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    I. General Principles of TaxationTaxation I

    Part I. General Principles ofTaxation

    I. Meaning, Nature, Basis, Characteristics andPurpose of Taxation

    A. SURVEY OF PHILIPPINE TAXES / OVERVIEW OFPHILIPPINE TAX SYSTEM

    1. Internal Revenue taxes National Internal RevenueCode (NIRC), as amended

    2. Local/Municipal Taxes Local Government Code, BookII

    3. Tariff / Duties Tariff and Customs Code, as amended4. Taxes / incentives under special laws

    B. MEANING OF TAX / TAXATION

    TAXATION / ACTOF LEVYING TAX / INHERENT POWEROFTHE STATE

    Taxation is the act of laying tax, i.e. the process or

    means by which the sovereign, through its law-makingbody, raises income to defray the necessary expenses ofgovernment. It is merely a way of apportioning the cost ofgovernment among those who in some measure areprivileged to enjoy its benefits and, therefore, must bearits burdens. (51 Am. Jur. 34)

    Taxation refers to the inherent power of the State todemand enforced contributions for public purposes.

    TAX DISTINGUISHED FROM OTHERTERMS

    License and Regulatory Fees

    Tax License Fee

    Enforced contributionassessed by sovereignauthority to defray publicexpenses

    Legal compensation orreward of an officer forspecific services

    Levied in the exercise oftaxing power

    Emanates from the policepower of the State

    Purpose is to generaterevenue

    Purpose is to regulate

    There is generally no limiton the amount of tax thatmay be imposed

    The amount of exaction orcharge must only besufficient to cover expensesof :1. issuing the license2. cost of necessary

    inspection or policesurveillance

    Imposed also on personsand property

    Imposed on the right toexercise a privilege

    Failure to pay does notnecessarily make the act orbusiness illegal could be a ground for

    criminal prosecution even businesses

    Failure to pay makes the actor business illegal

    carried on illegally aresubject to tax

    if the purpose is primarily for revenue or if revenue isone of the real and substantial purposes, then theexaction is a tax (PAL vs. Edu, 1988)

    where a permit collected from alien job applicants is inexcess of the cost of regulation, the exaction is a tax

    (Villegas vs. Hiu Chiong Tsai Pao Ho, 1978) however, in the case of license fees for non-

    useful occupations, the exaction may be verylarge without necessarily being a tax (PhysicalTherapy vs. Municipal Board of Manila, 101 Phil1142)

    three kinds of licenses licenses for regulation of useful occupations licenses for regulation or restriction of non-useful

    occupations or enterprises licenses for revenue only

    Special Assessment

    Tax Special Assessment

    Imposed on persons,property or services

    Levied only on land

    Personal liability of thetaxpayer

    Liability is limited only to theland involved

    Based on necessity andbenefit

    Based wholly on benefits

    Has general application Exceptional both as to timeand locality

    an exemption from taxation does not includeexemption from special assessments

    but the power to tax carries with it the power to levy a

    special assessmentToll

    Tax Toll

    Demand of sovereignty Demand of ownership

    Paid for the support of thegovernment

    Paid for the use of anothersproperty

    There is generally no limiton amount of tax that maybe imposed

    The amount of toll dependsupon the cost of constructionor maintenance of the publicimprovement used

    May be imposed only by thegovernment May be imposed by thegovernment or privateindividuals or entities

    Penalty

    Tax Penalty

    Civil liability Punishment for thecommission of a crime

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    Intended to raise revenue Designed to regulateconduct

    a person is criminally liable in taxation only becausehe fails to satisfy his civil obligation to pay taxes

    the violation of a tax law may give rise to imposition ofpenalty

    Tariff / Custom Duties

    custom duties and fees are charged upon commoditieson their being imported into or exported from acountry these are taxes

    tax is a broader term that include not only customduties but other taxes as well

    OBLIGATIONTO PAY TAXVS. OBLIGATIONTO PAY DEBT

    Art. 1279, CCIn order that compensation may be proper, it is necessary:1. That each of the obligors be bound principally and that

    he be at the same time a principal creditor of theother;

    2. That both debts consist in a sum of money, or if thethings due are consumable, they be of the same kind,and also of the same quality if the latter ahs beenstated;

    3. That the two 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 andcommunicated in due time to the debtor. (1196)

    Republic vs. Mambulao Lumber Company (1962)The general rule, based on grounds of public policy is

    well settled that no set off is admissible against demandsfor taxes levied for general or local governmental

    purposes. Taxes are not in the nature of contracts betweenthe party and party but grow out of a duty to, and are thepositive acts of the government, to the making andenforcing of which, the personal consent of the individualtaxpayers is not required.

    Philex Mining vs. CIR (1998)Taxes cannot be subject to compensation for the

    simple reason that the government and the taxpayer arenot creditors and debtors of each other. There is a materialdistinction between a tax and a debt. Debts are due to thegovernment in its corporate capacity, while taxes are dueto the government in its sovereign capacity

    xxx A person cannot refuse to pay a tax on the groundthat the government owes him an amount equal to orgreater than the tax being collected. The collection of a tax

    cannot await the results of a lawsuit against thegovernment.

    xxxTo be sure, we cannot allow Philex to refuse payment

    of its tax liabilities on the ground that it has a pending taxclaim for refund or credit against the government whichhas not yet been granted. It must be noted that adistinguishing feature of a tax is that it is compulsoryrather than a matter of bargain. Hence, a tax does notdepend upon the consent of the taxpayer. If any taxpayercan defer the payment of taxes by raising the defense that

    it still has a pending claim for refund or credit, this wouldadversely affect the government revenue system.

    Atlas Consolidated vs. CTA (2002)We reject the petitioners contention (that the

    petitioners tax liabilities and its claims for VAT refunds canbe the subject of set-off or compensation) for the followingreasons:

    First, compensation shall take place when two persons,in their own right, are creditors and debtors of each other.The parties herein are the Government and the petitioneras taxpayer. They are not mutually creditors and debtors ofeach other.

    Second, a tax is not a debt, but an enforcedproportionate contribution imposed upon persons,property, or interest by the legislature for a public purposeand generally payable in money.

    Third, taxes are not in the nature of contracts betweenthe parties but grow out of a duty to, and are positive actsof, the Government, to the making and enforcing of which,the personal consent of the taxpayer is not required.

    Exception:

    Domingo vs. Garlitos (1963)Another ground for denying the petition of the

    provincial fiscal (order for the payment by the estate of theestate and inheritance tax) is the fact that the court having

    jurisdiction of the state against the Government has beenrecognized and an amount of P262,200 has already beenappropriated for the purpose by a corresponding law.Under the above circumstances both the claim of theestate against the Government for inheritance taxes andthe claim of the intestate for services rendered havealready become overdue and demandable as well as fullyliquidated. Compensation, therefore, takes place byoperation of law.

    C. ESSENTIAL CHARACTERISTICS OF TAX

    1. Enforced contribution it is not a voluntary payment or donation its imposition is not dependent upon the will or

    assent, express or implied, of the person taxed not contracts but positive acts of the government

    2. Proportionate in character Laid by some rule of apportionment according to

    which persons share the public burden Conformably with the constitutional mandate on

    progressivity of a taxing system3. Pecuniary burden payable in money

    But a tax is not necessarily confined to thosepayable in money

    4. Imposed by the State on persons, property or services

    within its jurisdiction5. Levied by the legislative body of the State The taxing power is peculiarly and exclusively

    legislative in character6. Levied for a public purpose

    D. THEORY AND BASIS OF TAXATION

    1. NECESSITY THEORY Taxes proceed upon the theory that the existence of

    government is a necessity; that it cannot continuewithout the means to pay its expenses; and that for

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    those means, it has the right to compel all citizens andproperty within its limits to contribute

    Taxation is a power that emanating from necessity. Itis a necessary burden to preserve the Statessovereignty (Philippine Guaranty vs. CIR, 1965)

    Commissioner vs. Algue (1988)

    It is said that taxes are what we pay for civilizedsociety. Without taxes, the government would be paralyzedfor lack of the motive power to activate and operate it.Hence, despite the natural reluctance to surrender part ofones hard-earned income to the taxing authorities, everyperson who is able to must contribute his share in therunning of the government. The government for its part, isexpected to respond in the form of tangible and intangiblebenefits intended to improve the lives of the people andenhance their moral and material values. This symbioticrelationship is the rationale for taxation and should dispelthe erroneous notion that it is an arbitrary method ofexaction by those in the seat of power.

    NPC vs. City of Cabanatuan (2003)Taxes are the lifeblood of the government for without

    taxes, the government can neither exist nor endure. Aprincipal attribute of sovereignty, the exercise of taxingpower derives its source from the very existence of thestate whose social contract with its citizens obliges it topromote public interest and common good. The theorybehind the exercise of the power to tax emanates fromnecessity, without taxes, government cannot fulfill itsmandate of promoting the general welfare and well-beingof the people.

    2. BENEFIT RECEIVED PRINCIPLE

    The State demands and receives taxes from thesubjects of taxation within its jurisdiction so that itmay be enabled to carry its mandate into effect andperform the functions of government

    The citizen pays from his property the portiondemanded in order that he may be secured in theenjoyment of the benefits of an organized society The benefits are enjoyed even by those who do

    not pay taxes because they are not able to

    Lorenzo vs. Posadas (1937)The obligation to pay taxes rests not upon the

    privileges enjoyed by, or the protection afforded to, acitizen by the government, but upon the necessity ofmoney for the support of the state. For this reason, no oneis allowed to object to or resist the payment of taxes solelybecause no personal benefit to him can be pointed out.

    E. PURPOSE / OBJECTIVES OF TAXATION

    1. GENERAL / FISCAL / REVENUE

    The purpose of taxation is to provide funds or propertywith which the State promotes the general welfare andprotection of its citizens

    Commissioner vs. Algue (1988)It is said that taxes are what we pay for civilized

    society. Without taxes, the government would be paralyzedfor lack of the motive power to activate and operate it.Hence, despite the natural reluctance to surrender part of

    ones hard-earned income to the taxing authorities, everyperson who is able to must contribute his share in therunning of the government. The government for its part, isexpected to respond in the form of tangible and intangiblebenefits intended to improve the lives of the people andenhance their moral and material values. This symbioticrelationship is the rationale for taxation and should dispelthe erroneous notion that it is an arbitrary method of

    exaction by those in the seat of power.

    PAL vs. Edu (1988)Fees may properly be regarded as taxes even though

    they also serve as an instrument of regulation.Indeed, taxation may be made the implement of the

    states police power.If the purpose is primarily revenue, or if revenue is, at

    least, one of the real and substantial purposes, then theexaction is properly called a tax.

    xxxIt is quite apparent that vehicle registration fees were

    originally simple exactions intended only for regulatory

    purposes in the exercise of the States police powers. Overthe years, however, as vehicular traffic exploded in numberand motor vehicles became absolute necessities withoutwhich modern life as we know it would stand still, Congressfound the registration of vehicles a very convenient way ofraising such revenues. Without changing the earlierdenomination of registration payments as fees, theirnature has become that of taxes.

    In view of the foregoing, we rule that motor vehicleregistration fees as at present exacted pursuant to theLand Transportation and Traffic Code are actually taxesintended for additional revenues of government even if onefifth or less of the amount collected is set aside for theoperating expenses of the agency administering theprogram.

    Tolentino vs. Secretary of Finance (1995)A license tax, unlike an ordinary tax, is mainly forregulation. Its imposition on the press is unconstitutionalbcoz it lays a prior restraint on the exercise of its rt.Hence, although its application to others, such those sellinggoods, is valid, its application to the press or to religiousgroups, e.g. Jehovah's Witnesses, in the latter's sale ofreligious books & pamphlets, is unconstitutional. As theU.S. SC put it, "it is one thing to impose a tax on income orproperty of a preacher. It is quite another thing to exact atax on him for delivering a sermon."The VAT is, however, diff. It is not a license tax. It is not atax on the exercise of a privilege, much less aconstitutional rt. It is imposed on the sale, barter, lease orexchange of goods or properties or the sale or exchange ofservices & the lease of properties purely for revenue

    purposes. To subj the press to its pmt is not to burden theexercise of its rt any more than to make the press payincome tax or subj it to gen regulation is not to violate itsfreedom under the Constitution.

    2. NON-REVENUE / SPECIALORREGULATORY

    a. Taxation also has a regulatory purposeb. Taxation may also be used to implement police

    power in order to promote the general welfare ofthe people

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    c. Taxes may be levied to reduce inequalities ofwealth and income

    d. Taxation can grant incentives and exemptions inorder to encourage investments and promote thecountrys economic growth

    e. Taxes sometimes provide protection to localindustries

    Osmea vs. Orbos (1993)Hence, it seems clear that while the funds collected

    may be referred to as taxes, they are exacted in theexercise of the police power of the State.

    xxx Although the provision authorizing the ERB toimpose additional amounts could be construed to refer tothe power of taxation, it cannot be overlooked that theoverriding consideration is to enable the delegate to actwith expediency in carrying out the objectives of the lawwhich are embraced by the police power of the State.

    Caltex vs. Commission on Audit (1992)We find no merit in the petitioners contention that the

    OPSF contributions are not for a public purpose becausethey go to a special fund of the government. Taxation is

    no longer envisioned as a measure merely to raise revenueto support the existence of the government; taxes may belevied with a regulatory purpose to provide means for therehabilitation and stabilization of a threatened industrywhich is affected with public interest as to be within thepolice power of the State. Xxx

    Also, PD 1956, as amended by EO 137, explicitlyprovides that the source of OPSF is taxation. No amount ofsemantical juggleries could dim this fact.

    Esso Standard Eastern vs. Commissioner (1989)As to the contention that the margin levy is a tax on

    the purchase of foreign exchange and hence should notform part of the exchange rate, suffice it to state that wehave already held the contrary for the reason that a tax islevied to provide revenue for government operations, while

    the proceeds of the margin fee are applied to strengthenour countrys international reserves.

    F. CLASSIFICATION OF TAXES

    1. AS TO SCOPE

    a. National tax imposed by the NationalGovernment

    b. Local tax imposed by municipal corporations orlocal government units

    2. AS TO WHO SHOULDERSTHE BURDENOFTHE TAX

    a. Direct Tax Tax which is demanded from theperson who also shoulders the burden of the tax

    b. Indirect Tax Tax which is demanded from oneperson in the expectation and intention that heshall indemnify himself at the expense of another,falling finally upon the ultimate purchaser orconsumer

    Sec 105, NIRCPersons Liable Any person who, in the course of trade orbusiness, sells, barters, exchanges, leases goods orproperties, renders services, and any person who importsgoods shall be subject to value-added tax (VAT) imposed inSections 106 to 108 of this Code.

    The value-added tax is an indirect tax and the amount oftax may be shifted or passed on to the buyer, transferee orlessee of the goods, properties or services. This rule shalllikewise apply to existing contracts of sale or lease ofgoods, properties or services at the time of the effectivityof RA 7716.The phrase in the course of trade or business means theregular conduct or pursuit of a commercial or an economic

    activity, including transactions incidental thereto, by anyperson regardless of whether or not the person engagedtherein is a nonstick, nonprofit private organization(irrespective of the disposition of its net income andwhether or not it sells exclusively to members or theirguests), or government entity.The rule of regularity, to the contrary notwithstanding,services as defined in this Code rendered in the Philippinesby nonresident foreign persons shall be considered asbeing rendered in the course of trade or business.

    RA 9337SEC. 106Value-Added Tax on Sale of Goods or Properties. -

    (A) Rate and Base of Tax. - There shall be levied,

    assessed and collected on every sale, barter orexchange of goods or properties, a value-added taxequivalent to ten percent (10%) of the gross sellingprice or gross value in money of the goods orproperties sold, bartered or exchanged, such tax to bepaid by the seller or transferor:

    Provided, That the President, upon the recommendation ofthe Secretary of Finance, shall, effective January 1, 2006,raise the rate of value-added tax to twelve percent (12%),after any of the following conditions has been satisfied:

    (i) Value-added tax collection as a percentage ofGross Domestic product (GDP) of the previousyear exceeds two and four-fifth percent (2 4/5%);or

    (ii) National government deficit as a percentage ofGDP of the previous year exceeds one and one-half percent (1 1/2%).

    (1) The term 'goods or properties' shallmean all tangible and intangible objects whichare capable of pecuniary estimation and shallinclude:

    (a) Real properties held primarily for saleto customers or held for lease in theordinary course of trade or business(b) The right or the privilege to usepatent, copyright, design or model, plansecret formula or process, goodwill,trademark, trade brand or other likeproperty or right;(c) The right or the privilege to use in thePhilippines of any industrial, commercial

    or scientific equipment;(d) The right or the privilege to usemotion picture films, films, tapes anddiscs; and(e) Radio, television, satellitetransmission and cable television time.

    The term 'gross selling price' means thetotal amount of money or its equivalent whichthe purchaser pays or is obligated to pay tothe seller in consideration of the sale, barteror exchange of the goods or properties,excluding the value- added tax. The excise

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    tax, if any, on such goods or properties shallform part of the gross selling price.(2) The following sales by VAT-registeredpersons shall be subject to zero percent (0%)rate:

    (a)Export Sales. - The term 'exportsales' means:

    (1) The sale and actual shipment ofgoods from the Philippines to a foreigncountry, irrespective of any shippingarrangement that may be agreed uponwhich may influence or determine thetransfer of ownership of the goods soexported and paid for in acceptableforeign currency or its equivalent ingoods or services, and accounted for inaccordance with the rules andregulations of the Bangko Sentral ngPilipinas,(BSP);(2) Sale of raw materials orpackaging materials to a nonresidentbuyer for delivery to a resident localexport-oriented enterprise to be used

    in manufacturing, processing, packingor repacking in the Philippines of thesaid buyer's goods and paid for inacceptable foreign currency andaccounted for in accordance with therules and regulations of the BangkoSentral ng Pilipinas (BSP):(3) Sale of raw materials orpackaging materials to export-orientedenterprise whose export sales exceedseventy percent (70%) of total annualproduction;(4) Sale of gold to the BangkoSentral ng Pilipinas (BSP);(5) Those considered export salesunder Executive Order No. 226,otherwise known as the OmnibusInvestment Code of 1987, and otherspecial laws; and(6) The sale of goods, supplies,equipment and fuel to personsengaged in international shipping orinternational air transport operations.

    (b)Foreign Currency Denominated Sale. -The phrase 'foreign currencydenominated sale' means sale to anonresident of goods, except thosementioned in Sections 149 and 150,assembled or manufactured in thePhilippines for delivery to a resident inthe Philippines, paid for in acceptable

    foreign currency and accounted for inaccordance with the rules and regulationsof the Bangko Sentral ng Pilipinas (BSP).(c) Sales to persons or entities whoseexemption under special laws orinternational agreements to which thePhilippines is a signatory effectivelysubjects such sales to zero rate.

    (B) Transactions Deemed Sale. - The followingtransactions shall be deemed sale:

    (1) Transfer, use or consumption not in the course ofbusiness of goods or properties originally intendedfor sale or for use in the course of business;

    (2) Distribution or transfer to:(a) Shareholders or investors as share inthe profits of the VAT-registered persons: or(b) Creditors in payment of debt;

    (3) Consignment of goods if actual sale is not made

    within sixty (60) days following the date suchgoods, were consigned; and

    (4) Retirement from or cessation of business, withrespect to inventories of taxable aoods existing asof such retirement or cessation.

    (C) Changes in or Cessation of Status of a VAT-registered Person. The tax imposed in Subsection(A) of this Section shall also apply to goods disposedof or existing as of a certain date if undercircumstances to be prescribed in rules and regulationsto be promulgated by the Secretary of Finance, uponrecommendation of the Commissioner, the status of aperson as a VAT-registered person changes or isterminated.

    (D) Sales Returns, Allowances and Sales Discounts.- The value of goods or properties sold andsubsequently returned or for which allowances weregranted by a VAT-registered person may be deductedfrom the gross sales or receipts for the quarter inwhich a refund is made or a credit memorandum orrefund is issued. Sales discount granted and indicatedin the invoice at the time of sale and the grant ofwhich does not depend upon the happening of a futureevent may be excluded from the gross sales within thesame quarter it was given.

    (E) Authority of the Commissioner to Determine theAppropriate Tax Base. - The Commissioner shall, byrules and regulations prescribed by the Secretary ofFinance, determine the appropriate tax base incaseswhere a transaction is deemed a sale, barter or

    exchange of goods or properties under Subsection (B)hereof, or where the gross selling price isunreasonably lower than the actual market value."

    SEC. 107Value-Added Tax on Importation of Goods.

    (A) In General. - There shall be levied, assessed andcollected on every importation of goods a value-addedtax equivalent to ten percent (10%) based on the totalvalue used by the Bureau of Customs in determiningtariff and customs duties, plus customs duties, excisetaxes, if any, and other charges, such tax to be paidby the importer prior to the release of such goods fromcustoms custody: Provided, That where the customsduties are determined on the basis of the quantity or

    volume of the goods, the value-added tax shall bebased on the landed cost plus excise taxes, if any:Provided, further, That the President, upon therecommendation of the Secretary of Finance, shall,effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of thefollowing conditions has been satisfied:(i) Value-added tax collection as a percentage of

    Gross Domestic Product (GDP) of the previousyear exceeds two and four-fifth percent (24/5%); or

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    (ii) National government deficit as a percentageof GDP of the previous year exceeds one andone-half percent (1 1/2%).

    (B) Transfer of Goods by Tax-exempt Persons. - Inthe case of tax free importation of goods into thePhilippines by persons, entities or agencies exemptfrom tax where such goods are subsequently sold,

    transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers,transferees or recipients shall be considered theimporters thereof, who shall be liable for any internalrevenue tax on such importation. The tax due on suchimportation shall constitute a lien on the goodssuperior to all charges or liens on the goods,irrespective of the possessor thereof.

    SEC. 108Value-added Tax on Sale of Services and Use or Lease ofProperties. -

    (A) Rate and Base of Tax. - There shall be levied,assessed and collected, a value-added tax equivalentto ten percent (10%) of gross receipts derived fromthe sale or exchange of services, including the use orlease of properties: Provided, That the President, uponthe recommendation of the Secretary of Finance, shall,effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of thefollowing conditions has been satisfied:(i) Value-added tax collection as a percentage of

    Gross Domestic Product (GDP) of the previousyear exceeds two and four-fifth percent (24/5%); or

    (ii) National government deficit as a percentageof GDP of the previous year exceeds one andone-half percent (1 1/2%).

    The phrase 'sale or exchange of services' means theperformance of all kinds of services in the Philippines forothers for a fee, remuneration or consideration, including

    those performed or rendered by construction and servicecontractors; stock, real estate, commercial, customs andimmigration brokers; lessors of property, whether personalor real; warehousing services; lessors or distributors ofcinematographic films; persons engaged in milling,processing, manufacturing or repacking goods for others;proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns, resorts; proprietors oroperators of restaurants, refreshment parlors, cafes andother eating places, including clubs and caterers; dealers insecurities; lending investors; transportation contractors ontheir transport of goods or cargoes, including persons whotransport goods or cargoes for hire and other domesticcommon carriers by land relative to their transport ofgoods or cargoes; common carriers by air and sea relativeto their transport of passengers, goods or cargoes from

    one place in the Philippines to another place in thePhilippines; sales of electricity by generation companies,transmission, and distribution companies; services offranchise grantees of electric utilities, telephone andtelegraph, radio and television broadcasting and all otherfranchise grantees except those under Section 119 of thisCode and non-life insurance companies (except their cropinsurances), including surety, fidelity, indemnity andbonding companies; and similar services regardless ofwhether or not the performance thereof calls for theexercise or use of the physical or mental faculties. The

    phrase 'sale or exchange of services' shall likewiseinclude:

    (1) The lease or the use of or the right or privilege touse any copyright, patent, design or model plan,secret formula or process, goodwill, trademark,trade brand or other like property or right;

    (2) The lease or the use of, or the right to use of anyindustrial, commercial or, scientific equipment;

    (3) The supply of scientific, technical, industrial orcommercial knowledge or information;

    (4) The supply of any assistance that is ancillary andsubsidiary to and is furnished as a means ofenabling the application or enjoyment of any suchproperty, or right as is mentioned in subparagraph(2) or any such knowledge or information as ismentioned in subparagraph (3);

    (5) The supply of services by a nonresident person orhis employee in connection with the use ofproperty or rights belonging to, or the installationor operation of any brand, machinery or otherapparatus purchased from such nonresidentperson;

    (6) The supply of technicai advice, assistance or

    services rendered in connection with technicalmanagement or administration of any scientific,industrial or commercial undertaking, venture,project or scheme;

    (7) The lease of motion picture films, films, tapes anddiscs; and

    (8) The lease or the use of or the right to use radio,television, satellite transmission and cabletelevision time.

    Lease of properties shall be subject to the tax hereinimposed irrespective of the place where the contract oflease or licensing agreement was executed if the propertyis leased or used in the Philippines.The term 'gross receipts' means the total amount ofmoney or its equivalent representing the contract price,compensation, service fee, rental or royalty, including the

    amount charged for materials supplied with the servicesand deposits and advanced payments actually orconstructively received during the taxable quarter for theservices performed or to be performed for another person,excluding value-added tax.

    (B) Transactions Subject to Zero Percent (0%) Rate.- The following services performed in the Philippinesby VAT-registered persons shall be subject to zeropercent (0%) rate:(1) Processing, manufacturing or repacking goods for

    other persons doing business outside thePhilippines which goods are subsequentlyexported, where the services are paid for inacceptable foreign currency and accounted for inaccordance with the rules and regulations of the

    Bangko Sentral ng Pilipinas (BSP);(2) Services other than those mentioned in thepreceding paragraph rendered to a personengaged in business conducted outside thePhilippines or to a nonresident person notengaged in business who is outside the Philippineswhen the services are performed, theconsideration for which is paid for in acceptableforeign currency and accounted for in accordancewith the rules and regulations of the BangkoSentral ng Pilipinas (BSP);

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    (3) Services rendered to persons or entities whoseexemption under special laws or internationalagreements to which the Philippines is a signatoryeffectively subjects the supply of such services tozero percent (0%) rate;

    (4) Services rendered to persons engaged ininternational shipping or international air transportoperations, including leases of property for use

    thereof;(5) Services performed by subcontractors and/or

    contractors in processing, converting, ormanufacturing goods for an enterprise whoseexport sales exceed seventy percent (70%) oftotal annual production;

    (6) Transport of passengers and cargo by air or seavessels from the Philippines to a foreign country;and

    (7) Sale of power or fuel generated throughrenewable sources of energy such as, but notlimited to, biomass, solar, wind, hydropower,geothermal, ocean energy, and other emergingenergy sources using technologies such as fuelcells and hydrogen fuels.

    Tolentino vs. Secretary of Finance (1995)The Constitution does not really prohibit the

    imposition of indirect taxes w/c, like the VAT, areregressive. What it simply provides is that Congress shall"evolve a progressive system of taxation." Theconstitutional provision has been interpreted to meansimply that "direct taxes are to be preferred [&] as muchas possible, indirect taxes should be minimized." Indeed,the mandate to Congress is not to prescribe, but to evolve,a progressive tax system. Otherwise, sales taxes, w/cperhaps are the oldest form of indirect taxes, would havebeen prohibited Sales taxes are also regressive.Resort to indirect taxes should be minimized but notavoided entirely because it is difficult, if not impossible, toavoid them by imposing such taxes according to the

    taxpayers' ability to pay. In the case of the VAT, the lawminimizes the regressive effects of this imposition byproviding for zero rating of certain transactions, whilegranting exemptions to other transactions.

    Maceda vs. Macaraig (1991)It may be useful to make a distinction, for the

    purpose of this disposition, b/w a direct tax & an indirecttax. A direct tax is a tax for which a taxpayer is directlyliable on the transaction or business it engages in.Examples are the custom duties and ad valorem taxes paidby the oil cos. to the Bureau of Customs for theirimportation of crude oil, and the specific and ad valoremtaxes they pay to the BIR after converting the crude oilinto petroleum products.On the other hand, "indirect taxes are taxes primarily paid

    by persons who can shift the burden upon someone else."For example, the excise and ad valorem taxes that oil cos.pay to the BIR upon removal of petroleum products fromits refinery can be shifted to its buyer, like the NPC, byadding them to the "cash" and/or "selling price."

    Commissioner vs. John Gotamco (1987)Direct taxes are those that are demanded from the

    very person who, it is intended or desired, should paythem; while indirect taxes are those that are demanded inthe first instance from one person in the expectation andintention that he can shift the burden to someone else. The

    contactors tax is payable by the contractor but in the lastanalysis it is the owner of the building that shoulders theburden of the tax because the same is shifted by thecontractor to the owner as a matter of self-preservation.Thus, it is an indirect tax.

    Commissioner vs. PLDT (2005)In context, direct taxes are those that are exacted

    from the very person who, it is intended or desired, shouldpay them; they are impositions for which a taxpayer isdirectly liable on the transaction or business he is engagedin.

    On the other hand, indirect taxes are those that aredemanded, in the first instance, from, or are paid by, oneperson in the expectation and intention that he can shiftthe burden to someone else. Indirect taxes are taxeswherein the liability for the payment of tax falls on oneperson but the burden thereof can be shifted or passed onto another person.

    3. ASTO OBJECTORSUBJECT MATTEROF TAXa. Property

    Taxes assessed on all property or all property

    of a certain class within the jurisdiction of thetaxing power. Example: real estate tax

    b. Personalc. Poll / Capitation

    Taxes of a fixed amount upon all persons of acertain class within the jurisdiction of thetaxing power without regard to the amount oftheir property, or the occupations orbusinesses in which they are engaged.

    Example: communityd. Excise

    Also called privilege taxes Laid upon the manufacture, sale or

    consumption of commodities within thecountry; upon licenses to pursue certain

    occupations and upon corporate privileges Example: income tax, VAT, estate tax,donors taxCommissioner vs. CA (1995)

    Ad valorem tax is a tax not on the minerals, but uponthe privilege of severing or extracting the same from theearth, the government's right to exact the said impostspringing from the Regalian theory of State Ownership ofits natural resources."

    Villanueva vs. City of Iloilo (1968)In the case at bar, Ordinance No. 11, series of 1960,

    of the City of Iloilo, which imposed a municipal license taxon tenement houses, is valid and constitutional. The tax inquestion is not a real estate tax. The tax imposed inquestion does not possess the attributes of a real estate

    tax. It is not a tax on land on which the tenement housesare erected, although both land and tenement housesbelong to the same owner. The tax is not a fixed proportionof the assessed value of the tenement houses, and doesnot require the intervention of assessors or appraisers. It isnot payable at a designed time or date, and is notenforceable against tenement houses either by sale ordistraint. Clearly therefore, the tax in question is not a realestate tax.

    The contention that the petitioners are doubly taxed,because they are paying the real estate taxes and thetenement tax imposed by the ordinance in question, is also

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    devoid of merit. It is well-settled rule that a license taxmay be levied upon a business or occupation although theland or property used in connection therewith is subject toproperty tax.

    xxx It has been shown that a real estate tax and thetenement tax imposed by the ordinance, although imposedby the same taxing authority, are not of the same kind orcharacter.

    4. ASTO MANNEROF COMPUTINGTHE TAX

    a. Ad Valorem tax of a specific portion of the valueof the property with respect to which the tax isassessed; it requires the intervention of assessorsor appraisers to estimate the value of the propertybefore the amount due to each taxpayer can bedetermined Literally means according to value

    b. Specific tax of a fixed amount imposed by thehead or number or by some standard of weight ormeasurement. It requires no assessment otherthan a listing or classification of the object to betaxed

    Title VI, NIRCExcise Taxes on Certain Goods

    5. ASTO GRADUATIONORRATE

    a. Proportional / Flat Rate tax based on a fixedpercentage of the amount of the property,receipts or other basis to be taxed

    b. Progressive tax the rate of which increases asthe tax base or bracket increases

    c. Regressive tax the rate of which decreases asthe tax base or bracket increases

    G. ASPECTS OF TAXATION

    1. LEVY / IMPOSITIONBY LEGISLATIVE BODY

    2. COLLECTION / ADMINISTRATION

    Pay as you earn Income tax

    Pay as you are assessed Real property tax

    Pay as you file Business tax

    Pay as you transact VAT

    3. PAYMENT

    H. TAX SYSTEMS

    CLASSIFICATION

    Progressive / Regressive System of Taxation Progressive system of taxation is when there are more

    direct taxes than indirect taxes

    Regressive system of taxation is when there are more

    indirect taxes imposed than direct taxesProgressive System vs. Progressive Rate of Tax

    Tolentino vs. Secretary of Finance (1995)The Constitution does not really prohibit the

    imposition of indirect taxes w/c, like the VAT, areregressive. What it simply provides is that Congress shall"evolve a progressive system of taxation." Theconstitutional provision has been interpreted to meansimply that "direct taxes are to be preferred [&] as muchas possible, indirect taxes should be minimized." Indeed,the mandate to Congress is not to prescribe, but to evolve,a progressive tax system. Otherwise, sales taxes, w/cperhaps are the oldest form of indirect taxes, would havebeen prohibited Sales taxes are also regressive.

    Resort to indirect taxes should be minimized but notavoided entirely because it is difficult, if not impossible, toavoid them by imposing such taxes according to thetaxpayers' ability to pay. In the case of the VAT, the lawminimizes the regressive effects of this imposition byproviding for zero rating of certain transactions, whilegranting exemptions to other transactions.

    BASIC PRINCIPLESOFA SOUND TAX SYSTEM (MEANINGOF NEUTRALTAX)

    1. Fiscal adequacy Sources of government revenues must be

    adequate to meet government expenditures andtheir variations

    To avoid budget deficits and minimize localand foreign borrowings2. Theoretical justice

    A good tax system must be based on thetaxpayers ability to pay Ability-to-pay principle

    Connotes that the contribution of each persontowards the expense of the government should beso apportioned such that he would feel neithermore or less inconvenienced from his share of thepayment than every other person experiencesfrom his

    3. Administrative feasibility Taxes should be capable of being effectively

    enforced The legislature can require that taxes be paid

    with sacks of rice. However, this will entaillots of problems with regard to enforcement

    Chavez vs. Ongpin (1990)We agree with the observation of the OSG that

    without EO 73, the basis for collection of real propertytaxes will still be the 1978 revision of property values.Certainly, to continue collecting real property taxes basedon valuations arrived at several years ago, in disregard ofthe increases in the value of real properties that haveoccurred since then, is not in consonance with a sound taxsystem. Fiscal adequacy, which is one of the characteristics

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    of a sound tax system, requires that sources of revenuesmust be adequate to meet government expenditures andtheir variations.

    Taganito Mining Corporation vs. CommissionerThis set-up established by the petitioner is contrary to

    the principle of administrative feasibility which is one of thebasic principles of a sound tax system. Tax laws should be

    capable of convenient, just and effective administrationwhich is why it fixes a standard or a uniform tax base uponwhich taxes should be paid.

    II. Nature and Limitations of the Power ofTaxation

    A. NATURE OF THE POWER OF TAXATION

    1. INHERENTIN SOVEREIGNTY / DISTINGUISHEDFROM POLICE POWERAND EMINENT DOMAIN

    TaxationEminentDomain

    PolicePower

    Authority who

    exercisespower

    May beexercised onlyby thegovernment orits politicalsubdivision

    May beexercised bythegovernmentor itspoliticalsubdivisionsor granted topublicservicecompanies orpublicutilities

    May beexercisedonly by thegovernmentor its politicalsubdivision

    Purpose The property

    (generally inthe form ofmoney) istaken for thesupport of thegovernment

    The property

    is taken forpublic useand must becompensated

    The use of

    the propertyis regulatedfor thepurpose ofpromotingthe generalwelfare; it isnotcompensable

    Personsaffected

    Operates upona communityor class of individual

    Operates onan individualas the ownerof aparticularprop

    Operatesupon acommunityor class ofindividuals

    Effect The moneycontributedbecomes partof public funds

    There istransfer ofthe right tothe property

    There is notransfer oftitle. Atmost, thereis restrainton theinjurious useof property

    BenefitsReceived

    Assumed thatthe individual

    Personaffected

    The personaffected

    receives theequivalent ofthe tax in theform of protection andbenefits fromthe

    government

    receives themarket valueof thepropertytaken fromhim

    receives nodirectbenefits butonly such asmay arisefrom themaintenance

    of a healthyeconomicstandard ofsociety

    Amount ofImposition

    Generally,there is nolimit on theamt of tax thatmay beimposed aslong as it isnot iniquitousandunconscionable

    No amountimposed butrather theowner is paidthe marketvalue of thepropertytaken

    Amountimposedshould not bemore thansufficient tocover thecost of thelicense & necessaryexpenses

    Relationshipto

    ConstitutionIs subect tocertainconstitutionallimits includingthe prohibitionagainstimpairment ofthe obligationof contracts

    Inferior totheimpairmentprohibition;governmentcannotexpropriateprivate prop,whichc undercontract ithadpreviouslybound itselfto purchasefrom theother

    contractingparty

    Relativelyfree formconstitutionallimitations.It is superiorto theimpairmentprovisions.

    Roxas vs. CTA (1968)The power to tax is sometimes called the power to

    destroy. Therefore, it should be exercised with caution tominimize injury to the proprietary rights of a taxpayer. Itmust be exercised fairly, equally and uniformly, lest the taxcollector kill the hen that lays the golden egg.

    Tanada v. Angara (1997)The power to tax is sometimes called the power to

    destroy. Therefore, it should be exercised with caution tominimize injury to the proprietary rights of a taxpayer. Itmust be exercised fairly, equally and uniformly, lest the tax

    collector kill the hen that lays the golden egg.Land Transportation Office vs. City of Butuan (2000)

    Police power and taxation, along with eminentdomain, are inherent powers of sovereignty which theState might share with local government units bydelegation given under a constitutional or statutory fiat. Allthese inherent powers are for a public purpose andlegislative in nature but the similarities just about endthere. The basic aim of police power is public good andwelfare. Taxation, in its case, focuses on the power of thegovernment to raise revenue in order to support its

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    existence and carry out legitimate objectives. Althoughcorrelative to each other in many respects, the grant ofone does not necessarily carry with it the grant of theother. The two powers are by tradition and jurisprudence,separate and distinct powers, varying in their respectiveconcepts, character, scopes and limitations.

    2. EXCLUSIVELY LEGISLATIVEIN NATURE

    The power to tax is peculiarly and exclusivelylegislative and cannot be exercised by the executive or

    judicial branch of the government. The levy of tax,however, may also be made by a local legislative bodysubject to such limitations as may be imposed by law.

    Tan vs. Del Rosario (1994)With the legislature primarily lies the discretion to

    determine the nature (kind), object (purpose), extent(rate), coverage (subjects) and situs (place) of taxation.This court cannot freely delve into those matters which, byconstitutional fiat, rightly rest on legislative judgment. Ofcourse, where a tax measure becomes so unconscionableand unjust as to amount to confiscation of property, courtswill not hesitate to strike it down, for, despite all its

    plenitude, the power to tax cannot override constitutionalproscriptions.The due process clause may correctly be invoked only

    when there is clear contravention of inherent orconstitutional limitations in the exercise of tax power.

    Commissioner vs. Santos (1997)There is no doubt in the Courts mind, despite

    protestations to the contrary, that respondent judgeencroached upon matters properly falling within theprovince of legislative functions. In citing as basis for hisdecision unproven comparative data pertaining todifferences between tax rates of various Asian countries,and concluding that the jewelry industry in the Philippinessuffers as a result, the respondent judge took it uponhimself to supplant legislative policy regarding jewelry

    taxation. xxx There are reasons why jewelry, a non-essential item, is taxed as it is in this country, and thesereasons, deliberated upon by our legislature, are beyondthe reach of judicial questioning.

    What we see here is a debate on the wisdom of thelaws in question. This is a matter on which the RTC is notcompetent to rule

    3. SUBJECTTO INHERENTAND CONSTITUTIONAL LIMITATIONS

    WHO MAY QUESTION THE VALIDITY OF A TAX MEASURE OREXPENDITUREOF TAXES (TAXPAYERS SUIT)

    Lozada vs. Commissioner (1983)As taxpayers, petitioners may not file the instant

    petition, for nowhere therein is it alleged that tax money is

    being illegally spent. The act complained of is the inactionof the COMELEC to call a special election, as is allegedly itsministerial duty under the constitution, & therefore,involves no expenditure of public funds. It is only when anact complained of, w/c may include a legislative enactmentor statute, involves the illegal expenditure of public moneythat the so-called taxpayer suit may be allowed.

    Maceda vs. Macaraig (1991)In the petition it is alleged that petitioner is "instituting

    this suit in his capacity as a taxpayer and a duly-electedSenator of the Philippines." Public respondent argues that

    petitioner must show he has sustained direct injury as aresult of the action and that it is not sufficient for him tohave a mere general interest common to all members ofthe public.

    The Court however agrees with the petitioner that as ataxpayer he may file the instant petition following theruling in Lozada when it involves illegal expenditure ofpublic money. The petition ?s the legality of the tax refund

    to NPC by way of tax credit certificates & the use of saidassigned tax credits by respondent oil cos. to pay for theirtax & duty liabilities to the BIR and Bureau of Customs.

    Chavez vs. PCGG (1998)In Albano vs. Reyes, we said that while expenditure of

    public funds may not have been involved under thequestioned contract for the development, management andoperation of the MICT, public interest was definitelyinvolved considering the important role of the subjectcontract xxx in the economic development of the country &the magnitude of the financial consideration involved. Weconcluded that, as a consequence, the disclosure provisionin the Constitution would constitute sufficient authority forupholding the petitioners standing.

    Gonzales vs. Narvasa (2000)A taxpayer is deemed to have the standing to raise a

    constitutional issue when it is established that public fundshave been disbursed in contravention of the law or theConstitution. Thus, a taxpayers action is properly broughtonly when there is an exercise by Congress of its taxing orspending power.

    In Sanidad v. COMELEC, the petitioners therein wereallowed to bring a taxpayers suit to question severalpresident decrees promulgated by the Pres. Marcos in hislegislative capacity calling for a national referendum, w/the Ct explaining that xxx At the instance of taxpayers,laws providing for the disbursement of public funds may beenjoined, upon the theory that the expenditure of publicfunds by an officer of the State for the purpose of

    executing an unconstitutional act constitutes amisapplication of such funds.

    BAYAN vs. Executive Secretary (2000)As taxpayers, petitioners have not established that

    the VFA involves the exercise by Congress of its taxing orspending powers. On this point, it bears stressing that ataxpayers suit refers to a case where the act complainedof directly involves the illegal disbursement of public fundsderived from taxation. Thus, in Bugnay Const. &Development Corp. vs. Laron, we held:

    xxx it is exigent that the taxpayer-plaintiff sufficientlyshow that he would be benefited or injured by the

    judgment or entitled to the avails of the suit as a real partyin interest. Before he can invoke the power of judicialreview, he must specifically prove that he has sufficient

    interest in preventing the illegal expenditure of moneyraised by taxation and that he will sustain a direct injury asa result of the enforcement of the questioned statute orcontract. It is not sufficient that he has merely a generalinterest common to all members of the public.

    Del Mar vs. PAGCOR (2001)Melo, Dissenting: Petitioners have brought this suit in

    their capacity as taxpayers & legislators. In order for ataxpayers suit to prosper, petitioners must have locusstandi. In a dissenting opinion in Kilosbayan vs. Guingona,Jr., I stated that:

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    A taxpayers suit refers to a case where the actcomplained of directly involves the illegal disbursement ofpublic funds derived from taxation

    Miranda vs. Carreon (2003)Even as a taxpayer, petitioner does not stand "to be

    benefited or injured by the judgment of the suit." Notevery action filed by a taxpayer can qualify to challenge

    the legality of official acts done by the government. Itbears stressing that "a taxpayers suit refers to a casewhere the act complained of directly involves the illegaldisbursement of public funds from taxation." The issue inthis case is whether respondents services were illegallyterminated. Clearly, it does not involve the illegaldisbursement of public funds; hence, petitioners actioncannot be considered a taxpayers suit.

    B. INHERENT LIMITATIONS

    1. PURPOSE MUST BE PUBLICIN NATURE Public purpose a purpose affecting the inhabitants of

    the state or taxing district as a community and notmerely as individuals

    That the tax is laid for a public purpose is the firstrequisite of lawful taxation, and this is so whether theConstitution expressly so provides or not since thispurpose is inherent and implied in the levy of everytax (Mendoza vs. Municipality, 1954)

    A tax levied for a private for a private, not publicpurpose constitutes a taking of property without dueprocess of law as it is beyond the power of thegovernment to impose

    The purposes to be accomplished by taxation need notbe exclusively public. It is not necessary that the taxbe for the use of the whole inhabitants. Althoughprivate individuals are directly benefited, the tax wouldstill be valid provided such benefit is only incidental

    Tests for determining if it is for public purposea. The proceeds must be for the support of the

    governmentb. The proceeds must be for any recognized objectsof the government

    c. The proceeds must be used to promote thewelfare of the community

    Pascual vs. Secretary of Public Works (1960)It is a general rule that the legislature is w/o power to

    appropriate public revenue for anything but a publicpurpose It is the essential character of the direct objectof the expenditure w/c must determine its validity as

    justifying a tax, and not the magnitude of the interests tobe affected nor the degree to w/c the general advantage ofthe community, & thus the public welfare, may beultimately benefited by their promotion. Incidentaladvantage to the public or to the state, w/c results from

    the promotion of private interests & the prosperity ofprivate enterprises or business, does not justify their aid bythe use of public money.

    The rule is set forth in Corpus Juris Secundum in thefollowing language:

    "In accordance with the rule that the taxing powermust be exercised for public purposes only, money raisedby taxation can be expanded only for public purposes andnot for the advantage of private individuals."

    Explaining the reason underlying said rule, CorpusJuris Secundum states:

    "Generally, under the express or implied provisions ofthe Constitution, public funds may be used for a publicpurpose. The right of the legislature to appropriate funds iscorrelative w/ its right to tax, under Constitutionalprovisions against taxation except for public purposes &prohibiting the collection of a tax for one purpose and thedevotion thereof to another purpose, no appropriation ofstate funds can be made for other than a public purpose"

    "The test of the constitutionality of a statute requiringthe use of public funds is whether the statute is designedto promote the public interests, as opposed to thefurtherance of the advantage of individuals, although eachadvantage to individuals might incidentally serve thepublic"

    Caltex vs. Commissioner (1992)Taxation is no longer envisioned as a measure merely

    to raise revenue to support the existence of thegovernment; taxes may be levied w/ a regulatory purposeto provide means for the rehabilitation & stabilization of athreatened industry w/c is affected w/ pub interest as to bew/in the police power of the state. There can be no doubtthat the oil industry is greatly imbued w/ pub interest as it

    vitally affects the general welfare. Any unregulatedincrease in oil prices could hurt the lives of a majority ofthe people & cause economic crisis of untold proportions. Itwould have a chain reaction in terms of, among others,demands for wage increases & upward spiraling of the costof basic commodities. The stabilization then of oil prices isone of prime concern w/c the state, via its police power,may properly address.

    2. PROHIBITION AGAINST DELEGATIONOF TAXING POWERThe power of taxation being purely legislative,

    Congress cannot delegate power to others

    EXCEPTIONS

    1. Delegation to Local Governments

    Sec 5, Art X, 1987 ConstitutionEach local government unit shall have the power to createits own sources of revenues and to levy taxes, fees, andcharges subject to such guidelines and limitations as theCongress may provide, consistent with the basic policy oflocal autonomy. Such taxes, fees, and charges shall accrueexclusively to the local governments.

    Local Government Code, Book II

    It is in-line with the well-accepted principle that thepower to create municipal corporations for thepurposes of local self-government carries with it, bynecessary implication the power to confer the power totax on such local governments

    LTO vs. City of Butuan (2000)LGUs indubitably now have the power to regulate the

    operation of tricycles-for-hire & to grant franchises for theoperation thereof. "To regulate" means to fix, establish, orcontrol; to adjust by rule, method, or established mode; todirect by rule or restriction; or to subject to governingprinciples or laws. A franchise is defined to be a specialprivilege to do certain things conferred by government onan individual or corp., & w/c does not belong to citizensgenerally of common right. On the other hand, "toregister" means to record formally & exactly, to enroll, or

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    to enter precisely in a list or the like, & a "driver's license"is the cert or license issued by the government w/cauthorizes a person to operate a motor vehicle. Thedevolution of the functions of the DOTC, performed by theLTFRB, to the LGUs, as so aptly observed by the SolGen, isaimed at curbing the alarming increase of accidents innational highways involving tricycles. It has been theperception that local governments are in good position to

    achieve the end desired by the law-making body becauseof their proximity to the situation that can enable them toaddress that serious concern better than the nationalgovernment.

    It may not be amiss to state, nevertheless, that underArt. 458 (a)[3-VI] of the Local Government Code, thepower of LGUs to regulate the operation of tricycles and togrant franchises for the operation thereof is still subject tothe guidelines prescribed by the DOTC. In compliancetherewith, the DOTC issued "Guidelines to Implement theDevolution of LTFRBs Franchising Authority over Tricycles-For-Hire to LGUs pursuant to the Local Government Code."

    The City Government of Quezon City vs. BayanTelecommunications, Inc. (2006)

    While the system of local government taxation haschanged w/ the onset of the 1987 Constitution, the powerof LGUs to tax is still ltd. As we explained in Mactan CebuInternational Airport Authority:

    The power to tax is primarily vested in the Congress;however, in our jurisdiction, it may be exercised by locallegislative bodies, no longer merely be virtue of a validdelegation as before, but pursuant to direct authorityconferred by Sec. 5, Art. X of the Constitution. Under thelatter, the exercise of the power may be subject to suchguidelines & limitations as the Congress may provide w/c,however, must be consistent w/ the basic policy of localautonomy.

    Clearly then, while a new slant on the subject of localtaxation now prevails in the sense that the former doctrineof LGUs delegated power to tax had been effectively

    modified w/ Art. X, Sec. 5 of the 1987 Constitution now inplace, the basic doctrine on local taxation remainsessentially the same. For as the Court stressed in Mactan:

    the power to tax is [still] primarily vested in theCongress.

    This new perspective is best articulated by Fr. JoaquinG. Bernas, S.J., himself a Commissioner of the 1986Constitutional Commission which crafted the 1987Constitution, thus:

    What is the effect of Sec. 5 on the fiscal position ofmunicipal corporations? Sec. 5 does not change thedoctrine that municipal corporations do not possessinherent powers of taxation. What it does is to confermunicipal corporations a general power to levy taxes &otherwise create sources of revenue. They no longer haveto wait for a statutory grant of these powers. The power of

    the legislative authority relative to the fiscal powers of localgovernments has been reduced to the authority to imposelimitations on municipal powers. Moreover, theselimitations must be consistent with the basic policy of localautonomy. The important legal effect of Sec. 5 is thus toreverse the principle that doubts are resolved againstmunicipal corporations. Henceforth, in interpretingstatutory provisions on municipal fiscal powers, doubts willbe resolved in favor of municipal corporations. It isunderstood, however, that taxes imposed by localgovernment must be for a public purpose, uniform w/in a

    locality, must not be confiscatory, & must be w/in thejurisdiction of the local unit to pass.

    2. Delegation to the President

    Sec 28 (2), Art VI, 1987 Constitutionxxx(2) The Congress may, by law, authorize the President to

    fix within specified limits, and subject to such limitationsand restrictions as it may impose, tariff rates, import andexport quotas, tonnage and wharfage dues, and otherduties or imposts within the framework of the nationaldevelopment program of the Government.

    Sec 401, Tariff and Customs CodeFlexible Clause.

    a. The President, upon investigation by theCommission and recommendation of the NationalEconomic Council, is hereby empowered to reduceby not more than fifty per cent or to increase bynot more than five times the rates of import dutyexpressly fixed by statute (including anynecessary change in classification) when in his

    judgment such modification in the rates of importduty is necessary in the interest of nationaleconomy, general welfare and/or nationaldefense.

    b. Before any recommendation is submitted to thePresident by the Council pursuant to theprovisions of this section, the Commission shallconduct an investigation in the course of which itshall hold public hearings wherein interestedparties shall be afforded reasonable opportunity tobe present, to produce evidence and to be heard.The Commission may also request the views andrecommendations of any government office,agency or instrumentality, and such office, agencyor instrumentality shall cooperate fully with theCommission.

    c. The President shall have no authority to transferarticles from the duty-free list to the dutiable listnor from the dutiable list to the duty-free list ofthe tariff.

    d. The power of the President to increase ordecrease rates of import duty within the limitsfixed in subsection "a" shall include the authorityto modify the form of duty. In modifying the formof duty the corresponding ad valorem or specificequivalents of the duty with respect to importsfrom the principal concerning foreign country forthe most recent representation period shall beused as basis.

    e. The Commissioner of Customs shall regularlyfurnish to the Commission a copy each of all

    customs import entries containing every pertinentinformation appearing in the collectors' liquidatedduplicates, including the consular invoice and/orthe commercial invoice. The Commission or itsduly authorized agents shall have access to andthe right to copy all the customs import entriesand other documents appended thereto as finallyin the General Auditing Office.

    f. The Commission is authorized to adopt suchreasonable procedure, rules and regulations as itmay deem necessary to carry out the provisions ofthis section.

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    g. Any order issued by the President pursuant to theprovisions of this section shall take effect thirtydays after its issuance.

    h. The provisions of this section shall not apply toany article the importation of which into thePhilippines is or may be governed by Section 402of this Code.

    i. The authority herein granted to the President shall

    be exercised only when Congress is not in session.

    Garcia vs. Executive Secretary (1993)Under Sec. 24, Art. VI of the Constitution, the

    enactment of appropriation, revenue & tariff bills, like allother bills is, of course, w/in the province of the Legislativerather than the Exec Dept. It does not follow, however,that therefore EOs 475 & 478, assuming they may becharacterized as revenue measures, are prohibited to thePres., that they must be enacted instead by the Congressof the Philippines. Sect. 28(2) of Art. VI of the Constitutionprovides:

    "(2) The Congress may, by law, authorize thePresident to fix within specified limits, and subject to suchlimitations and restrictions as it may impose, tariff rates,

    import and export quotas, tonnage and wharfage dues, andother duties or imposts within the framework of thenational development program of the Government."

    There is thus explicit constitutional permission toCongress to authorize the President "subject to suchlimitations and restrictions as [Congress] may impose" tofix "within specific limits" "tariff rates and other duties orimposts ..."

    The relevant congressional statute is the Tariff andCustoms Code of the Philippines, and Sections 104 and401, the pertinent provisions thereof. These are theprovisions which the President explicitly invoked inpromulgating Executive Orders Nos. 475 and 478.

    3. Delegation to Administrative Agencies Powers which may be vested to administrative bodies

    a. Power to value property for purposes of taxationpursuant to fixed rulesb. Power to assess and collect the taxesc. Power to perform any of the innumerable details

    of computation, appraisement, and adjustment,and delegation of such details

    Powers which cannot be delegateda. Determination of the subject to be taxedb. The purpose of the taxc. The amount or rate of taxd. The manner, means and agencies of collectione. Prescribing of the necessary rules with respect

    thereto

    Osmena vs. Orbos (1993)Hence, it seems clear that while the funds collected

    may be referred to as taxes; they are exacted in theexercise of the police power of the State. Moreover, thatthe OPSF is a special fund is plain from the specialtreatment given it by E.O. 137. It is segregated from thegeneral fund; and while it is placed in what the law refersto as a "trust liability account," the fund nonethelessremains subject to the scrutiny and review of the COA. TheCourt is satisfied that these measures comply with theconstitutional description of a "special fund."

    Commissioner vs. CA (1996)

    With regard to the alleged undue delegation oflegislative power, the Ct finds that the provision conferringthe authority upon the ERB to impose additional amts onpetroleum products provides a sufficient standard by w/cthe authority must be exercised.

    The interplay & constant fluctuation of the variousfactors involved in the determination of the price of oil &petroleum products, & the frequently shifting need to

    either augment or exhaust the Fund, do not convenientlypermit the setting of fixed or rigid parameters in the law asproposed by the petitioner. To do so would render the ERBunable to respond effectively so as to mitigate or avoid theundesirable consequences of such fluidity. As such, thestandard as it is expressed suffices to guide the delegate inthe exercise of the delegated power, taking acct of thecircumstances under w/c it is to be exercised.

    For a valid delegation of power, it is essential that thelaw delegating the power must be (1) complete in itself,that is it must set forth the policy to be executed by thedelegate and (2) it must fix a standard limits of w/c aresufficiently determinate or determinable to w/c thedelegate must conform.

    The standard, as the Ct has already stated, may even

    be implied. In that light, there can be no ground upon w/cto sustain the petition, inasmuch as the challenged lawsets forth a determinable standard w/c guides the exerciseof the power granted to the ERB. By the same token, theproper exercise of the delegated power may be tested w/ease. It seems obvious that what the law intended was topermit the additional imposts for as long as there exists aneed to protect the general public & the petroleum industryfrom the adverse consequences of pump rate fluctuations."Where the standards set up for the guidance of anadministrative officer & the action taken are in factrecorded in the orders of such officer, so that Congress,the courts & the public are assured that the orders in the

    judgment of such officer conform to the legislativestandard, there is no failure in the performance of thelegislative functions."

    This Ct thus finds no serious impediment to sustainingthe validity of the legislation; the express purpose for w/cthe imposts are permitted & the general objectives &purposes of the fund are readily discernible, & theyconstitute a sufficient standard upon w/c the delegation ofpower may be justified.

    3. EXEMPTION OF GOVERNMENT ENTITIES, AGENCIES, ANDINSTRUMENTALITY

    Sec 27 (C), NIRCRates of Income Tax on Domestic Corporations(C) Government-owned or Controlled-Corporations,

    Agencies or Instrumentalities. - The provisions of existingspecial or general laws to the contrary notwithstanding, allcorporations, agencies, or instrumentalities owned or

    controlled by the Government, except the GovernmentService Insurance System (GSIS), the Social SecuritySystem (SSS), the Philippine Health Insurance Corporation(PHIC), the Philippine Charity Sweepstakes Office (PCSO)and the Philippine Amusement and Gaming Corporation(PAGCOR), shall pay such rate of tax upon their taxableincome as are imposed by this Section upon corporationsor associations engaged in s similar business, industry, oractivity.

    Executive Order 93

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    Sec. 1. The provisions of any general or special law to thecontrary notwithstanding, all tax and duty incentivesgranted to government and private entities are herebywithdrawn, except:a) those covered by the non-impairment clause of the

    Constitution;b) those conferred by effective international agreements

    to which the Government of the Republic of the

    Philippines is a signatory;c) those enjoyed by enterprises registered with:

    (i) the Board of Investments pursuant toPresidential Decree No. 1789, as amended;

    (ii) the Export Processing Zone Authority,pursuant to Presidential Decree No. 66, asamended;

    (iii) the Philippine Veterans InvestmentDevelopment Corporation Industrial Authoritypursuant to Presidential Decree No. 538, asamended;

    d) those enjoyed by the copper mining industry pursuantto the provisions of Letter of Instruction No. 1416;

    e) those conferred under the four basic codes namely:(i) the Tariff and Customs Code, as amended;

    (ii) the National Internal Revenue Code, asamended;(iii) the Local Tax Code, as amended;(iv) the Real Property Tax Code, as amended;

    f) those approved by the President upon therecommendation of the Fiscal Incentives ReviewBoard.

    PD 1931Sec. 1The provisions of special or general laws to the contrarynotwithstanding, all exemptions from the payment ofduties, taxes, fees, imposts and other charges heretoforegranted in favor of government-owned or controlledcorporations including their subsidiaries are herebywithdrawn.

    Maceda vs. Macaraig (1991)Moreover, it is a recognized principle that the rule on

    strict interpretation does not apply in the case ofexemptions in favor of a government political subdivisionor instrumentality.

    "The basis for applying the rule of strict construction tostatutory provisions granting tax exemptions ordeductions, even more obvious than with reference to theaffirmative or levying provisions of tax statutes, is tominimize differential treatment and foster impartiality,fairness, and equality of treatment among tax payers.

    The reason for the rule does not apply in the case ofexemptions running to the benefit of the government itselfor its agencies. In such case the practical effect of anexemption is merely to reduce the amount of money that

    has to be handled by government in the course of itsoperations. For these reasons, provisions grantingexemptions to government agencies may be construedliberally, in favor of non tax-liability of such agencies."

    In the case of property owned by the state or a city orother public corporations, the express exemption shouldnot be construed with the same degree of strictness thatapplies to exemptions contrary to the policy of the state,since as to such property "exemption is the rule andtaxation the exception."

    Mactan Cebu Airport vs. Marcos (1996)

    As a general rule, the power to tax is an incident ofsovereignty & is unlimited in its range, acknowledging in itsvery nature no limits, so that security against its abuse isto be found only in the responsibility of the legislature w/cimposes the tax on the constituency who are to pay it.Nevertheless, effective limitations thereon may be imposedby the people thru their Constitutions. Our Constitution, forinstance, provides that the rule of taxation shall be uniform

    & equitable & Congress shall evolve a progressive systemof taxation. So potent indeed is the power that it was onceopined that "the power to tax involves the power todestroy." Accordingly, tax statutes must be construedstrictly against the government & liberally in favor of thetaxpayer. But since taxes are what we pay for civilizedsociety, or are the lifeblood of the nation, the law frownsagainst exemptions from taxation & statutes granting taxexemptions are thus construed strictissimi juris against thetaxpayers & liberally in favor of the taxing authority. Aclaim of exemption from tax payment must be clearlyshown & based on language in the law too plain to bemistaken. Elsewise stated, taxation is the rule, exemptiontherefrom is the exception. However, if the grantee of theexemption is a political subdivision or instrumentality, the

    rigid rule of construction does not apply because thepractical effect of the exemption is merely to reduce theamount of money that has to be handled by thegovernment in the course of its operations.

    Thus, reading together Secs. 133, 232 & 234 of theLGC, we conclude that as a general rule, as laid down inSec. 133 the taxing powers of LGUs cannot extend to thelevy of "taxes, fees, and charges of any kind of theNational Government, its agencies and instrumentalities,and local government units"; however, pursuant to Sec.232, provinces, cities, municipalities in the MetropolitanManila Area may impose the real prop tax except on "realproperty owned by the Republic of the Philippines or any ofits political subdivisions except when the beneficial usedthereof has been granted, for consideration or otherwise,to a taxable person", as provided in item (a) of the first

    paragraph of Sec. 234.The terms "Republic of the Philippines" & "NationalGovernment" are not interchangeable.

    The former is boarder & synonymous w/ "Governmentof the Republic of the Philippines" w/c the AdministrativeCode of the 1987 defines as the "corporate governmentalentity though which the functions of the government areexercised through at the Philippines, including, saves asthe contrary appears from the context, the various armsthrough which political authority is made effective in thePhilippines, whether pertaining to the autonomous reason,the provincial, city, municipal or barangay subdivision orother forms of local government." These autonomousregions, provincial, city, municipal or barangaysubdivisions" are the political subdivision.

    On the other hand, "National Government" refers "to

    the entire machinery of the central government, asdistinguished from the different forms of localGovernments." The National Government then is composedof the three great departments the executive, thelegislative and the judicial.

    An "agency" of the Government refers to "any of thevarious units of the Government, including a department,bureau, office instrumentality, or government-owned orcontrolled corporation, or a local government or a distinctunit therein;" while an "instrumentality" refers to "anyagency of the National Government, not integrated withinthe department framework, vested with special functions

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    or jurisdiction by law, endowed with some if not allcorporate powers, administering special funds, andenjoying operational autonomy; usually through a charter.This term includes regulatory agencies, charteredinstitutions and government-owned and controlledcorporations"

    Manila International Airport Authority vs. CA (2006)

    Under Secs 2(10) & (13) of the Introductory Provisionsof the Administrative Code, w/c governs the legal relation& status of government units, agencies & offices w/in theentire government machinery, MIAA is a governmentinstrumentality & not a GOCC. Under Sec. 133(o) of theLGC, MIAA as a government instrumentality is not ataxable person because it is not subject to [t]axes, fees orcharges of any kind by local governments. The onlyexception is when MIAA leases its real prop to a taxableperson as provided in Sec. 234(a) of the LGC, in w/c casethe specific real prop leased becomes subject to real estatetax. Thus, only portions of the Airport Lands & Buildings.leased to taxable persons like private parties are subject toreal estate tax by the City of Paraaque.

    Under Art 420 CC, the Airport Lands & Buildings. of

    MIAA, being devoted to public use, are properties of publicdominion & thus owned by the State or the RP. Art. 420specifically mentions ports xxx constructed by the State,w/c includes public airports & seaports, as properties ofpublic dominion & owned by the Republic. As properties ofpublic dominion owned by the Republic, there is no doubtwhatsoever that the Airport Lands & Buildings areexpressly exempt from real estate tax under Sec. 234(a) ofthe LGC.

    BIR Ruling No. 013-2004September 13, 2004City of Makati is a political subdivision of the Republic ofthe Philippines. As an LGU, it serves as an instrumentalityof the State in carrying out governmental functions. TheCity collects taxes, fees and other charges. It also

    maintains deposit accounts and investments in governmentsecurities, commercial papers and the like. The depositarybanks and other financial institutions withhold the final tax20% on the interest earned from such investmentspursuant Sec.27(D)(1). The City claims that it is notsubject to the provisions of Chapter IV-Tax on Corporationsof the Tax Code of 1997.WON the interest derived from the Citys bank deposits andyields from investments in government securities and othercommercial papers subject to final tax on passive incomeunder Sec.27(D)(1). YESIn previous BIR rulings, it was established that LGUs areliable for income tax on the interest on their bank depositsand yields from deposit substitutes, trust funds and similararrangements because tax exemption privileges werewithdrawn by PD 1931 and EO 93. Under Sec.27(C),

    GOCCs, agencies or instrumentalities of the governmentare no longer exempt from taxation.The Citys argument that subjecting its income to taxationwould result to taking money out of its pocket andinserting it into the other pocket is contradicted by thefact that the taxation being collected from here is nationalin character since it is under the NIRC and therefore, thetax accrues to the national government. The City will onlyget an allotment out of the total of the national internalrevenue taxes.It is important to distinguish activities of the city inperformance of its government function and those in

    performance of its corporate or proprietary function. If it isin the former, the city is executing a legislative mandatewith respect to a public duty while in the case of the latter,it is exercising private rights as a corporate body. Underthe LGC, LGUs are mandated to keep a separate depositaryaccounts. However, this act cannot be construed as an actin promotion of public welfare nor an act included in thelegislative, judicial, public or political powers of the City. It

    is in the nature of a function for the special benefit andadvantage of the City and hence, proprietary in character.Moreover, it will also necessarily enter into contracts withbanks.WRT investments, the Court said in Sison v. Ancheta thatincome realized from its investment activities or receivedby it in proprietary powers is subject to income tax asother private corporations similarly situated.

    4. INTERNATIONAL COMITY

    Sec 2, Art II, 1987 ConstitutionThe Philippines renounces war as an instrument of nationalpolicy, adopts the generally accepted principles ofinternational law of the land and adheres to the policy of

    peace, equality, justice, freedom, cooperation, and amitywith all nations.

    This principle is based on the following groundsa. Sovereign equality among statesb. Usage among states that when one enters the

    territory of another, there is an impliedunderstanding that the former does not intend todegrade its dignity by placing itself under

    jurisdiction of the latterc. Rule that a foreign government may not be sued

    without its consent so that it is useless to assesstax since it cannot be collected anyway

    Tanada vs. Angara (1997)Unquestionably, the Constitution did not envision a

    hermit-type isolation of the country from the rest of theworld. In its Declaration of Principles & State Policies, theConstitution "adopts the generally accepted principles ofinternational law as part of the law of the land, & adheresto the policy of peace, equality, justice, freedom,cooperation & amity, w/ all nations." By the doctrine ofincorporation, the country is bound by generally acceptedprinciples of international law, which are considered to beautomatically part of our own laws.

    Mitsubishi Corp. vs. Commissioner (CTA, 2003)Dissent: While international comity is invoked in

    this case on the nebulous representation that the fundsinvolved in the loans are those of a foreign govt,scrupulous care must be taken to avoid opening thefloodgates to the violation of our tax laws. Otherwise, the

    mere expedient of having a Phil. corp. enter into a contractfor loans or other domestic securities w/ private foreignentities, w/c in turn will negotiate independently w/ theirgovernments, could be availed of to take advantage of thetax exemption law.

    5. LIMITATIONOF TERRITORIAL JURISDICTION A state may not tax property lying outside its borders

    or lay an excise or privilege tax upon the exercise orenjoyment of a right or privilege derived from the lawsof another state and therein exercised and enjoyed.

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    The property which is wholly and exclusivelywithin the jurisdiction of another state receivesnone of the protection for which a tax is supposedto be a compensation

    But a person may be taxed where there is a privity ofrelationship justifying the levy E.g. income tax of citizens residing abroad

    Iloilo Bottlers vs. City of Iloilo (1988)The tax imposed under Ordinance No. 5 is an excise

    tax. It is a tax on the privilege of distributing, mfg. orbottling soft drinks. Being an excise tax, it can be levied bythe taxing authority only when the acts, privileges orbusinesses are done or performed w/in the jurisdiction ofsaid authority. Specifically, the situs of the act ofdistributing, bottling or mfg. soft drinks must be w/in citylimits, before an entity engaged in any of the activities maybe taxed in Iloilo City.

    Commissioner vs. BOAC (1987)The source of an income is the property, activity or

    service that produced the income. For the source of incometo be considered as coming from the Philippines, it is

    sufficient that the income is derived from activity within thePhilippines. In BOAC's case, the sale of tickets in thePhilippines is the activity that produces the income. Thetickets exchanged hands here & pmts for fares were alsomade here in Philippine currency. The situs of the source ofpayments is the Philippines. The flow of wealth proceededfrom, & occurred w/in, Phil. territory, enjoying theprotection accorded by the Phil. government. Inconsideration of such protection, the flow of wealth shouldshare the burden of supporting the government.

    Hopewell Power vs. Commissioner (CTA, 1998)The power to levy an excise upon the performance of

    an act or the engaging in an occupation does not dependupon the domicile of the person subject to the excise, orthe physical location of the prop & in connection w/ the act

    or occupation taxed, but depends upon the place in w/c theact was performed or occupation engaged in.Thus, the gauge of taxability does not depend on the

    location of the office, but attaches upon the place wherethe respective transaction(s) is perfected &consummated.

    Smith vs. Commissioner (1984)Individual aliens employed w/in the Subic Special

    Economic Zone (SSEZ) are not exempt from the awesomepower of Phil. taxation especially so that they sourced outtheir earnings from w/in the Philippines To buttress thepoint that SSEZ is indeed w/in the Phil. jurisdiction, Sec.12 (h) of RA 7227, actually placed the fenced-off area ofSSEZ under the responsibility of the Philippine NationalGovernment, thus:

    The defense of the zone and the security of itsperimeters shall be the responsibility of the NationalGovernment in coordination with the Subic BayMetropolitan Authority. The Subic Bay MetropolitanAuthority shall provide and establish its own internalsecurity and fire-fighting forces.

    Such being the case, all subjects over w/c thePhilippines. can exercise dominion are necessarily objectsof taxation. As such, all subjects of taxation w/in its

    jurisdiction are required to pay tax in exchange of theprotection that the state gives. Thus, the SSEZ, being w/inthe territorial boundaries of the Philippines, the aliens

    residing t