Tax Notes I

7/22/2019 Tax Notes I

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CONSTITUTIONAL LIMITATIONS

1. DUE PROCESS OF LAW There must be a valid law Tax measure should not be unconscionable

and unjust as to amount to confiscation ofproperty.

Tax statute must not be arbitrary as to findno support in the Constitution.

Sec. 1 Art. III 1987 - No person shall be deprived of

life, liberty, or property without due process of law,

nor shall any person be denied the equal protection

of the laws.

Tan v. Del Rosario, supra(SNITS);

FACTS: Petitioners challenge the constitutionality ofRA 7496 or the simplified income taxation scheme

(SNIT) under Arts (26) and (28) and III (1). The SNIT

contained changes in the tax schedules and different

treatment in the professionals which petitioners assail

as unconstitutional for being isolative of the equal

protection clause in the constitution. Petitioner

contends that the tile of House Bill No. 34314

progenitor of RA 7496, is a misnomer or, at least,

deficient for being merely entitled, Simplified Net

Income Taxation Scheme for the Self-Employed and

Professional Engaged in the Practice of their

Profession.

HELD: Tax law is constitutional. Uniformity of

taxation, like the hindered concept of equal

protection, merely require that all subjects or objects

of taxation similarly situated are to be treated alike

both privileges and liabilities. Uniformity, does not

offend classification as long as it rest on substantial

distinctions, it is germane to the purpose of the law. It

is not limited to existing only and must apply equally

to all members of the same class. The due processclause may correctly be invoked only when there is a

clear contravention of inherent or constitutional

limitations in the exercise of the tax power. No such

transgression is evident to us.

Sison v. Ancheta, supraBP 135

FACTS: Batas Pambansa 135 was enacted. Sison, as

taxpayer, alleged that its provision (Section 1) unduly

discriminated against him by the imposition of higher

rates upon his income as a professional, that it

amounts to class legislation, and that it transgressesagainst the equal protection and due process clauses

of the Constitution as well as the rule requiring

uniformity in taxation.

Issue: Whether BP 135 violates the due process and

equal protection clauses, and the rule on uniformity

in taxation.

HELD: No, there was no violation of the due process

and equal protection clause, since petitioner did not

made a case, only allegations.

The Congress has the power to determinethe rates of taxation; thus, the due process

clause may be invoked where a taxing

statute is so arbitrary that it finds no support

in the Constitution. An obvious example is

where it can be shown to amount to the

confiscation of property. That would be a

clear abuse of power. It then becomes the

duty of this Court to say that such an

arbitrary act amounted to the exercise of an

authority not conferred. That properly calls

for the application of the Holmes dictum. It has also been held that where the assailed

tax measure is beyond the jurisdiction of the

state, or is not for a public purpose, or, in

case of a retroactive statute is so harsh and

unreasonable, it is subject to attack on due

process grounds.

2. EQUAL PROTECTION OF THE LAWSRight to be treated under like circumstance.

All persons subject to legislation shall betreated alike under similar circumstances

and conditions both in the privileges

conferred and liabilities imposed.

The doctrine does not require that personsor properties different in fact be treated in

law as though they were the same. What it

prohibits is Class Legislation which


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discriminates against some and favors

others.

As long as there are rational or reasonablegrounds for so doing. Congress may group

persons or property to be taxed and it is

sufficient if all members of the same classare subject to the same rate and the tax is

administered impartially upon them.

Requisites of a Valid Classification:

1. Must be based on SubstantialDistinctions.

2. Germane to the purpose of law 3. Classification must not be limited to

existing conditions only but must also

apply to future conditions substantially

identical to those of the present.

4. It must apply equally to all members ofthe same class.

Application

Where the statute or ordinance in question

applies alike to all persons, firms, or

corporations placed in similar situations, or

differently to persons, firms, or corporations

belonging to different classes provided all those

belonging to one class are treated alike, there is

no infringement of the constitutional guarantee.

What the Constitution requires is equal

treatment under the law and this may involve

same or different treatment depending on the

circumstances.

Sison v. Ancheta, supra.

There is a need for proof of such persuasivecharacter as would lead to a conclusion that

there was a violation of the due process and

equal protection clauses. Absent suchshowing, the presumption of validity must

prevail.

Equality and uniformity in taxation meansthat all taxable articles or kinds of property

of the same class shall be taxed at the same

rate.

The taxing power has the authority to makereasonable and natural classifications for

purposes of taxation. Where the

differentiation conforms to the practical

dictates of justice and equity, similar to the

standards of equal protection, it is not

discriminatory within the meaning of the

clause and is therefore uniform.

It suffices then that the laws

operate equally and uniformly on all persons

under similar circumstances or that all

persons must be treated in the same

manner, he conditions nt being different,

both in the privileges conferred and liabilities

imposed.

It is inherent in the power to tax

that a state be free to select the subjects of

taxation and it has been repeatedly held that

inequalities which result from a singling outof one particular class for taxation, or

exemption infringes no constitutional

limitation.

Villegas vs Hiu Chiong Tsai Pao Ho

FACTS: The Municipal Board of Manila enacted

Ordinance 6537 requiring aliens (except those

employed in the diplomatic and consular missions of

foreign countries, in technical assistance programs of

the government and another country, and members

of religious orders or congregations) to procure the

requisite mayors permit so as to be employed or

engage in trade in the City of Manila. The permit fee

is P50, and the penalty for the violation of the

ordinance is 3 to 6 months imprisonment or a fine of

P100 to P200, or both.

ISSUE: Whether the ordinance imposes a regulatory

fee or a tax.

HELD: The ordinances purpose is clearly to raise

money under the guise of regulation by exacting P50

from aliens who have been cleared for employment.

The amount is unreasonable and excessivebecause it fails to consider difference in

situation among aliens required to pay it, i.e.

being casual, permanent, part-time, rank-

and-file or executive.

The Ordinance was declared invalid as it isarbitrary, oppressive and unreasonable,

being applied only to aliens who are thus


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deprived of their rights to life, liberty and

property and therefore violates the due

process and equal protection clauses of the

Constitution.

Further, the ordinance does not lay downany criterion or standard to guide the Mayor

in the exercise of his discretion, thusconferring upon the mayor arbitrary and

unrestricted powers.Tan v. Del Rosario, supra.

The said law is not arbitrary; it is germane tothe purpose of the law and; applies to all

things of equal conditions and of same class.

It is neither violative of equal protectionclause due to the existence of substantial

difference between one who practice hisprofession alone and one who is engaged to

proprietorship.

Further, the SC said that RA 7496 is just anamendatory provision of the code of

taxpayers where it classifies taxpayers in to

four main groups: Individuals, Corporations,

Estate under Judicial Settlement and

Irrevocable Trust. The court would have

appreciated the contention of the petitioner

if RA 7496 was an independent law. But since

it is attached to a law that has already

classified taxpayers, there is no violation of

equal protection clause.

CIR VS. CA AND ALHAMBRA 267 SCRA 557 (1997)

FACTS: Alhambra industries, Inc. (Alhambra) is a

domestic corporation engaged in the manufacture

and sale of cigar and cigarette products. On May 7,

1991 private respondent received a letter dated April

26, 1991 from the Commissioner of Internal Revenue

assessing its deficiency Ad Valorem Tax (AVT) in the

total amount of P488,396.62, inclusive of increments,

on the removals of cigarette products from their

place of production during the period Nov. 2, 1990 toJanuary 22, 1991.Alhambra filed protest against

amount assessed by the CIR, however, it was denied

by the latter at the same time increasing the amount

assessed to P520,835.29. Alhambra filed a petition for

review with the CTA, despite payment under protest

the amount of P520,835.29. On December 1, 1993,

CTA ordered petitioner to refund said amount to

Alhambra. CA affirming such decision, hence, this

appeal.

ISSUE: whether private respondent's reliance on a

void BIR ruling conferred upon the latter a vested

right to apply the same in the computation of its ad

valorem tax and claim for tax refund

HELD: The government is not stopped from

collecting taxes legally due because of mistake/errors

of its agents, this admits of exceptions in the interest

of justice and fair play, as where injustice will result to

the taxpayer. As regards, petitioners argument the

private respondent should have made consultations

with it before private respondent used the

computation mandated by BIR ruling 473-88 suffice it

to state that the BIR ruling was clear and categorical,

there leaving no room for interpretation. The failure

of private respondent to consult petitioner does not

imply bad faith on the part of the former.

Tiu v. Court of Appeals, 301 SCRA 278 (1999)The

Subic Special Economic Zone case.

The Constitutional right to equal protectionof the law is not violated by an executive

order, issued pursuant to law, granting tax

and duty incentives only to business within

the secured area of the Subic Special

Economic Zone and denying them to those

who live within the Zone but outside such

fenced in territory.

The Constitution does not require absoluteequality among residents. It is enough that

all persons under like circumstances or

conditions are given the same privileges and

required to follow the same obligations. In

short, a classification based on valid and

reasonable standards does not violate the

equal protection clause.

We find real and substantial distinctionsbetween the circumstances obtaining inside

and those outside the Subic Naval Base,

thereby justifying a valid and reasonable

classification.

Classification based on:

1. Valid &2. Reasonable Standards

Does not violate

equal protection

clause


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3. UNIFORMITY AND EQUITY IN TAXATION- same class, same rate- classification of taxpayers, subject or items

to be taxed

The rule of taxation shall be uniform andequitable (Sec.28 (1), Art. III, 1987

Constitution).

The tax is uniform when it operates withthe same force and effect in every place

where the subject of it is found.

"Uniformity" means all property

belonging to the same class shall be

taxed alike. It does not signify an

intrinsic, but simply a geographic,

uniformity (Churchill & Tait vs.

Conception, 34 Phil. 969). Uniformity

does not require the same treatment; it

simply requires reasonable basis for

classification.

The concept of equality in taxationrequires that the apportionment of the

tax burden be more or less just in the

light of the taxpayers ability to shoulder

the tax burden and if warranted, on the

basis of the benefits received from the

government. Its cornerstone is the

taxpayers ability to pay.

Uniformity v. equity in taxation

The concept of uniformity in taxation impliesthat all taxable articles or properties of the

same class shall be taxed at the same rate. It

requires the uniform application and

operation, without discrimination, of the tax

in every place where the subject of the tax isfound. It does not, however, require

absolute identity or equality under all

circumstances, but subject to reasonable

classification.

The concept of equity in taxation requires

that the apportionment of the tax burden

be, more or less, just in the light of the

taxpayers ability to shoulder the tax burden

and, if warranted, on the basis of the

benefits received from the government. Itscornerstone is the taxpayers ability to pay.

Tolentino v. Sec. of Finance, supra, -

Equity and uniformity in taxation means thatall the taxable articles or kinds of properties

of the same class be taxed at the same rate.

The taxing power has the authority to make

reasonable and natural classifications for

purposes of taxation. To satisfy this

requirement, it is enough that the statute orordinance applies equally to all persons,

firms, and corporations placed in a similar

situation.

It is inherent in the power to tax that thestate be free to select the subjects of

taxation & it has been repeatedly held that

the inequalities which result from a singling

out of 1 particular class for taxation or

exception infringe no constitutional

limitation.

Manila Race Horse v. Dela Fuente No arbitrary

classification

it was said there is equality and uniformity intaxation if all articles or kinds of property of

the same class are taxed at the same rate.

The owners of boarding stables for racehorses and, for that matter, the race horse

owners themselves, who in the scheme of

shifting may carry the taxation burden, are a

class by themselves and appropriately taxed

where owners of other kinds of horses aretaxed less or not at all, considering that

equity in taxation is generally conceived in

terms of ability to pay in relation to the

benefits received by the taxpayer and by the

public from the business or property taxed.

Taking everything into account, thedifferentiation against which the plaintiffs

complain conforms to the practical dictates


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of justice and equity and is not

discriminatory within the meaning of the

Constitution.

Equity in taxation is generally conceived interms of liability to pay in relation to the

benefits received by the taxpayer and by the

public from the business or property taxed.

Eastern Theatrical Co. Inc., vs. Alfonso

there is equality and uniformity in taxation ifall articles or kinds of property of the same

class are taxed at the same rate. Thus, it was

held in that case, that "the fact that some

places of amusement are not taxed while

others, such cinematographs, theaters,

vaudeville companies, theatrical shows, and

boxing exhibitions and other kinds of

amusements or places of amusement are

taxed, is not argument at all against the

equality and uniformity of tax imposition."

The taxing power has the authority to makereasonable and natural classifications for

purposes of taxation.

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs.

CITY OF BUTUAN

FACTS: The ordinance imposes taxes for every case of

soft drinks, liquors and other carbonated beverages,

regardless of the volume of sales, shipped to the

agents and/or consignees by outside dealers or any

person or company having its actual business outside

the City.

ISSUE:Does the tax ordinance violate the uniformity

requirement of taxation?

HELD:Yes. The tax levied is discriminatory.

Even if the burden in question were regardedas a tax on the sale of said beverages, it

would still be invalid, as discriminatory, and

hence, violative of the uniformity required bythe Constitution and the law therefor, since

only sales by "agents or consignees" of

outside dealers would be subject to the tax.

Sales by local dealers, not acting for or on

behalf of other merchants, regardless of the

volume of their sales, and even if the same

exceeded those made by said agents or

consignees of producers or merchants

established outside the City of Butuan,

would be exempt from the disputed tax.

It is true that the uniformity essential to thevalid exercise of the power of taxation does

not require identity or equality under all

circumstances, or negate the authority to

classify the objects of taxation.

The classification made in the exercise of thisauthority, to be valid, must, however, be

reasonable and this requirement is not

deemed satisfied unless:

o (1) it is based upon substantialdistinctions which make real

differences;

o (2) these are germane to thepurpose of the legislation or

ordinance;

o (3) the classification applies, notonly to present conditions, but, also,

to future conditions substantially

identical to those of the present;

and

o (4) the classification applies equallyto all those who belong to the same

class.

Shell Company of P.I, Ltd. Vs. Vano, etc. 94 Phil 387

FACTS: The municipal council of Cordova, Cebu

adopted several ordinances among which Ordinance10 imposing an annual tax of P150 on occupation or

the exercise of the privilege of installation manager.

Shell Co., a foreign corporation, filed suit for the

refund of the taxes paid by it on the ground that the

ordinance imposing such tax is ultra vires for being

discriminatory and hostile because there is no other

person in the locality who exercise such designation

or occupation.

HELD: A tax on installation manager is not

discriminatory just because at the time said tax was

imposed, there was no other person in the locality

who exercised such occupation. The tax is and will beapplicable to any person or firm who exercises such

calling or occupation designated as installation

manager.

CITY OF BAGUIO vs. DE LEON 25 SCRA 938

FACTS: The City of Baguio passed an ordinance

imposing a license fee on any person, entity or


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corporation doing business in the City. De Leon was

assessed for P50 annual fee it being shown that he

was engaged in property rental and deriving income

therefrom. The latter assailed the validity of the

ordinance arguing that it is ultra vires for there is no

statutory authority which expressly grants the City of

Baguio to levy such tax, and that there it imposeddouble taxation, and violates the requirement of

uniformity.

HELD:No.

First, RA 329 was enacted amending Section2553 of the Revised Administrative Code

empowering the City Council not only to

impose a license fee but to levy a tax for

purposes of revenue, thus the ordinance

cannot be considered ultra vires for there is

more than ample statutory authority for the

enactment thereof.

Second, an argument against double taxationmay not be invoked where one tax is

imposed by the state and the other is

imposed by the city.

And third, violation of uniformity is out ofplace it being widely recognized that there is

nothing inherently obnoxious in the

requirement that license fees or taxes be

exacted with respect to the same

occupation, calling or activity by both the

state and the political subdivisions thereof.

A tax is considered uniform when it operateswith the same force and effect in every place

where the object may be found.

Kapatiran vs. Tan

FACTS: EO 273 amended the Revenue Code,

adopting the (VAT) effective 1 January 1988. Four

petitions assailed the validity of the VAT Law for being

beyond the President to enact; for being oppressive,

discriminatory, regressive, and violative of the due

process and equal protection clauses, among others,

of the Constitution. The Integrated Customs Brokers

Association particularly contend that it undulydiscriminate against customs brokers (Section 103 [r])

as the amended provision of the Tax Code provides

that service performed in the exercise of profession

or calling(except custom brokers) subject to

occupational tax under the Local Tax Code, and

professional services performed by registered general

professional partnerships are exempt from VAT.

ISSUE: Whether the E-VAT law discriminates against

customs brokers.

HELD: The phrase except custom brokers is not

meant to discriminate against custom brokers but to

avert a potential conflict between Sections 102 and

103 of the Tax Code, as amended.

The distinction of the customs brokers fromthe other professionals who are subject to

occupation tax under the Local Tax Code is

based upon material differences, in that the

activities of customs brokers partake more of

a business, rather than a profession and

were thus subjected to the percentage tax

under Section 174 of the Tax Code prior to its

amendment by EO 273. EO 273 abolished the

percentage tax and replaced it with the VAT.

Villanueva vs. City of Iloilo,supra:The ordinance is not violative of the rule of uniformity

in taxation.

The Supreme Court has already ruled thattenement houses constitute adistinct classof property. It has likewise ruled that "taxes

are uniform and equal when imposed upon

all property of the same class or character

within the taxing authority."

The fact, therefore, that the owners of otherclasses of buildings in the City of Iloilo do not

pay the taxes imposed by the ordinance in

question is no argument at all against

uniformity and equality of the tax imposition.

Neither is the rule of equality and uniformityviolated by the fact that tenement taxes are

not imposed in other cities, for the same rule

does not require that taxes for the same

purpose should be imposed in different

territorial subdivisions at the same time.

So long as the burden of the tax falls equallyand impartially on all owners or operators of

tenement houses similarly classified or

situated, equality and uniformity of taxation

is accomplished.

Association of Custom Brokers v. Mun.Board,supra:

Facts:The Association of Customs Brokers, Inc., which

is composed of all brokers and public service

operators of motor vehicles in the City of Manila

challenge the validity Ordinance No. 3379 on the

ground that (1xxx (2) said ordinance offends against

the rule of uniformity of taxation; and (3) xxx.
http://coffeeafficionado.blogspot.com/2012/02/villanueva-vs-city-of-iloilo-december.htmlhttp://coffeeafficionado.blogspot.com/2012/02/association-of-custom-brokers-inc-vs.htmlhttp://coffeeafficionado.blogspot.com/2012/02/association-of-custom-brokers-inc-vs.htmlhttp://coffeeafficionado.blogspot.com/2012/02/villanueva-vs-city-of-iloilo-december.html


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The ordinance exacts the tax upon all motorvehicles operating within the City of Manila.

It does not distinguish between a motorvehicle for hire and one which is purely for

private use. Neither does it distinguish

between a motor vehicle registered in the

City of Manila and one registered in anotherplace but occasionally comes to Manila and

uses its streets and public highways. This is

an inequality which the Court finds in the

ordinance, and which renders it offensive to

the Constitution.

4. PROHIBITION AGAINST IMPRISONMENT FORNON-PAYMENT OF POLL TAX

Section 20, Article III, Constitution. No person shall

be imprisoned for debt or non-payment of poll tax.

The non-imprisonment rule applies to non-payment

of poll tax which is punishable only by a surcharge,

but not to other violations like falsification of

community tax certificate and non-payment of other

taxes.

Community Tax v. Poll Tax

Poll tax is a tax of fixed amount imposed onresidents within a specific territory

regardless of citizenship, business or

profession. Example is community tax. Community taxCities or municipalities may

levy a community tax in accordance with the

provisions of this article. 156 RA 7160.

Section 157. Individuals Liable to Community Tax. -

(18) or over who has been regularly employed on a

wage or salary basis for at least thirty (30)

consecutive working days, or who is engaged in

business or occupation, or who owns real property

with an aggregate assessed value of One thousand

pesos (P1,000.00) or more, or who is required by law

to file an income tax return shall pay an annualadditional tax of Five pesos (P5.00) and an annual

additional tax of One peso (P1.00) for every One

thousand pesos (P1,000.00) of income regardless of

whether from business, exercise of profession or from

property which in no case shall exceed Five thousand

pesos (P5,000.00).

In the case of husband and wife, the additional tax

herein imposed shall be based upon the total

property owned by them and the total gross receipts

or earnings derived by them.

Section 158. Juridical Persons Liable to Community

Tax. - Every corporation no matter how created ororganized, whether domestic or resident foreign,

engaged in or doing business in the Philippines shall

pay an annual community tax of Five hundred pesos

(P500.00) and an annual additional tax, which, in no

case, shall exceed Ten thousand pesos (P10,000.00) in

accordance with the following schedule:

(1) For every Five thousand pesos (P5,000.00) worth

of real property in the Philippines owned by it during

the preceding year based on the valuation used for

the payment of real property tax under existing laws,

found in the assessment rolls of the city ormunicipality where the real property is situated - Two

pesos (P2.00); and

(2) For every Five thousand pesos (P5,000.00) of gross

receipts or earnings derived by it from its business in

the Philippines during the preceding year - Two pesos

(P2.00).

The dividends received by a corporation from another

corporation however shall, for the purpose of the

additional tax, be considered as part of the gross

receipts or earnings of said corporation.

Section 159. Exemptions. - The following are exempt

from the community tax:

(1) Diplomatic and consular representatives; and

(2) Transient visitors when their stay in the Philippines

does not exceed three (3) months.

Section 160. Place of Payment. - The community tax

shall be paid in the place of residence of the

individual, or in the place where the principal office of

the juridical entity is located.

164 (c) The proceeds of the community tax actually

and directly collected by the city or municipal

treasurer shall accrue entirely to the general fund of

the city or municipality concerned. However,

proceeds of the community tax collected through the

barangay treasurers shall be apportioned as follows:


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(1) (50%) shall accrue to the general fund of

the city or municipality concerned; and

(2) (50%) shall accrue to the barangay where

the tax is collected.

5. PROHIBITION AGAINST IMPAIRMENT OFOBLIGATION OF CONTRACTS

No law impairing the obligation of contracts shall be

passed. [Section 10, Article III, Constitution]

The power of taxation cannot be exercised in a

manner that would impair the obligation of contracts.

What is prohibited is that a taxing statute be passed

that would alter the relative rights of the parties with

each other.

The mere fact that a tax makes the conduct of a

business more expensive or makes an activity more

difficult does not result in the impairment of the

obligation of contracts. Contract is impaired only if

the relative position of the parties to a contract (i.e.

equality that is assumed when the contract was

entered into) is disturbed by the operation of a taxing

statute.

The obligation of a contract is impaired whenits terms or conditions are changed by law orby a party without the consent of the other,

thereby weakening the position or rights of

the latter.

An example of impairment by law is when alater taxing statute revokes a tax exemption

based on a contract. But this only applies

when the tax exemption has been granted

for a valid consideration.

A later statute may revoke exemption fromtaxation provided for in a franchise becausethe Constitution provides that a franchise is

subject to amendment, alteration or repeal.

Note: A latter statue may revoke exemption from

taxation provided for in a franchise because the

Constitution provides that a franchise is subject to

amendment, alteration or repeal. [Sec. 11 Art. XII]

OPOSA vs. FACTORAN

Police power prevails over the non-impairment clause

LA INSULAR vs. MANCHUCA

A lawful tax on a new subject or an increasedtax on an old one, does not interfere with a

contract or impairs its obligation.

The constitutional guarantee of the non-impairment clause can only invoked in the

grant of tax exemption.

RULES:

1. If the exemption was granted for valuableconsideration and it is granted on the basis

of a contract.

cannot be revoked2. If the exemption is granted by virtue of a

contract, wherein the government enters

into a contract with a private corporation

cannot be revoked unilaterally bythe government

3. If the basis of the tax exemption is afranchise granted by Congress and under the

franchise or the tax exemption is given to a

particular holder or person

can be unilaterally revoked by the

government (Congress)

The non-impairment clause appliesonly to contracts and not to afranchise.

The non-impairment clause appliesto taxation but not to police power

and eminent domain.

Furthermore, it applies only whereone party is the government and

the other, a private individual.

As a rule, the obligation to pay tax isbased on law. But when, for

instance, a taxpayer enters into a

compromise with the BIR, the

obligation of the taxpayer becomes

one based on contract.

Tolentino v. Sec. of Finance, supra:

1 issue that was raised was whether the imposition of

the VAT on sales & leases on real estate by virtue of

contract s entered into prior to the efectivity of the

law would violate the non-impairment of contracts

rule in the constitution.


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HELD:

It is enough to say that parties to a contractcannot, through the exercise of prophetic

discernment, fetter the exercise of the taxing

power of the state.

For not only are existing laws read intocontracts in order to fix obligations as

between parties, but the reservation of

essential attributes of sovereign power is

also read into contracts as a basic postulate

of the legal order.

The policy of protecting contracts againstimpairment presupposes the maintenance of

a government which retains adequate

authority to secure the peace & good order

of society.

6. PROHIBITION AGAINST INFRINGEMENT OFRELIGIOUS FREEDOM

No law shall be made respecting an establishment of

religion, or prohibiting the free exercise thereof. The

free exercise and enjoyment of religious profession

and worship, without discrimination or preference,

shall forever be allowed. No religious test shall be

required for the exercise of civil or political rights.

[Section 5, Article III, Constitution]

American Bible Society v. City of Manila

FACTS: In the course of its ministry, the Philippine

agency of the American Bible Society has been

distributing

and selling bibles and/or gospel portions thereof

throughout the Philippines and translating the same

into several Philippine dialets. The acting City

Treasurer of Manila required the society to secure the

corresponding Mayors permit and municipal license

fees, together with compromise covering the period

from the 4th quarter of 1945 to the 2nd quarter of

1953. The society paid such under protest, and filed

suit questioning the legality of the ordinances under

which the fees are being collected.

HELD: The payment of license fees for the

distribution and sale of bibles suppresses the

constitutional right of free exercise of religion.

A tax ordinance is considered violative of thefree exercise of religion when it becomes a

prior restraint to the exercise thereof. In this

case, the business permit is a prior restraint

to the exercise of one's religion since the

constitutional guaranty of the free exercise

and enjoyment of religious profession and

worship carries with it the right to

disseminate religious information.

It is one thing to impose a tax on the incomeor property of a preacher, and another to

exact a tax for him for the privilege of

delivering a sermon.

The power to tax the exercise of a privilegeis the power to control or suppress its

enjoyment

7. PROHIBITION AGAINST APPROPRIATION OFPROCEEDS OF TAXATION

Section 29, Article VI, Constitution

1. No money shall be paid out of the Treasury

except in pursuance of an appropriation

made by law.

2. No public money or property shall be

appropriated, applied, paid, or employed

directly or indirectly, for the use, benefit, or

support of any 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 ordignitary is assigned to the armed forces, or

to any penal institution, or government

orphanage or leprosarium.

3. All money collected on any tax levied for a

special purpose shall be treated as a special

fund and paid out for such purpose only. If

the purpose for which a special fund was

created has been fulfilled or abandoned, the

balance, if any, shall be transferred to the

general funds of the government.

Use of tax levied for a special purpose:

Osmena v. Orbos, supra - It seems clear that while

the funds collected may be referred to as taxes, they

are exacted in the exercise of the police power of the

State. Moreover, that the OPSF as a special fund is

plain from the special treatment given it by E.O. 137.

It is segregated from the general fund; and while it is

placed in what the law refers to as a "trust liability

account," the fund nonetheless remains subject to


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the scrutiny and review of the COA. The Court is

satisfied that these measures comply with the

constitutional description of a "special fund."

8. Prohibition against taxation of real propertyactually, directly and exclusively used forreligious, charitable and educational purposes

Charitable institutions, churches andparsonages or convents appurtenant

thereto, mosques, non-profit

cemeteries, and all lands, buildings, and

improvements, actually, directly, and

exclusively used for religious, charitable,

or educational purposes shall be exempt

from taxation. [Section 28 (3) , Article VI,

Constitution]

This is an exemption from real propertytax only.

Abra Valley College vs. Aquino

Facts: Abra Valley College rents out the ground floor

of its college building to Northern Marketing

Corporation while the second floor thereof is used by

the Director of the College for residential purposes.

The municipal and provincial treasurers served upon

the College a notice of seizure and later a notice of

sale due to the alleged failure of the College to pay

real estate taxes and penalties thereon. The school

filed suit to annul said notices, claiming that it is tax-

exempt.

Issue:Whether the College is exempt from taxes

HELD:

While the Court allows a more liberal andnon-restrictive interpretation of the phrase

exclusively used for educational purposes,

reasonable emphasis has always been made

that exemption extends to facilities which

are incidental to and reasonably necessary

for the accomplishment of the main

purposes.

While the second floors use, as residence ofthe director, is incidental to education; the

lease of the first floor cannot by any stretch

of imagination be considered incidental to

the purposes of education.

The test of exemption from taxation is theuse of the property for purposes mentioned

in the Constitution.

Use overrides ownership. If a property is incidentally used for the

aforementioned purposes, it is clear fromdecided cases that tax exemption still

subsist.

9. Prohibition against taxation of the revenuesand assets of non-stock, non-profit educational

institutions

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. [Section 4, Article XIV,

Constitution]

This exemption from corporate income tax is

embodied in Section 30 of the NIRC which includes a

non-stock, non-profit educational institution.

Note: however the last paragraph of Section 30

which states: Notwithstanding the provisions in thepreceding paragraphs, the income of whatever kind

and character of the foregoing organizations from any

of their property, real or personal, or from any of

their activities conducted for profit, regardless of the

disposition made of such income, shall be subject to

tax imposed under this Code.

Charitable institutions, churches and parsonages or

convents appurtenant thereto, mosques, non-profit

cemeteries, and all lands, buildings, and

improvements, actually, directly, and exclusively used

for religious, charitable, or educational purposes shall

be exempt from taxation. [Section 28 (3) , Article VI,

Constitution]

This is an exemption from realproperty tax only.

The exemption in favor of property

used exclusively for charitable or


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educational purposes is not limited

to property actually indispensable

therefore, but extends to facilities

which are incidental to and

reasonably necessary for the

accomplishment of said purposes.[Abra Valley College v. Aquino, 162

SCRA 106]

Department of Finance Order 145-85

Non-stock, non-profit educationalinstitutions are exempt from taxes

on all their revenues and assets

used actually, directly and

exclusively for educational

purposes. However, they shall be subject to

internal revenue tax on income

from trade, business or other

activity, the conduct of which is not

related to the exercise or

performance by such educational

institution of its educational

purposes or functions.

Interest income shall be exemptonly when used directly and

exclusively for educationalpurposes. To substantiate this claim,

the institution must submit an

annual information return and duly

audited financial statement. A

certification of actual utilization and

the Board resolution or the

proposed project to be funded out

of the money deposited in banks

shall also be submitted.

Department of Finance Order 137-87

An educational institution means anon-stock, non-profit corporation or

association duly registered under

Philippine law, and operated

exclusively for educational

purposes, maintained and

administered by a private individual

or group offering formal education,

and with an issued permit to

operate by the DECS.

Revenues derived from and assetsused in the operation ofcafeteria/canteens, dormitories,

and bookstores are exempt from

taxation provided they are owned

and operated by the educational

institution as ancillary activities and

the same are located within the

school premises.

CIR v. Court of Appeals, et.al., 298 SCRA 83 (1998)

FACTS: The Young Mens Christian Association ofthe Philippines, Inc. (YMCA) was established as a

welfare, educational and charitable non-profit

corporation. It conducts various programs and

activities that are beneficial to the public, especially

the young people, pursuant to its religious,

educational and charitable objectives.

HELD: In this case, the Supreme Court held that the

income derived by YMCA from leasing out a portion

of its premises to small shop owners, like restaurant

and canteen operators, and from parking feescollected from non-members are taxable income.

First, the constitutional tax exemption granted to

non-stock, non-profit educational institutions does

not find application because YMCA is not an

educational institution. The term educational

institution or institution of learning has acquired a

well known technical meaning. Under the Education

Act of 1982, such term refers to schools.

Second, even if it be exempt under Section 30 of theNIRC as a non-profit, non-stock educational

corporation, the income from the rent of its premises

and parking fees is not covered by the exemption,

according to the last paragraph of the same section.

Section 30 provides that income of whatever kind and

character from any of its properties, real or personal,


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or from any of its activities for profit are not exempt

from income tax.

Finally, Section 28(3), Article VI of the Constitution

does not apply as it extends exemption only from real

property taxesnot from income taxes.

CIR v. CA, CTA, and ATENEO

The Supreme Court denied the petition andaffirmed the assailed Decision of the Court

of Appeals. The Court ruled that the private

respondent is not a contractor selling its

services for a fee but an academic institution

conducting these researches pursuant to its

commitments to education and, ultimately,

to public service. For the institute to have tenaciously

continued operating for so long despite its

accumulation of significant losses, we can

only agree with both the Court of Tax

Appeals and the Court of Appeals that

education and not profit is motive for

undertaking the research projects

10. Other Constitutional Limitations

1. Grant of tax exemption

No law granting any tax exemption shall be passed

without the concurrence of a majority of all Members

of Congress.[Section 28 (4), Article VI, Constitution]

CHAVEZ VS PCGG

The General and Supplemental Agreementdated December 28, 1993, which PCGG and

the Marcos heirs entered into are hereby

declared NULL AND VOID for being contrary

to law and the Constitution. Under Item No. 2 of the General Agreement,

the PCGG commits to exempt from all forms

of taxes the properties to be retained by the

Marcos heirs. This is a clear violation of the

Construction.

The power to tax and to grant taxexemptions is vested in the Congress and, to

a certain extent, in the local legislative

bodies.

Section 28 (4), Article VI of the Constitution,specifically provides: "No law granting any

tax exemption shall be passed without the

concurrence of a majority of all the Member

of the Congress." The PCGG has absolutely no power to grant

tax exemptions, even under the cover of its

authority to compromise ill-gotten wealth

cases. Even granting that Congress enacts a

law exempting the Marcoses form paying

taxes on their properties, such law will

definitely not pass the test of the equal

protection clause under the Bill of Rights.

Any special grant of tax exemption in favor

only of the Marcos heirs will constitute class

legislation. It will also violate the

constitutional rule that "taxation shall be

uniform and equitable."

2. Veto of appropriation, revenue, or tariff bills

by the President

The President shall have the power to veto any

particular item or items in an appropriation, revenue,

or tariff bill, but the veto shall not affect the item or

items to which he does not object. [Section 27 (2)

Article VI, Constitution]

An item in a bill refers to particulars, details,the distinct and severable parts of a bill. In

budgetary legislation, an item is an

individual sum of money dedicated to a

stated purpose. [Gonzales v. Macaraig, 191

SCRA 452]

3. Non-impairment of the jurisdiction of the

Supreme Court

Congress cannot take away from theSupreme Court the power given to it by the

Constitution as the final arbiter of tax cases.

Section 5 (2) (b), Article VIII, Constitution - The

Supreme Court shall have the following powers:

Review, revise, reverse, modify, or affirm on appeal

or certiorari, as the law or the Rules of Court may


13/36

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.

CIR v. Santos

The policy of the courts is to avoid ruling onconstitutional questions and to presume that

the acts of the political departments are

valid in the absence of a clear and

unmistakable showing to the contrary.

This is not to say that RTC has no powerwhatsoever to declare a law

unconstitutional, but this authority does not

extend to deciding questions which pertain

to legislative policy. RTC have the power to declare the law

unconstitutional but this authority does not

extend to deciding questions which pertain

to legislative policy.

RTC can only look into the validity of aprovision, that is whether or not it has been

passed according to the provisions laid down

by law, and thus cannot inquire as to the

reasons for its existence.

RULING ON THE EXTENT OF LEGISLATIVEPOWER TO TAX : SC held that it is within the

power of the legislature whether to tax

jewelry or not. With the legislature primarilylies the discretion to determine the nature

(kind), object(purpose), extent (rate),

coverage (subject) and situs (place) of

taxation

San Miguel Corp. v. Avelino

FACTS: City Treasurer, on April 1, 1974, demanded

from SMC payment of the made specific tax on the

total volume of beer it produced in the City of

Mandaue. SMC on April 8,1974, contested the

correction of said specific tax "on the ground thatSection 12(e) (7) in relation to Section 12(e) (1) and

(2), Mandaue City Ordinance No. 97, is illegal and void

because it imposed a specific tax beyond its territorial

jurisdiction.

In an opinion the City Fiscal upheld its validity which

was reversed by the Secretary of Justice,

saying the ordinance was of doubtful validity. City of

Cebu then filed a suit for collection where it squarely

put in issue the validity of such ordinance.

Issue:Can Citys act of filing suit after the Secretary

of Justices opinion was rendered be considered "an

appeal" under the Presidential Decree?

HELD: Yes, action by City valid. The writs prayed for,

certiorari and prohibition, cannot issue.

The validity of a statute, an executive orderor ordinance is a matter for the judiciary to

decide and whenever in the disposition of a

pending case such a question becomes

unavoidable then it is not only the power but

the duty of the Court to resolve such a

question.

It is undoubted that under the Constitution,even the legislative body cannot deprive thisCourt of its appellate jurisdiction over all

cases coming from inferior courts where the

constitutionality or validity of an ordinance

or the legality of any tax, impost,

assessment, or toll is in question.

Since it is likewise expressly provided inSection 43 of the Judiciary Act that the

original jurisdiction over all civil actions

involving the legality of any tax, impost or

assessment appertains to the Court of First

Instance, it takes a certain degree ofingenuity to allege that the lower court was

bereft of such authority.

Both under the Constitution and theJudiciary Act, respondent Judge is vested

with jurisdiction to make a declaration

regarding an ordinances validity

It would be therefore premature for thecorrective power of this Tribunal to be

interposed, just because he did not grant the

motion to dismiss on the allegation that

there was lack of jurisdiction. Authorities

support the municipal power to impose

specific taxes on beverages manufactured

within its territorial boundaries.

4. Revenue bills shall originate exclusively from

the House of Representatives


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Section 24, Article VI, Constitution - All

appropriation, revenue or tariff bills, bills authorizing

an increase of the public debt, bills of local

application, and private bills shall originate exclusively

in the House of Representatives, but the Senate may

propose or concur with amendments.

Tolentino v. Secretary of Finance

The Constitution simply means that theinitiative for the filing of bills must come

from the House of Representatives, on the

theory that, elected as they are from the

districts, the members of the House can be

expected to be more sensitive to the local

needs and problems.

It is not the law but the revenue bill which is required by the Constitution tooriginate exclusively in the House of

Representatives, because a bill originating in

the House may undergo such extensive

changes in the Senate that the result may be

a rewriting of the whole, and a distinct bill

may be produced.

The Constitution does not also prohibit thefiling in the Senate of a substitute bill in

anticipation of its receipt of the bill from the

House, as long as action by the Senate is

withheld until receipt of said bill. [Tolentino

v. Secretary of Finance]

Senate can endorse an entirely new bill.5. Infringement of Press Freedom

This limitation does not mean that the pressis exempt from taxation.

Taxation constitutes an infringement ofpress freedom when it operates as a prior

restraint to the exercise of this

constitutional right.

When the tax is imposed on the receipts orthe income of the press it is a valid exercise

of the sovereign prerogative.

Tolentino v. Sec. of Finance, supra

Petitioners claim that the R.A. violates theirpress freedom and religious liberty, having

removed them from the exemption to pay

VAT. Suffice it to say that since the law

granted the press a privilege, the law could

take back the privilege anytime without

offense to the Constitution. By granting

exemptions, the State does not foreverwaive the exercise of its sovereign

prerogative.

6. Grant of franchise

Tax exemptions included in the grant of a franchise

may be revoked by another law as it is specifically

provided in the Constitution that the grant of any

franchise is always subject to amendment, alteration,

or repeal by the Congress when the common good so

requires.

Petitioners claim that the R.A. violates theirpress freedom and religious liberty, having

removed them from the exemption to pay

VAT. Suffice it to say that since the law

granted the press a privilege, the law could

take back the privilege anytime without

offense to the Constitution. By granting

exemptions, the State does not forever

waive the exercise of its sovereign

prerogative. [Tolentino v. Sec. of Finance]

C. SITUS OF TAXATION & DOUBLE TAXATION

Meaning of SitusThe source of the tax, orthe place of taxation. Literally, situs of

taxation means place of taxation. It is the

State or political unit which has jurisdiction

to impose a particular tax.

The determination of the situs of taxationdepends on various factors including the:

1. Nature of the tax;2. Subject matter thereof (i.e. person,

property, act or activity;

3. Possible protection and benefit thatmay accrue both to the government

and the taxpayer;


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4. Residence or citizenship of thetaxpayer; and

5. Source of the income.A. Situs of tax on persons (poll tax)

Poll tax may be properly levied upon personswho are inhabitants or residents of the State,

whether or not they are citizens.

B. Situs of tax on real property Situs is where the property is located

pursuant to the principle of lex rei sitae. This

applies whether or not the owner is a

resident of the place where the property is

located.

This is so because the taxing authority hascontrol over the property which is of a fixed

and stationary character.

The place where the real property is locatedgives protection to the real property, hence,

the owner must support the government of

that place.

Lex rei sitae - This is a principle followed infixing the situs of taxation of a property. This

means that the property is taxable in the

State where it has its actual situs, specifically

in the place where it is located, even though

the owner resides in another jurisdiction.

With respect to property taxes, real propertyis subject to taxation in the State where it is

located and taxable only there. Lex rei sitae

has also been adopted for tangible personal

property under Article 16 of the Civil Code. A

different rule applies to intangible personal

property, specifically, mobilia sequuntur

personam.

C. Situs of tangible personal property It is taxable in the State where it has actual

situs although the owner resides in another

jurisdiction. As stated above, lex rei sitae has also been

adopted for tangible personal property

under Article 16 of the Civil Code.D. Situs of taxation of intangible personal property

General rule: Situs is the domicile of theowner pursuant to the principle of mobilia

sequuntur personam. This rule is based on

the fact that such property does not admit of

any actual location and that such property

receives the protection and benefits of thelaw where they are located.

Exceptions:1. When it is inconsistent with the express

provisions of the statute.

2. When the property has acquired abusiness situsin another jurisdiction.

Mobilia sequuntor personam

This Latin maxim literally means that theproperty follows the person. Thus, the

place where the owner is found is the

situs of taxation under the rule that

movables follow the person. This is

generally where the owner resides.

In taxation, this principle is applied tointangible personal property the situs of

which is fixed by the domicile of the

owner. The reason is that this type of

property rarely admits of actual location.

However, there are two exceptions tothe rule. One is when it is inconsistent

with the express provisions of a

statute. Two, when the interests of

justice demand that it should not be

applied, i.e. where the property has in

fact a situs elsewhere.

Theories re: Situs of Income tax

1. Domicilliary theoryThe location where the income earner

resides is the situs of taxation. This is where

he is given protection, hence, he must

support it.

2. Nationality theory


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The country of citizenship is the situs of

taxation. This is so because a citizen is given

protection by his country no matter where

he is found or no matter where he earns hisincome.

3. Source lawThe country which is the source of the

income or where the activity that produced

the income is the situs of taxation.

Wells Fargo v. Collector, 70 Phil 325

This case involves the collection of inheritancetaxes on shares of stock issued by the Benguet

Consolidated Mining Corporation and owned by

Lillian Eye. Said shares were already subjected to

inheritance taxes in California and are now being

taxed by Philippine authorities.

Originally, the settled law in the United States is

that intangibles have only one situs for the

purpose of inheritance tax the domicile of the

decedent at the time of death. But this rule has,

of late, been relaxed. The maxim mobiliasequuntur personam, upon which the rules rests,

has been decried as a mere fiction of law having

its origin in considerations of general

convenience and public policy and cannot be

applied to limit or control the right of the State to

tax property within its jurisdiction. It must yield

to established fact of legal ownership, actual

presence and control elsewhere, and cannot be

applied if to do so would result in inescapable

and patent injustice.

The relaxation of the original rule rests on either

of two fundamental considerations:

1. Upon the recognition of the inherent

power of each government to tax persons,

properties and rights within its jurisdiction and

enjoying the protection of its laws; or

2. Upon the principle that as to intangibles, a

single location in space is hardly possible,

considering the multiple, distinct relationships

which may be entered into with respect thereto.

The actual situs of the shares of stock is in thePhilippines, the corporation being domiciled

therein. And besides, the certificates of stock

have remained in this country up to the time

when the deceased died in California, and they

were in the possession of the secretary of the

Benguet Corporation. The secretary had the right

to vote, collect dividends, among others. For all

practical purposes, the secretary had legal title to

the certificates of stock held in trust for Eye. Eye

extended in the Philippines her activities re: her

intangible personal property so as to avail herselfof the protection and benefits of the Philippine

laws.

E. Income Income tax may properly be exactedfrom persons who are residents or citizens in the

taxing jurisdiction and even from those who are

neither residents nor citizens provided the

income is derived from sources within the taxing

state.

F. Business, occupation and transaction Thegeneral rule is that the power to levy an excisetax depend upon the place where the business is

done, or the occupation is engaged in, or the

transaction took place.

G. Gratuitous transfer of Property Thetransmission of property from a donor to a done

or from a decedent to his heirs may be subject to

taxation in the state where the transferor is or

was a citizen or resident, or where the property is

located.

Commissioner vs. British Overseas Airways Corp.

The source of an income is the property,activity or service that produced the income.

For the source of income to be consideredas coming from the Philippines, it is

sufficient that the income is derived from

activity within the Philippines. Herein, the


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sale of tickets in the Philippines is the

activity that produced the income. The

tickets exchanged hands here and payments

for fares were also made here in Philippine

currency.

The situs of the source of payments is thePhilippines. The flow of wealth proceededfrom, and occurred within, Philippine

territory, enjoying the protection accorded

by the Philippine Government. In

consideration of such protection, the flow of

wealth should share the burden of

supporting the government.

PD 68, in relation to PD 1355, ensures thatinternational airlines are taxed on their

income from Philippine sources.

CIR v. Japan Airlines

Citing the case of CIR v BOAC, the courtreiterated that the source of an income is

the property, activity or service that

produced the income.

For the source of income to be considered ascoming from the Philippines, it is sufficient

that the income is derived from activity

within the Philippines.

The absence of flight operations to and fromthe Philippines is not determinative of the

source of income or the situs of income

taxation.

The test of taxability is the source, and thesource of the income is that activity which

produced the income. In this case, as JAL

constitutes PAL as its agent, thesales of JAL

tickets made by PAL is taxable

Wells Fargo Bank v. Collector

It is the identity or association of intangibleswith the person of their owner at his

domicile which gives jurisdiction to tax.

But when the taxpayer extends his activitieswith respect to his intangibles, so as to avail

himself of the protection and benefit of the

laws of another state, in such a way as to

bring his person or property within the reach

of the tax gatherer there, the reason for a

single place of taxation no longer obtains.

In this case, the actual situs of the shares ofstock is in the Philippines, the corporation

being domiciled therein. The owner residing

in California has extended her activities with

respect to her intangibles so as to avail

herself of the protection and benefit of the

Philippine laws

3. MULTIPLICITY OF SITUS

Multiplicity of situs, or the taxation of thesame income or intangible subject in several

taxing jurisdictions, arises from various

factors:

1. The variance in the concept of domicile for tax

purposes;

2. Multiple distinct relationships that may arise

with respect to intangible personal property; or

3. The use to which the property may have been

devoted all of which may receive the protection of

the laws of jurisdictions other than the domicile of

the owner thereto.

The remedy to avoid or reduce theconsequent burden in case of multiplicity of

situs is either to:

1. Provide exemptions or allowance ofdeduction or tax credit for foreign

taxes; or

2. Enter into tax treaties with otherStates.

Collector v. De Lara

The Supreme Court did not subject to estateand inheritance taxes the shares of stock

issued by Philippine corporations which were

left by a non-resident alien after his death.

Considering that he is a resident of a foreign

country, his estate is entitled to exemption

from inheritance tax on the intangible

personal property found in the Philippines.

This exemption is granted to non-residents

to reduce the burden of multiple taxation,

which otherwise would subject a decedents

intangible personal property to the


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inheritance tax both in his place of residence

and domicile and the place where those

properties are found.

This is, therefore, an exception to thedecision of the Supreme Court in Wells Fargo

v. Collector. This has since been incorporatedin Section 104 of the NIRC.

As to the shares of stocks issued byPhilippine corporations, an exemption was

granted to the estate by virtue of Section

122 of the Tax Code, which provides as

follows:. . ."And Provided, however, That no

tax shall be collected under this Title in

respect of intangible personal property (a) if

the decedent at the time of his death was a

resident of a foreign country which at the

time of his death did not impose a transfer

tax or death tax of any character in respect

of intangible personal property of citizens of

the Philippines not residing in that country,

or (b) if the laws of the foreign country of

which the decedent was resident at the tune

of his death allow a similar exemption from

transfer taxes or death taxes of every

character in respect of intangible personal

property owned by citizen, of the Philippine

not residing in that foreign country.

4. Double Taxation

In its strict sense, referred to as directduplicate taxation, double taxation means:

1. taxing twice;2. by the same taxing authority;3. within the same jurisdiction or

taxing district;

4. for the same purpose;5. in the same year or taxing period;6. some of the property in the

territory.

In its broad sense, referred to as indirectdouble taxation, double taxation is taxation

other than direct duplicate taxation. It

extends to all cases in which there is a

burden of two or more impositions.

Constitutionality of double taxation

Unlike the United States Constitution, ourConstitution does not prohibit double

taxation.

However, while it is not forbidden, it issomething not favored. Such taxation

should, whenever possible, be avoided and

prevented.

In addition, where there is direct doubletaxation, there may be a violation of the

constitutional precepts of equal protection

and uniformity in taxation.

CIR v. S.C. Johnson and Son, Inc.

The RP-US Tax Treaty is just one of a number ofbilateral treaties which the Philippines has entered

into for the avoidance of double taxation.

The purpose of these international agreements is to

reconcile the national fiscal legislations of the

contracting parties in order to help the taxpayer avoid

simultaneous taxation in two different jurisdictions.

More precisely, the tax conventions are drafted with

a view towards the elimination of international

juridical double taxation, which is defined as the

imposition of comparable taxes in two or more states

on the same taxpayer in respect of the same subjectmatter and for identical periods.

The apparent rationale for doing away with double

taxation is of encourage the free flow of goods and

services and the movement of capital, technology and

persons between countries, conditions deemed vital

in creating robust and dynamic economies.

Double taxation usually takes place when a person is

resident of a contracting state and derives income

from, or owns capital in, the other contracting state

and both states impose tax on that income or capital.

In order to eliminate double taxation, a tax treaty

resorts to several methods. First, it sets out the

respective rights to tax of the state of source or situs

and of the state of residence with regard to certain

classes of income or capital. In some cases, an

exclusive right to tax is conferred on one of the

contracting states; however, for other items


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of income or capital, both states are given the right to

tax, although the amount of tax that may be imposed

by the state of source is limited.

b. Double Taxation in its broadest sense.

In its broad sense, referred to as indirect double

taxation, double taxation is taxation other than direct

duplicate taxation. It extends to all cases in which

there is a burden of two or more impositions.

Villanueva v. City of Iloilo, 265 SCRA 528

An ordinance imposing a municipal tax ontenement houses was challenged because

the owners already pay real estate taxes and

also income taxes under the NIRC.

The Supreme Court held that there was nodouble taxation.

The same tax may be imposed by theNational Government as well as the local

government.

There is nothing inherently obnoxious in theexaction of license fees or taxes with respect

to the same occupation, calling, or activity by

both the State and a political subdivision

thereof.

Further, a license tax may be levied upon abusiness or occupation although the land

used in connection therewith is subject to

property tax.

In order to constitute double taxation in the

objectionable or prohibited sense:

1. the same property must be taxed twice

when it should be taxed once;

2. both taxes must be imposed on the

same property or subject matter;

3. for the same purpose;

4. by the same State, Government, or

taxing authority;

5. within the same jurisdiction or taxing

district;

6. during the same taxing period; and

7. of the same kind or character of tax.

C. Constitutionality of Double Taxation

Unlike the United States Constitution, ourConstitution does not prohibit doubletaxation.

However, while it is not forbidden, it issomething not favored. Such taxation

should, whenever possible, be avoided and

prevented.

In addition, where there is direct doubletaxation, there may be a violation of the

constitutional precepts of equal protection

and uniformity in taxation.

City of Baguio v. De Leon, 25 SCRA 938

The argument against double taxation maynot be invoked where one tax is imposed by

the State and the other is imposed by the

city, it being widely recognized that there is

nothing inherently obnoxious in the

requirement that license fees or taxes be

exacted with respect to the same

occupation, calling, or activity by both the

State and a political subdivision thereof.

And where the statute or ordinance inquestions applies equally to all persons,

firms and corporations placed in a similar

situation, there is no infringement of the rule

on equality.

Pepsi-Cola Bottling Co. vs. City of Butuan

The Ordinance, as amended, is discriminatory since

only sales by agents or consignees of outside

dealers would be subject to the tax. Sales by local

dealers, not acting for or on behalf of other

merchants, regardless of the volume of their sales ,

and even if the same exceeded those made by said

agents or consignees of producers or merchants

established outside the city, would be exempt from

the tax. The classification made in the exercise of the

authority to tax, to be valid must be reasonable,

which would be satisfied if the classification is based

upon substantial distinctions which makes real


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differences; these are germane to the purpose of

legislation or ordinance; the classification applies not

only to present conditions but also to future

conditions substantially identical to those of the

present; and the classification applies equally to all

those who belong to the same class. These conditions

are not fully met by the ordinance in question.

Sanchez v. Collector

Sanchez has an accessoria building which she leases

out as an apartment. Searate tax levied upon a

business or occupation and the property used therein

does not amount to double taxation. Income tax and

real estate dealers tax are different taxes.

Double taxation may not be invoked as a defense

against the validity of a tax law as where the realestate dealers tax is imposed for engaging in the

business of leasing real estate in addition to the real

estate tax on the property leased and the income tax

on the income derived as it is a different kind of tax.

City of Manila v. Interisland Gas Service

The City of Manila collects deficiency municipal tax

from interisland for liquefied flammable gas taxed as

merchandise. Fees aid for storage, installation, use

and transportation of compressed inflammable gasare charged by way of license fees in the exercise of

police power of the state.

Double Taxation may not be invoked as a defense

against the validity of a tax law as where aside from

the tax, a license fee is imposed in the exercise of

police power. Here the license fee is imposed for a

different purpose, i.e, as a regulatory measure.

Compana General de Tabacos v. City of Manila,

supra;

Both a license fee and a tax may be imposed on the

same business or occupation for selling the same

article and this is not in violation of the rules against

double taxation.

Means of Avoiding or Minimizing the Burden of

Taxation:

1. Shifting- is the transfer of the burden of a taxby the original payer or the one on whom the

tax was assessed or imposed to someone else.

It should be borne in mind that what is

transferred is not the payment of the tax but

the burden of the tax.

Only indirect taxes may be shifted; direct taxes

cannot be shifted.

Ways of shifting the tax burden

a. Forward shifting - When the burden ofthe tax is transferred from a factor of

production through factors of

distribution until it finally settles on the

ultimate purchaser or consumer.

i. Example: Manufacturer orproducer may shift tax

assessed to wholesaler, who in

turn shifts it to the retailer,

who also shifts it to the final

purchaser or consumer.

b. Backward shifting - when the burden ofthe tax is transferred from the

consumer or purchaser through the

factors of distribution to the factor of

production.

i. Example: Consumer orpurchaser may shift tax

imposed on him to retailer by

purchasing only after the price

is reduced, and from the latter

to the wholesaler, and finally

to the manufacturer orproducer.

c. Onward shifting - when the tax isshifted two or more times either

forward or backward.

i. Thus, a transfer from theseller to the purchaser

involves one shift; from the


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producer to the

wholesaler, then to

retailer, we have two

shifts; and if the tax is

transferred again to the

purchaser by the retailer,we have three shifts in all.

Persons Liable (Sec. 105) - Any person who, in the

course of trade or business, sells barters, exchanges,

leases goods or properties, renders services, and any

person who imports goods shall be subject to the

value-added tax (VAT)imposed in Sections 106 to 108

of this Code. The value-added tax is an indirect tax

and the amount of tax may be shifted or passed on to

the buyer, transferee or lessee of the goods,

properties or services. This rule shall likewise apply to

existing contracts of sale or lease of goods, properties

or services at the time of the effectivity of Republic

Act No.7716.

Impact and incidence of taxation

Impact of taxation is the point on which a taxis originally imposed. In so far as the law is

concerned, the taxpayer is the person who

must pay the tax to the government. He is

also termed as the statutory taxpayer the

one on whom the tax is formally assessed.

He is the subject of the tax.

Incidence of taxation is that point on whichthe tax burden finally rests or settle down. It

takes place when shifting has been effected

from the statutory taxpayer to another.

Statutory taxpayer - The statutory taxpayer is the

person required by law to pay the tax or the one on

whom the tax is formally assessed. In short, he or she

is the subject of the tax.

In direct taxes, the statutory taxpayer is theone who shoulders the burden of the tax

while in indirect taxes, the statutory taxpayer

is the one who pay the tax to the

government but the burden can be passed to

another person or entity.

Relationship between impact, shifting, and incidence

of a tax

The impact is the initial phenomenon, theshifting is the intermediate process, and the

incidence is the result. Thus, the impact in asales tax (i.e. VAT) is on the seller

(manufacturer) who shifts the burden to the

customer who finally bears the incidence of

the tax.

Impact is the imposition of the tax; shifting isthe transfer of the tax; while incidence is the

setting or coming to rest of the tax.

2. Tax Evasion Tax evasion is the use by the taxpayer of

illegal or fraudulent means to defeat or

lessen the payment of a tax. It is also known

as tax dodging. It is punishable by law.

Tax evasion is a term that connotes fraudthrough the use of pretenses or forbidden

devices to lessen or defeat taxes. [Yutivo v.

Court of Tax Appeals, 1 SCRA 160]

Example: Deliberate failure to report ataxable income or property; deliberate

reduction of income that has been received.

Elements of tax evasion:

1. The end to be achieved. Example: the payment of less

than that known by the

taxpayer to be legally due, or in

paying no tax when such is

due.

2. An accompanying state of minddescribed as being evil, in bad faith,

willful or deliberate and not

accidental.

3. A course of action (or failure of action)which is unlawful.


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Evidence to prove evasion

Since fraud is a state of mind, it need not beproved by direct evidence but may be

proved from the circumstances of the case.

Republic v. Gonzales [13 SCRA 633]

SC affirmed the assessment of a deficiencytax against Gonzales, a private

concessionaire engaged in the manufacturer

of furniture inside the Clark Air Base, for

underdeclaration of his income. SC held that

the failure of the taxpayer to declare for

taxation purposes his true and actual income

derived from his business for two (2)

consecutive years is an indication of his

fraudulent intent to cheat the government if

its due taxes.

SEC. 254. Attempt to Evade or Defeat Tax. - Any

person who willfully attempts in any manner to evade

or defeat any tax imposed under this Code or the

payment thereof shall, in addition to other penalties

provided by law, upon conviction thereof, be

punished by a fine not less than Thirty thousand

(P30,000) but not more than One hunderd thousand

pesos (P100,000) and suffer imprisonment of not less

than two (2) years but not more than four (4) years:

Provided, That the conviction or acquittal obtained

under this Section shall not be a bar to the filing of a

civil suit for the collection of taxes.

3. Tax Avoidance

Tax avoidance is the exploitation by thetaxpayer of legally permissible alternative tax

rates or methods of assessing taxable

property or income in order to avoid or

reduce tax liability. It is politely called taxminimization and is not punishable by law.

Delphers Traders Corp. v. IAC[157 SCRA 349],

SC upheld the estate planning schemeresorted to by the Pacheco family in

converting their property to shares of stock

in a corporation which they themselves

owned and controlled. By virtue of the deed

of exchange, the Pachecho co-owners saved

on inheritance taxes. The Supreme Court

said the records do not point to anything

wrong and objectionable about this estateplanning scheme resorted to. The legal right

of the taxpayer to decreased the amount of

what otherwise could be his taxes or

altogether avoid them by means which the

law permits cannot be doubted.

What they really did was to invest theirproperties and change the nature of

their ownership from unincorporated to

incorporated form by organizing Delpher

Trades Corporation to take control of

their properties and at the same time saveon inheritance taxes. The "Deed of

Exchange" of property between the

Pachecos and Delpher Trades Corporation

cannot be considered a contract of sale.

There was no transfer of actual ownershipinterests by the Pachecos to a third party.

The Pacheco family merely changed their

ownership from one form to another. The

ownership remained in the same hands.

Hence, the private respondent has no basis

for its claim of alight of first refusal under thelease contract.

Yutivo v. CTA

Facts: Yutivo Sons Hardware Co. bought a number of

cars and trucks from General Motors Overseas

Corporation. As importer, GM paid sales tax

prescribed by sections 184, 185and 186 of the Tax

Code on the basis of its selling price to Yutivo. Said

tax being collected only once on original sales, Yutivo

paid no further sales tax on its sales to the public.

Southern Motors, Inc. was organized to engage in thebusiness of selling cars, trucks and spare parts. After

the incorporation of SM and until the withdrawal of

GM from the Philippines in the middle of 1947, the

cars and trucks purchased by Yutivo from GM were

sold by Yutivo to SM which, in turn, sold them to the

public in the Visayas and Mindanao.


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Issue: Whether or not Southern Motors, Inc. was

organized as a tax evasion device.

Held: NO.

SM was organized in June, 1946 when itcould not have caused Yutivo any tax savings.

From that date up to June 30, 1947, or aperiod of more than one year, GM was the

importer of the cars and trucks sold to

Yutivo, which, in turn resold them to SM.

During that period, it is not disputed that GMas importer, was the one solely liable for

sales taxes. Neither Yutivo or SM was subject

to the sales taxes on their sales of cars and

trucks.

The sales tax liability of Yutivo did notarizeuntil July 1, 1947 when it became the

importer and simply continued its practice of

selling to SM. The decision, therefore, of the

Tax Court that SM was organized purposely

as a tax evasion device runs counter to the

fact that there was no tax to evade

Intention to minimize taxes used in thecontext of fraud, must be proved by clear

and convincing evidence amounting to more

than mere preponderance and cannot be

justified by mere speculation. Fraud is never

presumed.

4. Exemption from Taxation

It is the grant of immunity to particularpersons or corporations or to persons or

corporations of a particular class from a tax

which persons and corporations generally

within the same state or taxing district are

obliged to pay.

It is an immunity or privilege; it is freedomfrom a financial charge or burden to which

others are subjected.

Exemption is allowed only if there is a clearprovision therefor.

It is not necessarily discriminatory as long asthere is a reasonable foundation or rational

basis.

Greenfield v. Meer

Facts: Since the year 1933, the plaintiff has been

continuously engaged in the embroidery business. In

1935, the plaintiff began engaging in buying and

selling mining stocks and securities for his own

exclusive account and not for the account of others.The plaintiff has not been a dealer in securities as

defined in section 84 (t) of Commonwealth Act No.

466; he has no established place of business for the

purchase and sale of mining stocks and securities; and

he was never a member of any stock exchange. The

plaintiff filed an income tax return where he claims a

deduction of P67,307.80 representing the net loss

sustained by him in mining stocks securities during

the year 1939. The defendant disallowed said item of

deduction on the ground that said losses were

sustained by the plaintiff from the sale of mining

stocks and securities which are capital assets, and

that the loss arising from the sale of the same should

be allowed only to the extent of the gains from such

sales, which gains were already taken into

consideration in the computation of the alleged net

loss of P67,307.80.

Issue: Whether the personal and additional

exemptions granted bysection 23 of Commonwealth

Act No. 466 should be considered as a credit against

or be deducted from the net income, or whether it is

the tax on such exemptions that should be deducted

from the tax on the total net income.

Held/Ratio: Personal and additional exemptions

claimed by appellant should be credited against or

deducted from the net income.

"Exception is an immunity or privilege; itis freedom from a charge or burden to

which others are subjected."

(If the amounts of personal andadditional exe

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