I.GENERAL PRINCIPLES THE POWER OF TAXATION Definitions: 1.

1. Taxation: Power by which the sovereign raises revenue to defray the necessary expenses of the government from among those who in some measure are privileged to enjoy its benefits and must bear its burden. 2. Taxes: Enforced proportional contribution from properties and persons levied by the State by virtue of its sovereignty for the support of government and for public needs. Characteristics of Taxes: 1. forced charge; 2. generally payable in money; 3. levied by the legislature; 4. assessed with some reasonable rule of apportionment; 5. imposed by the State within its jurisdiction; 6. levied for public purpose. Theories or bases of taxation: 1. Lifeblood Theory Taxes are the lifeblood of the nation. Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. (CIR vs Algue, Inc., et. al.) Illustrations of Lifeblood Theory: a. Collection of taxes may not be enjoined by injunction. b. Taxes could not be the subject of compensation and set-off. c. A valid tax may result in destruction of the taxpayer's property.
2. Necessity Theory

Existence of a government is a necessity and cannot continue without any means to pay for expenses. a. Marshall Dictum Power to tax is the power to destroy describes the unlimitedness of the power and the degree of vigor with which the taxing power may be employed in order to raise revenue. b. Oliver Wendell Holmes Dictum Power to tax is not the power to destroy while this court (US Supreme Court) sits power to tax knows no limits except those expressly stated in the Constitution. Marshall and Holmes Dictums Reconciled: Although the power to tax is almost unlimited, it must not be exercised in an arbitrary manner. We have courts to which people may seek redress in case of irregularities.
3. Benefits-Protection Theory

There exist reciprocal duties of protection and support between State and its inhabitants. Inhabitants pay taxes and in return receive benefits and protection from the State. Importance of Taxes Taxes are the lifeblood of the government and so should be calculated without unnecessary hindrance; therefore, their prompt and imperious availability is an imperious need. General Rule: Taxes are personal to the taxpayer. Illustrations:

1. Corporations tax delinquency cannot be enforced against the stockholder (Corporate Entity

Doctrine). Exception: Stockholders may be held liable for unpaid taxes of a dissolved corporation if the corporate assets have passed into their hands. 2. Transfer tax on the estate cannot be assessed against the heirs. Exception: Heirs may be held liable for the transfer tax on the estate, if prior to the payment of the same, the properties of the decedent have been distributed to the heirs. Nature of the Taxing Power 1. attribute of sovereignty and emanates from necessity, relinquishment of which is never presumed; 2. legislative in character; and 3. subject to inherent and constitutional limitations. Purpose and Objectives of Taxation: 1. Revenue 2. Non-Revenue (still a tax but imposed under its non-revenue objective) KEY: PR2EP a. Regulation; b. Promotion of general welfare; c. Reduction of social inequity; d. Encouragement of economic growth; and e. Protectionism. Scope of legislative taxing power (MS SAPAK): 1. Subject to be taxed, provided it is within its jurisdiction; 2. Amount or rate of the tax; 3. Purposes for its levy, provided it be for public purpose; 4. Kind of tax to be collected; 5. Apportionment of the tax; 6. Situs of taxation; and 7. Method of collection. Aspects of Taxation: 1. Levy or imposition of the tax; and 2. Enforcement or tax administration Basic Principles of a sound tax system: A sound tax system must be: 1. sufficient to meet governmental expenditures (fiscal adequacy); 2. capable of being effectively enforced (administrative feasibility); and 3. based on the taxpayers ability to pay (theoretical justice). TAXATION, POLICE POWER AND EMINENT DOMAIN DISTINGUISHED TAXATION POLICE POWER EMINENT DOMAIN Purpose: To promote public To facilitate the States need of To raise revenue welfare through property for public use regulations Amount of exaction: Not limited Limited No exaction; just compensation is paid by the Government Benefits: No special or direct benefits No direct benefits are Direct benefits result in the form of just compensation are received by the received; damnum absque injuria is taxpayer

TAXATION

POLICE POWER attained of be Contracts impaired may

EMINENT DOMAIN

Non-impairment contracts: Contracts may not impaired

be Contracts may be impaired

Effect of transfer: Taxes paid become part of No transfer but only the public funds restrain on the exercise of property rights Scope: It affects all persons, property, It affects all persons, property, privileges, and excises and even rights Basis: Public necessity and Public necessity right of State and of public to selfprotection and selfpreservation Impositions not strictly considered as taxes:

Property is taken by the State upon payment of just compensation It affects only the particular property compre-hended Necessity of the public for private property

1. Toll amount charged for the cost and maintenance of property used; 2. Compromise penalty amount collected in lieu of criminal prosecution in cases of tax

violations;
3. Special assessment levied only on land based wholly on the benefit accruing thereon as

a result of improvements or public works undertaken by government within the vicinity;

4. License fee regulatory imposition in the exercise of the police power of the State; 5. Margin fee exaction designed to stabilize the currency; 6. Custom duties and fees duties charged upon commodities on their being imported into

or exported from a country;

7. Debt a tax is not a debt but is an obligation imposed by law.

LICENSE FEE VS. TAX LICENSE FEE Basis: Police power Purpose: To regulate Limitation: Limited to costs of (1) issuing the license; and (2) necessary inspection or police surveillance Effect of non-payment: Makes the business illegal. Classification of Taxes:

TAX Power of taxation. To raise revenue. Inherent and constitutional limitations.

Does not make the business illegal.

As to subject matter 1. Personal tax also known as capitalization or poll tax. 2. Property tax assessed on property of a certain class. 3. Excise tax imposed on the exercise of a privilege. 4. Custom duties duties charged upon commodities on being imported into or exported from a country; 5. Local taxes taxes levied by local government units pursuant to validly delegated power to tax; As to burden 1. Direct tax incidence and impact of taxation fall to one person and cannot be shifted to another. 2. Indirect tax incidence and liability for the tax fall to one person but the burden thereof can be passed on to another. As to purpose 1. General taxes taxes levied for ordinary or general purpose of the government. 2. Special taxes levied for a special purpose. As to measure of application 1. Specific tax- tax imposed by the head or number or by some standard of weight or measurement. 2. Ad valorem tax tax imposed upon the value of the article. As to rate: 1. Progressive taxes rate increases as the tax base increases. 2. Regressive taxes rate increases as tax base decreases. SITUS OF TAXATION Situs of Taxation - an inherent mandate that taxation shall only be exercised on persons, properties and excises within the territory of the taxing power. Factors that determine the situs of taxation: 1. Nature of the tax; 2. Subject matter of the tax; 3. Citizenship of the taxpayer; 4. Residence of the taxpayer; and 5. Source of income Application of Situs of Taxation: 1. Tax on persons residence of the taxpayer; 2. Community tax residence or domicile of the person taxed; 3. Business tax where business is conducted; 4. Privilege or occupation tax where occupation is pursued; 5. Sales tax where transaction takes place; 6. Real property tax where property is located; 7. Personal property tax tangible; where it is physically located; intangible: subject to Sec. 104 of CTRP and principle of mobilia sequuntur personam; 8. Income where income is earned or residence or citizenship of the taxpayer; 9. Transfer tax residence or citizenship of the taxpayer or location of the property; 10. Franchise tax State which granted the franchise; 11. Tax on corporations and other judicial entities law of incorporation. Intangible properties deemed with a situs in the Philippines: 1. franchise which must be exercised in the Philippines; 2. shares, obligations or bonds issued by a corporation organized and constituted in the Philippines in accordance with its laws; 3. shares, obligations or bonds issued by a foreign corporation 85% of its business is located in the Philippines;

4. shares, obligations or bonds issued by a foreign corporation if such shares, obligations or

bonds have acquired a business situs in the Philippines; and 5. shares or rights in any partnership, business or industry established in the Philippines. (Sec. 104, R.A. 8424 or the CTRP) LIMITATIONS ON THE POWER TO TAX A. Inherent Limitations The following are the inherent limitations on the power to tax (SPINE): 1. Public Purpose of taxes; 2. Non-delegability of the taxing power; 3. Territoriality or situs of taxation; 4. Tax exemption of government; 5. International comity Test in Determining Public Purpose 1. whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the state, as a government, to provide 2. whether the proceeds of the tax will directly promote the welfare of the community in equal measure. Non-delegability of the taxing power: - The power of taxation is peculiarly and exclusively legislative. Consequently, the taxing power as a general rule may not be delegated. Non-delegable Legislative Power: 1. selection of property to be taxed; 2. determination of the purposes for which taxes shall be levied; 3. fixing of the rate of taxation; 4. rules of taxation in general Delegable Legislative Power: 1. Authority of the President to fix tariff rates, import and export quotas (Art. VI, Sec. 28[2], 1987 Constitution). 2. Power of local government units to tax subject to limitations as may be provided by Local Government Code (Art. X, Sec. 5, 1987 Constitution). Situs of taxation as a limitation on the power to tax: (See the subheading on Situs of Taxation, supra.) Exemption of the Government from Taxes As a matter of public policy, property of the State or any of its political subdivisions devoted to government uses and purposes are generally exempt from taxation. B. Constitutional Limitations 1. Due Process of Law (Sec.1, Art. III of the Constitution) Requisites: a. The interests of the public generally as distinguished from those of a particular class require the intervention of the State; and b. The means employed must be reasonably necessary to the accomplishment of the purpose and not unduly oppressive. In a string of cases, the SC held that in order that due process of law will not be violated, the imposition of the tax must not be done in an arbitrary, despotic, capricious, or whimsical manner.

2. Equal Protection of the Law (Sec. 1, Art. III of the Constitution) Requisites for a valid classification: a. Must not be arbitrary; b. Must be based upon substantial distinctions; c. Must be germane to the purposes of law; d. Must not be limited to existing conditions only; and e. Must apply equally to all members of a class. 3. Uniformity, Equitability, and Progressivity of Taxation (Art. VI, Sec. 28 (1) of the Constitution) Definitions: a. Uniformity: All taxable articles or kinds of property of the same class shall be taxed at the same rate. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. b. Equitability: Taxation is said to be equitable when its burden falls to those better able to pay. c. Progressivity: Rate increases as the tax base increases. 4. Non-impairment of Contracts (Art. III, Sec. 10 of the Constitution) 5. Non-imprisonment for Non-payment of Poll Tax(Art. III, Sec. 20 of the Constitution) 6. Origin of Appropriation, Revenue, and Tariff Bills (Art. VI, Sec. 24 of the Constitution; Tolentino vs. Sec. of Finance). 7. Non-infringement of Religious Freedom and Worship (Art. III, Sec. 24 of the Constitution) American Bible Society vs. City of Manila and Tolentino vs. Sec. of Finance rulings reconciled: The imposition in the former is a license tax which is intended to regulate the exercise of freedom of religion while in the latter is a revenue tax. With respect to revenue tax, Congress can choose anyone who will be taxed. Its imposition is a political question. 8. Delegation of Legislative Authority to the President to Fix Tariff Rates, Import and Export Quotas (Art. VIII, Sec. 28(2) of the Constitution) 9. Tax Exemption of Properties Actually, Directly, and Exclusively Used for Religious, Charitable and Educational Purposes (See Art. VI, Sec. 28(3) of the Constitution; Lladoc vs. Commissioner; Province of Abra vs. Hernando). This provision refers only to property taxes. 10. Majority Vote of all Members of Congress Required in Case of a Legislative Grant of Tax Exemptions (Art. VI, Sec. 28 (4) of the Constitution) 11. Non-impairment of the Supreme Courts Jurisdiction in Tax Cases [Art. VIII, Sec. 2(1) and Art. VIII, Sec.5(b) of the Constitution] 12. Tax Exemption of Revenues and Assets of, including Grants, Endowments, Donations, or Contributions to, Educational Institutions (Art. XIV, Secs. 4(3) and (4) of the Constitution) 13. Other Provisions of the Constitution Which are Related to Taxation a. Power of the President to veto item or items in an Appropriation, Revenue, or Tariff Bill (Art. VI, Sec. 27 (2)) b. Necessity of an a Appropriation before Money may be paid out of the Public Treasury (Art. VI, Sec. 29 (1)) c. Non-appropriation of Public Money or Property for the benefit of any Church, Sect, or System of religion. (Art. VI, Sec. 29(2) d. Treatment of Taxes Levied for a Special Purpose.(Art.VI, Sec. 29 (3)) e. Internal Revenue Allotments to Local Government Units. (Art.X, Sec.6)

 DOUBLE TAXATION Definition: Taxing the same subject twice when it should be taxed only once. Also known as duplicate taxation. Is double taxation prohibited in the Philippines? No. There is no constitutional prohibition against double taxation in the Philippines. It is something not favored but permissible (Pepsi Cola Bottling Co. v. City of Butuan, 1968). Kinds of Double Taxation (DT) 1. Direct duplicate taxation/obnoxious DT in the objectionable or prohibited sense. REASON: This constitutes a violation of substantive due process. The same property is taxed twice when it should be taxed only once. Requisites: a. the same property is taxed twice when it should only be taxed once; b. both taxes are imposed on the same property or subject matter for the same purpose; c. imposed by the same taxing authority; d. within the same jurisdiction e. during the same taxing period; and f. covering the same kind or character of tax. 2. Indirect double taxation: Not legally objectionable. The absence of one or more of the foregoing requisites of obnoxious DT makes the DT indirect. Reliefs from Effects of Double Taxation 1. Tax deductions Example: Vanishing deductions in transfer taxes. 2. Tax credits An amount allowed as a reduction of the Phil. Income tax on account of income tax(es) paid or incurred to foreign countries. It is given to a taxpayer in order to provide a relief from too onerous a burden of taxation in case where the same income is subject to a foreign and Phil. Income tax. This may be claimed by (1) citizens of the Philippines and (2) domestic corporations. 3. Exemptions 4. Treaties with other states 5. Principle of reciprocity FORMS OF ESCAPE FROM TAXATION The following are the forms of escape from taxation: 1. Shifting S 2. Capitalization C 3. Transformation T 4. Avoidance A 5. Exemption E 6. evasion-unlawful E Key: ESCATE A. Shifting Definition: Process by which tax burden is transferred from statutory taxpayer to another without violating the law. Impact of taxation point on which tax is originally imposed. Incidents of taxation point on which the tax burden finally rests or settles down.
B. Capitalization

Definition: Reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay.
C. Transformation

 Definition: The manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production, thereby turning out his units at a lower cost. D. Tax Avoidance Definition: exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability. E. Tax Evasion Definition: Used by the taxpayer through illegal or fraudulent means to defeat or lessen the payment of the tax. Indicia of Fraud in Tax Evasion: 1. failure to declare for taxation purposes true and actual income derived from business for two consecutive years; or 2. substantial underdeclaration of income tax returns of the taxpayer for four consecutive years coupled with intentional overstatement of deductions. F. Tax exemption Definition: A grant of immunity, express or implied, to particular persons or corporations from the obligation to pay taxes. Kinds of Tax Exemptions As to basis: 1. Constitutional: Immunities from taxation which originate from the constitution 2. Statutory: Those which emanate from legislation As to form: 1. Express: Expressly granted by organic or statute law 2. Implied: When particular persons, properties, or excises are deemed exempt as they fall outside the scope of the taxing provision itself. As to extent: 1. Total: Connotes absolute immunity. 2. Partial: One where a collection of a part of the tax is dispensed with. Principles Governing Tax Exemptions 1. Exemptions from taxation are highly disfavored in law. 2. He who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. If ambiguous, there is no tax exemption. Taxation is the rule, tax exemption is the exception. 3. He who claims an exemption must justify that the legislature intended to exempt him by words too plain to be mistaken. 4. He who claims exemption should convincingly prove that he is exempted. 5. Tax exemption must be strictly construed. 6. Tax exemptions are not presumed. 7. Constitutional grants of tax exemptions are self-executing. 8. Tax exemptions are personal. 9. Deductions for income tax purposes partake of the nature of tax exemptions; hence, they are also to be strictly construed against the taxpayer. TAX ENFORCEMENT AND ADMINISTRATION Sources of Tax Laws (Key: SPEC2TRA BLT) 1. Statutes 5. Court Decisions 2. Presidential Decrees 6. Tax Codes 3. Executive Orders 7. Revenue Regulations 4. Constitution 8. Administrative issuances

 Requisites of Tax Regulations 1. Reasonable 2. Within the authority conferred 3. Not contrary to law 4. Must be published

9. BIR Rulings 10. Local Tax Ordinances

11. Tax

treaties and conventions with foreign countries

 Retroactivity of BIR Rulings: General Rule: Prospective. Exceptions: 1. Where no vested right will be impaired; 2. Where the law allows retroactive application; and 3. If there is bad faith on the part of the taxpayer. Agencies Involved in Tax Administration: 1. BIR 2. Bureau of Customs 3. Provincial, city, and municipal assessors and treasurers Powers and Duties of the BIR (Sec. 2, CTRP): (AGEE) 1. Assessment and collection of all national internal revenue taxes, fees, and charges 2. Give effect to and administer the supervisory and police power conferred to it by the Tax Code or other laws 3. Enforcement of all forfeitures, penalties and fines in connection therewith 4. Execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts Assessment Defined: It is a finding by the taxing agency that the taxpayer has not paid his correct taxes. It is also a written notice to a taxpayer to the effect that the amount stated therein is due as a tax, and containing a demand for the payment thereof. Burden of proof in pre-assessment proceedings: There is a presumption of correctness on the part of the CIR, thus the burden of proof is on the taxpayer. Otherwise, the finding of the CIR will be conclusive and the CIR will assess the taxpayer. Such finding is conclusive even if CIR is wrong if the taxpayer does not controvert. Principles Governing Tax Assessments: (PADDD) 1. Assessments are prima facie presumed correct and made in good faith 2. Assessments should be based on actual facts 3. Assessment is discretionary on the part of the Commissioner 4. The authority vested in the Commissioner to assess taxes may be delegated. 5. Assessments must be directed to the right party. Means Employed in the Assessment of Taxes (Sec. 6, CTRP): (BETI-PPEA) 1. Examination of tax returns 2. Use of the best evidence obtainable 3. Inventory taking, surveillance and use of presumptive gross sales and receipts 4. Termination of taxable period 5. Prescription of real property values 6. Examination of bank deposits to determine the correct amount of the gross estate 7. Accreditation and registration of tax agents 8. Prescription of additional procedural or documentary requirements. Examination of Income Tax Returns: General Rule: Income tax returns are confidential. Exceptions: Inspection of the return may be authorized: 1. upon written order of the President of the Philippines; 2. under Finance Regulations no. 33 of the Secretary of Finance; 3. when the production of the tax return is material evidence in a criminal case wherein the Government is interested in the result; 4. by the taxpayer himself; Cases when Commissioner may Assess Taxes on the Basis of the Best Evidence Obtainable: 1. a person fails to file a return or other document at the time prescribed by law 2. he willfully or otherwise files a false or fraudulent return or other document

 Grounds for Termination of Taxable Period: (CRIP) 1. the taxpayer is retiring from business subject to tax 2. he intends to leave the Philippines or remove his property therefrom 3. he hides or conceals his property 4. he performs any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or renders the same totally or partly ineffective unless such proceedings are began immediately. Instances when the Commissioner may inquire into Bank Deposits: 1. When determining the gross estate of a decedent; 2. Where a taxpayer offers to compromise his tax liability on the ground of financial inability in which case he must submit a waiver. Inspection and Examination of Books and Records, When Made General Rule: Shall be made once in a taxable year. Exceptions: 1. in cases of fraud, irregularity, or mistakes 2. when taxpayer requests a reinvestigation 3. to verify compliance with withholding tax laws and regulations 4. to verify capital gains tax liabilities 5. upon order of the Commissioner 25% Surcharge on the Amount of the Tax Due is imposed in the Following Cases: 1. failure to file any return required under Tax Code or regulations on the date prescribed 2. filing a return with the wrong internal revenue officer 3. failure to pay the tax within the time prescribed for its payment 4. failure to pay the full amount of tax shown on any return required to be filed under the Tax Code or regulations or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment