CHAPTER 1: General Principles

TAXATION
A mode of raising revenue for public purposes Are enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of the government and for all its public needs 1. 2. 3. 4. Enforced contributions Proportional in character Levied by authority of the law For the support of the government and all its public needs

Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share he received from the inheritance.3 His liability, however, cannot exceed the amount of his share As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid income taxes the Government has two ways of collecting the tax in question:
(1)

by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due pursuant to the lien created by Section 315 of the Tax Code

BASIS OF TAXATION Taxation and the Lifeblood Doctrine

CIR vs BPI BPI was sent a notice of deficiency for percentage and documentary stamp tax on October 28, 1988 Council of BPI requested for specifics on a letter dated December 10, 1988 Specifications were sent on a letter by CIR dated May 8, 1991, received on June 27, 1991; final decision Reconsideration was denied and CTA dismissed for lack of jurisdiction since failed to protest under Sec 270 of NIRC CA reversed the CTAs decision and remanded the case The October 28, 1988 assessments were valid because prior to amendment by RA 8424, Section 270 of the NIRC did not require a computation of tax liabilities BPIs failure to protest the October 28, 1988 assessment within the 30-day period meant they became final and unappealable w/n a protest was made, BPI cannot be absolved from its liabilities Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people CIR vs Pineda Estate of Anastasio Pineda was subjected to income tax returns not filed from 1945-1948 The inheritance was already divided to the heirs including petitioner Manuel Pineda Manuel Pineda appealed only that proportionate part or portion pertaining to him as one of the heirs CTA and CA ruled that CIRs right to assess and collect the tax has prescribed W/N Pineda is liable for unpaid tax due the estate only up to the extent of and in proportion to any share he received

(2)

the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt and certain availability is an imperious need Vera vs. Fernandez Deficiency income tax was filed against the estate of Luis D. Tongoy CFI judge Jose Fernandez dismissed the motion on the ground that it was barred under Section 5, Rule 86 of the ROC w/n the statute of non-claims Sec 5, Rule 86 bars claims of the government for unpaid taxes still within the period of limitation in Sections 331 and 332 of the NIRC

RULING:

RULING No. Claims for taxes may be collected even after the distribution of the decedents estate among his heirs who shall be liable therefor in proportion of their share in the inheritance Reason for the more liberal treatment of claims for taxes is because taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. Upon taxation depends the Governments ability to serve the people for whose benefit taxes are collected Payment of income tax shall be a lien in favor of the GPI CIR vs CTA CTA demanded the Commissioner to grant a refund to Citytrust Commissioner prayed for the suspension of the proceedings with the CTA since tax refund was already being processed by the Tax Credit/ Refund Division ---dismissed since CTA already acquired jurisdiction

RULING The Tax Refund Division continued to act administratively on the claim for refund previously filed therein The Government is not bound by the errors committed by its agents. The Government cannot and must not be stopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents

RULING The Government can require Manuel B. Pineda to pay the full amount of the taxes assessed

Commissioner v. Algue Algue Inc. claimed a deduction of P75K for ITR for services rendered as promotional fees Collected by the payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines which purchased the Phil. Sugar Estate Development Company CIR denied the deduction contending that they were not an ordinary, reasonable or necessary business expense

RMC created a clear inconsistency with the provisions of Sec 230 of 1977 NIRC--- legislation Estoppels does not apply against the government BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters Philippine Guaranty Co. inc. v CIR Reinsurance remittances to foreign insurance corporations not doing business in the Philippines was excluded in the computation of ITR subject to income tax since activity was in the Philippines withholding tax on reinsurance premiums is computed on total amount ceded and not amount actually remitted the Government is not stopped from collecting taxes by the mistakes or errors of its agents Philex Mining Corporation v CIR Excise tax was assessed against Philex mining Philex contended that it should not pay its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted Claim for VAT input credit/ refund There is no legal compensation because taxpayer and the Government are not creditor-debtor Tax is compulsory North Camarines Lumber Co. v CIR North Camarines sold lumber to General Lumber Co. Inc with the agreement that the latter would pay for the sales tax General Lumber failed to pay its tax liabilities including the sales tax CIR sent a letter to North Camarines requiring it to pay the sales tax CTA dismissed for lack of jurisdiction since the case was filed 33 days after the receipt of the denial by the CIR Appeal was filed out of time. It is to be counted from the letter of demand and not from the denial of request for reconsideration. The commencement of the 30-day statutory period cannot be left solely on the will of the taxpayers Taxes are the lifeblood of the government, and their prompt and certain availability an imperious need.

RULING: Private respondents had proved that they payment of the fees were necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business Taxes are the lifeblood of the government and 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 itselg. YMCA vs CIR YMCA, a nonstock, non-profit corporation leased its facilities to small shop owners and charged for parking fees The government assessed rental income tax Subject to rental tax and professional tax because only real property is free from taxation Davao Gulf Lumber Corp. vs CIR W/N Section 5 of RA 1435 or Section 153 and 156 of the NIRC applies in computing petitioners tax refund (for oil and gas used by lumber and mining corporations) Ferdinand Marcos II vs CA Even if the property is still under probate proceedings and the exact value of the estate cannot be determined, or even if it is still under investigation by the DOJ for illgotten wealth, the estimation given by the BIR for income tax not filed by the decedent, Imelda and Ferdinand II, may be assessed on the estate of the deceased, and subsequently properties may be levied to satisfy the tax delinquency JBL Reyes vs Almanzor Tax assessment of the City Assessor of Manila is higher than the annual income from the rents of the real property in question W/N income approach or comparable sales approach is to be applied in lieu of the Rental Freezing Law The power to tax includes the power to destroy--- would result to forfeiture of property It must be appraised in its current and fair market value for the purposes of taxation Philippine Bank or Communications vs CIR PBCom requested a tax credit for overpayment of taxes in 1985 in 1987 and filed a claim with the CTA in 1988 CTA dismissed the claim since it was filed beyond the 2-yr reglementary period W/N a Revenue Memorandum Circular (RMC) may extend the prescriptive period provided by law from 2-yrs to 10yrs

Theories on Taxation
NECESSITY THEORY a power predicated upon necessity (Phil. Guaranty Co. Inc. v Commissioner) a necessary burden to preserve the States sovereignty

BENEFITS-PROTECTION THEORY the reciprocal duties of support and protection the citizens support the State in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society

DOCTRINE OF SYMBIOTIC RELATIONSHIP

CIR v. Algue 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.

The protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion, subject only to the test of reasonableness

(2) Discretion as to SUBJECTS of taxation No constitutional restriction provided the property is within the territorial jurisdiction of the taxing state

Benjamin Gomez vs. Enrico Palomar Anti-TB Stamp tax RA 1635 was enacted whereby an additional 50 centavos was required for the purchase of the special stamp for mail sent from Aug 19- Sept 30 to help raise funds for the Philippine Tuberculosis Society Not in violation of the equal protection clause because legislature has the inherent power to select the subjects of taxation and grant exemptions Classification is based on ability to pay and administrative convenience Silvestre Punsalan v. The Municipal Board of the City of Manila Petitioners are professional assessed for occupation tax by the City of Manila and they claim double taxation and challenge the validity of the ordinance as well the citys charter granting such power to enforce taxes The legislative department determines what entities should be empowered to impose occupation tax Legislature may, in its discretion, select what occupations shall be taxes and in the exercise of that discretion it may tax all or it may select for taxation certain classes and leave the others untaxes There is double taxation where one tax is imposed by the state and the other is imposed by the city there is nothing inherently obnoxious in the requirement that license fees or taxes be enacted with respect to the same occupation, calling or activity by both the state and the political subdivisions thereof

Liabilities Involved
Taxes are PERSONAL to the taxpayer Civil Liability Nonpayment thereof creates a CRIMINAL liability

NATURE OF THE TAXING POWER Taxation as an inherent Attribute of Sovereignty

Does not need constitutional conferment Constitutional provisions merely impose the limitations The relinquishment of taxation is never presumed The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty

Taxation as Legislative in Character

The State is free to select the object of taxation, such power being exclusively vested in the legislature EXCEPT where the constitution provides otherwise

(3) Discretion as TO AMOUNT OR RATE OF TAX (4) Discretion as to the MANNER, MEANS AND AGENCIES of collection of taxes Is the power to Tax the Power to Destroy The power to tax includes the power to destroy if it is usd validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare

ASPECTS, PROCESSES, PHASES OF TAXATION Levy/ Imposition

Levy refers to the enactment of rax laws or statutes Scope of Legislative Power to Tax (1) Discretion as to PURPOSES for which taxes shall be levied Lutz v Araneta Walter Lutz, administrator of the estate of Antonio Ledesma, questions the constitutionality of the Sugar Adjustment Act (CA 567) since it is being levied for the aid and support of the sugar industry exclusively and not for a public purpose The tax provided in CA 567 is a pure exercise of taxing power and the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of police power.

Judicial Review of Taxation The power to tax is not the power to destroy while the Supreme Court sits The power to declare a legislative enactment void is one which the judge, conscious of the fallibility of the human judgment, will shrink from exercising

Assessment and Collection

FIRST: taxes Can be delegated tax law must designate which agency will collect the

SECOND: Circulars or regulations must be in accordance with the tax measures imposed by Congress

Payment
Signifies act of compliance by the taxpayer

TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS AND IMPOSITIONS

Taxation Police power Promote public welfare through regulation Limited to the cost or regulation, issuance of the license or surveillance No special or direct benefits A healthy economic standard of society is maintained DNA Purpose Raising revenues

PURPOSES OF TAXATION Primary Purpose:

-

To raise Revenues
Amount of Exaction No limits

To raise revenues/ funds or property to enable the State to promote the general welfare and protection of its citizens

Secondary Purpose
Reduction of Social Inequality Progressive system of taxation: increases as the tax base increases Encourage the Growth of Local Industry The power to grant tax exemptions Superiority of Contracts tax rate Benefits received by the taxpayer No special or direct benefits General benefit of protection of his person, property and welfare Recognizes the obligations imposed by contracts Taxes paid form part of the public funds

Tax exemptions and tax reliefs serve as incentives to encourage investment in our local industry and thereby promote economic growth Protection of the Local Industry Tariff and customs code imposes certain taxes upon imported goods or articles As an Implement of the Police Power Tio v. Videogram Regulatory Board

As to transfer of property rights

Allows merely the restraint on the exercise of property rights

Taxation Purpose Compensation Raise public revenue Accrue to the general benefit of the citizens All persons, property and excises

Power of Eminent domain Taking of property for public use The owner of the expropriated property A particular property

May the power of taxation be used as an implement of the power of eminent domain? YES CIR v Central Luzon Drug Corp Tax measure are but enforced contributions exacted on pain of penal sunctions

EXTENT OF THE TAXING POWER (CUPS)

C- omprehensive U- nlimited P- lenary --- complete S- upreme [ insofar as the selection of the subject of taxation is concerned]

Persons Affected

Tax and Special Assessment Special Assessment - in the nature of a tax upon property levied according to benefits conferred on the property Based on the doctrine that the property against which it is levied derives some special benefit from the improvement Levied Only on a land Cannot be made a personal liability of the persons assessed Based wholly on benefits A charge imposed only on property owners benefited

PRINCIPLES OF A SOUND TAX SYSTEM

1.

Fiscal Adequacy
Must be adequate to meet government expenditures

2. 3. 4.

Theoretical justice
Take into consideration the taxpayers ability to pay Rule of taxation must be uniform and equitable Evolve a progressive system of taxation Equitable = when its burden falls on those better able to pay Progressive = when the rate goes up depending on the resources of the person affected Tax

Tax and License

License Police power For regulatory purposes Must be of sufficient amount Regulation is the

Taxing power To generate revenues Unlimited Regulation is

Administrative Feasibility
Tax laws must be capable of effective and efficient enforcement

merely incidental

primary purpose

Collection of a tax cannot await the results of a lawsuit against the government Republic vs Mambulao Lumber Co. o A claim for taxes is not a debt, demand or contract or judgment as is allowed to be setoff Taxes are not in the nature of contracts between the parties but grown out of duty to and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers are not required

Gerochi vs Department of Energy in exacting the universal charge through Sec 34 of Electric Power Industry Reform Act of 2001, the States police power is invoked Tax and Toll Toll a demand of proprietorship; for cost and maintenance Tax a demand of sovereignty; for raising public revenues Tax and Penalty Tax civil liability but may become a criminal liability if the person does not pay its civil obligation Penalty punishment for the commission of a crime Tax and Debt A tax is not a debt It does not depend upon the consent of the taxpayer

Government and the taxpayer are not mutually creditors and debtors of each other under Art 1278 of the CC Tax was due to the city government while expropriation was effected by the national government The amount owed by the government (P4116) was deposited in PNB long before the sale at public auction LC ruled that petitioner Francia was properly notified about the sale and that the gross inadequacy thereof is usually to allow the debtor to redeem the property sold

(1) Taxes are not contracts but positive acts of the government (2) Cannot be assigned as debts or proved in bankruptcy as such (3) Not the subject of set-off (4) Do not draw interest (5) The proceedings to collect taxes are not barred by ordinary statutes of limitation

Domingo vs Garlitos In an earlier case the court ruled that the estate of Walter Scott Price was liable to pay estate and inheritance tax amounting to P40,058.55. The fiscal presented a petition to execute the judgment which the court denied (Hon. Lorenzo Garlitos) since the government was indebted to the estate in the amount of P262,200. o A note executed by Pres. Garcia, directed Dir. Castrillo of the Bureau of Lands to pay the administratrix and RA 2700 appropriated P262,200 for the payment of Leyte Cadastral Survey Inc. Judge Garlitos ordered that the P40,058.55 due the CIR be deducted from the P262,200 owed the estate

Francia vs IAC Engracio Francia is the owner of a 328 sq.m. lot in Pasay, MM, which was expropriated by the government for P4116.00 From 1963 to 1977 Francia failed to pay his real estate taxes (P2400) and his property was sold at public auction by the City Treasurer of Pasay City Francia was not present during the auction sale wherein Ho Fernandez was the highest bidder for P2400 Francia filed an action to annul the auction sale o o Dismissed by the lower court The dismissal by the LC was affirmed by the IAC Whether the payment of tax delinquency was set-off for the Governments indebtedness to Francia Whether petitioner Francia was properly notified about the auction sale Whether the price was grossly inadequate There can be no off-setting of taxes against the claims that the taxpayer may have against the government A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected

The motion to set aside the order must be denied for lack of merit The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount thereof In the testate or intestate proceedings, the properties belonging to the estate are under the jurisdiction of the court until distribution among the heirs entitled --- in custodia legis The court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law Both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered were due and demandable as well as fully liquidated Compensation takes place by operation of law (Art. 1279 and 1290) Philex Mining Corporation vs CIR

ISSUES: 1) 2) 3) RULING

BIR informed Philex of its tax liabilities for the 2nd,3rd,4th quarter of 1991 and 1st and 2nd quarter of 1992 amounting to P123,821.52. Philex protested the demand stating that it has VAT input credit/refund for taxes paid in 1989-1991 BIR: ruled that the claims have not yet been established or determined with certainty therefore no legal compensation takes place CTA: (there was a credit applied to the tax liability reducing it to 110,677,688.52) there is no legal compensation because the claims of the petitioner for VAT refund is still pending litigation and has to be determined by the Court o The liquidated debt of the Petitioner cannot be set off against the unliquidated claim of petitioner Taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract

CA affirmed CTA A few days after denial of its MR. Philex was able to obtain Vat input credit/refund for 1989-1992 and 1994 Petitioner contends that since both had become due and demandable as well as fully liquidated, legal compensation can take place

RULING Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other The ruling in CIR vs Itogon-Suyoc Mines cannot be applied because Sec. 51(d) of the NIRC Code of 1939 upon which it was based was omitted in the NIRC Code of 1977 Philexs contention that it had no obligation to pay excise tax liabilities since it had pending claims disregards the basic principle that taxes are the lifeblood of the government and should be collected without unnecessary hindrance A tax is compulsory It does not depend upon the consent of the taxpayer If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. The fact that Philex has pending claims for VAT input claim/refund is immaterial for the imposition of charges and penalties prescribed under Sec 248 and 249 of the Tax Code of 1977 o Payment of a surcharge is mandatory