AQUINAS UNIVERSITY of LEGAZPI CITY (COLLEGE OF LAW)

AQUINAS UNIVERSITY of LEGAZPI CITY (COLLEGE OF LAW)OUTLINE IN TAXATION LAW

General Principles of Taxation

I. Taxation -- power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of government.A.Theory and basis of taxation.1. Necessity Theory

Taxes proceed upon the theory that the existence of government is a necessity; that it cannot continue without the means to pay its expenses; thus, it has the right to compel all citizens and property within its limits to contribute.Taxation is a power emanating from necessity. It is a necessary burden to preserve the States sovereignty and a means to give the citizens an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the States territory and facilities, and protection which a government is supposed to provide.2. Lifeblood Theory

Taxes are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Thus, despite the natural reluctance to surrender part of ones earned income to the taxing authorities, every person who is able must contribute his share in the running of the government.3. Benefits-Received Principle

The State demands and receives taxes from the subjects of taxation within its jurisdiction so that it may be enabled to carry its mandate into effect and perform the functions of government, and the citizen pays from his property the portion demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of organized society.CASES:1. CIR v. Algue, et. al.

Facts:Respondent-corporation was appointed as agent of Philippine Sugar Estate Development Company authorizing the former to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. For this sale, Algue received as agent a commission of P126,000 and it was from this commission that the P75,000 promotional fees were paid to the aforenamed individuals.Respondent-corporation claimed that these promotional fees be deducted from its gross income as legitimate business expense. Petitioner (CIR) however disallowed the deduction contending that these payments are fictitious because most of the payees are members of the same family in control of Algue and that there was no indication as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction. Further, petitioner insists that these promotional fees, if to be deducted, are excessive.Issue:Whether or not the CIR correctly disallowed the P75,000 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returnsRuling:NO.

1.PAYMENTS IN PROMOTIONAL FEES, NOT FICTITIOUS; CLAIMED DEDUCTION OF P75,000 IS PROPER; STRICT BUSINESS PROCEDURE NOT ALLOWED IN A FAMILY CORPORATION.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.20 Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation.2.AMOUNT OF PROMOTIONAL FEES, NOT EXCESSIVE.The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000. After deducting the said fees, Algue still had a balance of P50,000 as clear profit from the transaction. The amount of P75,000 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with Sec. 30 of the Tax Code.3.BURDEN ON TAXPAYER TO PROVE VALIDITY OF THE CLAIMED DEDUCTION, SUCCESSFULLY DISCHARGED. PAYMENT OF THE FEES WAS NECESSARY AND REASONABLE.

The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.4.NATURE OF TAXES; PURPOSE OF TAXES; COLLECTION OF TAXES SHOULD BE MADE IN ACCORDANCE WITH LAW.

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

5.RATIONALE OF TAXATION.

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. 2. CIR v. Tokyo Shipping Co., Ltd., et. al Facts:Vessel M/V Gardenia owned and operated by private respondent was chartered by NASUTRA to load 16,500 metric tons of raw sugar in the Philippines. Pursuant to this, its operations supervisor paid the required income and common carriers taxes based on the expected gross receipts of the vessel. Upon arriving, however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. Thereafter, NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan without any cargo. Apparently, no profit was realized by respondent-corporation from the charter agreement. In view thereof, respondent-corporation instituted a claim for tax credit or refund of the sum previously paid for income and common carriers taxes before petitioner Commissioner of Internal Revenue. Petitioner failed to act promptly on the claim. Hence, private respondent filed a petition for review before public respondent Court of Tax Appeals which the latter, however, ruled in favor of the private respondent. Petitioners motion for reconsideration was denied. Its petition for review suffered the same fate. However, despite the courts findings that private respondent satisfactorily proved that it derived no receipt from its charter agreement and the BIR examiner and appellate division of the BIRs recommendation for the approval of the claim for refund, petitioner continued to withhold the tax erroneously prepaid.Issue:Whether or not petitioner is justified in withholding the tax refund due the private respondent.Ruling:NO.

1.NATURE OF CLAIM FOR REFUND.

A claim for refund is in the nature of a claim for exemption 8 and should be construed in strictissimi juris against the taxpayer. 9 Likewise, there can be no disagreement with petitioner's stance that private respondent has the burden of proof to establish the factual basis of its claim for tax refund.2.TAXPAYERS OWE HONESTY TO GOVERNMENT JUST AS GOVERNMENT OWES FAIRNESS TO TAXPAYERS.

The tax was paid way back in 1980 and despite the clear showing that it was erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After fifteen (15) long years and the expenses of litigation, the money that will be finally refunded to the private respondent is just worth a damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs to increase its collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund without any unreasonable delay what it has erroneously collected. In Roxas v. Court of Tax Appeals12 is apropos to recall:The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

3. BPI-Family Savings Bank Inc. v. CA, et. al. Facts:Petitioners Corporate Annual Income Tax Return for the year 1989 shows that it has a refundable amount. In the same year, petitioner declared in the same 1989 income tax return that the same refundable amount will be applied as tax credit to the succeeding taxable year. However, in 1990, to which the tax refund is prayed to be applied, petitioner incurred losses. Consequently, it initiated an action for a claim for tax refund before the CIR. Pending action, petitioner filed a petition for review before the CTA. To prove its claim that it did not apply the amount as a tax credit, the manager of petitioner's accounting department, testified to this fact during the trial. It likewise presented its claim for refund and a certification issued by Mr. Gil Lopez, petitioner's vice-president, stating that the amount of P112,491 has not been and/or will not be automatically credited/offset against any succeeding quarters' income tax liabilities for the rest of the calendar year ending December 31, 1990. Also presented were the quarterly returns for the first two quarters of 1990. The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact, it presented no evidence at all. The CTA however dismissed the case on the ground that petitioner failed to present as evidence its corporate Annual Income Tax Return for 1990 to establish the fact that petitioner had not yet credited the amount to its 1990 income tax liability. In its motion for reconsideration, petitioner attached a copy of its Final Adjustment Return for 1990 showing that it incurred a loss or gained a profit during the taxable year. But the same was denied. The CA affirmed the decision of Tax Appeals. Both courts reasoned out that since petitioner declared in its 1989 Income Tax Return that it would apply the excess withholding tax as a tax credit for the following year, the Tax Court held that petitioner was presumed to have done so. The CTA and the CA ruled that petitioner failed to overcome this presumption because it did not present its 1990 Return, which would have shown that the amount which would have shown that the amount in dispute was not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a tax refund. Hence, this petition.Issue:Whether or not petitioner is entitled to a tax refund.

Ruling:YES.1.RETURN SHOWS PETITIONER SUFFERED NET LOSS IN 1990; BIR NOT JUSTIFIED IN WITHHOLDING THE TAX REFUNDIn the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a tax credit. In failing to consider the said Return, as well as the other documentary evidence presented during the trial, the appellate court committed a reversible error.It should be stressed that the rationale of the rules of procedure is to secure a just determination of every action. They are tools designed to facilitate the attainment of justice.14 But there can be no just determination of the present action if we ignore, on grounds of strict technicality, the Return submitted before the CTA and even before this Court.15 To repeat, the undisputed fact is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax liability to which the tax credit could be applied. Consequently, there is no reason for the BIR and this Court to withhold the tax refund which rightfully belongs to the petitioner.2.TECHNICALITIES AND LEGALISMS SET ASIDE TO ATTAIN SUBSTANTIAL JUSTICE, EQUITY AND FAIR PLAY.

Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the claimant. Under the facts of this case, we hold that petitioner has established its claim. Petitioner may have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances, however, should not compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in 1990, and that it could not have applied the amount claimed as tax credits.Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness.

4. Philippine Bank of Communications v. CIR, et. al.Facts:Petitioner filed its quarterly income tax returns for the first and second quarters of 1985 with an overpayment of P5,016,954. In 1986, however, it incurred losses and thus declared no tax payable for the year despite the fact that it earned rental income from leased properties during these two years. The lessees, however, withheld and remitted to the BIR withholding creditable taxes due in 1985 and in 1986. Consequently, on August 7, 1987, petitioner requested the CIR for a tax credit of the amount overpaid in the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 and in 1986. On November 18, 1988, petitioner filed a petition for review before the CTA pending the investigation of the CIR. The CTA denied the request of petitioner for a tax refund or credit of the overpaid amount ruling that it was filed beyond the reglementary period and likewise denied its request for tax refund of the amount representing the withheld taxes remitted by its lessees to the BIR on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year.On appeal, petitioner finds refuge on the Revenue Memorandum Circular (RMC) issued by the Acting Commissioner modifying the prescriptive period for filing tax refund or credit from two years, as prescribed by law in Sec. 30 of the NIRC, to ten years. Further, petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers.Issue:Whether or not the RMC may be given effect despite its being inconsistent with the prescriptive period for filing tax refund or credit provided by law so that petitioner be entitled to tax refund or credit.

Ruling:NO.1.REVENUE MEMORANDUM CIRCULAR (RMC) CANNOT BE APPLIED AS IT DISREGARDS THE TWO-YEAR PRESCRIPTIVE PERIOD SET BY LAW.The relaxation of Revenue Regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law.Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters.The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.2.ESTOPPEL DOES NOT LIE AGAINST THE GOVERNMENT.Fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, would amend the statute.The Memorandum Circular (MC), stating that a taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or tax credit and corresponding petition for review within the two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, was the ruling and judicial interpretation of the Court of Tax Appeals (CTA). Estoppel has no application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for to do so would in effect amend the statute.3.MEMORANDUM CIRCULAR (MC) OF A BUREAU HEAD DOES NOT VEST A TAXPAYER WITH SHIELD AGAINST JUDICIAL ACTION.A memorandum circular (MC) of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same.27 Moreover, the non-retroactivity of rulings by the Commissioner of Internal Revenue (CIR) is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the CIR. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer.B.Purposes of taxation.1. Revenue or fiscal.To provide funds or property with which the State promote the general welfare and protection of its citizens.2. Regulation.

Taxes may also be imposed for a regulatory purpose, such as to:a. regulate inflation;b. achieve economic and social stability; andc. serve as key instrument for social control.3. Promotion of general welfare.Taxation may be used as an implement of the police power in order to promote the general welfare of the people.

4. Reduction of social inequality.This is made possible through the progressive system of taxation where the objective is to prevent the undue concentration of wealth in the hands of a few individuals.progressivity -- those who are able to pay should shoulder the bigger portion of the tax burden (e.g. present rates of income, estate and gift taxes).5. Encourage economic growth.To grant incentives or exemptions in order to encourage investments and thereby promote the countrys economic growth.GR:

The power to exempt from tax is inherent in the State.XPN: Local taxation.Since the taxing power is only delegated, it follows that in order to grant tax exemptions, local governments must justify its exercise under constitutional or statutory law or both, as the case may be.Note:In the LGC, local governments may grant tax exemptions. However, with respect to real property taxes, no such power exists, save in the case of condonation of taxes which can be granted only for certain justifiable reasons.

6. Protectionism.

In the case of foreign importations, protective tariff and customs are imposed to protect local industries.C.Principles of a Sound Tax System.1. Fiscal adequacy.

The sources of government revenue must be sufficient to meet the government expenditures and other public needs.CASE:Chavez v. Ongpin, et. al.Facts:Frank Chavez, as taxpayer, and intervenor Realty Owners Association of the Philippines, Inc. (ROAP), alleges that E.O. 73 providing for the collection of Real Property taxes as provided for under Section 21 of the P.D. 464 (Real Property Tax Code) is unconstitutional because it accelerated the application of the general revision of assessments to January 1, 1987 thereby increasing in real property taxes by 100% to 400% on improvements, and up to 100% on land which would necessarily lead to an increase in real property taxes amounting to confiscation of property. Additionally, P.D.464 is unconstitutional insofar as it imposes an additional 1% tax on all property owners to raise funds for education, as real property tax is admittedly a local tax for local governments. Is the contention of the petitioner and intervenor correct?Ruling:NO.To continue collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenues must be adequate to meet government expenditures and their variations.

2. Administrative feasibility.The tax system should be capable of being effectively administered and enforced with the least convenience to the taxpayer.Note:Non-observance of this canon will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired.

3. Equality or theoretical justice.a. Must take into consideration the taxpayers ability to pay (Ability to Pay Principle).b. Art. VI, Sec. 28(1), 1987 Constitution mandates that the rule on taxation must be uniform and equitable and that the State must evolve a progressive system of taxation.D.Taxation Distinguished from Police Power and Eminent Domain.

As toTAXATIONPOLICE POWEREMINENT DOMAIN

Concept.Power to enforce contribution to raise government funds.Power to make and implement laws for the general welfare.

Power to take private property for public use with just compensation.

Scope.Comprehensive, Unlimited, Plenary and SupremeBroader in application;

General power to make and implement laws.Merely a power to take private property for public use.

Authority.Exercised only by government or its political subdivisionsGovernment or public service or public utility companies

Purpose.To raise revenue in order to support the government.Promotion of general welfare through regulations.To facilitate the taking of private property for public purpose.

Necessity of delegation.The power to make tax laws cannot be delegated.Can be expressly delegated to the local government units by the law-making body.

Persons protected.Upon the community or class of individualsOn an individual as the owner of a particular property

Benefits received.Protection of a secured organized society, benefits received from governmentNo direct benefit.Maintenance of healthy economic standard of society

No direct benefit receivedThe person receives the fair market value of the property taken from himDirect benefit results.

Amount of monetary imposition.No ceiling except inherent limitations.Limited to the cost of regulation, issuance of license or surveillance.No imposition, the owner is paid the market value of his property.

Impairment of contractsTax laws generally do not impair contracts, UNLESS:

Government is a party to a contract granting for a consideration.Contracts may be impaired

Limitation.Constraints by inherent and Constitutional limitations.Limited by the demand for public interest and due process.Bounded by public purpose and just compensation.

E.Taxes distinguished from other impositions.a. Toll.

TAXTOLL

Definition.An enforced proportional contribution from persons and property for public purpose/s.A consideration paid for the use of a road, bridge or the like, of a public nature.

Basis.Demand of sovereigntyDemand of proprietorship

Amount.Generally the amount is unlimitedAmount is limited to the cost and maintenance of public improvement

Purpose.For the support of governmentFor the use of anothers property

Authority.May be imposed by the State onlyMay be imposed by private individuals or entities

b. Penalty.

TAXPENALTY

Purpose.It is imposed to raise revenue.It is imposed to regulate conduct through punishment and suppression of injurious acts

Authority.It is imposed only by the governmentMay be imposed by the government or by private individuals

Source.It arises from lawIt may arise from law or contract

Mode of payment.Generally payable in moneyMay be paid in money or in kind

c. Compromise penalty.

TAXCOMPROMISE PENALTY

Purpose.To raise revenue.An amount that is collected as a compromise in cases involving violations of the Tax Code, rules and regulations.

d. Special assessment.

TAXSPECIAL ASSESSMENT

Nature.An enforced proportional contribution from persons and property for public purposes.An enforced proportional contribution from owners of lands especially those who are peculiarly benefited by public improvements.

Subject.Imposed on persons, property, rights or transactions.Levied only on land.

Person liable.A personal liability of the taxpayer.Not a personal liability of the person assessed.

Purpose.For the support of the government.Contribution to the cost of public improvement.

Scope.Regular exaction.Exceptional as to time and locality.

e. License fee.

TAXLICENSE FEE

PurposeImposed to raise revenueFor regulation and control

BasisCollected under the power of taxationCollected under police power

AmountGenerally, amount is unlimitedLimited to the necessary expenses of regulation and control

SubjectImposed on persons, property, rights or transactionsImposed on the exercise of a right or privilege

Effect of non-paymentNon-payment does not make the business illegalNon-payment makes the business illegal

Time of paymentNormally paid after the start of businessNormally paid before the commencement of the business

f. Margin fee.

TAXMARGIN FEE

PurposeImposed to raise revenue.A currency measure designed to stabilize the currency, such as the exaction of a certain fee under RA 2069 on the remittance of profits earned in this country.

g. Debt.

TAXDEBT

Basis.Obligation created by law.Obligation based on contract, express or implied.

Assignability.Not assignable.Assignable.

Mode of payment.Payable in money or in kind.

Set-off.Not subject to set-off.Subject to set-off.

Effect of non-payment.May result to imprisonment.No imprisonment

(except when debt arises from crime).

Interest.Bears interest only if delinquent.Interest depends upon the written stipulation of the parties.

Prescription.Governed by the special prescriptive periods provided for in the NIRC.Governed by the ordinary periods of prescription.

CASES:1. Philex Mining Corporation v. CIRFacts:

Philex was required to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992. Philex protested the demand for payment contending that it has pending claims for VAT refund/credit for the taxes it paid during the previous years. Philex wanted these tax refund/credit to be applied against the tax liabilities. The BIR, however, denied its request for legal compensation arguing that since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter. Consequently, Philex raised the issue to the CTA. Pending the proceeding, BIR granted Philex tax credit which was applied to its excise tax liabilities, but still the same did not cover all the tax liabilities due. After trial, the CTA still ordered Philex to pay the remaining balance plus interest holding that for legal compensation to take place, both obligations must be liquidated and demandable. Liquidated debts are those where the exact amount has already been determined. In the instant case, the petitioners claim for VAT refund is still pending litigation, and still has to be determined by this Court. A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor.

Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract.

Thereafter, Philex was able to obtain its VAT input credit/refund. In view thereof, it contended that the remaining balance of its tax liabilities should now be off-set since both have already become due and demandable, as well as fully liquidated, hence, legal compensation can properly take place.Issue:Whether or not tax credit/refund can off-set tax liabilities.Ruling:NO.

1.TAXES CANNOT BE SUBJECT TO COMPENSATION; DEBT v. TAXES.Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity.

In Francia v. Intermediate Appellate Court, ((( there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.2.TAX IS COMPULSORY, RATHER THAN A BARGAIN.To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government.27 Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities.2. Gerochi, et. al. v. Department of Energy, et. al.Facts:

Petitioners assail the constitutionality of Sec. 34 of the Electric Power Industry Reform Act of 2001 being imposed as a tax which is to be collected from all electric end-users and self-generating entities. Petitioners further contend that being in the nature of tax, there is undue delegation of legislative power on the Energy Regulatory Commission, the agency tasked to determine, fix and approve the Universal Charge being imposed by the said law. On the other hand, respondents through the Office of the Government Corporate Counsel (OGCC) contend that unlike a tax which is imposed to provide income for public purposes, such as support of the government, administration of the law, or payment of public expenses, the assailed Universal Charge is levied for a specific regulatory purpose, which is to ensure the viability of the country's electric power industry. Thus, it is exacted by the State in the exercise of its inherent police power. On this premise, PSALM submits that there is no undue delegation of legislative power to the ERC since the latter merely exercises a limited authority or discretion as to the execution and implementation of the provisions of the EPIRA.Issues:Whether or not the Universal Charge imposed under Sec. 34 of the EPIRA is a tax.

Whether or not there is undue delegation of legislative power to tax on the part of the ERC.

Ruling:YES, but it is a tax for regulatory purposes.

NONE, there is no undue delegation of legislative power to tax on the part of ERC.1.POLICE POWER v. TAXATION.The power to tax is an incident of sovereignty and is 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 legislature which imposes the tax on the constituency that is to pay it. It is based on the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need. Thus, the theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.On the other hand, police power is the power of the state to promote public welfare by restraining and regulating the use of liberty and property. It is the most pervasive, the least limitable, and the most demanding of the three fundamental powers of the State. The justification is found in the Latin maxims salus populi est suprema lex (the welfare of the people is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not to injure the property of others). As an inherent attribute of sovereignty which virtually extends to all public needs, police power grants a wide panoply of instruments through which the State, as parens patriae, gives effect to a host of its regulatory powers. We have held that the power to regulate means the power to protect, foster, promote, preserve, and control, with due regard for the interests, first and foremost, of the public, then of the utility and of its patrons.The conservative and pivotal distinction between these two powers rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax.In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power, particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34 which enumerates the purposes for which the Universal Charge is imposed and which can be amply discerned as regulatory in character.2.TAXING POWER AS AN IMPLEMENT OF POLICE POWER.It is a well-established doctrine that the taxing power may be used as an implement of police power.

With the Universal Charge, a Special Trust Fund (STF) is also created under the administration of PSALM,

it has the following characteristics:1. In the implementation of stranded cost recovery, the ERC shall conduct a review to determine whether there is under-recovery or over recovery and adjust (true-up) the level of the stranded cost recovery charge. In case of an over-recovery, the ERC shall ensure that any excess amount shall be remitted to the STF. A separate account shall be created for these amounts which shall be held in trust for any future claims of distribution utilities for stranded cost recovery. At the end of the stranded cost recovery period, any remaining amount in this account shall be used to reduce the electricity rates to the end-users2. With respect to the assailed Universal Charge, if the total amount collected for the same is greater than the actual availments against it, the PSALM shall retain the balance within the STF to pay for periods where a shortfall occurs.3. Upon expiration of the term of PSALM, the administration of the STF shall be transferred to the DOF or any of the DOF attached agencies as designated by the DOF Secretary.3.IMPOSITION OF UNIVERSAL CHARGE; PURPOSE.This feature of the Universal Charge further boosts the position that the same is an exaction imposed primarily in pursuit of the State's police objectives. The STF reasonably serves and assures the attainment and perpetuity of the purposes for which the Universal Charge is imposed, i.e., to ensure the viability of the country's electric power industry.4.TESTS FOR A VALID EXERCISE OF SUBORDINATE LEGISLATION.All that is required for the valid exercise of this power of subordinate legislation is that the regulation be germane to the objects and purposes of the law and that the regulation be not in contradiction to, but in conformity with, the standards prescribed by the law. These requirements are denominated as the completeness test and the sufficient standard test.

Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's authority and prevent the delegation from running riot.The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is complete in all its essential terms and conditions, and that it contains sufficient standards. Although Sec. 34 of the EPIRA merely provides that within one (1) year from the effectivity thereof, a Universal Charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users, and therefore, does not state the specific amount to be paid as Universal Charge, the amount nevertheless is made certain by the legislative parameters provided in the law itself.As to the second test, this Court had, in the past, accepted as sufficient standards the following: interest of law and order; adequate and efficient instruction; public interest; justice and equity; public convenience and welfare; simplicity, economy and efficiency; standardization and regulation of medical education; and fair and equitable employment practices. Provisions of the EPIRA such as, among others, to ensure the total electrification of the country and the quality, reliability, security and affordability of the supply of electric power and watershed rehabilitation and management60 meet the requirements for valid delegation, as they provide the limitations on the ERCs power to formulate the IRR. These are sufficient standards.5.DELEGATION OF POWERS TO THE ERC.In his Concurring and Dissenting Opinion62 in the same case, then Associate Justice, now Chief Justice, Reynato S. Puno described the immensity of police power in relation to the delegation of powers to the ERC and its regulatory functions over electric power as a vital public utility, to wit:Over the years, however, the range of police power was no longer limited to the preservation of public health, safety and morals, which used to be the primary social interests in earlier times. Police power now requires the State to assume an affirmative duty to eliminate the excesses and injustices that are the concomitants of an unrestrained industrial economy. Police power is now exerted to further the public welfare a concept as vast as the good of society itself. Hence, police power is but another name for the governmental authority to further the welfare of society that is the basic end of all government. When police power is delegated to administrative bodies with regulatory functions, its exercise should be given a wide latitude. Police power takes on an even broader dimension in developing countries such as ours, where the State must take a more active role in balancing the many conflicting interests in society. The Questioned Order was issued by the ERC, acting as an agent of the State in the exercise of police power. We should have exceptionally good grounds to curtail its exercise. This approach is more compelling in the field of rate-regulation of electric power rates. Electric power generation and distribution is a traditional instrument of economic growth that affects not only a few but the entire nation. It is an important factor in encouraging investment and promoting business. The engines of progress may come to a screeching halt if the delivery of electric power is impaired. Billions of pesos would be lost as a result of power outages or unreliable electric power services. The State thru the ERC should be able to exercise its police power with great flexibility, when the need arises.F.Scope of the legislative taxing power.1. The determination of: (SAP-MAKS)

Subjects of taxation.

Persons, property, occupation, excises or privileges to be taxed, provided they are within the taxing jurisdiction.Amount or rate of tax.Purposes for which taxes shall be levied provided they are public purposes.Method of collection.

Note:Not exclusive to Congress.Apportionment of the tax.

Whether the tax shall be of general application or limited to a particular locality or partly general and partly local)

Kind of tax to be collected.Situs of taxation.2. The grant of tax exemptions and condonations.

3. The power to specify or provide for administrative as well as judicial remedies.

The power to tax is the power to destroy.Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.The power to tax is not the power to destroy while the Supreme Court sits.When a legislative body having the power to tax a certain subject matter actually imposes such a burdensome tax as effectually to destroy the right to perform the act or to use the property subject to the tax, the validity of the enactment depends upon the nature and character of the right destroyed. If so great an abuse is manifested as to destroy natural and fundamental rights which no free government consistently violate, it is the duty of the judiciary to hold such an act unconstitutional.CASES:

1. Roxas, et. al. v. CTA

Facts:Petitioners inherited from their grandparents agricultural lands in Nasugbu, Batangas which they subsequently sold to the tenants who have been tilling it as having been persuaded by the Government in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers. Thus, petitioners formed a partnership to further this purpose. However, the Government did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000 as loan. Roxas y Cia. allowed the farmers to buy the lands for the same price, but by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers. In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code.Thereafter, the CIR assessed and demanded petitioners to pay real estate dealers tax proceeding from the income they gained from the sale of lands in Nasugbu, Batangas based on the purposes of Roxas y Cia. as contained in its Articles of Partnership.Issue:Whether or not the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable.

Ruling:NO.

1.SALE OF PROPERTY BY LANDOWNER NOT SUBJECT TO REAL ESTATE DELAERS TAX.The sale of property by the landowner to tenants under government policy to allocate lands to the landless is not subject to real estate dealers tax.

2.THE FORMATION OF PARTNERSHIP FOR THE PURPOSE OF SUBDIVIDING AND SELLING LANDS DOES NOT MAKE ROXAS Y CIA A REAL ESTATE DEALER.The proposition of the Commissioner of Internal Revenue (CIR) cannot be favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude.3.POWER TO TAX MUST BE EXERCISED WITH CAUTION TO MINIMIZE INJURY TO THE PROPRIETARY RIGHTS OF A TAXPAYER.

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. And, in order to maintain the general publics trust and confidence in the Government this power must be used justly and not treacherously. It does not conform with Our sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call.In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.2. Philippine Health Care Providers, Inc. v. CIR

Facts:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. In other words, petitioner is a health maintenance organization providing health services through health care agreement.In view thereof, the CIR assessed and demanded the petitioner the payment of Documentary Stamp Tax (DST), contending that it is in the nature of an insurance contract which under Sec. 185 of the NIRC is required to pay DST. Petitioner protested the assessment. Issue:Whether or not a health care agreement is an insurance contract contemplated under Sec. 185 of the NIRC, hence, petitioner is liable for DST.Ruling:NO.1.HEALTH CARE AGREEMENT NOT AN INSURANCE CONTRACT CONTEMPLATED UNDER SEC. 185 of NIRC.

Section 185 states that DST is imposed on all policies of insurance ((( or obligations of the nature of indemnity for loss, damage, or liability (((. In our decision dated June 12, 2008, we ruled that petitioners health care agreements are contracts of indemnity and are therefore insurance contracts:

It is ((( incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term loss or damage is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury.Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called out-patient services (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner.Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has prepaid. Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care program. This is insurance.In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing authority.38 This is because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.39 Hence, tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided.We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.

2.THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE AGREEMENTS OF HMOs.Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA 924348 but Section 185 was untouched.On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a total enrollment of more than 2 million.49We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an HMO.Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the provision.3.THE POWER TO TAX IS NOT THE POWER TO DESTROY.As a general rule, the power to tax is an incident of sovereignty and is 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 legislature which imposes the tax on the constituency who is to pay it.51 So potent indeed is the power that it was once opined that the power to tax involves the power to destroy.52Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its net worth of P259 million.54 Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate business. As aptly held in Roxas, et al. v. CTA, et. al.:The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg.G.Power of judicial review in taxation.

The courts power in taxation is limited only to the:1. application, and

2. interpretation of the law.

Thus, as long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or restrictions, the courts have no concern with the wisdom or policy of the exaction, the political or other collateral motives behind it, the amount to be raised, or the persons, property or other privileges to be taxed.

Aspects of taxation.a. Levy or imposition of the tax on persons, property or excises (Congress).b. Collection of the taxes already levied (BIR and Bureau of Customs).

CASES:1. CIR v. Lingayen Gulf Electric Power Co.Facts:Respondent-corporation was granted municipal franchise to operate an electric power plant serving the adjoining municipalities of Lingayen and Binmaley, both in the province of Pangasinan. Under said municipal franchise, respondent shall be required to pay 1% of the gross earnings obtained thru that privilege for the first 20 years and 2% for last 15 years of its operation. Meanwhile, the BIR assessed against and demanded from respondent an amount representing the deficiency franchise taxes and surcharges applying the franchise tax rate of 5% on gross receipts as prescribed in Sec. 259 of the NIRC instead of the lower rates provided in the municipal franchises. A reinvestigation was requested by respondent but it was denied. Respondent attempted and proposed to settle the liability amicably but the same was denied. Thus, the appeal to the CTA. While the hearing was pending, RA 3843 was passed granting to the respondent a legislative franchise for the operation of the electric light, heat, and power system in the same municipalities of Pangasinan. Said law prescribed 2% franchise tax of the gross receipts from electric current sold or supplied under said franchise. The 2% franchise tax shall be paid in lieu of any and all taxes and/or licenses of any kind, nature or description levied, established, or collected by any authority whatsoever, municipal, provincial or national, now or in the future, on its poles, wires, insulator ((( and on its franchise, rights, privileges, receipts, revenues and profits, from which taxes and/or licenses, the grantee is hereby expressly exempted and effective further upon the date the original franchise was granted, no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts as provided for in the original franchise shall be collected.

Issues:Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal Revenue Code assessed against the private respondent on its gross receipts realized before the effectivity of R.A. No. 3843 is collectible.

Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the uniformity and equality of taxation clause of the ConstitutionRuling:BOTH NO.1.THE ORIGINAL FRANCHISE WAS AMENDED, ALTERED AND EVEN REPEALED WHEN RESPONDENT WAS GRANTED LEGISLATIVE FRANCHISE.

R.A. No. 3843 granted the private respondent a legislative franchise in June, 1963, amending, altering, or even repealing the original municipal franchises, and providing that the private respondent should pay only a 2% franchise tax on its gross receipts, in lieu of any and all taxes and/or licenses of any kind, nature or description levied, established, or collected by any authority whatsoever, municipal, provincial, or national, now or in the future ((( and effective further upon the date the original franchise was granted, no other tax and/or licenses other than the franchise tax of two per centum on the gross receipts ((( shall be collected, any provision of law to the contrary notwithstanding. Thus, by virtue of R.A. No. 3843, the private respondent was liable to pay only the 2% franchise tax, effective from the date the original municipal franchise was granted.2.SEC. 4 OF RA 3843, NOT UNCONSTITUTIONAL; LEGISLATURE MAY SELECT THE SUBJECTS OF GRANT EXEMPTIONS.

On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the uniformity and equality of taxation clause of the Constitution, and, if adjudged valid, whether or not it should be given retroactive effect, the petitioner submits that the said law is unconstitutional insofar as it provides for the payment by the private respondent of a franchise tax of 2% of its gross receipts, while other taxpayers similarly situated were subject to the 5% franchise tax imposed in Section 259 of the Tax Code, thereby discriminatory and violative of the rule on uniformity and equality of taxation.A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. Uniformity means that all property belonging to the same class shall be taxed alike. The Legislature has the inherent power not only to select the subjects of taxation but to grant exemptions. Tax exemptions have never been deemed violative of the equal protection clause.1 It is true that the private respondents municipal franchises were obtained under Act No. 6672 of the Philippine Commission, but these original franchises have been replaced by a new legislative franchise, i.e. R.A. No. 3843. As correctly held by the respondent court, the latter was granted subject to the terms and conditions established in Act No. 3636,3 as amended by C.A. No. 132. These conditions Identify the private respondent's power plant as falling within that class of power plants created by Act No. 3636, as amended. The benefits of the tax reduction provided by law (Act No. 3636 as amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's power plant and others circumscribed within this class. R.A-No. 3843 merely transferred the petitioner's power plant from that class provided for in Act No. 667, as amended, to which it belonged until the approval of R.A. No. 3843, and placed it within the class falling under Act No. 3636, as amended. Thus, it only effected the transfer of a taxable property from one class to another.3.COURTS HAVE NO AUTHORITY TO INQUIRE THE WISDOM OF THE ACT.We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5% franchise tax rate provided in Section 259 of the Tax Code was never intended to have a universal application.4 We note that the said Section 259 of the Tax Code expressly allows the payment of taxes at rates lower than 5% when the charter granting the franchise of a grantee, like the one granted to the private respondent under Section 4 of R.A. No. 3843, precludes the imposition of a higher tax. R.A. No. 3843 did not only fix and specify a franchise tax of 2% on its gross receipts, but made it in lieu of any and all taxes, all laws to the contrary notwithstanding, thus, leaving no room for doubt regarding the legislative intent. Charters or special laws granted and enacted by the Legislature are in the nature of private contracts. They do not constitute a part of the machinery of the general government. They are usually adopted after careful consideration of the private rights in relation with resultant benefits to the State ((( in passing a special charter the attention of the Legislature is directed to the facts and circumstances which the act or charter is intended to meet. The Legislature consider (sic) and make (sic) provision for all the circumstances of a particular case.5 In view of the foregoing, we find no reason to disturb the respondent court's ruling upholding the constitutionality of the law in question.2. CIR vs. Santos, et al.Facts:

Respondent judge made a pronouncement in his decision that the provisions of Sec. 150 (a) of the NIRC are confiscatory and destructive of the property right of the petitioners to engage in business in violation of Sec.1, Art. 3 of the 1987 Constitution. Said statutory provisions provide that non- essential items, such as imported jewelries shall be subject to 10% VAT and 20% excise tax, hence, taxed heavily. Respondent judge further made a comparison of the customs duties as imposed in the neighboring countries like Hong Kong, Thailand, Malaysia and Singapore wherein in the said countries, imported gemstones and other precious metals are duty free. Consequently, petitioners assail the decision rendered by the public respondent, contending that the latter has no authority to pass judgment upon the taxation policy of the government. In addition, the petitioners impugn the decision in question by asserting that there was no showing that the tax laws on jewelry are confiscatory and destructive of private respondent's proprietary rights.Issue:Whether or not the court may look into the wisdom of the legislature in imposing tax ratesRuling:NO.1.THE AUTHORITY OF THE LOWER COURTS TO DECIDE QUESTIONS OF CONSTITUTIONALITY OF ANY TREATY OR LAW DOES NOT EXTEND TO DECIDING QUESTIONS WHICH PERTAINS TO LEGISLATIVE POLICY.

There is no doubt in the Court's mind, despite protestations to the contrary, that respondent judge encroached upon matters properly falling within the province of legislative functions. In citing as basis for his decision unproven comparative data pertaining to differences between tax rates of various Asian countries, and concluding that the jewelry industry in the Philippines suffers as a result, the respondent judge took it upon himself to supplant legislative policy regarding jewelry taxation. In advocating the abolition of local tax and duty on jewelry simply because other countries have adopted such policies, the respondent judge overlooked the fact that such matters are not for him to decide. There are reasons why jewelry, a non-essential item, is taxed as it is in this country, and these reasons, deliberated upon by our legislature, are beyond the reach of judicial questioning.This is a matter on which the RTC is not competent to rule.16 As Cooley observed: Debatable questions are for the legislature to decide. The courts do not sit to resolve the merits of conflicting issues. In Angara vs. Electoral Commission, Justice Laurel made it clear that the judiciary does not pass upon questions of wisdom, justice or expediency of legislation. And fittingly so, for in the exercise of judicial power, we are allowed only to settle actual controversies involving rights which are legally demandable and enforceable, and may not annul an act of the political departments simply because we feel it is unwise or impractical. This is not to say that Regional Trial Courts have no power whatsoever to declare a law unconstitutional. In J.M. Tuason and Co. v. Court of Appeals, we said that [p]lainly the Constitution contemplates that the inferior courts should have jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior courts in cases where such constitutionality happens to be in issue. This authority of lower courts to decide questions of constitutionality in the first instance reaffirmed in Ynos v. Intermediate Court of Appeals. But this authority does not extend to deciding questions which pertain to legislative policy.The trial court is not the proper forum for the ventilation of the issues raised by the private respondents. The arguments they presented focus on the wisdom of the provisions of law which they seek to nullify. Regional Trial Courts can only look into the validity of a provision, that is, whether or not it has been passed according to the procedures laid down by law, and thus cannot inquire as to the reasons for its existence. Granting arguendo that the private respondents may have provided convincing arguments why the jewelry industry in the Philippines should not be taxed as it is, it is to the legislature that they must resort to for relief, since with the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This Court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. As succinctly put in Lim vs. Pacquing: Where a controversy may be settled on a platform other than one involving constitutional adjudication, the court should exercise becoming modesty and avoid the constitutional question. As judges, we can only interpret and apply the law and, despite our doubts about its wisdom, cannot repeal or amend it.2.INHERENT IN THE POWER TO TAX THAT THE STATE BE FREE TO SELECT THE SUBJECTS OF TAXATION; INEQUALITIES WHICH RESULT FROM A SINGLING OUT OR ONE PARTICULAR CLASS FOR TAXATION, OR EXEMPTION, INFRINGE NO CONSTITUTIONAL LIMITATION

The respondents presented an exhaustive study on the tax rates on jewelry levied by different Asian countries. This is meant to convince us that compared to other countries, the tax rates imposed on said industry in the Philippines is oppressive and confiscatory. This Court, however, cannot subscribe to the theory that the tax rates of other countries should be used as a yardstick in determining what may be the proper subjects of taxation in our own country. It should be pointed out that in imposing the aforementioned taxes and duties, the State, acting through the legislative and executive branches, is exercising its sovereign prerogative. It is inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly held that inequalities which result from a singling out or one particular class for taxation, or exemption, infringe no constitutional limitation.H.Nature of the power of taxation.1. Inherent in sovereignty.The government having the sovereignty can enforce contributions upon its citizens even without a specific provision in the Constitution authorizing it. It is so because the State has the supreme power to command and enforce obedience to its will from the people within its jurisdiction.

2. Legislative in nature.

The law-making body of the government and its political subdivisions exercise the power of taxation. The powers to enact laws and ordinances, and to impose and collect taxes are given to the Congress.

3. Subject to Constitutional and inherent limitations.

As an inherent power, tax power should be exercised for its very nature, purpose and jurisdiction.Our Constitution provides some provisions to limit the exercise of the tax power.Characteristics of the power to tax (CUPS).

1. Comprehensive.

It covers persons, business, activities, professions, rights and privileges.

2. Unlimited.It is so unlimited and searching in extent that courts scarcely venture to declare that it is subject to any restrictions, except those that such rests in the discretion of the authority which exercises it.

3. Plenary.It is complete. Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes.

4. Supreme.

It is supreme insofar as the selection of the subject of taxation is concerned.

CASES:1. Mactan Cebu International Airport Authority v. Marcos, etc.

Facts:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of R.A. No. 6958, under which it was granted tax exemption from real property tax. By the advent of RA 7160 otherwise known as the Local Government Code, the tax exemption it previously enjoyed has been withdrawn. For this reason, the Officer in charge of the Office of the Treasurer of the City of Cebu demanded payment for realty taxes on several parcels of land belonging to the petitioner. Naturally, petitioner objected to such demand claiming that the provisions of Sec. 14 of RA 6958 exempt it from payment of realty taxes and that under Sec 133(o) of the LGC, it is considered as an instrumentality of the government over which the taxing power of the local government units does not extend. Sec. 133 should be read in relation to Sec. 234 (a) which provides that real property owned by the Republic of the Philippines or any of its political subdivision shall be exempt from real property tax except when the beneficial ownership thereof had been granted, for consideration or otherwise, to taxable person. Issue:Whether or not the petitioner is a taxable person hence liable to pay real property tax to the city of Cebu.

Ruling:BOTH YES.1.TAXATION TO ADHERE TO CONSTITUTIONAL LIMITATION; TAXATION IS THE GENERAL RULE, EXEMPTION IS THE EXCEPTION.

As a general rule, the power to tax is an incident of sovereignty and is 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 legislature which imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by the people through their Constitutions. Our Constitution, for instance, provides that the rule of taxation shall be uniform and equitable and Congress shall evolve a progressive system of taxation. So potent indeed is the power that it was once opined that "the power to tax involves the power to destroy." Verily, taxation is a destructive power which interferes with the personal and property for the support of the government. Accordingly, tax statutes must be construed strictly against the government and liberally in favor of the taxpayer. But since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor of the taxing authority. A claim of exemption from tax payment must be clearly shown and based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the course of its operations.2.LGU, TO EXERCISE TAXING POWER THRU VALID DELEGATION.

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution.22 Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy.3.NON IMPAIRMENT CLAUSE.There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of realty taxes imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and is thus covered by the non-impairment clause of the Constitution.

4.SEC. 234, LAST PAR., UNEQUIVOCALLY WITHDREW EXEMPTIONS PREVIOUSLY GRANTED TO ((( GOCC LIKE THE PETITIONER.

Section 232 must be deemed to qualify Section 133.Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as laid down in Section 133 the taxing powers of local government units cannot extend to the levy of inter alia, taxes, fees, and charges of any kind of the National Government, its agencies and instrumentalities, and local government units; however, pursuant to Section 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial used thereof has been granted, for consideration or otherwise, to a taxable person, as provided in item (a) of the first paragraph of Section 234.As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including government-owned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except upon the effectivity of the LGC, except those granted to local water districts, cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer to Section 234, which enumerates the properties exempt from real property tax. But the last paragraph of Section 234 further qualifies the retention of the exemption in so far as the real property taxes are concerned by limiting the retention only to those enumerated there-in; all others not included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the real property is owned by the Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has been granted to taxable person for consideration or otherwise.Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from real property taxes granted to natural or juridical persons, including government-owned or controlled corporations, except as provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is qualified by Section 232 and 234.5.PETITIONER, A TAXABLE PERSON.Moreover, the petitioner cannot claim that it was never a taxable person under its Charter. It was only exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property tax.Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be an agency or instrumentality of the Government, a taxable person for such purpose in view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment of real property taxes, which, as earlier adverted to, applies to the petitioner.2. Luzon Stevedoring Corp. vs. CTA, et. al.Facts:

Petitioner seeks to claim tax refund for the repair and maintenance of its tugboats, imported various engine parts and other equipment for which it paid, under protest, the assessed compensating tax. Petitioner sought refuge from the exemption granted under Sec. 190 of the NIRC as amended by R.A. No. 3176 providing for tax exemption to passenger and/or cargo vessel. To support its claim for exemption, it argues that in legal contemplation, the tugboat and a barge loaded with cargoes with the former towing the latter for loading and unloading of a vessel in part, constitute a single vessel. Accordingly, it concludes that the engines, spare parts and equipment imported by it and used in the repair and maintenance of its tugboats are exempt from compensating tax. Respondent, on the other hand, appellees counter that petitioner-appellant's tugboats are not Cargo vessel because they are neither designed nor used for carrying and/or transporting persons or goods by themselves but are mainly employed for towing and pulling purposes. As such, it cannot be claimed that the tugboats in question are used in carrying and transporting passengers or cargoes as a common carrier by water, either coastwise or oceangoing and, therefore, not within the purview of Section 190 of the Tax Code, as amended by R.A. No. 3176.Issue:Whether or not petitioners tugboat is exempt from compensating tax and hence entitled to a tax refund.

Ruling:NO.1.GENERAL RULE IS TAXATION; EXEMPTION IS THE EXCEPTION.As the power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any reduction or diminutions thereof with respect to its mode or its rate, must be strictly construed, and the same must be coached in clear and unmistakable terms in order that it may be applied. More specifically stated, the general rule is that any claim for exemption from the tax statute should be strictly construed against the taxpayer.2. REQUIREMENTS FOR EXEMPTION FROM COMPENSATING TAX.As correctly analyzed by the CTA, in order that the importations in question may be declared exempt from the compensating tax, it is indispensable that the requirements of the amendatory law be complied with, namely: (1) the engines and spare parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation.As pointed out by the CTA, the amendatory provisions of R.A. No. 3176 limit tax exemption from the compensating tax to imported items to be used by the importer himself as operator of passenger and/or cargo vessel3.TUGBOAT IS NOT A CARGO VESSEL WITHIN THE CONTEMPLATION OF THE PROVISIONS OF SEC. 190 OF THE NIRC, AS AMENDED.As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:

A tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also used for attendance on vessel. A tugboat is a diesel or steam power vessel designed primarily for moving large ships to and from piers for towing barges and lighters in harbors, rivers and canals. A tug is a steam vessel built for towing, synonymous with tugboat.Under the foregoing definitions, petitioner's tugboats clearly do not fall under the categories of passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory construction that where a provision of law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms. I.Essential characteristics of tax.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.1. Enforced contribution.

The imposition shall not be dependent upon the will of the taxpayer

2. Imposed by the legislative body.The Congress makes tax laws

3. Proportionate in character.Taxes must be based on ability to pay4. Pecuniary burden payable in money.

A tax is not necessarily confined to those payable in money.

Note: Backpay certificates under RA 304 could be used as payment of taxes.

5. Imposed for the purpose of raising revenue.Taxes are the primary source of government funds to finance its expenditures and projects

6. Used for public purpose.Money is taken from the public so it can be returned to them in the form of public benefits.

7. Enforced on some persons, properties or rights.Objects of taxation are either tangible or intangible properties, including business transactions

8. Commonly required to be paid at regular intervals.The dates for paying of taxes are fixed by the law to comply with the principle of administrative feasibility

9. Imposed by the sovereign State within its jurisdiction.The enforcement of tax is subject to territorial jurisdiction and international comity.

Requisites of valid tax.1. It should be for a public purpose;

2. It should be uniform;

3. That either the person or property being taxed be within the jurisdiction of the taxing authority; and

4. The tax must not impinge on the inherent and constitutional limitations on the power of taxation.CASES:1. De Borja v. GellaFacts:Petitioner offered to pay his delinquent taxes due the Cities of Manila and Pasay with backpay certificates who were assigned to him. the offer to pay with these certificates was, however, rejected by both treasurers of the said cities. De Borja then inquired into the negotiability of the backpay certificates to the Treasurer of the Philippines who opined that that the negotiable certificates cannot be accepted as payment of real estate taxes inasmuch as the law provides for their acceptance from their backpay holder only or the original applicant himself, but not his assignee. De Borja was however hopeful that the backpay certificates would be accepted in payment of the taxes since it then became due redeemable.Issue:Whether or not backpay certificates may be accepted in payment of the taxes of an assignee.Ruling:NO.1.ASSIGNEE CANNOT USE BACKPAY CERTIFICATES TO SETTLE HIS TAXES, IT BEING ALLOWED ONLY TO THE APPLICANT HIMSELF.

To begin with, it cannot be contended that appellants are in duty bound to accept the negotiable certificates of indebtedness held by appellee in payment of his real estate taxes for the simple reason that they were not obligations subsisting at the time of the approval of Republic Act No. 304 which took effect on June 18, 1948. It should be noted that the real estate taxes in question have reference to those due in 1958 and subsequent years. The law is explicit that in order that a certificate may be used in payment of an obligation the same must be subsisting at the time of its approval even if we hold that a tax partakes of this character, neither can it be contended that appellee can compel the government to accept the alleged certificates of indebtedness in payment of his real estate taxes under proviso No. 2 above quoted also for the reason that in order that such payment may be allowed the tax must be owed by the applicant himself . This is the correct implication that may be drawn from the use by the law of the words his taxes. Verily, the right to use the backpay certificate in settlement of taxes is given only to the applicant and not to any holder of any negotiable certificate to whom the law only gives the right to have it discounted by a Filipino citizen or corporation under certain limitations. Here appellee is not himself the applicant of the certificate, in question. He is merely an assignee thereof, or a subsequent holder whose right is at most to have it discounted upon maturity or to negotiate it in the meantime. A fortiori, it may be included that, not having the right to use said certificates to pay his taxes, appellee cannot compel appellants to accept them as he requests in the present petition for mandamus. As a consequence, we cannot but hold that mandamus does not lie against appellants because they have in no way neglected to perform an act enjoined upon them by law as a duty, nor have they unlawfully excluded appellee from the use or enjoyment of a right to which he is entitled.2. Tan Tiong Bio v. CIRFacts:Central Syndicate composed of the petitioners was held liable for deficiency sales tax on the surplus goods it purchased from the Foreign Liquidation Commission. Central Syndicate argued that it should be Dee Hong Lue be made liable to pay said sales tax because he was the one who purchased the same from the FLC, the latter only transferred the surplus goods in question to Central syndicate by virtue of sale. However, it was proved by the investigator that Hong Lue purchased the surplus goods from the FLC not in his own right but on behalf of the Central Syndicate. Consequently, the Collector demanded Central Syndicate the assessed deficiency sales tax. Pursuant thereto, the Collector filed a motion requiring the syndicate to file a bond to guarantee the payment of the tax assessed against it which motion was denied by the Court of Tax Appeals on the ground that cannot be legally done it appearing that the syndicate is already a non-existing entity due to the expiration of its corporate existence. Petitioners, however, requested for the substitution of the officers and directors of the defunct Central Syndicate which the CTA allowed. As a consequence of the substitution, petitioners are now being held liable for the payment of the sales tax on surplus goods. A