegated can no expenses of government. longer be delegated. Taxation is merely a way of apportioning the cost of government TESTS FOR VALID DELEGATION among those who in some measure are 1. Completeness test - the law must be privileged to enjoy its benefits and complete in all aspects when it leaves must bear its burdens (51 Am. Jur. 341; the legislature for it to be valid. The 1 Cooley 72-93). only thing left to do is to implement the The power of taxation proceeds upon law the theory that the existence of 2. Sufficient standard test - there must be government is a necessity; that it a sufficient standard to define the cannot continue without means to pay boundaries of the authority of the its expenses; and that for those means delegate. This is done by defining the  it has the right to compel all citizens it may be employed in order to raise and property within its limits to revenues. Thus, even if a tax should destroy contribute. a business, such fact alone could not The basis of taxation is found in the invalidate the tax. (TRIDHARMA Marketing reciprocal duties of protection and Corp. v CA G.R. No. 215950, June 20, 2016) support between the State and its Incidentally, our Constitution mandates inhabitants. (This is the so-called that "the rule of taxation shall be uniform benefits-received principle.) and equitable." In a case, our Supreme Court said: "The power of taxation is TAXES sometimes called also the power to are enforced proportional destroy. Therefore, it should be exercised contributions from persons and with caution to minimize injury to the property levied by the law-making proprietary rights of the taxpayer. body of the State by virtue of its sovereignty for the support of the ESSENTIAL CHARACTERISTICS OF TAX government and all public needs. 1. It is an enforced contribution. 2. It is generally payable in the form of money. NATURE OF THE POWER OF TAXATION 3. It is proportionate in character or is laid by a. Inherent in sovereignty some rule of apportionment. It exists apart from constitutions and 4. It is levied on persons, property, rights, acts, without being expressly conferred by privileges, or transactions. the people. Hence, it can be exercised 5. It is levied by the State which has jurisdiction by the government even if the or control over the subject to be taxed. Constitution is entirely silent on the 6. It is levied by the law-making body of the subject. State. b. Essentially a legislative function 7. It is levied for public purpose. The power to tax is peculiarly and exclusively legislative and cannot be PURPOSE OF TAXATION exercised by the executive or judicial branch of the government. REVENUE RAISING c. Subject to constitutional and inherent Primary purpose of taxation is to limitations provide funds or property with which These limitations are those provided in to promote the general welfare and the fundamental law or implied protection it its citizens. therefrom, while the rest spring from Fees may be properly regarded as taxes the nature of the taxing power itself even though they also serve as an although they may or may not be instrument of regulation. provided in the Constitution. If the purpose is primarily revenue, or if revenue is, at least, one of the real SCOPE OF TAXATION and substantial purposes, then the a. Subject to constitutional and inherent exaction is properly called a tax. restrictions, the power of taxation is regarded as supreme, unlimited and comprehensive. NON-REVENUE/SPECIAL OR REGULATORY b. The principal check on its abuse rests only on Taxation is often employed as a device for the responsibility of the members of the regulation by means of which certain effects or legislature to their constituents. conditions envisioned by governments may be achieved. EXTENT OF THE LEGISLATIVE POWER TO TAX 1. Strengthen anemic enterprises or 1. The subjects or objects to be taxed. provide incentive to greater production. 2. The purpose or object of the tax so long as it is 2. Protect local industries against foreign a public purpose. competition or decreased to encourage 3. The amount or rate of the tax. foreign trade. 4. The manner, means, and agencies of collection 3. On imported goods, as a bargaining tool of the tax. 4. Halt inflation in periods of prosperity to According to Chief Justice John Marshall, curb spending power; ward off "the power to tax involves the power to depression in periods of slump to expand destroy." To say, however, that the power business. to tax is the power to destroy is to describe 5. Reduce inequalities in wealth and not the purposes for which the taxing incomes. power may be used but the extent to which  6. Taxes may be levied to promote science duties of protection and support and invention; or to finance educational between the State and its inhabitants. activities; or to improve the efficiency of This symbiotic relationship is the local police forces. rationale of taxation and should dispel 7. As an implement of the police power to the erroneous notion that it is an promote the general welfare. arbitrary method of exaction by those in the seat of power. Taxes may be levied with a regulatory purpose to provide means for rehabilitation and DOCTRINES IN TAXATION stabilization of a threatened industry which is imbued with public interest. PROSPECTIVITY OF TAX LAWS As long as a tax is for a public purpose, its General rule: Tax laws are prospective in validity is not affected by collateral purposes or operation. motives of the legislature in imposing the levy, or Reason: Nature and amount of the tax could not by the fact that it has a regulatory effect or it be foreseen and understood by the taxpayer at discourages or even definitely deters the the time the transaction. activities taxed. Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the PRINCIPLES OF SOUND TAX SYSTEM legislative intent. 1. Fiscal Adequacy - the sources of tax revenue should Exception to the exception: when retroactive coincide with, and approximate the needs of, application would be so harsh and oppressive. government expenditures. 2. Administrative Feasibility - Tax laws should be Collection of interest in tax cases is not capable of convenient, just and effective penal in nature; it is but a just administration. compensation to the State. The 3. Theoretical Justice or Equality - The tax burden constitutional prohibition against ex post should be in proportion to the taxpayer’s ability to facto laws is not applicable to the pay. This is the so-called ability to pay principle. collection of interest on back taxes. Nota Bene: Taxation should be uniform as well as NON-RETROACTIVITY OF RULINGS equitable. The non-observance of the principles General rule: Any revocation, modification or will not necessarily render the tax-imposed reversal of rules and regulations promulgated in invalid except to the extent those specific accordance with Sections 244 and 245 of the Tax constitutional limitations are violated. Code and rulings or circulars promulgated by the CIR, THEORY AND BASIS OF TAXATION that is prejudicial to the taxpayer, as a general rule, shall NOT be given retroactive effect. LIFEBLOOD THEORY Exceptions: Taxes are the lifeblood of the (1) Where the taxpayer deliberately misstates or government and their prompt and omits material facts from his return or any certain availability is an imperious need. document required of him by BIR; Taxes are the lifeblood of the (2) Where the facts subsequently gathered by government and so should be collected the BIR are materially different from the facts on without unnecessary hindrance. (YMCA which the ruling is based; OR v. CIR, 298 SCRA - THE LIFEBLOOD (3) Where the taxpayer acted in bad DOCTRINE) faith. NECESSITY THEORY IMPRESCRIPTIBILITY The power of taxation proceeds upon Unless otherwise provided by the tax theory that the existence of government itself, taxes are imprescriptible. is a necessity; that is cannot continue The law on prescription, being a without means to pay its expenses; and remedial measure, should be liberally that for those means it has the right to construed in order to afford such compel all citizens and property within protection. its limits to contribute. PRESCRIPTIONS FOUND IN STATUTES BENEFITS-PROTECTION THEORY (SYMBIOTIC 1. National Internal Revenue Code - statute of RELATIONSHIP) limitations (see Section 203 and 222) in the This principle serves as the basis of assessment and collection of taxes therein taxation and is founded on the reciprocal imposed. 2. Tariff and Customs Code - does not express any If the tax law follows the constitutional general statute of limitation; it provides, rule on uniformity, there can be no valid however, that “when articles have been objection to taxing the same income, entered and passed free of duty or final business or property twice. [China adjustments of duties made, with subsequent Banking Corp. v. CA, G.R.No. 146749 delivery, such entry and passage free of duty or (2003)] settlements of duties will, after the expiration Double taxation in its narrow sense is of one (1) year, from the date of the final undoubtedly unconstitutional but that in payment of duties. the broader sense is not necessarily so. 3. Local Government Code - prescribes Where double taxation (in its narrow prescriptive periods for the assessment (5 sense) occurs, the taxpayer may seek years) and collection (5 years) of taxes. (see relief under the uniformity rule or the Sections 194 and 270, Rep. Act No. 7160 The equal protection guarantee. Local Government Code). Modes of eliminating double taxation DOUBLE TAXATION (1) Allowing reciprocal exemption either by law Means taxing twice for the same tax or by treaty; period the same thing or activity, when it (2) Allowance of tax credit for foreign taxes paid should be taxed but once, for the same (3) Allowance of deduction for foreign taxes paid purpose and with the same kind of (4) Reduction of Philippine tax rate. character of tax. PRELIM LIST OF CASES TWO KINDS OF DOUBLE TAXATION 1. Direct double taxation - prohibited WEEK 2 2. Indirect double taxation – not prohibited TRIDHARMA MARKETING CORPORATION, PETITIONER, VS. COURT OF TAX APPEALS, Strict sense (Direct duplicate Taxation or Direct SECOND DIVISION, AND THE COMMISSIONER double taxation). To constitute direct double OF INTERNAL REVENUE, RESPONDENTS. G.R. taxation, the following requisites must be No. 215950, June 20, 2016 present. (1) the same property must be taxed twice when Facts: it should be taxed once; Petitioner received PAN from the BIR (2) both taxes must be imposed on the same assessing it with various deficiency taxes - property or subject matter; income tax (IT), value-added tax (VAT), (3) for the same purpose; withholding tax on compensation (WTC), (4) by the same State, Government, or taxing expanded withholding tax (EWT) and authority; documentary stamp tax (DST). (5) within the same territory, jurisdiction or A substantial portion of the deficiency taxing district; income tax and VAT arose from the complete (6) during the same taxing period; and disallowance by the BIR of the petitioner's (7) of the same kind or character of tax. purchases. FLD and eventually FDDA were issued. CIR then denied petitioner’s request for Broad sense reconsideration. But prior to such, petitioner There is double taxation in the broad already paid the assessments corresponding to sense or there is indirect duplicate the WTC, DST and EWT deficiency assessments taxation if any of the elements for direct but reiterated its offer to compromise the alleged duplicate taxation is absent. deficiency assessments on IT and VAT. It extends to all cases in which there is a Petitioner appealed the CIR's decision to burden of two or more pecuniary the CTA via its so-called Petition for Review with impositions. For example, a tax upon the Motion to Suspend Collection of Tax. The CTA same property imposed by two different granted said motion reasoning that to yield to states. respondent's alleged assessment and collection in the amount of would definitely jeopardize the Constitutionality of double taxation normal business operations of petitioner thereby There is no constitutional prohibition causing irreparable injury to its ability to against double taxation in the continue. Said Decision was anchored on the Philippines. It is something not favored, condition that the petitioner will deposit with but is permissible, provided some other this Court an acceptable surety bond equivalent constitutional requirement is not to 150% of the assessment. thereby violated. On partial MR, CTA reduced the amount of the petitioner's surety bond equivalent to the BIR's deficiency assessment for IT and VAT. religious, educational and charitable objectives. Hence, the petitioner has commenced this In 1980, the CIR issued an assessment to private special civil action for certiorari. respondent for deficiency income tax, deficiency expanded withholding taxes on rentals and Issue: professional fees and deficiency withholding tax 1. WON the CTA abuse its discretion in requiring on wages. YMCA filed protest but the CIR denied bond that T is legally and physically incapable of it. procuring. On appeal, the CTA ruled in favor of 2. WON the bond requirement properly issued YMCA holding that the lease of properties of considering T's allegation of illegal collection. YMCA facilities to small shop owners, to restaurant and canteen operators and the Ruling operation of the parking lot are reasonably 1. Yes, the CTA abused its discretion. Although incidental to and reasonably necessary for the the Tax Code empowers the CTA to suspend tax accomplishment of the objectives. It concluded collection by requiring either the (1) deposit of that the income derived from rentals of small the tax claimed or (2) surety bond for not more shops and parking fees is exempt from taxation. than double the amount, T was able to show that The decision was affirmed by CA. The CIR it is not capable of producing the amount of elevated the case to SC. The CIR posits that rental 6.701 billion pesos as its net worth is only almost income derived by a tax-exempt organization 1 billion pesos. Plus, it is legally impossible to from the lease of its properties, real or personal procure the bond from bonding companies that is not exempt from income taxation, even if such are limited in their risk assumptions. What the income is exclusively used for the CTA should have done is to conduct a preliminary accomplishment of its objectives. On the other hearing on T's ability to deposit or procure bond. hand, YMCA argues that the last paragraph of While there is legal justification for the bond Section 27 should be "subject to the qualification requirement, the power to tax is not the power that the income from the properties must arise to destroy. For the bond to equal the deficiency from activities 'conducted for profit' before it assessment would practically deny to the may be considered taxable. YMCA also invoke 2 petitioner the meaningful opportunity to contest provisions of the Constitution, namely Article VI, the validity of the assessments, and would likely Section 28 of par. 3 of the 1987 which exempts even impoverish it as to force it out of business. "charitable institutions" from the payment not 2. The bond requirement was not properly only of property taxes but also of income tax issued. Section 11 of R.A. 1125, as amended, from any source and Article XIV, Section 4, par. 3 indicates that the requirement of the bond as a claiming that the YMCA "is a non-stock, non- condition precedent to suspension of the profit educational institution whose revenues collection applies only in cases where the and assets are used actually, directly and processes by which the collection sought to be exclusively for educational purposes so it is made by means thereof are carried out in exempt from taxes on its properties and income. consonance with the law, not when the processes are in plain violation of the law that ISSUE: WON the rental income of the YMCA from they have to be suspended for jeopardizing the its real estate subject to tax interests of the taxpayer. The Court is not in the position to rule on the correctness of the RULING: deficiency assessment, which is a matter still YES. The provisions of Section 27 of NIRC pending in the CTA. The determination of exempts to tax, among others, the non-profit whether the methods, employed by the CIR in its organizations organized for social welfare, assessment, jeopardized the interests of a pleasure, recreation and other non-profitable taxpayer for being patently in violation of the law purposes. However, the last paragraph thereof is a question of fact that calls for the reception of provides that the income of whatever kind and evidence. character of the foregoing organizations from any of their properties, real or personal, or from WEEK 3 any of their activities conducted for profit, THE LIFEBLOOD DOCTRINE regardless of the disposition made of such CIR v YMCA G.R. No. 124043 October 14, 1998 income, shall be subject to the tax imposed PANGANIBAN, J.: under this Code. Thus, the CIR is correct in concluding that the exemption does not apply to FACTS: income derived from any of their properties, real YMCA is a non-stock, non-profit or personal, or from any of their activities institution, which conducts various programs and conducted for profit, regardless of the activities that are beneficial to the public, disposition made of such income. The CA is especially the young people, pursuant to its wrong in allowing tax exemption on the ground that the said income is not collected for profit but WEEK 4 is merely incidental to its operation. The law does not make a distinction. The rental income is CHINA BANKING CORPORATION vs. COURT OF taxable regardless of whence such income is APPEALS G.R. No. 146749; June 10, 2003 derived and how it is used or disposed of. Where the law does not distinguish, neither should we. FACTS: Because taxes are the lifeblood of the Petitioner paid P12,354,933.00 as gross nation, the Court has always applied the doctrine receipts tax on its income from interests on loan of strict in interpretation in construing tax investments, commissions, services, collection exemptions. Furthermore, a claim of statutory charges, foreign exchange profits and other exemption from taxation should be manifest. and operating earnings during the second quarter of unmistakable from the language of the law on 1994. Citing Asian Bank, Petitioner argued that it which it is based. Thus, the claimed exemption was not liable for the gross receipts tax - "must expressly be granted in a statute stated in amounting to P1,140,623.82 - on the sums a language too clear to be mistaken." In the withheld by the Bangko Sentral ng Pilipinas as instant case, the exemption claimed by the YMCA final withholding tax on its passive interest is expressly disallowed by the very wording of the income in 1994. last paragraph of then Section 27 of the NIRC Disputing Petitioner’s claim, the which mandates that the income of exempt Commissioner asserted that Petitioner paid the organizations (such as the YMCA) from any of gross receipts tax pursuant to Section 119 (now their properties, real or personal, be subject to Section 121) of the National Internal Revenue the tax imposed by the same Code. Because the Code ("Tax Code") and pertinent Bureau of last paragraph of said section unequivocally Internal Revenue ("BIR") regulations. Further it subjects to tax the rent income of the YMCA from argued that the final withholding tax on a bank’s its real property, 20 the Court is duty-bound to interest income forms part of its gross receipts in abide strictly by its literal meaning and to refrain computing the gross receipts tax. Contending from resorting to any convoluted attempt at that the term "gross receipts" means the entire construction. income or receipt, without any deduction. The Constitutional provisions cited by The Court of Tax Appeals ruled in favor of YMCA does not help its case. The exemption in Petitioner and held that the 20% final Article VI, Section 28 of par. 3 pertained only to withholding tax on interest income does not real estate taxes on lands, buildings and form part of CBC’s taxable gross receipts. improvements actually, directly and exclusively used for religious, charitable or educational ISSUE: purposes. Income tax on the rentals from its a. WON the 20% final withholding tax on interest property is not exempted. The bare allegation income should form part of CBC’s gross receipts alone that it is a non-stock, non-profit in computing the gross receipts tax on banks. educational institution is insufficient to justify its b. WON there is double taxation exemption from the payment of income tax. Laws allowing tax exemption are construed RULING: strictissimi juris. Hence, for the YMCA to be a. Yes. The concept of a withholding tax on granted the exemption it claims under the income obviously and necessarily implies that aforecited provision, it must prove with the amount of the tax withheld comes from the substantial evidence that (1) it falls under the income earned by the taxpayer. Since the classification non-stock, non-profit educational amount of the tax withheld constitutes income institution; and (2) the income it seeks to be earned by the taxpayer, then that amount exempted from taxation is used actually, directly, manifestly forms part of the taxpayer’s gross and exclusively for educational purposes. receipts. Because the amount withheld belongs However, the Court notes that not a scintilla of to the taxpayer, he can transfer its ownership to evidence was submitted by private respondent the government in payment of his tax liability. to prove that it met the said requisites. The amount withheld indubitably comes from Neither is YMCA an educational institution within income of the taxpayer, and thus forms part of the purview of Article XIV, Section 4, par. 3 of the his gross receipts. Actual receipt of interest Constitution. The term "educational institution," income is not limited to physical receipt. Actual when used in laws granting tax exemptions, receipt may either be physical receipt or refers to a school seminary, college or constructive receipt. When the depository bank educational establishment. Thus, there is no withholds the final tax to pay the tax liability of basis for granting the YMCA exemption from the lending bank, there is prior to the income tax under the constitutional provision withholding a constructive receipt by the lending invoked. bank of the amount withheld. From the amount constructively received by the lending bank, the depository bank deducts the final withholding tax and remits it to the government for the account of the lending bank. Thus, the interest income actually received by the lending bank, both physically and constructively, is the net interest plus the amount withheld as final tax. b. No. There is no double taxation when Section 121 of the Tax Code imposes a gross receipts tax on interest income that is already subjected to the 20% final withholding tax under Section 27 of the Tax Code. The gross receipts tax is a business tax under Title V of the Tax Code, while the final withholding tax is an income tax under Title II of the Code. There is no double taxation if the law imposes two different taxes on the same income, business or property.