4.

Purposes, Objectives of Taxation

a. General, fiscal, revenue

CIR v. Algue

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person who
is able to must contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the lives of
the people and enhance their moral and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.

Osmena v. Orbos

The OPSF is a "Trust Account" which was established "for the purpose of minimizing the frequent price
changes brought about by exchange rate adjustment and/or changes in world market prices of crude
oil and imported petroleum products.

Like the the sugar stabilization fund; the stabilization fees collected are in the nature of a tax, which is
within the power of the State to impose for the promotion of the sugar industry (Lutz v. Araneta, 98
Phil. 148). . . . The tax collected is not in a pure exercise of the taxing power. It is levied with a
regulatory purpose, to provide a means for the stabilization of the sugar industry. The levy is primarily
in the exercise of the police power of the State (Lutz v. Araneta, supra).

While the funds collected may be referred to as taxes, they are exacted in the exercise of the police
power of the State.

PAL v. Edu

It is possible for an exaction to be both tax and regulation. License fees are charges looked to as a
source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for
example, of automobile license fees. Isabela such case, the fees may properly be regarded as taxes
even though they also serve as an instrument of regulation.

As vehicular traffic exploded in number and motor vehicles became absolute necessities without which
modem life as we know it would stand still, Congress found the registration of vehicles a very
convenient way of raising much needed revenues. Without changing the earlier deputy. of registration
payments as "fees," their nature has become that of "taxes."

Motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic
Code are actually taxes intended for additional revenues of government (for the construction and
maintenance of public roads, streets and bridges) even if one fifth or less of the amount collected is
set aside for the operating expenses of the agency administering the program.

Tolentino v. Secretary of Finance

Nature:
These are various suits for certiorari and prohibition, challenging the constitutionality of Republic Act
No. 7716.

Purpose:

The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as
on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in
money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or
exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system
and enhance its administration by amending the National Internal Revenue Code.

b. Non-revenue, special or regulatory

Osmena v. Orbos

Republic v. Bacolod-Murcia Milling Co.

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

A special assessment being a levy upon property predicated on the doctrine that the property against
which it is levied derives some special benefit from the improvement. It is not a tax measure intended
to raise revenues for the Government.

The special assessment, that is, that the levy for the Philsugin Fund, is not so much an exercise of the
power of taxation, nor the imposition of a special assessment, but, the exercise of the police power for
the general welfare of the entire country.

The case dispute that the operation of a sugar refinery is a phase of sugar production and that from
such operation may be learned methods of reducing the cost of sugar manufactured no less than it
may afford the opportunity to discover the more effective means of achieving progress in the industry.
Philsugin's experience alone of running a refinery is a gain to the entire industry. That the operation
resulted in a financial loss is by no means an index that the industry did not profit therefrom, as other
farms of a different nature may have been realized. Thus, from its financially unsuccessful venture,
the Philsugin could very well have advanced in its appreciation of the problems of management faced
by sugar centrals. It could have understood more clearly the difficulties of marketing sugar products.
It could have known with better intimacy the precise area of the industry in need of the more help
from the government.

Tio v. Videogram Regulatory Board

GR No. L-75697 June 18, 1987

Nature:
This is a petition which assails the constitutionality of Presidential Decree No. 1987 entitled "An Act
Creating the Videogram Regulatory Board" with broad powers to regulate and supervise the
videogram industry.

Facts:
In 1985, Presidential Decree No. 1987 entitled “An Act Creating the Videogram Regulatory Board” was
enacted which gave broad powers to the VRB to regulate and supervise the videogram industry. The
said law sought to minimize the economic effects of piracy.

There was a need to regulate the sale of videograms as it has adverse effects to the movie industry.
The proliferation of videograms has significantly lessened the revenue being acquired from the movie
industry, and that such loss may be recovered if videograms are to be taxed. Section 10 of the PD
imposes a 30% tax on the gross receipts payable to the LGUs.

Issue:
1. Whether the tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in
violation of the due process clause of the Constitution?
2. Whether there is over regulation of the video industry as if it were a nuisance

Ruling:
1. No.

Tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the
activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent,
that 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.

The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the
realization that earnings of videogram establishments. It is an end-user tax, imposed on retailers for
every videogram they make available for public viewing. It is similar to the 30% amusement tax
imposed or borne by the movie industry which the theater-owners pay to the government, but which
is passed on to the entire cost of the admission ticket, thus shifting the tax burden on the buying or
the viewing public. It is a tax that is imposed uniformly on all videogram operators.

The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry.

The public purpose of a tax may legally exist even if the motive which impelled the legislature to
impose the tax was to favor one industry over another.

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that "inequities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation". Taxation has been made the implement of the state's
police power.

The rate of tax is a matter better addressed to the taxing legislature.

2. No.

Being a relatively new industry, the need for its regulation was apparent. The underlying objective of
the DECREE is to protect the moribund movie industry.
Lutz v. Araneta
G.R. No. L-7859 December 22, 1955

Nature:
This is an appeal from the decision of the Court of First Instance dismissing the action questioning the
legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar
Adjustment Act.

Facts:
Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act provided an increase of
the existing tax on the manufacture of sugar. The purpose of which was for the creation of a special
fund to be known as the 'Sugar Adjustment and Stabilization Fund'.

Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme
Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the
estate as taxes alleging that such tax is unconstitutional and void, being levied for the aid and support
of the sugar industry which is not a public purpose.

Issue:
Whether the State may validly collect to support an industry?

Ruling:
Yes.

The tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of
the threatened sugar industry. In other words, the act is primarily an exercise of the police power.

Sugar production is one of the great industries of our nation. Its promotion, protection and
advancement, therefore redounds greatly to the general welfare.

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

ESSO v. CIR
G.R. Nos. L-28508-9 July 7, 1989

Nature:
This is an appeal of the decision of the Court of Tax Appeals denying petitioner's claims for refund of
overpaid income taxes which upheld the disallowance made by the CIR regarding petitioner’s claim
that margin fees were ordinary and necessary business expense.

Facts:
ESSO received an assessment from the CIR for deficiency of income tax payments. The deficiency
arose from the disallowance of the margin fees ESSO paid to the Central Bank on its profit remittances
to its New York head office, which ESSO claimed as a deduction from its gross income being an
ordinary and necessary business expense.

Issue:
1. Whether “margin fees” may be considered as tax which is deductible under Sec. 30(c) of NIRC?
2. Whether “margin fees” may be considered as ordinary and necessary expense?

Ruling:
1. No.
Sec. 30(c) of the National Internal Revenue Code provides that all taxes paid or accrued during or
within the taxable year and which are related to the taxpayer's trade, business or profession are
deductible from gross income.

Tax is levied to provide revenue for government operations, while the proceeds of the margin fee are
applied to strengthen our country's international reserves. Hence, margin fee was imposed by the
State in the exercise of its police power and not the power of taxation.

2. No.

To be deductible as a business expense, three conditions are imposed, namely:

(1) the expense must be ordinary and necessary;
(2) it must be paid or incurred within the taxable year; and
(3) it must be paid or incurred in carrying on a trade or business.

In addition, not only must the taxpayer meet the business test, he must substantially prove by
evidence or records the deductions claimed under the law.

An expense will be considered 'necessary' where the expenditure is appropriate and helpful in the
development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is
normal in relation to the business of the taxpayer and the surrounding circumstances.

Margin fees are not expenses in connection with the production or earning of petitioner's incomes in
the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the
remittance of funds after they have already been earned by petitioner's branch in the Philippines for
the disposal of its Head Office in New York which is already another distinct and separate income
taxpayer.

ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business.

Caltex v. COA

Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization
of a threatened industry which is affected with public interest as to be within the police power of the
state.

There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects
the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the
people and cause economic crisis of untold proportions. It would have a chain reaction in terms of,
among others, demands for wage increases and upward spiralling of the cost of basic commodities.
The stabilization then of oil prices is of prime concern which the state, via its police power, may
properly address.

CLASSIFICATION OF TAXES
 a. As to scope of the tax

National taxes, local taxes

Benguet Corporation v. CBAA

GR No. 100959 June 29, 1992

Nature:
This is an original petition for certiorari which seeks to annul and set aside the Decision of the Central
Board of Assessment Appeals as well as its Resolution denying its motion for reconsideration, which
affirmed the decision of respondent Local Board of Assessment Appeals of the Province of Benguet
declaring as valid the tax assessments made by the Municipal Assessor of Itogon, Benguet, on the
bunkhouses of petitioner occupied as dwelling by its rank and file employees.

Facts:
The Provincial Assessor of Benguet, through the Municipal Assessor of Itogon, assessed real property
tax on the bunkhouses of petitioner Benguet Corporation occupied for residential purposes by its rank
and file employees.

Benguet Corporation contends that local government units are without any authority to levy realty
taxes on mines pursuant to Sec. 52 of P.D. 463 and Sec. 5 (m) of The Local Tax Code.

Sec. 52 of P.D. 463

Sec. 52. Power to Levy Taxes on Mines, Mining Operations and Mineral Products. — Any law to
the contrary notwithstanding, no province, city, municipality, barrio or municipal district
shall levy and collect taxes, fees, rentals, royalties or charges of any kind whatsoever on
mines, mining claims, mineral products, or any operation, process or activity connected
therewith.

Sec. 5 (m) of The Local Tax Code

Sec. 5. Common limitations on the taxing powers of local governments. — The exercise of the
taxing powers of provinces, cities, municipalities and barrios shall not extend to the
imposition of the following: . . .

(m) Taxes on mines; mining operations; and minerals, mineral products, and their by-
products when sold domestically by the operator

Issue:
Whether real property tax is a local tax which the LGUs do not have the authority to impose?

Ruling:
No.

While local government units are charged with fixing the rate of real property taxes, it does not
necessarily follow from that authority the determination of whether or not to impose the tax. In fact,
local governments have no alternative but to collect taxes as mandated in Sec. 38 of the Real Property
Tax Code.
The national government, expressing itself through the legislative branch, that levies the real property
tax. Consequently, when local governments are required to fix the rates, they are merely constituted
as agents of the national government in the enforcement of the Real Property Tax Code. The
delegation of taxing power is not even involved here because the national government has already
imposed realty tax in Sec. 38, leaving only the enforcement to be done by local governments.

Consequently, the provisions of Sec. 52 of the P.D. 463 and Sec. 5 (m), 17 (d) and 22 (c) of The Local
Tax Code (P.D. 231) cited by petitioner are mere limitations on the taxing power of local
government units; they are not pertinent to the issue before Us and, therefore, cannot and should not
affect the imposition of real property tax by the national government.