Tax 1

General concepts:

Inherent power:

Supreme, Plenary, Unlimited, Comprehensive

Power to destroy vis-à-vis Power to Build

Sison vs Ancheta

Petitioner questions thru declaratory relief and prohibition sec 1 of bp 135

which amends sec 21 of the 1977 NIRC which provides tax rates on
several sources of income.

Petitioner as a taxpayer alleges that he would be unduly be discriminated

upon by the imposition of higher tax rates from the exercise of his
profession vs those who derive income from a fixed income, the law
amounting to class legislation, oppressive and capricious. Therefore, the
law violates the due process, equal protection clause of the constitution,
and the rule requiring the uniformity of taxation.

Decision:

On arbitrariness: mere allegations does not suffice. There must be a

factual foundation of the allegations. Absent any proof, the presumption
of validity must prevail.

One the equal protection clause: it suffices that the law operates similarly
and equally on all persons under similar circumstances.

On uniformity: as long as the tax operates with the same force and effect
everywhere the subject may be found.
The rule on uniformity does not call for perfect uniformity or perfect
equality because it is hardly attainable. Equality and uniformity means
that all taxable subjects shall be taxed at the same rate.
The taxing authority has the authority to make reasonable and natural
classifications for the purposes of taxation.

Philippine health care providers vs CIR

Philippine health care providers isa a group practice that takes care of the
sick and disabled, on a prepaid basis. Members pay in an annual basis.
CIR sent assessments of 224M. deficiency documentary stamp tax was
also imposed. Petitioner protested to the CIR but was not acted upon.
Petitioner then filed for a petition for review to the CTA. CTA reduced
the assessed taxes, and nullified the DST.

CIR appealed to the CTA stating that the contract was an insurance
contract, and thus is subject to DST. CTA reversed its original decision,
deciding that the contract was a non life insurance contract, and subject to
DST.

Petitioner appealed to the CA, but was denied.

SC states that HMOs are not insurance companies. Tho there are
similarities, HMOs reduce the assumption of risk or indemnity by
providing healthcare. Insurance companies merely indemnify the insured
for any expenses incurred up to a certain amount.

The power to tax does not include the power to destroy. The power to tax
is an incident of sovereignty, unlimited in its range and acknowledges no
limits. Security against its abuse is found only upon the legislature which
imposes it to the constituency. When a tax is more than the worth of a
company, it is highly oppressive. It is not the aim of government to
curtail business, but to promote it, as long as it is for a proper purpose.
Because the power or tax is sometimes the power to destroy, it must be
used carefully. It should be used to minimize the injury on the proprietary
of the tax payer. It must be exercised fairly, equally, and uniformly, lest,
the tax collector kills the hen that lays the golden egg. A legitimate
business enjoys the constitutional protection not to be taxed out of
existence because it is against the state’s thrust for a better economy thus
will benefit the people.

Importance of taxation and the lifeblood doctrine:

Commissioner v. Algue

Taxes are the lifeblood of the government, and should be collected

without hindrance, but the collection must be made in accordance to law,
as arbitrariness will negate will negate the very reason for the government
its self. Threfore, it is necessary to reconcile conflicting interests of
taxpayers and the state, so that the real purpose of taxation will be
achieved, which is for the common good.
 NAPOCOR v. City of Cabanatuan,

Taxes and its surcharges and penalties cannot be construed in such a way
as to become oppressive and confiscatory. Taxes are implied burdens that
ensure that individuals and businesses prosper in a conducive
environment assured by good and effective government. A healthy
balance should be maintained such that laws are interpreted in a way that
these burdens do not amount to a confiscatory outcome. Taxes are not
and should not be construed to drive businesses into insolvency. To a
certain extent, a reasonable surcharge will provide incentive to pay; an
unreasonable one delays payment and engages government in
unnecessary litigation and expense.

PAL vs Edu as Secretary of LTO

PAL seeks to dispute the registration fees imposed by the LTO on its
autombiles. Under its franchise, PAL is exempt from taxes.

PAL insists motor vehicle fees are taxes, LTO insists they are fees.
Fees are to be used in the used for the regulation and inspection, and
should not go over those costs. Taxes are for revenue.
The court saw that only a small portion of the “fees” collected were used
by LTO, as a larger portion was to be used for the construction and
maintenance of public infrastructure, thus the fees were not intended to be
for regulatory purposes.

Taxes may be used as an implement to the police power of the

government, as in the case of Lutz vs Araneta. Ig the purpose of the
exaction is for revenue, or at least, one of the real and substantial
purposes, then the exaction is a tax.

Ferrer, Jr., Vs. City Mayor Herbert

Bautista, Et.Al., G.R. No. 210551, June 30,
2015

The city government of QC passes the ordinance in question,

assessin .05% of all real estate properties that exceed 100,000 that will be
used for the socialized housing project of the city government. A tax
credit shall be given by those who pay the aforementioned taxes after
paying continuously for 5 years.
Decision: as stated in the case of pelizloy vs city of baguio, municipal
corporations are not clothed with the inherent power to tax. Its charter
must plainly show the intent to confer the municipality with that power,
and it cannot be assumed.

The power to tax is strictissimi juris, where any doubt must be construed
against the municipality. Inferences, deduction and implications have no
place in the interpretation of the taxing power of a municipality.

Tio vs videogram

Tio is a videogram operator, and filed the case in his and other videogram
operator’s behalf. They question the constitutionality of the creation of
the videogram regulatory board. The reason for the enactment of the
decree was to curtail movie piracy, and videogram operators have not
been taxed, as a few.

Decision: tax is not oppressive since it is like the amusement tax imposed
on movie houses. There is an act being suppressed witch is film piracy.

Smart vs malvar batangas

Malvar, batangas passed an ordinance on regulating special projects. It

imposed an assessment on smart. Smart made a protest and questioned
the validity of the ordinance.

Decision: smart raised that the fees are in fact taxes. No. The exaction is a
fee since its primary objective was to to regulate the construction of
structures, and other activities. The exaction was not primarily for raising
revenue. While fees may contribute to the revenues of the city, it is
merely incidental. Thus, the exaction are fees, not taxes.

Drugstores Association of the Philippines,

Inc. and Northern Luzon Drug
Corporation v. National Council on
Disability Affairs, et al., G.R. No. 194561;
Petitioners question the magna carta of pwds. Where pwds would get a
20% discount on the purchase of medicines, and a tax deduction scheme
would be introduced, stating that the discounts extended would be
deductible from the gross income based on the net cost of goods sold.

Decision: it is a valid exercise of police power since it is a promotion of

public welfare, while imminent domain is the condemnation of private
property for public use upon payment of just compensation. The law
was enacted to support the well being of pwds and to integrate them into
the mainstream. The priority of pwds are enshrined in the constitution.t
has a valid subject considering that the concept of public use is no longer
confined to the traditional notion of use by the public, but held
synonymous with public interest, public benefit, public welfare,
and public convenience Also, the means employed to provide a fair, just
and quality health care to PWDs are reasonably related to its
accomplishment, and are not oppressive, considering that as a form of
reimbursement, the discount extended to PWDs in the purchase of
medicine can be claimed by the establishments as allowable tax
deductions pursuant to Section 32 of R.A. No. 9442 as implemented in
Section 4 of DOF Revenue Regulations No. 1-2009. Otherwise stated, the
discount reduces taxable income upon which the tax liability of the
establishments is computed.

Lutz vs Araneta

The law questioned was the sugar adjustment act. Petitioner contends that
the law only advances the sugar industry, thus not for a public purpose.
The supreme court held that the exaction was made for the protection of
the entire sugar industry, hence, it is a valid exercise of police power. The
sugar industry is a source of great wealth for the country employing a lot
of people. It thus redounds greatly to public welfare.

CIR v. Central Luzon Drug Corporation,

Facts:
Respondents operated six drugstores under the business name Mercury
Drug. From January to December 1996 respondent granted 20% sales
discount to qualified senior citizens on their purchases of medicines
pursuant to RA 7432 for a total of ₱ 904,769.
On April 15, 1997, respondent filed its annual Income Tax Return for
taxable year 1996 declaring therein net losses. On Jan. 16, 1998
respondent filed with petitioner a claim for tax refund/credit of ₱
904,769.00 allegedly arising from the 20% sales discount. Unable to
obtain affirmative response from petitioner, respondent elevated its claim
to the Court of Tax Appeals. The court dismissed the same but upon
reconsideration, the latter reversed its earlier ruling and ordered petitioner
to issue a Tax Credit Certificate in favor of respondent citing CA GR SP
No. 60057 (May 31, 2001, Central Luzon Drug Corp. vs. CIR) citing that
Sec. 229 of RA 7432 deals exclusively with illegally collected or
erroneously paid taxes but that there are other situations which may
warrant a tax credit/refund.

CA affirmed Court of Tax Appeal's decision reasoning that RA 7432

required neither a tax liability nor a payment of taxes by private
establishments prior to the availment of a tax credit. Moreover, such
credit is not tantamount to an unintended benefit from the law, but rather
a just compensation for the taking of private property for public use.

Issue:
Whether or not respondent, despite incurring a net loss, may still claim
the 20% sales discount as a tax credit.

Ruling:
Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the
privilege of obtaining a 20% discount on their purchase of medicine from
any private establishment in the country. The latter may then claim the
cost of the discount as a tax credit. Such credit can be claimed even if the
establishment operates at a loss.

A tax credit generally refers to an amount that is “subtracted directly from

one’s total tax liability.” It is an “allowance against the tax itself” or “a
deduction from what is owed” by a taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of
these is tax deduction – which is subtraction “from income for tax
purposes,” or an amount that is “allowed by law to reduce income prior to
the application of the tax rate to compute the amount of tax which is
due.” In other words, whereas a tax credit reduces the tax due, tax
deduction reduces the income subject to tax in order to arrive at the
taxable income.

A tax credit is used to reduce directly the tax that is due, there ought to be
a tax liability before the tax credit can be applied.  Without that liability,
any tax credit application will be useless.  There will be no reason for
deducting the latter when there is, to begin with, no existing obligation to
the government.  However, as will be presented shortly, the existence of a
tax credit or its grant by law is not the same as the availment or use of
such credit.  While the grant is mandatory, the availment or use is not. If a
net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against
which any tax credit can be applied.  For the establishment to choose the
immediate availment of a tax credit will be premature and impracticable.

Diaz v. Secretary of Finance,

Petitions claim that VAT will result in increased tolll fees. Petitioners
contend that congress did not intend VAT on toll since tolls are users tax
and not a sale of service, that would result in the imposition of tax on
public service, and that vat was not included in the computation of toll
which means that it is in violation of the non impairment clause.
Sol gen argues that vat may be imposed on all all kinds of franchises not
excluded by law.

Decision: SC said that expressways are subject in the definition “all other
franchises”.
Fees collected by private toll operators are not taxes in any sense. Taxes
are for raising revenue, tolls are for the reimbursement of expenses and
maintenance of its operations. Taxes are imposed under its sovereign
authority. Tolls are exacted by either the government or private entities as
an attribute of ownership.
Vat on tollways are not tax on tax due to the nature of vat as an indirect
tax, in indirect taxes, there is a distinction of the tax liability and the tax
burden. In indirect taxes, the one liable may shift the burden on the end
users. Therefore, what is not the liability, but the burden,

Inherent limitations:
Must be for a public purpose:

Taxpayers suit: petitioner must prove interest, illegal expenditure thru

taxation.
Establish personal and substantial interest. Has or will sustain direct
injury. Benefited or inured by the decision of the case.

Tax laws and doctrines:

Sources of tax laws:
Constitution-does not impose a tax liability. Grant of taxing power to lgus
and limitations.
Statutes: For lgus, there must be a tax law to enable it.
Issuances issued by the sec of finance. - subordinate legislation. To be
considered valid, publication and public hearing.

Fortune case: legislative ruling is a revenue regulation. Interpretative

ruling is an administrative ruling.
Admin ruling is issued by the commissioner of bir, can delegate, but not
with rulings of first impressions. Issue raided is novel or new.
Nature: rr is subordinate legislation so it is an implementing law. Cant go
beyond the provisions of the law it implements.
Admin ruling is only the best guess of the commissioner, it doenst have
the force and effect of law.

Scope: rr applies to all tax payers.

Admin ruling: only applies to the tax payer who sought that ruling.
Exception:
San roque case: general interpretative ruling- one single taxpayer
requested for the interpretation but thee government its self.

Admin issuances may be issued by customs, bir.

Tax treaty: bilateral agreement bet 2 states. Avoidance of double

taxation- indirect double taxation or international double taxation.

Dutch bank vs cir

Cir vs johnson and sons: state of residence - domicle country
vs state of source- state where the income was earned
World wide tax system. Income is taxable wherever earned

Pacta sunt servanda- strictly comply with treaties

Dutch bank vs cir

Prospectivity of tax laws: prospective in application, unless law specifies

for retroactive application.

Tax laws are not penal laws. Taxes are imprescriptible, as to collection,
unless specified by law.
Escapes from taxes: may or may not result in a loss
exemption given by law
Tax minimization- legal, means sanctioned by law.
Tax evasion- outside of lawful means

Cir vs toda: evasion: elements: ends to be achieved

If there is any ambiguities as to tax laws.
Taxes are strictly construed against the govt, not be construed to be a tax
law unless it is clear, unanimous and express
Tax exemption, use strictissimi juris.
Power to tax is liberally construed in favor of the govt because it is
inherent (national)
Not if involves municipalities because it is not inherent but given by law.

Double taxation. Direct double taxation- strict sense, may infringe the
constitution
Indirect double taxation-broad sense, may be allowed but
theres a need to countervail by giving deductions, exemptions and credits.
Procter and gamble case: exemption method- 1 state gives exemption
Credit method- 1 state will tax and 1 will give a tax
credit.

Income vs capital
Schedular- tax varies from the type of income
Global tax system- same tax for same kinds of income

Tests existence of gain, realization of gain, not exempted by law.

Severance test-
Claim of right doctrine- presence of claim of right and absence of a
definite and unconditional right to return
Tax benefit rule: recognition of expense, results in a tax benefit

Income taxation:

Conwi vs cir:

Petitioners are employees of procter and gamble philippines, assigned to

p and g usa.
They applied for a refund based on the reasoning that they were paid in us
dollars, and that they used the floating rate of conversion to compute for
their taxable income. Subsequently, the par value of the dollar was used
based on newer ruling.
Issue: whether the income was derived from foreign currency exchange
transactions.

Decision: income is the flow from the fruit of ones labor over a period of
time.
Since money earned was a fruit of their labor, and that they were also
spending in dollars, the transactions were not of foreign currency
transactions.

Madrigal vs rafferty

Madrigal and paterno were husband and wife. Madrigal filed a return
where he gained a total net income of 298k. after, madrigal made a refund
stating that the 298k was from the entire conjugal partnership, and only
half should be assessed.

Decision: there was a ruling stating that the husband, as the head of the
family, should file a return of the aggregate income of himself and his
wife.
Capital is a fund and income is a flow. Susana has only an inchoate right
over the conjugal partnership, and therefore, should not be divided, and
also in computing taxes. The income of each cannot be considered
separate for the determination of taxes.

Cir vs federation of golf clubs:

Rmc 35-2012 held that clubs for recreation, pleasure and other non profit
purposes are liable for income tax.
The receipts of these clubs are strictly for the maintenance and upkeep of
their establishments, and therefore, a pool of capital and not income.

This is a petition assailing the validity of Batas Pambansa 135 Section 1

which further amends Section 21 of the National Internal Revenue Code
of 1977. Petitioner as taxpayer alleges that by virtue thereof, "he would
be unduly discriminated against by the imposition of higher rates of tax
upon his income arising from the exercise of his profession vis-à-
vis those which are imposed upon fixed income or salaried individual
taxpayers.  He characterizes the above section as arbitrary amounting to
class legislation, oppressive and capricious in character.
 
 
For petitioner, therefore, there is a transgression of both the equal
protection and due process clauses of the Constitution as well as of the
rule requiring uniformity in taxation.
 
 
 
ISSUE:
Whether or not the provision violates the equal protection and due
process of the Constitution as well as of the rule requiring uniformity in
taxation?
 
 
 
RULING:
The petition must be dismissed.
 
 
It is manifest that the field of state activity has assumed a much wider
scope, hence, the need for more revenues. The power to tax, an inherent
prerogative, has to be availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds.
 
 
The petitioner alleges arbitrariness. A mere allegation, as here. does not
suffice. There must be a factual foundation of such unconstitutional taint.
Absent such a showing, the presumption of validity must prevail. 
 
 
Now for equal protection. It suffices that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons
must be treated in the same manner, the conditions not being different,
both in the privileges conferred and the liabilities imposed. That same
formulation applies as well to taxation measures.
Petitioner likewise invoked the kindred concept of uniformity. "Equality
and uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. The taxing
power has the authority to make reasonable and natural classifications for
purposes of taxation. There is quite a similarity then to the standard of
equal protection for all that is required is that the tax "applies equally to
all persons, firms and corporations placed in similar situation."
 
 
What misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. It is enough that the
classification must rest upon substantial distinctions that make real
differences. In the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses necessary to
produce their income.
 
 
There is ample justification then for the Batasang Pambansa to adopt the
gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional and
business income
 
 
The petition is without merit, considering the (1) lack of factual
foundation to show the arbitrary character of the assailed provision; (2)
the force of controlling doctrines on due process, equal protection, and
uniformity in taxation and (3) the reasonableness of the distinction
between compensation and taxable net income of professionals and
businessman certainly not a suspect classification.

Cir vs marubeni

Marubeni is a japanese corp with a branch in manila. It won a bidding to

construct an amonia plant and a wharf. The cir found that marubeni had
undeclared income from the contracts, so they issued an assessment.
Marubeni filed for 2 petitions to question the assessments.
2 eos were issued for tax amnesties. Marubeni seasonally filed for
amnesty. Cta ruled in favor of marubeni, and also won the appeal with the
ca.

Issue: is marubeni exempt from paying the taxes

Decision: yes. Cir contends that marubeni is disqualified since the eo

specifically states that taxpayers with a pending tax case is disqualified.
Since marubeni filed the case after the effectivity of the ordinance, and
not before, they are not disqualified.
Marubeni also contends that even if it did not file for amnesty, it still was
not liable for the tax since a portion of contract was offshore, and
materials and labor was done in japan, and even subcontracted.
Cir said that the contract was a pc of work so it cant be divided. The situs
was in the philippines, so it should be taxed.
Marubeni was able to convince the court that not all of the work was done
in the philippines, so it is not liable for tax.
Since the contract was divided into 2 portions, 1 for the onshore portion
to be paid in pesos, and the offshore portion to be paid in yen. The cir did
not argue that marubeni paid the onshore portion.

Cir vs juliane baier nickel.

Baier nickel is a non resident citizen and president of jubanitex. She was
able to sell products of jubanitex in germany and was given a
commission. Jubanitex withheld 10% as tax. She now claims for a refund
because she was a non resident who sold the items in germany, so she
should not be taxed.

The sc decided that the meaning of source is not a place, but an activity or
property. For a source of income to be considered to be coming from the
philippines, it is enough that the income is derived from a activity within
the philippines (manufactured in the phils but sold abroad)