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LGG/UNO-R Law/Taxation I

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UNIVERSITY OF NEGROS OCCIDENTAL RECOLETOS
COLLEGE OF LAW
Course Reviewer for Taxation


I. General Principles of Taxation

A. Meaning, Nature, Basis, Characteristics and Purposes of Taxation

1. Meaning of tax, taxation, CIR v. Algue, 158 SCRA 9 (1988)

Taxes:
Enforced proportional contributions from properties and persons levied by the State by virtue its
sovereignty for the support of the government and for public needs.

Taxation:

Taxation is the inherent power of the sovereign, exercised through the legislature, to impose
burdens upon the subjects and objects within its jurisdiction, for the purpose of raising revenues to carry out
the legitimate objects of the government. The process or means by which a sovereign through its lawmaking
boy raises income to defray the expenses of the government. As a power, it is an inherent power of the state
to demand enforced contribution for public purpose.

CIR v. Algue, 158 SCRA 9 (1988) 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.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's 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.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. 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,
as it has here, that the law has not been observed.

a. Taxation as an inherent power of the state
Abakada Guro Party List v. Ermita, GR No. 168056, 1 Sept. 2005

b. Tax as a general term, as a legal term

Compania General de Tabacos v. City of Manila, 8 SCRA 367 (1963) Distinction between license fee and
tax: the term tax applies generally speakingto all kinds of exaction which becomes public funds. The term
is often used to include levies for revenue as well as levies for regulatory purposes. Thus license fees are
commonly called taxes. Legally speaking, license fee is a legal concept quite distinct from tax. License fee is
imposed in the exercise of police power for purpose of regulation, while Tax is imposed under the taxing
power for the purpose of raising revenues. (McQuillin, Muncipal Corporations, Vol. 9, 3
rd
Edition, p.26)


Taxation From Other Monetary impositions

1) toll amount charged for the cost and maintenance of property used;
2) penalty punishment for the commission of a crime.
3) compromise penalty amount collected in lieu of criminal prosecution in cases of tax violations;
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4) special assessment levied only on land based wholly on the benefit accruing thereon as a result
of improvements of public works undertaken by government within the vicinity.
5) license or fee regulatory imposition in the exercise of the police power of the State;
6) margin fee exaction designed to stabilize the currency
7) custom duties and fees duties charged upon commodities on their being imported into or
exported from a country;
8) debt a tax is not a debt but is an obligation imposed by law.
9) Subsidy a legislative grant of money in aid of a private enterprise deemed to promote public
welfare.
10) Revenue a broad term that includes taxes and income from other sources as well.
11) Impost in its general sense, it signifies any tax, tribute or duty. In its limited sense, it means a duty
on imported goods and merchandise.

c. Tax v. License and regulatory fee

License fee is imposed for regulation, while a tax is levied for revenue.

License fee involves the exercise of police power, while tax the exercise of power of taxation.

Amount of license fees should be limited to the necessary expenses of inspection and regulation,
while there is generally no limit on the amount of the tax to be imposed.

License fees are imposed only on the right to exercise a privilege, while taxes are also imposed on
persons and property.

Failure to pay a license fee makes the act or business illegal, while failure to pay a tax does not
necessarily make the act or business illegal.

Osmena v. Orbos, 220 SCRA 703 (1993)
Article VI of the Constitution, reading as follows:
(3) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid
out for such purposes only. If the purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds of the Government.
Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the
exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special
treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law
refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the
COA. The Court is satisfied that these measures comply with the constitutional description of a "special
fund." Indeed, the practice is not without precedent.

PAL v. Edu, 164 SCRA 320 (1988)What is the nature of motor vehicle registration fees? Are they taxes or
regulatory fees?It is quite apparent that vehicle registration fees were originally simple exceptional. intended
only for rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular
traffic exploded in number and motor vehicles became absolute necessities without which modem life as we
know it would stand still, Congress found the registration of vehicles a very convenient way of raising much
needed revenues. Without changing the earlier deputy of registration payments as "fees," their nature has
become that of "taxes."
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In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the
Land Transportation and Traffic Code are actually taxes intended for additional revenues of government
even if one fifth or less of the amount collected is set aside for the operating expenses of the agency
administering the program.

Progressive Development v. QC, 172 SCRA 629 (1989)The term "tax" frequently applies to all kinds of
exactions of monies which become public funds. It is often loosely used to include levies for revenue as well
as levies for regulatory purposes such that license fees are frequently called taxes although license fee is a
legal concept distinguishable from tax: the former is imposed in the exercise of police power primarily for
purposes of regulation, while the latter is imposed under the taxing power primarily for purposes of raising
revenues. 9 Thus, if the generating of revenue is the primary purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax
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We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes, not a tax
on income, not a city income tax (as distinguished from the national income tax imposed by the National
Internal Revenue Code) within the meaning of Section 2 (g) of the Local Autonomy Act, but rather a license
tax or fee for the regulation of the business in which the petitioner is engaged. While it is true that the
amount imposed by the questioned ordinances may be considered in determining whether the exaction is
really one for revenue or prohibition, instead of one of regulation under the police power, it nevertheless will
be presumed to be reasonable.

Local' governments are allowed wide discretion in determining the rates of imposable license fees even in
cases of purely police power measures, in the absence of proof as to particular municipal conditions and the
nature of the business being taxed as well as other detailed factors relevant to the issue of arbitrariness or
unreasonableness of the questioned rates.

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to
judicial inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in
writing off an ordinance as unreasonable unless the amount is so excessive as to be prohibitory, arbitrary,
unreasonable, oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to
such an inquiry are the municipal conditions as a whole and the nature of the business made subject to
imposition.
Regulatory power is expressly accompanied by the taxing power.

Tolentino v. Sec. of Finance, 249 SCRA 628 (1995) The Vat is not a license tax, it is imposed on the sale
barter, lease, or exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to burden the exercise of
its right anymore than to make the press pay income tax or subject it to general regulation without violating
its freedom under the Constitution.

Examples of regulatory tax

Motor vehicle registration fee, Sugar levy, Coconut levy, regulation of non-useful occupations.

d. Tax v. Special Assessment

Sec. 240, R.A. 7160

SEC. 240. Special Levy by Local Government Units. A province, city or municipality may impose a special
levy on the lands comprised within its territorial jurisdiction specially benefited by public works projects or
improvements funded by the local government unit concerned: Provided, however, That the special levy
shall not exceed sixty percent (60%) of the actual cost of such projects and improvements, including the
costs of acquiring land and such other real property in connection therewith: Provided, further, That the
special levy shall not apply to lands exempt from basic real property tax and the remainder of the land
portions of which have been donated to the local government unit concerned for the construction of such
projects or improvements.

Distinction of Tax vs Special Assessment

1. A special assessment tax is an enforced proportional contribution from owners of lands
especially benefited by public improvements
2. A special assessment is levied only on land.
3. A special assessment is not a personal liability of the person assessed; it is limited to the land.
4. A special assessment is based wholly on benefits, not necessity.
5. A special assessment is exceptional both as to time and place; a tax has general application.


Republic v. Bacolod, 17 SCRA 632. A special assessment is a levy on property which derives some
special benefit from the improvement. Its purpose is to finance such improvement. It is not a tax measure
intended to raise revenues for the government. The proceeds thereof may be devoted to the specific
purpose for which the assessment was authorized, thus accruing only to the owners thereof who, after all,
pay the assessment.

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Some Rules:

An exemption from taxation does not include exemption from a special treatment.

The power to tax carries with it a power to levy a special assessment.

e. Tax v. toll

Toll is a sum of money for the use of something. It is consideration which is paid for the use of a road,
bridge, or the like, of a public nature. Taxes, on the other hand, are enforced proportional contributions form
persons and property levied by the State by virtue of its sovereignty for the support of the government and
all public needs.

Toll is a demand of proprietorship, while tax is a demand of sovereignty.

Toll is paid for the use of anothers property; tax is paid for the support of government.

The amount paid as toll depends on the cost of construction or maintenance of the public improvement
used; while there is no limit on the amount of tax that can be collected as long as it is not excessive,
unreasonable, or confiscatory.

Toll may be imposed by the government or by private individuals or entities; tax may be imposed only by the
government.

*Toll fee/charges are could be imposed by LGU through a local ordinance to impose such.

Sec. 155, R.A. 7160

SEC. 155. Toll Fees or Charges. The sanggunian concerned may prescribe the terms and conditions and
fix the rates for the imposition of toll fees or charges for the use of any public road, pier or wharf, waterway,
bridge, ferry or telecommunication system funded and constructed by the local government unit concerned:
Provided, That no such toll fees or charges shall be collected from officers and enlisted men of the Armed
Forces of the Philippines and members of the Philippine National Police on mission, post office personnel
delivering mail, physically-handicapped, and disabled citizens who are sixty-five (65) years or older. When
public safety and welfare so requires, the sanggunian concerned may discontinue the collection of the tolls,
and thereafter the said facility shall be free and open for public use.


f. Tax v. penalty

Penalty is any sanction imposed as a punishment for violation of law or for acts deemed injurious; taxes are
enforced proportional contributions from persons and property levied by the State by virtue of its sovereignty
for the support of the government and all public needs.

Penalty is designed to regulate conduct; taxes are generally intended to generate revenue.

Penalty may be imposed by the government or by private individuals or entities; taxes only by the
government.

Secs. 247-281

g. Tax v. tariff and customs duties

Tariff and Duties

The term tariff and duties are used interchangeably in the Tariff and Customs Code (PD No. 1464).

Customs duties or simply duties, are taxes imposed on goods exported from or imported into a
country. Customs duties are really taxes but the latter term is broader in scope.

On the other hand, tariff may used in any of the three senses:
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1) A book of rates drawn usually in alphabetical order containing the names of several
kinds of merchandise with the corresponding duties to be paid for the same; or
2) The duties payable on goods imported or exported; or

3) The system or principle of imposing duties on the importation or exportation of goods.

Garcia v. Executive Secretary, 211 SCRA 219 (1992) President may increase tariff rates as authorized by
law even for revenue purposes solely.(Sec. 28, Art. VI)

Customs duties which are assessed at the prescribed tariff rates are very much like taxes which are
frequently imposed for both revenue-raising and for regulatory purposes. Thus, it has been held that
customs duties is the name given to taxes on the importation and exportation of commodities, the tariff or
tax assessed upon merchandise imported from, or exported to, a foreign country. The levying of customs
duties on imported goods may have in some measure the effect of protecting local industrieswhere local
industries actually exist and are producing comfortable goods. Simultaneously, however, the very same
customs duties inevitably have the effect of producing governmental revenues.

Customs duties like internal revenue taxes are rarely, if ever, designed to achieve one policy objective only.
Most commonly, customs duties which constitute taxes in the sense of exactions the proceeds of which
become public fundshave either or both the generation of revenue and the regulation of economic or
social activity as their moving purposes and frequently, it is very difficult to say which, in a particular
instance, is the dominant or principal objective.


h. Obligation to pay tax v. obligation to pay debt

General rule: A tax delinquency cannot be extinguished by legal compensation. This is so because the
government and the person assessed with the tax are not mutually creditors and debtors. Neither is a tax
obligation an ordinary debt. Moreover, the collection of a tax cannot await the results of a lawsuit against the
government. Finally, taxes are not in the nature of contracts but grow out of the 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
[Francia v. IAC, 162 SCRA 622].

Obligation to Pay Debt vs. Obligation to Pay Tax
1. A debt is generally based on contract, express or implied, while a tax is based on laws.
2. A debt is assignable, while a tax cannot generally be assigned.
3. A debt may be paid in kind, while a tax is generally paid in money.
4. A debt may be the subject of set off or compensation, a tax cannot.
5. A person cannot be imprisoned for non-payment of tax, except poll tax.
6. A debt is governed by the ordinary periods of prescription, while a tax is governed by the special
prescriptive periods provided for in the NIRC.
7. A debt draws interest when it is so stipulated or where there is default, while a tax does not draw
interest except only when delinquent.

Requisites of compensation
1. That each one of the obligor be bound principally, and that he be at the same time a principal
creditor of the other.
2. That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind and also of the same quality if the latter has been stated.
3. That the two (2) debts be due.
4. That they be liquidated and demandable.
5. That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtors.

Requisites of Compensation in taxation (Domingo v. Garlitos)

1. That the tax assessed and the claim against the government be fully liquidated.

2. That the tax assessed and the claim against the government is due and demandable, and

3. That the government had already appropriated funds for the payment of the claim.
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ILLUSTRATIONS:
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. (PHYSICAL THERAPY
ORGANIZATION v. MUNICIPAL BOARD, 101 PHIL 114)
Claim for payment of unpaid services of a government employee vis--vis the estate taxes due from
his estate. The fact that the court having jurisdiction of the estate had found that the claim of the
estate against the government has been appropriated for the purpose by a corresponding law
shows that both the claim of the government for inheritance taxes and the claim of the intestate for
services rendered have already become overdue and demandable as well as fully liquidated.
Compensation therefore takes place by operation of law. (Domingo v. Garlitos 8 SCRA 443)

Art. 1279, 1290 NCC

Republic v. Mambulao Lumber, 6 SCRA 858 (1962)

Philex Mining Corp. v. CIR, 294 SCRA 687 [1998] Philex Mining Corp. wants to set-off its claims for VAT
input credit/refund for the excise taxes due from it. The Supreme Court disallowed such set-off or
compensation. Taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and a
debt. Debts are due to the government in its corporate capacity, while taxes are due to the government in its
sovereign capacity.

Caltex v. COA, 208 SCRA 726 (1992)

Francia v. IAC, 162 SCRA 753 (1988) The Government and the taxpayer are not mutually creditors and
debtors of each other under Article 1278 of the Civil Code and a claim of taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.

i. Tax V. Government Revenue

Revenue a broad term that includes taxes and income from other sources as well.

2. Essential Characteristics of Tax

Characteristics: (ILS)

Attribute of sovereignty and emanates from necessity, relinquishment of which is never presumed
and legislative in character.

I. Inherent in Sovereigntyhence may be exercised although not expressly granted by the
constitution.
II. Legislative in Characteronly the legislature can impose taxes (although may be delegated).
III. Subject to constitutional limitation and inherent limitationsit is not an absolute power that can
be exercise by the legislature anyway it pleases.

Caltex v. COA, id.

3. Theory and Basis of Taxation

1. Theories and Basis of Taxation

a. Lifeblood Theory

This theory states that taxes is the lifeblood of the nation and must be collected without
unnecessary hindrance. Taxes are what we paid for civilized society. Without taxes, the state
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willll be paralyzed lacking power to activate or operate it. The state in return must provide
tangible and intangible benefit to improve the moral and material value of its citizen

a. Necessity Theory

The power of taxation proceeds upon the theory that the existence of a government is a
necessity and cannot continue without any means to pay for expenses and the government has
the right to compel all citizens and property within its limits to contribute.

c. Benefits-Protection Theory (Symbiotic)

Basis of taxation is found in the reciprocal duties of protection and support between State and
inhabitants. In return for his contribution, the taxpayer received benefits and protection from the
government.

Lorenzo v. Posadas, 64 Phil 353 (1937) Taxes are essential to the existence of the government. The
obligation to pay taxes rests not upon the privileges enjoyed by or the protection afforded to the citizen by
the government, but upon the necessity of money for the support of the State. For this reason, no one is
allowed to object to or resist payment of taxes solely because no personal benefit to him can be pointed out
as arising from the tax,

Commissioner v. Algue, supra The Supreme Court said that taxes are the lifeblood of the government and
should be collected without necessary hindrance. They are what we pay for a civilized society. Without
taxes, the government would be paralyzed for lack of motive power to activate and operate it. 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.

The power of taxation is essential because the government can neither exist nor endure without taxation.
Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need,
[Bull v. United States, 295 U.S. 247, 15 APTR 1069, 1073]. The collection of taxes must be made without
any hindrance if the state is to maintain its orderly existence.

4. Purposes, Objectives of Taxation

a. General, fiscal, revenue

Tax which imposed for the purpose of raising funds or property to promote the general welfare and
protection of the citizen. (Income Tax, Value Added Tax, Excise Tax)

Commissioner v. Algue, 158 SCRA 9. Government projects and infrastructures are made possible through
the availability of funds provided through taxation. The governments ability to serve and protect the people
depends largely upon taxes. Taxes are what we pay for a civilized society, [

PAL v. Edu, supra, This involves the imposition of motor vehicle registration fees which the Supreme Court
ruled as taxes. Fees may be regarded as taxes even though they also serve as instruments of regulation
because taxation may be made the implement of the States Police Power. But, if the purpose is primarily
revenue, or if revenue is, at least one of the real and substantial purposes, then the exaction is properly
called a tax.

Tolentino vs Secretary of Finance, SCRA 629, 1995 The Vat is imposed on the sale, barter, lease or
exchange of goods or properties, or the sale or exchange services and the lease o properties purely for
revenue purposes.

b. Nonrevenue, special or regulatory

Tax imposed primarily for the regulation of an enterprise or for the protection of local industries for against
foreign competition. (Protective Tariff or Customs Duties)

1) Used to reduce social inequality
2) Utilized to implement the police power of the State
3) Used to protect our local industries against unfair competition
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4) Utilized by the government to encourage the growth of local industries


Caltex v. Commissioner, 208 SCRA 755.Taxation is no longer a measure merely to raise revenue to
support the existence of government. Taxes may be levied with a regulatory purpose to provide means for
the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be
within the police power of the State. The oil industry is greatly imbued with public interest as it vitally affects
the general welfare.

Republic v. Bacolod-Murcia Milling Co., 17 SCRA 632 (1966) Levy on sugar centrals for the purpose of
constituting the Sugar Research and Stabilization Fund is an exercise of the police power, not of the taxing
power.

The contribution levied upon sugar centrals and sugar cane planters under R.A. 632 in order to constitute
the Sugar Research and Stabilization Fund or the capital of the Philippine Sugar Institute (Philsugin), is not
an exercise of the power of taxation nor the imposition of a special assessment but an exercise of the police
power for the general welfare of the country. It is constitutional, being similar to the levy under the Sugar
Adjustment
Act (Com Act No 567) which constituted the Sugar Adjustment Fund..

Lutz v. J. Antonio Araneta, 98 Phil 148, The SC upheld the validity of the tax law increasing the existing
tax on the manufacture of sugar. The protection and promotion of the sugar industry is a matter of public
concern; the legislature may determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. If objective and methods alike are constitutionally valid, there is no reason why
the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the
implement of the states police power.

Tio v. Videogram Regulatory Board, 151 SCRA 208. The levy of a 30% tax under PD1987, was imposed
primarily for answering the need for regulating the video industry, particularly the rampant film piracy, the
flagrant violation of intellectual property rights, and the proliferation of pornographic videotapes, and is
therefore valid. While the direct beneficiaries of the said decree is the movie industry, the citizens are held to
be its indirect beneficiaries.

Osmena v. Orbos, supra.
Republic v. Bacolod-Murcia Milling Co., supra.
Tio v. Videogram Regulatory Board, 151 SCRA 208 (1987)
Lutz v. Araneta, 98 Phil 150 (1955)
Caltex v. COA, supra.
Esso v. CIR, 175 SCRA 149 (1989)

5. Classification of Taxes

a. As to scope of the tax

National taxes, local taxes

National Tax- Imposed by National Government (National Internal Revenue Tax, Customs Duties, Taxes
under Special Laws)

Local or Municipal Tax- Tax imposed by municipal corporations or LGUs (Real Property, Professional
Tax)

Realty Tax- are national taxes collected by Local Government (Benguet v. CBAA, 210 SCRA 579 (1992)

b. As to who shoulders the burden of the tax

Direct taxes, indirect taxes

Direct Tax- Demanded from the person who shoulders the burden of taxation, a tax which taxpayer is
directly or primaril liable which cant be shifted to another. (Corporate/Individual Income Tax, Estate Tax,
Donors Tax)
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Indirect Tax- Tax which demanded from one person in the expectation and intention that he shall indemnify
at the expense of another. Or it is a tax which the taxpayer can shift to another. (Excise Tax, professional
tax, Value Added Tax, amusement taxes, custom duties)

Sec. 105 VAT
Tolentino v. Sec. of Finance, (1995) supra.
Philippine Acetylene v. CIR, 20 SCRA 1056 (1967)
Maceda v. Macaraig, 197 SCRA 771 (1991)
Maceda v. Macaraig, 223 SCRA 217 (1993)
CIR v. John Gotamco, 148 SCRA 36 (1987)

c. As to the object or subject matter of the tax

Property, personal, poll or capitation, excise

Personal, Poll Or Capitation Tax- Tax of a fixed amount imposed on persons residing within a specified
territory, whether citizens or not, without regard to their property or the occupation or business in which they
may be engaged. e.g. Community tax.

Property Tax-Tax imposed on property, real or personal, in proportion to its value or in accordance with
some other reasonable method of apportionment.

Excise Tax-A charge imposed upon the performance of an act, the enjoyment of a privilege, or the
engagement in an occupation.

Villanueva v. City of Iloilo, 26 SCRA 578 (1968)
CIR v. CA, 242 SCRA 289 (1995)
Assoc. of Customs Brokers v. Municipal Board, 93 Phil 107 (1953)

d. As to the manner of computing the tax

Title VI
Ad valorem, specific

Specific tax-A specific tax is a tax of fixed amount, imposed by the head or number or by some other
standard of weight or measurement. It requires no assessment other than the listing or classification of the
objects to be taxed.

Ad valorem tax-As ad valorem tax is a tax of fixed proportion of the value of the property with respect to
which the tax is assessed. It requires the intervention of assessors or appraisers to estimate the value of
such property before the amount due from each taxpayer can be determined

e. As to graduation or rate

1. proportional, flat rate

Proportional tax-Tax based on a fixed percentage of the amount of the property receipts or other basis to
be taxed. e.g. Real estate tax.

Sec. 233, R.A. 7160

2. progressive, digressive rate

Progressive or graduated tax-The tax rate of which increases as the tax base or bracket increases. e.g.
Income tax

Digressive tax rate- progressive rate stops at a certain point. Progression halts at a particular stage.

*Not to be confused with Progressive system of taxation, wherein the number of indirect taxes outnumber
the direct taxes
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Sec. 24 (A)

3. regressive,
Regressive tax-The rate of which decreases as the tax base or bracket increases. There is no such tax in
the Philippines.

Tolentino v. Sec. of Finance, (1995) supra.

6. Aspects of taxation.

a. Levy or imposition by the legislative body
Levy (or imposition) of the tax by a legislative act (passage of tax laws and ordinances)

b. Collection or administration
Essentially administrative in character, it is the collection of taxes through the administrative agencies.

c. Methods of collection: withholding system
voluntary assessment and payment
assessment and payment
Manner of compliance by the taxpayers, including options and remedies available to them.

Assessment is the fixing the amount of tax due and demanding payment; not the assessment which
refers to the valuation of real properties to fix the bases of real property taxes under the RPTC.

7. Tax systems

a. Classification

Constitutional Mandate (Sec. 28 (1), Art. VI, 1987 Constitution)

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation. [Sec. 28, Art. VI, Constitution]

Tolentino v. Secretary of Finance. Regressivity is not a negative standard for courts to enforce. What the
Constitution requires the Congress to do is to evolve a progressive system of taxation. This is a directive to
Congress, just like the directive given to it, to give priority to the enactment of laws for the enhancement of
human dignity. The provisions are put in the Constitution as moral incentives to legislation, not as judicially
enforceable rights.

Progressive system of taxation and regressive system of taxation (Progressive system, regressive
system)

A progressive system of taxation means that tax laws shall place emphasis on direct taxes rather than on
indirect taxes, with ability to pay as the principal criterion.

A regressive system of taxation exists when there are more indirect taxes imposed than direct taxes.

Regressive tax rates (Tolentino v. Sec. of Finance, supra., supra.)

Tax the rate of which decreases as the tax base or bracket increases. There are no regressive taxes in the
Philippine jurisdiction.

Regressive tax rates should be differentiated from a regressive system of taxation which exists when there
are more indirect taxes imposed than direct taxes.

Progressive system v. progressive rate of tax

Progressive System Of Taxation means that tax laws shall place emphasis on direct taxes rather than on
indirect taxes, with ability to pay as the principal criterion.

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Progressive Rate of Tax- This focuses on the increase of rate of tax as the tax based/bracket increase as
well.

c. Basic principles of a sound tax system (FEA)

Fiscal adequacy-It means that the sources of revenue should be sufficient to meet the demands of public
expenditures. [Chavez v. Ongpin, 186 SCRA 331].

Even if a tax law violates the principle of Fiscal Adequacy , in other words, the proceeds may not be
sufficient to satisfy the needs of the government, still the tax law is valid

Equality or theoretical justice-It means that the tax burden should be proportionate to the taxpayers ability
to pay. This is the so-called ability to pay principle.

Equitable taxation has been mandated by our constitution, as if taxes are unjust and unreasonable then they
are not equitable, thus invalid.

Administrative feasibility- It means that tax laws should be capable of convenient, just and effective
administration.

There is no law that requires compliance with this principle, so even if the tax law violates this principle; such
tax law is valid.

Chavez v. Ongpin, 186 SCRA 331 (1990)

B. Nature and Limitations of the Power of Taxation

1. Nature of the power of taxation

a. Inherent in sovereignty

It may be exercised although not expressly granted by the Constitution

The power of taxation is an incident of sovereignty as it is inherent in the the State, belonging as a matter of
right to every independent government. It does need constitutional conferment. Constitutional provisions do
not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible
power. No attribute of sovereignty is more pervading, and at no point does the power of government affect
more constantly and intimately all the relations of life than through the exactions made under it, [Churchill
and Tait v. Concepcion, 34 Phil 969].

Roxas v. CTA, 23 SCRA 276 (1968)
Tanada v. Angara, 272 SCRA 18 (1997)

b. Exclusively legislative in nature

The power to tax is peculiarly and exclusively legislative and cannot be exercised by the executive or judicial
branches of the government. Hence, only legislature can impose taxes ( Although it may be delegate)

i. Extent of the legislative power to tax

a. Object to be taxed
b. Amount of rate to be taxed
c. Purposes for which the tax is levied provided that it is for a public purpose
d. Kind of tax to be collected
e. Apportionment of tax
f. Situs of taxation
g. Method of collection.

CIR v. Santos, 277 SCRA 617 (1997) With the legislature primarily lies the discretion to determine the;

1. Nature (Kind)
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2. Object (Purpose)
3. Extent (Rate)
4. Coverage (Subjects)
5. Situs (place)

CIR v. Santos, 277 SCRA 617 [1997]The Supreme Court held that it is within the province of the legislature
whether to tax jewelry or not. With the legislature, lies primarily the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects), and situs (place), of taxation.

It is inherent in the power to tax that the 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.

Tan v. del Rosario, 237 SCRA 324 (1994)
Sison v. Ancheta, 130 SCRA 654 (1984)
Kapatiran v. Tan, 163 SCRA 371 (1988)
Reyes v. Almanzor, 196 SCRA 322 (1991)

ii. Non-delegability of power to tax

The power of taxation, being purely legislative, cannot be delegated by the Congress. This limitation arises
from the doctrine of separation of powers among the three branches of government.

Except: devolved power to LGUs, express grant in legislative franchise
Maceda v. ERB, 192 SCRA 363 (1990)
Maceda v. Macaraig, (1991) supra.
Basco v. PAGCOR, 197 SCRA 52 (1991)
Pepsi-Cola v. City of Butuan, 24 SCRA 789 (1968)
PAL v. Edu, supra.

c. Who may question the validity of a tax measure or expenditure of taxes?

Not only person individually affected but even taxpayers whose money paid as taxes to the government is
being appropriated by legislature may question or prevent illegal expenditures of public money.
You can always question the validity of such tax measure on the ground that it is not for a public purpose
before the courts. But once it is settled that it is for a public purpose, you can no longer inquire on such tax
measure.

TAXPAYERS SUIT-a case where the act complained of directly involves the illegal disbursement of public
funds derived from taxation

courts discretion to allow
Taxpayers have sufficient interest of preventing the illegal expenditures of money raised by taxation
(NOT DONATIONS AND CONTRIBUTIONS)
A taxpayer is not relieved from the obligation of paying a tax because of his belief that it is being
misappropriated by certain officials
A taxpayer has no legal standing to question executive acts that do not involve the use of public funds.
(GONZALES vs. MARCOS)

Lozada v. Comelec, 120 SCRA 337 (1983)
Maceda v. Macaraig, (1991) supra.
Gonzales v. Marcos, 65 SCRA 624 (1975)
Chavez v. PCGG, 299 SCRA 744 (1998)

d. Subject to inherent and constitutional limitations

It is subject to Constitutional and inherent limitations; hence, it is not an absolute power that can be
exercised by the legislature anyway it pleases.

2. Inherent Limitations

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a. Purpose must be public in nature

The Legislature is without the power to appropriate revenues for anything but for public purposes. Public
money can only be spent for a public purpose.
TEST
1. If the public advantage or benefit is merely incidental in the promotion of a particular enterprise,
that will render the law INVALID
2. If what is incidental is the promotion of a private enterprise, the tax law is still for a public
purpose(VALID)
> A tax levied for a private, not public purpose constitutes taking of property without due process of
law as it is beyond the powers of the government to impose it.
> Although private individuals are directly benefited, the tax would still be valid, provided such
benefit is only incidental
> If what is incidental is the promotion of a private enterprise, as long as there is a link to the public
welfare, the purpose is still public
> The test is not as to who receives the money, but the character of the purpose for which it is
expended
> Not the immediate result of the expenditure, but rather the ultimate

The test that must be applied in determining whether the purpose is public or private
1) The character of the direct object
2) The ultimate result not the immediate result
3) The general welfare for public good

TEST OF RIGHTFUL TAXATION
Proceeds of a tax must be used
1) for the support of the government
2) for any of the recognized objects of the government
3) to promote the welfare of the community

Pascual v. Sec. of Public Works 110 SCRA Phil 331, the SC held that the appropriation for construction of
feeder roads on land belonging to a private person is not valid, and donation to the government of the said
land made over 5 months after the approval and effectivity of the Act for the purpose of giving semblance of
legality to the appropriation does not cure the basic defect. Incidental advantage to the public or to the State,
which results form the promotion of private enterprises, does not justify the use of public funds.

Pascual v. Sec. of Public Works, 110 SCRA 331 (1960)
Tio v. Videogram Regulatory Board, supra.
Gaston v. RPB, 158 SCRA 626 (1988)


b. Prohibition against delegation of taxing power
NON-DELEGATION OF THE POWER TO TAX

The power of taxation is peculiarly and exclusively legislative, therefore, it may not be delegated
EXCEPTIONS:
1) Delegation to the President
2) Delegation to local government units
3) Delegation to administrative units

POWERS WHICH CANNOT BE DELEGATED
1) Determination of the subjects to be taxed
2) Purpose of the tax
3) Amount or rate of the tax
4) Manner, means and agencies of collection
5) Prescription of the necessary rules with respect thereto

DELEGATION TO THE PRESIDENT
Congress may authorize, by law, the President to fix, within specified limits and subject to such limitations
and restrictions as it may impose
1) Tariff rates
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2) Import and export quotas
3) Tonnage and wharfage dues
4) Other duties and import within the national development program of the government
There must be a law authorizing the President to fix tariff rates
The delegation of power must impose limitations and restrictions and specify the minimum as well
as the maximum tariff rates.

FLEXIBLE TARIFF CLAUSE (SEC. 401 TCC)
In the interest of national economy, general welfare and/or national security, the President upon the
recommendation of the National Economic and Development Authority is empowered:
1) To increase, reduce or remove existing protective rates of import duty, provided that the increase
should not be higher than 100% ad valorem
2) To establish import quota or to ban imports of any commodity
3) To impose additional duty on all imports not exceeding 10% ad valorem

exceptions
i. delegation to LGUs
DELEGATION TO LOCAL GOVERNMENT UNITS

Each local government unit has the power to create its own revenue and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may provide (ART X Sec 5)

Local government units have no power to further delegate said constitutional grant to raise revenue,
because what is delegated is not the enactment or the imposition of a tax, it is the administrative
implementation

BASCO vs. PAGCOR

The power of local government units to impose taxes and fees is always subject to the limitations which
Congress may provide, the former having no inherent power to tax.

Municipal corporations are mere creatures of Congress which has the power to create and abolish municipal
corporations. Congress therefore has the power to control over local government units. If Congress can
grant to a municipal corporation the power to tax certain matters, it can also provide for exemptions or even
take back the power
Sec. 5, Art. X, 1987 Constitution
Book II, R.A. 7160
Basco v. PAGCOR, supra.
Maceda v. Macaraig, (1991) supra.

ii. delegation to the President

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. (Sec. 28[2], Art. VI, 1987 Constitution)

Delegation to the President

Congress may authorize, by law, the President to fix, within specified limits and subject to such
limitations and restrictions as it may impose:
1. Tariff rates;

2. Import and export quotas;

3. Tonnage and wharfage dues; and

4. other duties or imposts within the national development program of the government.

This authorization is embodied in Sec. 401 of the Tariff and Customs Code which is also called the
flexible tariff clause
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15

Flexible tariff clause

In the interest of national economy, general welfare and/or national security, the President, upon
recommendation of the National Economic and Development Authority, is empowered:

1. To increase, reduce or remove existing protective rates of import duty, provided that the
increase should not be higher than 100% ad valorem.

2. To establish import quota or to ban imports of any commodity; and

3. To impose additional duty on all imports not exceeding 10% ad valorem.

Sec. 28 (2), Art. VI, 1987 Constitution
Sec. 401, Tariff and Customs Code
Garcia v. Executive Sec., supra.

iii. delegation to administrative agencies

DELEGATION TO ADMINISTRATIVE AGENCIES

For the delegation to be constitutionally valid, the law must be complete in itself and must set forth sufficient
standards.

Certain aspects of the taxing process that are not really legislative in nature are vested in administrative
agencies. In these cases, there really is no delegation, to wit:
A) power to value property
B) power to assess and collect taxes
C) power to perform details of computation, appraisement or adjustments.

Maceda v. Macaraig, 196 SCRA 771. With the growing complexities of modern life, and the many technical
fields of government functions, as in matters pertaining to tax exemptions, delegation of legislative powers
has become the rule and non-delegation the exception. The legislature may not have the competence, let
alone the interest and the time, to provide direct and efficacious solutions to many problems attendant upon
present day undertakings. The legislature could not be expected to state all the detailed situations wherein
the tax exemption privilege would be restored. The task may be assigned to an administrative body like the
Fiscal Incentives Review Board (FIRB).

Osmena v. Orbos, supra.
Maceda v. Macaraig, (1991) supra.
Maceda v. ERB, supra.

c. Exemption of government entities, agencies and instrumentalities

As a matter of public policy, property of the state and of its municipal subdivisions devoted to government
uses and purposes is deemed to be exempt from taxation although no express provisions in the law are
made therefore.

1) Agencies performing governmental functions >> TAX EXEMPT, unless when the law expressly
provides for tax.
2) Agencies performing proprietary functions >> TAXABLE, unless exempted by law.
3) GOCCs >> TAXABLE, at the rate imposed upon corporations or associations engaged in a similar
business, industry or activity.
EXCEPT: GSIS, SSS, PHIC, PCSO, PAGCOR (Sec 27[C], NIRC)

REASON FOR THE EXEMPTION:

Taxing itself would require administration unnecessarily increasing its expenditures with administrative
expenses in the collection of payment of such taxes, without an increase in total revenues.

Sec. 27 (C)
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Mactan Cebu Airport v. Marcos, supra.
Maceda v. Macaraig, supra., supra.
E. O. 93 and P. D. 1931

d. International comity

International comity

Under International Law, property of a foreign State may not be taxed by another State.

Reasons for exemption

This principle is based on the sovereign equality among states under international law by virtue of which,
one state cannot exercise its sovereign power over another, and the rule of international law that a foreign
government may not be sued without its consent so that it is useless to assess the tax since anyway it
cannot be
When one State enters the territory of another State, there is an implied understanding that the
former does not intend to denigrate by placing itself under the jurisdiction of the other State.

Immunity from suit of a State.

Doctrine of Incorporation-The country is bound by generally accepted principles of international law which
are considered to be automatically part of our own laws.

Sec. 2, Art. II, 1987 Constitution
Tanada v. Angara, supra.

e. Limitation of territorial jurisdiction
territorial v. personal jurisdiction

Limitation of territorial jurisdiction-Tax laws cannot operate beyond a states territorial limits. Property
outside ones jurisdiction does not receive any protection from the State.


CIR v. British Overseas Airway Corp., 149 SCRA 395 (1987)
CIR v. Japan Airlines, 202 SCRA 450 (1991)
Air Canada v. CIR, (CA) Case No. 6572, 22 December 2004
Iloilo Bottlers v. City of Iloilo, 164 SCRA 607 (1988)
TERRITORIAL JURISDICTION
RULES:
Tax laws cannot operate beyond a States territorial limits
The government cannot tax a particular object of taxation which is not within its territorial jurisdiction.
Property outside ones jurisdiction does not receive any protection of the State
If a law is passed by Congress, Congress must always see to it that the object or subject of taxation is
within the territorial jurisdiction of the taxing authority
SITUS OF TAXATION-Place of taxation
RULE:
! The State where the subject to be taxed has a situs may rightfully levy and collect the tax
> In determining the situs of taxation, you have to consider the nature of the taxes
Example:
1) POLL TAX, CAPITATION TAX, COMMUNITY TAX
> Residence of the taxpayer

2) REAL PROPERTY TAX OR PROPERTY TAX
> Location of the property
> We can only impose property tax on the properties of a person whose residence is in the
Philippines.

EXCEPTIONS TO THE TERRITORIALITY RULE
A) Where the tax laws operate outside territorial jurisdiction
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1) TAXATION of resident citizens on their incomes derived from abroad
B) Where tax laws do not operate within the territorial jurisdiction of the State
1) When exempted by treaty obligations
2) When exempted by international comity

SITUS OF TAX ON REAL PROPERTY
- LEX REI SITUS or where the property is located
REASON:
! The place where the real property is located gives protection to the real property, hence the
property or its owner should support the government of that place

SITUS OF PROPERTY TAX ON PERSONAL PROPERTY
- MOBILIA SEQUNTUR PERSONAM
= movables follow the owner
= movables follow the domicile of the owner
RULES:
1) TANGIBLE PERSONAL PROPERTY
- Where located, usually the owners domicile
2) INTANGIBLLE PERSONAL PROPERTY
G. R. Domicile of the owner
EXCEPTION: The situs location not domicile
> Where the intangible personal property has acquired a business situs in another jurisdiction
* > The principle of Mobilia Sequntur Personam is only for purposes of convenience. It must yield to
the actual situs of such property.
* > Personal intangible properties which acquires business situs here in the Philippines
1) Franchise which is exercised within the Philippines
2) Shares, obligations, bonds issued by a domestic corporation
3) Shares, obligations, bonds issued by a foreign corporation, 85% of its business is conducted in the
Philippines
4) Shares, obligations, bonds issued by a foreign corporation which shares of stock or bonds acquire situs
here
5) Rights, interest in a partnership, business or industry established in the Philippines
> These intangible properties acquire business situs here in the Philippines, you cannot apply the principle
of Mobilia Sequntur Personam because the properties have acquired situs here.

SITUS OF INCOME TAX

a. DOMICILLARY THEORY-The location where the income earner resides in the situs of taxation
b. NATIONALITY THEORY-The country where the income earner is a citizen is the situs of taxation
c. SOURCE RULE-The country which is the source of the income or where the activity that produced the
income took place is the situs of taxation.

SITUS OF SALE OF PERSONAL PROPERTY

The place where the sale is consummated and perfected

SITUS OF TAX ON INTEREST INCOME
The residence of the borrower who pays the interest irrespective of the place where the obligation
was contracted
CIR vs. BOAC
> Revenue derived by an of-line international carrier without any flight from the Philippines, from
ticket sales through its local agent are subject to tax on gross Philippine billings

SITUS OF EXCISE TAX
Where the transaction performed
HOPEWELL vs. COM. OF CUSTOMS
> The power to levy an excise upon the performance of an act or the engaging in an occupation
does not depend upon the domicile of the person subject to the exercise, nor upon the physical
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location of the property or in connection with the act or occupation taxed, but depends upon the
place on which the act is performed or occupation engaged in.
Thus, the gauge of taxability does not depend on the location of the office, but attaches upon the
place where the respective transaction is perfected and consummated

The power to tax is limited only to persons, property or businesses within the jurisdiction or territory of the
taxing power.
EXCEPT:
C) Where the tax laws operate outside territorial jurisdiction
1) TAXATION of resident citizens on their incomes derived from abroad
D) Where tax laws do not operate within the territorial jurisdiction of the State
3) When exempted by treaty obligations
4) When exempted by international comity

* Mobilia Sequuntur Personam movables follow the person. According to this maxim, the situs of
personal property is the domicile of the owner. This is a merely a fiction of law intended for convenience and
not to be controlling where justice does not demand it.

** the following intangible properties are considered as properties with a situs in the Philippines:
a. Franchise which must be exercised in the Philippines
b. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws.
c. Shares, obligations or bonds issued by any foreign corporation 85% of business which is located in
the Philippines
d. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations or bonds
have acquired a business situs in the Philippines; and
e. Shares or rights in any partnership business or industry established in the Philippines.

Factors that Determine Situs
a. Kind or classification of the tax being levied
b. Situs of the thing or property taxed
c. Citizenship of the tax payer
d. Residence of the taxpayer
e. Source of the income taxed
f. Situs of the excise, privilege, business or occupation being taxed.
g. Method of collection.



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KIND OF TAX SITUS
Personal or Community Tax Residence or domicile of the taxpayer
Real Property Tax
Location of the property
Personal Property Tax TANGIBLE: where it is physically located or
permanently kept (Lex Rei Sitae)

INTANGIBLE: Subject to Sec 104 of the NIRC *
and the principle of Mobilia Sequuntur
Personam **
Business Tax Place of Business
Excise or Privilege Tax Where the act is performed or where
occupation is pursued
Sales Tax Where the sale is consummated
Income Tax Consider: (1) citizenship, (2) residence, (3)
source of income (Sec 42, 23, NIRC of 1997)
Transfer Tax Residence or citizenship of the taxpayer or
location of the property
Donors Tax Location of the property and the citizenship of
the donor (Sec 98, NIRC 1997)
Estate Tax Location and citizenship of the decedent.(Sec
85, NIRC)
Franchise Tax state which granted the franchise