TABLE OF CONTENTS The Bureau of Internal Revenue IR) 3 “The Barangay Miero Bi Business Enterpises (omBE) 5 co Mems and concept of income 123 . 6 7 Brings benefits and fringe benefits tax tax : 165 | a 7 Exclusions from gross income 2 204 8 Taxation of individuals eae Bs 243 » 9 Taxation of corporations A . os 9 4. "10. ‘Taxation of partnerships and partners 360 “1 Taxationofestaesandirusts. SSS gg 12 Sources of income 402 13 Sales or exchanges of capital assets and other properties 416 14 Deductions from gross income 46514-B Losses, bad debts, depreciation and depletion 499 14-C Research & development, pension trust and 524 contributions 15 ‘Accounting periods ind methods pe : 557 16 Withholding taxsystem 581 47 Filing of retumns, payment oftax and compliance requirements 599 18 Additions ia 4ay Ses sa 622 : 19 ‘Tax remedies : ; 633 20 ‘The CourtofTax Appeals (CTA) SSG 21 Certificate Authorizing Registration (CAR); Opening and Closing a Business 678Chapter 1 — General Principles of Taxation A. Taxation Definition Taxation is the process or méans by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses of the government. Purposes of taxation The purposes of taxation maybe classified into Primary and secondary, to wit: : 1. Primary purpose To provide funds or property with which to promote the general welfare and protection of its citizens and to enable it to finance its multifarious activities, 2. Secondary purposes a. To strengthen anemic enterprises by giving tax exemptions; b. To protect local. industries against foreign competition through imposition of high customs duties on imported goods; c. To reduce inequalities in wealth and income by imposing progressively higher tax rates; and d. To prevent inflation by increasing taxes or ward off depression by decreasing them. Scope of taxation ., In the absence of constitutional restrictions and subject to the will of the legislative bodies with whom it. is entrusted and the discretion of the authorities which exercise it, the Power of taxation \ is unlimited, comprehensive, plenary and Supreme, the principal check upon its abuse festing in the fesponsibility of the members of the legis! resting in gislature to their Since the power to tax is the strongest of all the powers of the Government, the legislature is free to select the subjects or objects to bs4 INCOME TAXATION (With Tax Principles & Remedies) Ampongan taxed. They may be persons, whether natural or juridical; property, whether real or personal, tangible or intangible; businesses, transactions, rights, or privileges. It is of course to be admitted for all its plenitude, the power to tax is not without restrictions (Comm. vs. Algue, G.R. No. L-28896, 17 Feb. 1988). Despite all its tenacity, taxation is nonetheless subject to established limitations, such as those inherent.in the power itself or mandated by the constitutional precepts (Vitug, Tax Law and Jurisprudence, 3 Ed., p. 4). Case 1-1 After having been informed that some massage parlors are being used as fronts for prostitution, the Sangguniang Panlungsod passed an ordinance subjecting the massage parlors to such onerous taxes that leave them no other alternative but to stop operating. Is the ordinance valid? ce. Answer: Yes, The power to tax may include the power to destroy if it is used validly as an implement of the police power in discouraging and ultimately prohibiting in effect certain things or enterprises inimical to the public welfare (Crw, Constitutional Law (1987). p. 79). e b ‘A tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose tax 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 (Tio us. Videogram Regulatory Board, G.R. No. 75697, 19 June, 1987). Theory and basis of taxation 1. Theory. — The power of taxation proceeds upon the theory that the existence of the government is anecessity; that it cannot continue without means to pay its expenses; and that it has a right to compel all its citizens its limits to contribute (see 51 Am. Jr., 42-43). and property. within i Case 1-2 t has called upon its residents and citizens to pay taxes and cemetary an Tt its widely expanding services and assume monetary burdens so that it can meet r carry out its other functions. Miss Cory refused to pay taxes. Accordingly, she eee5. Chapter 1 - General Principles of Taxation i ii he does not care whether the government shall continue to exist or ang sI wants her millions to remain intact. Is the contention of Miss Cory justified: ce Answer: No. The continued existence of the. government is the responsibility of every citizen. Consequently, they have to pay their taxes religiously. 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-eamned income to the taxing authorities, every person who is able to must contribute his share in the running of the government (Comm. us. Algue, Inc., G.R. No, L-28896, 17 Feb. 1988). 2. Basis. - The basis of taxation is found on the reciprocal duties of protection and support between the State and its inhabitants. The state receives taxes that it may be enabled to carry out its mandates into effect, and perform functions of government and the citizen pays the portion of taxes demanded in order that he may, by means thereof, be secured in the enjoyment of benefits of an organized society (ibid.). This is otherwise known as benefit-received principle.” Case 1-3 Mr. Maco refuses to pay taxes because according to him, while some people are receiving full protection, he has not been receiving any protection to his life, liberty and property from the government. Is the contention of Mr. Maco tenable? ge Answer: No. While it may be true that not all taxpayers receive benefits from the Sovernment, the theory is that they are presumed to have received such benefit even in unequal proportions for uniformity in this respect is impossible of attainment. Nowadays, it is hardly believable to conclude that there are taxpayers who receive no benefits at all from Projects sponsored by the government, all of which improvements are used, directly or indirectly by all People or inhabitants (Nolledo, Reviewer in Taxation £1990], p. 2).6' INCOME TAXATION (With Tax Principles & Remedies) Ampongan Basic principles of a sound tax system 1. Fiscal adequacy. The sources of revenue should be sufficient to meet the demands of public expenditures (Report of 1* Tax Commission, Vol. 1, pp 24 23 cited in Teodoro and De Leon. The Law on Income Taxation [1974] p. 3) 5 This can be obtained by creating new taxes or new tax machinery, o, by merely changing the rates applicable to existing taxes so that th revenue would substantially respond to the expanding needs of pul expenditures. 2. Equality or Theoretical Justice. The tax burden should be proportionate to the taxpayer's ability to pay (this is the so-called Ability-To-Pay Principie) (ibid.), and 3. Administrative Feasibility. The tax laws should be capable of convenient just, and effective administration (id }. fach tax should be clear and plain to the taxpayer, capable of uniform enforcement by government officials, convenient as to time, place, and manner of payment, and’ not unduly burdensome upon, or discouraging to business activity. Nature or characteristics of the state’s power to tax 1. It is inherent in sovereignty. The power of taxation may be exercised by the State although not expressly granted by the constitution Case. 1-4 Assuming that the constitution drafted by a Constitutional Convention and ratified by the people failed to provide for the enactment of law imposing loxcs, may the Congress created by the same constitution enact tax laws? cg Answer: « Yes, the power to tax is an inherent power of the state‘and can be exercised by the legislative without a previous constitutional authority; it is not merely a constitutional grant. ° Note, however, that this is vested only in a sovereign state. Local government units such as barangays, municipalities, cities and provinces do not have an inherent power of taxation.OE i Chapter 1 — General Principles of Taxation 7 2. Legislative in character. It { S only the legislature that can enact tax laws. Case 1-5 cg Answer: No. The President of the Philippines is not empowered to grant tax exemption as this power is lodged solely with Congress. Taxation being legislative in character can be exercised only by the lawmaking body. This rule is also true to the granting of tax exemption. “What one cannot impose, one cannot condone.” 3. Subject to constitutional and inherent limitations. Taxation is not an absolute power that can be exercised by the legislature anyway it pleases. Case 1-6 A law is passed requiring all real property owners to pay real property tax retroactive 50 years back. The government’s justification is that the Power of taxation is unlimited, comprehensive, plenary and supreme. Is the Justification tenable? ge Answer: No, because the power of taxation is subject to constitutional and inherent limitations. Any tax law that may be passed by the legislature should not go beyond these limitations. Requiring the real Property owners to pay said taxes violates the Constitutional limitation on due process because the justification made by the Sovernment is inferior to constitutional and inherent limitations. Hence, the tax lawis not valid. A tax law may be given retroactive effect if it is favorable to the taxpayers.iples & Remedies) Ampongan 8 INCOME TAXATION (With Te Limitations on the power of taxation 1 Constitutional limitations. Those restrictions found in the constitution implied from its provisions. - 2. inherent limitations. Those which restrict the power although they are nq) embodied in the constitution. ; Constitutional limitations 1 Due process. ~ No person shall be deprived of life. liberty. or property without due process of law. nor shall any person be denied the equa! protection of the law (Sec. / Art. ii, NC) Case t= 4Hipine income eaimers te par ur dl requiring all avy valid? acome. ts the vg Answer: fe tek dow No. Taxes whicb are excessive and beyond the crs are confiscatory, oppressive and could be ungu sulion of the iaxpayer's property without due process. 2. Equal protection of the laws. ~- (Same with the provision in No 1) The constitutional provision on equal protection of laws means that “nc person or class of persons Shall be deprived of the same protection of laws enjoyed by other persons or other classes in the same place ane! in !! circumstances 1Phil Rurai Electic Cooperatives Ass. inc vs DEG 403 SCR 556) Case 1-8 Gonzales, a eopra dealer claims [hat he should be exempt trem payment! taxes considering that coconut farmers and producers are exempt. After all, ee said, they both sel! copra in its original state. ‘Should Gonzales be given the same exemption? cae Answer: No. There is substantial difference between copra producers on one hand, and copra traders on the other. There is no violation of the equal protectionOO Chapter.1 — General Principles of Taxation 9 ion that finds no support in reason. In thie case, the former produces and sells copra while the latter merely sell them (Mis. Oriental Ass. of Coco Traders, Inc. us. Sec. of Finance, et. al., G. No. 108524, Nov. 10, 1994). 3, Rule of uniformity and equity in taxation. - The rule of taxation shall be uniform and equitable. The Congress shall evolve @ progressive system of taxation (Sec. 28 (1), Art. vi, Ibid.) Case 1-9 A municipal couneil passed an ordinance imposing an occupation tax on the profession or occupation of an “installation manager”. Manny is the only salaried person with such occupation in the municipality. Can he successfully challenge the validity of the ordinance as being discriminatory since he is the only one adversely affected? cg Answer: No, because the occupation tax could be imposed on all installation managers who may come within the jurisdiction of the municipality. What the ordinance taxes is the occupation itself and not the person. Hence, the number of persons exercising the occupation is not material (Shell vs. Vano, 94 Phil. 382). Uniformity of taxation means that all the taxable persons or property of the same class shall be taxed at the uniform or same rate. There is uniformity of taxation when the tax operates with the same force and effect on this subject wherever found (Churchill vs. Concepcion, 24 Phil, 969). 4. Non-imprisonment for non-payment of poll tax. - No person shall be imprisoned for debt or non-payment of a poll tax (Sec. 20, Art. Mh, ih). Case 1-10 Evander refused to pay the basic community tax of P5.00 and the additional tax of P 1.00 for every P 1,000 of his income from business. May he be imprisoned for non-payment?INCOME TAXATION (With Tax Principles & Remedi 10 cip! dies) Ampongan ge Answer: He cannot be imprisoned for non-payment of the basic tax of p. 00, However, imprisonment is a.sanction for his failure to pay the additions community tax because it is not a poll tax. : 5. Non-impairment of the obligations of contracts. — No law impairing the obligations of contracts shail be passed (Sec 10. Art Ili id) There is “impairment” when a law substantially invalidates, releases or extinguishes the obligations of a contract, or that derogates substantial contractual rights (Home Building & Loan Association vs Blaisdeli. 290 U.S. 398. cited n Domondon, Bar Reviewer in Taxation) Case 14 ‘The government entered into a contract with Abala Lines. The condition provides that Abala Lines shall carry government mails. In return, the former shall be exempt from the payment of income tax. Can the Congress later on pass a law revoking such exemption without the consent of Abala Lines? ge Answer: No. Since the granting of tax exemption is based on a valid contract, il withdrawal would impair the obligation of contracts. The obligation of contract is impaired when its terms or conditions are changed by law or by treaty without the consent of the other, thereby weakening the position of the latter (Edwards us. Kearney. 96 U.S. 607). Case 1-12 ABC Corporation was a recipient of a law approved in Congress which grants tax exemption on companies engaged in an operation of public utilities. Prior to its expiry date, the law extending tax exemption was revoked by Congress. Is there an impairment of an obligation of contracts? gg Answer: None. There is no contractual relation between the government and ABC Corporation because the grant of tax exemption was gratuitous in character which could be withdrawn at any time.Chapter 1 — General Principles of Taxation 11 A cont which the Government, acting in a private capacity sheds its cloak of authority and waives its government wmmunity (Meralco vs. Province of Laguna, G.R. No. 131359, May 9, 1999). There was no material considerati result of the tax exemption; thus, it does protected by the non-impairment clause. on received by the government as a not fall within the purview of a contract 8. Non-infringement of religious freedom. — No law shall be made respecting the establishment of Teligion, or prohibiting the free exercise thereof. The free exercise of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil OF political rights (Sec. 5, Art. Ill id.). Case 1-13 A religious group engaged in the sale of bibles and other religious articles Was required to pay taxes on the sales of the merchandise. Is the imposition of the tax valid? ge Answer: No. To require such religious group to pay taxes would impair its free exercise and enjoyment of religious freedom and worship, as well as its rights and dissemination of religious beliefs (American Bible Society vs. City of Manila, 101 Phil. 396). 7. No appropriation for religious purposes. - No Public money or property Shall be appropriated, applied, paid or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, Preacher, minister, or other religious teacher, or dignitary as such, except when such priest, Preacher, minister, or dignitary is assigned to the armed forces, or to any Penal institution, or government orphanage or leprosarium (Sec. 29 (2), Art 1) Case 1-14 The Barangay Council of May-Ogob disbursed a certain amount of its Economic Development Fund in the Annual Budget of the barangay for the Construction of the barangay chapel. Is the action valid?12 INCOME TAXATION (With Tax Principles & Remedies) Ampongan ge Answer: No. The constitution strictly prohibits public money from bein appropriated, applied, paid or used, directly or indirectly, for the use, benefit or support of any sect, church, denomination, sectarian institution, or system of religion. 8. Exemption of religious, charitable or educational entities, non-profit cemeteries, and churches from taxation. - Charitable institutions. churches, and parsonages or convents appurtefiant thereto, mosques. non-profit cemeteries, and all lands. buildings and improvements, actually directly, and exclusively used for ‘religious, charitable, or educationai purposes shall be exempt from taxation (Sec. 28/3). Art Vi id) The word “exclusive” means primarily rather than solely (Hospital de San Juan de Dios v. Pasay City, 16 SCRA 226). Thus, the admission of pay patients does not detract from the charitable character of a hospital if all its funds are devoted exclusively to the maintenance of the institution as a public charity 9. Exemption of revenues and assets of non-stock,.non-profit educational institutions and donations for educational purposes from taxation. — All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned may likewise be entitled to such exemptions, subject to the limitations provided by law. including restrictions on dividends and provisions for reinvestments. Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax (Art. XIV. Sec. 4[3). [4))Chapter 1 — General Principles of Taxation seen 3 Limitation 8 (Art. VI, Sec. 28) and Limitation 9 (Art. XIV, Sec 4), compared — ice rf i 8 _| io Who are exempt? | Charitable, educational &| Non-stock, non-profit religious institutions educational institutions | What taxes are exempt? Property tax customs duties Income tax, property tax, | Case 1-15 The Lung Center of the Philippines, a charitable institution, is erected in the middle of a twelve (12) hectare lot. A big space at its ground floor is being Icased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area of the lot on the left side of the building is vacant and idle, while a big Portion on the right side is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. Are the real properties consisting of the building and the lot exempt from real property taxes? ge Answer: What is meant by actual, direct, and exclusive use of the Property for charitable purposes is the direct and immediate actual application of the Practitioners) are not exempt from property tax. . The portions of the land occupied by the hospi i h 0 d! pital and portions of the used for its patients, whether paying or non-paying are exempt from real Property taxes (Lung Center of the Philippines us. Quezon City, 433 SCRA 129). * The vacant portion is, undoubtedh I i : h s ly, subject to property tax it i ing used actually, directly, and exclusively for charitable parece? ite hospital14 INCOME TAXATION (With Tax Principles & Remedies) Ampongan Case 1-16 Hanap Taypa Corporation, a non-stock corporation which owns and operates a memorial park, contests the real estate assessment made by the City of Manila. Stied by the city, Hanap Taypa Corporation contends that burial grounds are exempt from real estate tax. It appears that two years prior to the assessment, Hanap Taypa Corporation “had declared dividends to its stockholders. Is the corporation justified in disputing the assessment? cae Answer: No. Only non-profit cemeteries are exempt from the real property tax. One of the requisites for a non-profit institution is that it must declare no dividends ‘The fact that the company declared dividends to its stockholders clearly shows that itis a profit oriented corporation. Moreover, the lot must also be used actually, directly and exclusively for religious or charitable purposes. Considering that these requisites are not satisfied, it is not included within the exemptions. “He who claims exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implication, otherwise state revenues will suffer.” Case 1-17 The ARTS College of Business and Arts (ACBA) is a non-stock, non-profit educational institution. It owns a 5-hectare lot. One half of which is used as its + school campus while the other one-half is vacant. The school plans to do the following effective January 1 of next year: a. Rent out to Aristocrat, Inc. the vacant portion of the lot for Pi million a year; b. Lease a two storey building owned hy Mrs. Tee to be used as library, fac for student nurses and computer room for students of computer courses; c. Increase tuition fees by 6% in accordance with government regulations; and d. import 100 computers for use in its computer courses. Q 1: Is the school subject to real estate tax on ils 5-hectare lot for the current year and succeeding year?15 Chapter 1 — General Principles of Taxation aca Answet ‘ Only the one-half portion which is vacant and was subsequently rented out to Aristocrat Inc. is subject to real property tax because it is not actually, directly and exclusively used for educational purposes. Q 2: Is the two-storey building exempt from real property tax? Answer: - Yes. The test of exemption from property tax is the use of the proper! for the purposés mentioned in the constitution and not the ownership. ‘Thus, even if the building is not owned by the school, it is exempt from property tax hecause it is being used actually, directly, ‘and exclusively for educational purposes. Will the school be subject to income tax on its rental income from Aristocrat, Ine? 4 Answer: The rental income is tubject to income tax because the property is not being used actually, direct! ly and exclusively for educational purpose, Q 4: If the increase in tuition fees results in net income from school operations next year, will the school be subject to income tax on the said income? Answer: No. The inéome to be derived from increase in tuition fee: because all revenues of non-stock non-profit educati exempt from income tax. is exempt ‘onal institutions are (5: Is the importation of the computers subject to ta a Answer: No, The provision of the constitution is clear that all a sets of non- bees hon-protit educational institutions are exempt from taxes and dutic ‘© word “duties” refers to customs duties on importation. 716 INCOME TAXATION (With Tax Principles & Remedies) A\ ™MPOngan 10. Concurrence by a majority of all the members of the Congress for passage of a law granting any tax exemption — No \aw granting an ee exemption shall be passed without the concurrence of a majority a - the members of the Congress (Sec. 28(4], Art. Vi. id.) al 11. Power of the President to veto any particular item or items in a reveni or tariff bill. — The President shall have the power to veto any Particulse item or items in an appropriation, revenue or tariff bill, but the veto shal ve affect the item or items to which he does Not object (Sec. 2712). Art 12. __Non-impairment of the jurisdiction of the Supreme Court in tax cases, — The Supreme Court shall have the power to review, revise. modify or affirm.on appeal or certiorari as the law or the Rules of Court may provide, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto (Sec. 5/2}, Art Vill, id.) , Teverse, Case 1-18 The Congress enacted a law declaring that the decisions of the Court of Tax Appeals shall be final and non-appealable for Purposes of improving the tax collection of the government. Is the law valid? ge Answer: No, such law ‘shall violate the constitutional limitation on the non- impairment of the jurisdiction of the Supreme Court in tax cases. Inherent limitations on the power of taxation 1. Requirement that levy must be for a public purpose. Case 1-19 i if u iti for the A law is passed imposing a tax of five pesos (P5.00) on every citizen Br the purpose of raising funds to be given as loans to earthquake victims in Minds The victims are required to give collateral for the loans and to pay interest. Is tax valid?_—_ i.}8@©© EEE ei a a 17 Chapter 1 = General Principles of Taxation gp Answer: ‘The tax is valid because raising funds for earthquake victims is for public purpose. The true test of what is public purpose is that which requires that ine work shall be essentially public and for the general good of all inhabitants of the taxing body. This does not mean, however, thal a tax is not for a public purpose unless the benefits from the funds to be raised are to be spread equally over the whole community or a large portion thereof. A.use may be public although it is of benefit primarily to the inhabitants of asmall and restricted municipality. 2. Non-delegation of the legislative power to tax. The rule is “potestas delegata non delegare potest” — what has been delegated cannot be delegated. The people created a legislative department for the exercise of legislative power. Thus, this power should not be delegated to any other person or body. However, delegation of this power is permitted in the following cases: a. Delegation to the President. This is based on Section 28 (2) of Article VI of the Constitution which provides 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 fates, import and export quotas, tonnage and wharfage dues, and other duties or imposts, within the framework of the national development program of the government.” b. Delegation to local governments. The reason for this is that local legislatures are in a better position to enact necessary and appropriate legislation considering that they are more knowledgeable than the national lawmaking body on matters of purely local concern. Section 5, Article X of the Constitution provides that “each local government unit shall have the power to create its own sources of revenues and 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. *18 INCOME TAXATION (With Tax Principles & Remedies) Ampongan Case FLO, An ordinance of Quevon City on the operation of its market stall and collection of market stall fees created a market committee “to formulae” recommend and adopt, subject to the ratification of the municipal honrd a approval by the City Mayor, policies and rules and regulations in the creation at market stalls Is the creation of the committee a violation uf the tule” delegation of the legislative power of nation? ‘ cee Answer: No, because the authority to pass the ordinance has not been delegated Clearly, the recommendations of the market commitlee are not yel final, because they are still subject to rat tion by the Sangguniang Panlungsod, the body that is empowered to pass tax ordinances (Bagatsing us. Ramirez, L-41631, Dec. 17, 1976). ® ¢, Delegation to administrative bodies. - This is otherwise known as the “power of subordinate legislation.”. To be valid, (1) the delegation must be complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate, and (2) the law must fix a standard — the limits of which are sufficiently determinate and determinable — to which the delegate must conform in the performance of his functions (Abakada Guro Party List vs. Ermita GR. 168056. Sept. 1, 2005) 3. Exemption from taxation of government entities. Case 1-21 ‘The Congress passed a law requiring government agencies to pay taxes to the government. Should the government be liable for taxes? «ge Answer: Asa rule, the government is not liable for taxes on the theory that it ae be tantamount to taking money from one’s pocket and Pucting: is is nae of levy a tax upon public property would require new taxes to meet the nd this imposition and no one would be benefited but the officers employed whos' compensation would go to increase the useless levy (/ Cooley 263). - i : itution fr uiring the Congress is not, however, precluded by the constitution from reqi ihe government, or any of its agencies or instrumentalities such as the Armed ForCE Chapter 1 — General Principles of Taxation _ ee 2 h9 of the Philippines to pay t Phil. 1338)- ‘The mule is: Agencies performing governmental functions are exeinpt from tax unless expressly taxed, while those Performing proprietary functions are subject to ax unless expressly exempted (De Leon, Comprehensive Review of Taxation [988], p. 28). 2 y ‘axes if itso desires 4. International comity. The term comity mea jurisdiction within its territo; sovereign equals. INS recognition or respect accorded by one Ty over the law of another because they are As a consequence of international comity, no state can claim jurisdiction over another (par in parem non habet imperium) Case 1-22 The United States Embassy in the Philippines is being required by the Bureau of Customs to pay customs duties on all properties being transported to the Philippines, for use in the embassy by the ambassador and other diplomatic officers. May the U.S. government be required to pay ge Answer: No, under international comity the Property of a foreign state or government may not be the subject of taxation by another. ‘This principle based on the sovereign equality among states under international law, by of which one state cannot exercise its sovereign power over another. 5. Territorial jurisdiction Case 1-23 A law is passed requiring owners of lands in Indonesia to pay real property tax in the Philippines. Qu: Is the law valid? ce Answer No. A state may not tax property lying outside its borders or lay an excise ° privilege tax upon the exercise or eitjoyment of a right or privilege in another20 INCOME TAXATION (With Tax Principles & Remedies) Ampongan state. The reason is that tax laws do not operate beyond a country’s jurisdictional hin the jurisdiction of limits. Another reason is that properties located wit! another state generally do not receive protection from the Philippine government (61 CJ. 87-88). Q 2: How about if the tax being imposed is on income earned b abroad? y Filipinos ge Answer: The law is valid because the imposition falls within the exception to the rule. When there is between the taxing state and the object of the tax a privity of relationship (such as citizenship in cases of income tax). the taxing state can operate beyond its jurisdictional limits (Union Refrigerator vs. kentucky. 188 US. 5). Aspects of taxation 1. Levy. Deals with the provisions of law which determines the person or property to be faxed, the sum or sums to be raised, the rate thereof, and the time and manner of levying, receiving and collecting the taxes. 2. Collection. Constituted of the provisions of law which prescribe the manner of enforcing the obligation on the part of those taxed to pay the demand thus created. B. Taxes Definition The enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of the government and all public needs. Essential elements of a tax 1. Enforced contribution. 2 Generally payable in money. 3. Proportionate in character.Chapter 1_— General Principles of Taxation _ 21 4. Levied on persons, Property, or the exercise of a right or privilege 5. Levied by the sate which’ has jurisdiction over the subject.or object of taxation. 6. Levied by the lawmaking body of the state. __ The power of taxation can only be levied by the Congress of the Philippines through enactment of tax statutes But this power is also granted by the Constitution to local government units, subject to such limitations as may be provided by law. It should be noted that Executive Order No. 273, otherwise known as the “Value Added Tax Law" was enacted through issuance of an Executive Order by former President Corazon C. Aquino. During that time, the country was under a Revolutionary Government where the executive and the legislative powers were, vested solely in the President of the Philippines. During the Martial Law era, then President Marcos exercised also legislative powers despite the existence of the Interim Batasang Pambansa, including the power to tax, through issuance of Presidential Decrees because he was. vested such power in the 1973 Constitution. 7. Levied for public purpose or purposes. The term “public purpose” includes the following a. Construction of roads and bridges; b. Pensions to retired government employees and their widows and children; c. Assistance to victims of calamities; and d. Social welfare and health care projects Classification of taxes 1. As to subject matter or object a. Personal, poll or capitation. - Tax of a. fixed amount imposed on individuals, whether citizens or not, residing within a specified territory without regard to their property or the occupation in which they may be engaged. Example: Community taxb. Property. - Tax imposed on property, whether real or personal. jn Proportion either to its value, or in accordance with some other reasonable method of apportionment. Example: Real Property Tax - A tax imposed upon the performance of an rivilege, or the engaging in an occupation, any ithin the classification of a poll tax or a c. Excise (Privilege Tax). act, the enjoyment of a pt tax which does not fall wi property tax. Example: Income tax, donor's tax, estate tax 2. As to who bears the burden ~\ a. Direct. — A tax that is demanded from the person who also shoulders JY } the burden of the tax. “ Examples: Income tax, estate tax, donor's tax b. Indirect. — A tax demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. Examples: Value-added tax 3. As to determination of amount a. Specific. — Tax of fixed amount imposed by the head or number, or by some standard of weight or measurement; it requires no assessment other than a listing of classification of the subjects to be taxed. Examples: Excise tax on distilled spirits, cigars, cigarettes b. ‘Ad valorem. — Tax of a fixed proportion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined, Example: Real property tax 4. As to purpose a. General, fiscal or revenue. - Tax that is imposed solely to raise revenue for government expenditures.Chapter 1 ~ General Principles of Taxation _ Examples: Income tax, value-added tax b. Special or regulatory. ~ Tax imposed for a special purpose, ie. to achieve some social or economic ends irrespective of whether revenue is actually raised or not a 7 Examples: Sugar adjustment faxes; Oil Price Stabilization Fund (OPSF) 5. As to authority imposing the same a. National. - Tax imposed by the national government Examples: Intemal revenue faxes, customs duties b. Municipal or local. - Tax imposed by Municipal corporations. Examples: Sand and gravel tax, occupation tax 6. As to graduation or rate a. Proportional. - Tax based on a fixed Percentage of the amount of the Property, receipts, or other basis to be taxed. Example: Value-added tax. estate tax, donor's tax b. Progressive. - Tax the rate of which increa ISe€S as the tax base or bracket increases. Examples: Income tax ©. Regressive. - Tax rate of which decreases as the tax base increases. Three inherent powers of the government The three inherent powers of the government are the following: - Eminent domain. The power of the state or those to whom the power has been delegated to take private property for public use upon paying to the Owner a just compensation. Police power. The power of the state to enact such laws in relation to Persons and property as may promote public health, public morals, public Safety, and the general welfare of the people.y ‘SS 24 4 INCOME TAXATION (With Tax Principles & Remedies) Ampongan lhe sovereign, thru its legislature, raises 3. Taxation. The power by which t 5 of the government revenue to support the necessary expenditure: tt domain, police power and taxation Distinctions - eminen' each other in the The three inherent powers of the State differ from following ways: 14. The police power regulates both liberty and property. The power of eminent domain and the power of taxation affect only property rights. 2. The police power and the power of taxation may be exercised only by the goverment. The power of eminent domain may be exercised by some public utilities or public service companies. 3. The property taken in the exercise of the police power is destroyed because it is noxious or intended for a noxious purpose. The properly taken under the power of eminent domain and the power of taxation is intended for a public use or purpose and is therefore wholesome. 4. The compensation of the person subjected to police power is the feeling that he has contributed to the general welfare. rs ig more concrete, to wil, a intangiblé altruistic The compensation involved in the other powe' nt of the property expropriated or protection and full and fair equivalet public improvements for the taxes paid (Cruz, Political Law (1987]. p. 37). 5. There is generally no limit on the amount of fax that may be imposed. in police power, the ‘amount is limited to cover the cost of the license and the necessary expenses of police surveillance and regulation; whereas, 'n eminent domain, there is no imposition, rather the owner of the property taken is paid its market value. < Case 1-24 ‘An exhaust fan was installed in a tunnel to clear it of smoke after the passage, of the trains. Most of the smoke, however, blew directly into the house of Richard. Is he entitled to just compensation? ge Answer: al; it was the character t merely consequenti: c e taking. Considering, Yes, the damage caused was no ether there was th of the invasion that determines wh) eer 25 General Principles of Taxation. = _--___— ver of eminent herefore, that there was as to Richard a taking under the power ol en ai main, he is entitled (o just compensation Case! \ law is passed providing for compulsory vaccination and subjects a pets to imprisonment for refusing to submit to vai ination, except when itis appa a or il can be’shown that the person is not fit for vaccination because of Pus physical condition. Is the Taw’ valid? nswer: pe Answe The law is valid under the police power. of the state for the purpose of proleeting and preserving public health. Tax distinguished from license fee Permit or license fee is a charge imposed under the police power for purposes of regulation. 1 Taxes are levied by virtue of the taxing power: license fees are iiposed by virtue of the police power, 2 Taxes are levied for revenue. license fees are imposed for regulation 3 There is generally no limit on the amount of tax that may be imposed license fees may not exceed the amount necessary to defray the cost of regulation 4. Taxes are imposed on persons. property, business occupation. or the exercise of any privilege, whether legal or illegal: license fees may be impose only on legitimate businesses and occupation: and 5 Failure to pay @ tax does not render the business or oc: Cupation illegal non-payment of a license fee renders the business or oc ‘cupation illegal Tax distinguished from toll Toll is a sum of money for the use of somethin: the Consideration which is paid for the use of a road, Public nature 1 9. Generally applied to bridge or the like ofa Tollis a demand of proprietorship; tax is a demand of sovereignty is:26 INCOME TAXATION (With T: Principles & Remedies) Ampongan 2. Toll is a compensation for the use of another's i ; property, or of improve. ments made by him; taxes are levied for the support of the government and their amount is regulated by necessities; and ‘ 3. A toll may be imposed by the government or private individuals or entities- a tax may be imposed only by the State. , Tax distinguished from special assessment Special assessment is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements. 1. Tax has general application; special assessment has special application only as to a particular time and place; 2. Tax can be levied on land, persons, property, income, business, etc. special assessment is levied only on land; and ~ Tax is based on necessity and partially on benefits; special assessment is based wholly on benefits (Apostolic Prefect vs. Treasurer of Baguio, 71 Phil 547). in the Local Government Code of 1991, special assessment is called as Special Levy (Sec. 240, LGC). 3. Tax distinguished from debt 1. Debt generally arises from contract, express or implied; fax is created by law; 2. Debt is assignable; fax cannot generally be assigned; 3. Debt may be paid in kind; tax is generally payable in money; and 4. A person cannot be imprisoned for non-payment of debt; imprisonment is a sanction for non-payment of tax (except poll tax) Tax distinguished from customs duties A tax includes various kinds of imposition on persons or property, for supplying the treasury as tribute, subsidy, excise, imposts, or customs, customs duties are taxes levied upon commodities, imported into or exported across national boundaries. It follows that taxes include customs duties: and an act granting exemption from all taxes of any kind and nature carries with it exemptions from customs duties (Umali, Reviewer in Taxation [1977]. p.13)