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Tax Reviewer Midterms

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Based on MAMALATEO, BAR Qs up to 2018
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  Section C TAXATION LAWS 1 Page 1 of 55   GENERAL PRINCIPLES OF TAXATION I.   Definition of Taxation It is the power by which the sovereign raises revenue to defray the expenses of the government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burden . Taxes are the enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of government and for public needs. Power to Tax is the Power to Destroy Reconcile these seemingly conflicting views. Chief Justice Marshall opines that the power to tax is the power to destroy. Justice Malcolm opines that the power to tax does not include the power to destroy. This is worth 5 points. “The conflict is more apparent than real. Chief Justice Marshall is correct in the sense that the power to tax is the power to destroy if it is used validly as an implement of the police power of the State. Justice Malcolm is likewise correct in this perspective: where the power to tax is used solely for the purpose of raising revenues, it cannot be allowed to confiscate or destroy.” (J. Isagani Cruz) II.   Characteristics of Taxation 1.   Comprehensive  - It is comprehensive as it covers persons, businesses, activities, professions, rights and privileges. 2.   Unlimited  - It is unlimited because the tax does not cease to be valid merely because it regulates, discourages or even definitely deters the activities taxed, and the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. 3.   Plenary  - It is plenary in the sense that it is complete. 4.   Supreme  - It is supreme insofar as the selection of the subject of taxation is concerned. III.   Theories in Taxation 1.   Lifeblood Theory -  The lifeblood doctrine is one that is enunciated by the Supreme Court in Commissioner of Internal Revenue v. Pineda,[2] as follows: taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.” This means that,  without taxes, the State can neither exist nor endure. Taxes should be collected without unnecessary hindrance. Q:When must the payment under protest be lodged? A: It must be lodged within 30 days from payment of the tax. Q: Explain the rule of payment under protest? A: Payment under protest means payment of real property tax before filing a protest. Q: What does the lifeblood doctrine dictate or require regarding the application of Sec. 252? A: Before you can protest, you must first pay the real property tax. Q: What does lifeblood doctrine require regarding the rule of payment under protest? A: The lifeblood doctrine requires strict compliance of this rule. Dimaampao: Payment under protest is thus consistent with the lifeblood doctrine, and as such their collection cannot be curtailed by injunction or any like action; otherwise, the state or, in this case, the local government unit, shall be crippled in dispensing the needed services to the people, and its machinery gravely disabled. 2.   Necessity Theory -  The necessity theory, as pronounced by the Supreme Court in Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue, [3] states that taxation is a power predicated upon necessity. It is a necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State’s territory and facilit ies and protection which a government is supposed to provide. 3.   Benefits-Protection Theory -  The basis of taxation is the reciprocal duty of protection between the state and its inhabitants. In return for the contributions, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. 4.   Symbiotic Relationship Theory  - The doctrine of symbiotic relationship is a term culled from the ruling of the Supreme Court in Commissioner of Internal Revenue v Algue , Inc., 4which stressed that: “Taxes are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of the motive power  Section C TAXATION LAWS 1 Page 2 of 55   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 burden of running 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 material and moral values.”   IV.   Nature of Taxation 1.   Attribute of Sovereignty  - The power of taxation is inherent in sovereignty as an incident or attribute thereof, being essential to the existence of every government. It can be exercised by the government even if the Constitution is entirely silent on the subject. a. Constitutional provisions relating to the power of taxation do not operate as grants of the power to the government. They merely constitute limitations upon a power which would otherwise be practically without limit. b. While the power to tax is not expressly provided for in our constitutions, its existence is recognized by the provisions relating to taxation. In the case of Mactan Cebu International Airport Authority vs Marcos, Sept. 11, 1996, as an incident of sovereignty, the power to tax has been described as “unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislative which imposes the tax on the constituency who are to pay it.”  2.   Legislative - The power to tax is exclusively legislative and cannot be exercised by the executive or judicial branch of the government. 3.   Non-delegable  –    it is generally not delegated to the judicial or executive branch   Exceptions: a.   Taxing power of local governments (Section 5, Art. X, 1987 Constitution) Sec. 5, Art. X, Constitution: “Section 5. Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.”  i.   Pepsi Cola v. Municipality of Tanauan: “Legislative powers may be delegated to local governments in respect of matters of local concern. This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax.”  ii.   Quezon City v. ABS- CBN: “Municipal Corporation has a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for the statutory grant for these powers. The taxing power of the local government is limited in the sense that Congress can enact legislation granting exemptions. Q: What are the exceptions to the principle of non-delegation of powers?  A: Delegation of the powers of the Congress is allowed in: 1. Article VI, Section 28(2) of the Constitution, which states that “The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.”  2. Article X, Section 5 of the Constitution, which states tha t “Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.”   b.   When allowed by the Constitution [Section 28(2), Article VI, 1987 Constitution]  Section C TAXATION LAWS 1 Page 3 of 55   i.   Under the Constitution, Congress may expressly authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. (Sec 28[2], Art. VI, Constitution) c.   Administrative Implementation - When delegation merely relates to the administrative implementation or implied from the policy and purpose of the Act. 4.   It is not the contract between the State and its citizens. 5.   It is not political in nature. Tax laws are civil in nature. Not political. Hence, even during the period of enemy occupation (such as, for instance, during the Japanese occupation of the Philippines in World War II), tax laws are continually enforced as they are deemed to be the laws of the occupied territory and not of the occupying power. 6.   Subject to Constitution and Inherent limitations. - Although in one decided case the Supreme Court called it an awesome power, the power of taxation is subject to certain limitations. Most of these limitations are specifically provided in the Constitution or implied therefrom while the rest are inherent and they are those which spring from the nature of the taxing power itself although, they may or may not be provided in the Constitution. a.   Inherent Limitations i.   Public purpose - One test of determining the public purpose in a tax is whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State, as a government, to provide. Another test is whether the proceeds of the tax will directly promote the welfare of the community in equal measure.   ii.   Non- delegability - The power of taxation is exclusively legislative. Consequently, the taxing power as a general rule may not be delegated. Exemption of the Government: As a matter of public policy, property of the State and of its municipal subdivisions devoted to government uses and purposes is generally deemed to be exempt from taxation although no express provision in the law is made therefor. Such exemption is upheld as long as the said property is devoted to government uses and purposes. Further, it may be said that it is absurd to tax entities which is actually funded by the revenues raised through taxation. GOCCs are exempted unless they are performing proprietary functions in which case such income derived therefrom Exempt Entities: PHIC, SSS, GSIS, PCSO 1. Delegation to the President . Under the Constitution, Congress may expressly authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. (Sec. 28[2], Art. VI, 1987 Constitution) a. Flexible Tariff Clause b. Emergency Powers 2. Delegation to Local Governments . Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. (Sec. 5, Art. X, 1987 Constitution)  Section C TAXATION LAWS 1 Page 4 of 55   3. Delegation to Administrative Agencies . Administrative agencies like the BIR and Bureau of Customs may be delegated with respect to administrative purposes  –   that is, only for tax collection. iii.   International Comity  - The property of a foreign state or government may not be taxed by another under the principle of sovereign equality among states by virtue of which one state cannot exercise its sovereign powers over another. Sec 2, Article II of the Philippine Constitution - Section 2. The Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations. 1.   See Resolution in the First National Tax Association cited in International Comity in Taxation by Clyde J. Crobaugh, University of Chicago Press, p. 269. Territorial Jurisdiction or Situs  - However broad the power of taxation may be as to its character and no matter how searching it is in its extent, such power is necessarily limited only to persons, property or businesses within its jurisdiction. b.   Constitutional Limitations i.   Due Process Clause (Section 1, Article III, 1987 Constitution) Sec. 1, Art. III of the Constitution provides in part that “(n)o person shall be deprived of life, liberty or property without due process of law.”   Substantive Requirement.  The tax law should be valid; should not be harsh, oppressive or confiscatory; must be for a public purpose and imposed within territorial jurisdiction. Procedural Requirement.  This involves the compliance with the fair and reasonable methods of procedure prescribed by law. There must be no arbitrariness in assessment and collection and that the taxpayer is entitled to right to notice and hearing. ii.   Equal Protection Clause  (Section 1, Article III, 1987 Constitution) All persons subject to legislation shall be treated alike under like circumstances and conditions both in the privileges conferred and obligations imposed. The Constitution prohibits class legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for so doing, Congress may, therefore, group the persons or properties to be taxed and it is sufficient “if all of the same class are subject to the same rate and the tax is administered impartially upon them. Classification to be valid must: - Rest on substantial distinctions - Germane to the purposes of the law - Not be limited to existing conditions only - Equally apply to all members of the same class iii.   The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation (Section 28[1], Article III, 1987 Constitution) Uniformity in taxation means that all taxable articles or properties of the same class shall be taxed at the same rate. This means that there  Section C TAXATION LAWS 1 Page 5 of 55   must be equality in burden and not necessarily equality in amount. It does not signify an intrinsic, but simply a geographic, uniformity. A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It does not signify an intrinsic but simply geographic uniformity. A levy of tax is not unconstitutional because it is not intrinsically equal and uniform in its operation. The uniformity rule does not prohibit classification for purposes of taxation. (British American Tobacco v. Camacho) Equity in taxation involves the application of the ability to pay principle. The concept of equity in taxation requires that such apportionment be more or less just in the light of the taxpayer’s ability to shoulder the tax burden (usually measured in terms of the size of wealth or property and income, gross or net) and, if warranted, on the basis of the benefits he receives from the government. Taxation may be uniform but inequitable when the amount of tax imposed is excessive or unreasonable. To insure and enhance the equity objective, the Constitution enjoins Congress to “evolve a progressive system of taxation.” This means that tax laws shall place emphasis on direct rather than indirect taxation, with ability to pay as the principal criterion. On the basis of the foregoing discussions, it can safely be said that while equal protection refers more to like treatment of persons in like circumstances, uniformity and equity refers to the proper relative treatment for tax purposes of persons in unlike circumstances. Absolute or perfect equality or uniformity and equity is, of course, hardly attainable, if not impossible. No system has ever been devised which has produced perfect equality and uniformity of taxation as between persons or corporations or different classes of property and such a result cannot reasonably be expected. (First Nat. Bank v. Holmes, 92 N.E. 893.) Approximation to it is all that can be had. iv.   No law impairing the obligation of contracts shall be passed (Section 10, Article III, 1987 Constitution) - The above proceeds from the constitutional provision that “No law impairing the obligation of contracts shall be passed.” (Sec. 10, Art. III)   The obligation of a contract is impaired when its terms or conditions are changed by law or by a party without the consent of the other, thereby weakening the position or rights of the latter. An exemption of impairment by law is when a tax exemption based on a contract is revoked by a later taxing statute. Note that when the government is a party to the contract granting exemption, it cannot be withdrawn without violating the non-impairment clause. However, non-impairment may not be invoked in the case of a public utility franchise grantee; the legislature can impair a grantee’s franchise since a franchise is granted under the Constitutional condition that it shall be subject to amendment, alteration or repeal by Congress when the public interest so requires. (See Sec. 11, Art. XII) Thus in the case of PPI v. Chato, the SC said that since the law granted the press a privilege, the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative. Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been subject. In Tolentino v. Sec. of Finance, CREBA, one of the petitioners, alleged that the imposition of the VAT on sales and leases of real estate by
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