Tax3.docx

A. Inherent Limitations on the Taxing Power a. Public Purpose of Taxes 

The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objects of government or directly to promote the welfare of the community.

Test: whether the statute is designed to promote the public interest, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public. [Pascual v. Secretary of Public Works (1960)]  The protection and promotion of the sugar industry is a matter of public concern; the legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. [Lutz v Araneta (1955)]  The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. [Tio v. Videogram (1987)] Tests in Determining Public Purpose: (1) Duty Test - Whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a government to provide. (2) Promotion of General Welfare Test - Whether the proceeds of the tax will directly promote the welfare of the community in equal measure. (3) Character of the Direct Object of the Expenditure – it is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion. Incidental advantage to the public or to the State, which results from the promotion of private enterprises or business, does not justify their aid with public money. [Pascual v. Sec. of Public Works, G.R. No. L10405, December 29, 1960] Pascual v Secretary of Public Works and Communications, et.al G.R. No. L-10405 December 29, 1950 "It is a general rule that the legislature is without power to appropriate public revenue for anything but a public purpose. . . . It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax, and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion. Incidental advantage to the public or to the state, which results from the promotion of private interests and the prosperity of private enterprises or business, does not justify their aid by the use of public money. "In accordance with the rule that the taxing power must be exercised for public purposes only, money raised by taxation can be expanded only for public purposes and not for the advantage of private individuals. The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public interests, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public.

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The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon events occupying, or acts performed, subsequently thereto, unless the latter consist of an amendment of the organic law, removing, with retrospective operation, the constitutional limitation infringed by said statute. b. Non-Delegability of the Taxing Power INHERENTLY LEGISLATIVE Stated in another way, taxation may exceptionally be delegated, subject to such well-settled limitations as – (1) The delegation shall not contravene any constitutional provision or the inherent limitations of taxation; (2) The delegation is effected either by the Constitution or by validly enacted legislative measures or statute; and (3) The delegated levy power, except when the delegation is by an express provision of the Constitution itself, should only be in favor of the local legislative body of the local or municipal government concerned. [Vitug and Acosta] General Rule: Delegata potestas non potest delegari. The power to tax is exclusively vested in the legislative body and it may not be re-delegated. Judge Cooley enunciates the doctrine in the following oft-quoted language: "One of the settled maxims in constitutional law is that the power conferred upon the legislature to make laws cannot be delegated by that department to any other body or authority. Where the sovereign power of the state has located the authority, there it must remain; and by the constitutional agency alone the laws must be made until the Constitution itself is charged.” [People v. Vera, G.R. No. L45685, November 16, 1937] Legislature has the power to determine the: (1) nature (kind), (2) object (purpose), (3) extent (rate), (4) coverage (subjects) and (5) situs (place) of taxation. Exceptions (1) Delegation to local governments - This exception is in line with the general principle that the power to create municipal corporations for purposes of local self-government carries with it, by necessary implication, the power to confer the power to tax on such local governments. This is logical for after all, municipal corporations are merely instrumentalities of the state for the better administration of the government in respect to matters of local concern. [Pepsi-Cola Bottling Co. of the Phil. Inc. v. Mun. of Tanauan, 69 SCRA 460, 1976]. Under the new Constitution, however, LGUs are now expressly given the power to create its own sources of revenue and to levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may provide which must be consistent with the basic policy of local autonomy. [Art X, Sec 5, 1987 Constitution] (2) Delegation to the President (a) to enter into Executive agreements, and (b) To ratify treaties which grant tax exemption subject to Senate concurrence.

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The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government. [Art. 6, Sec. 28 (2), 1987 Constitution] (3) Delegation to administrative agencies - Limited to the administrative implementation that calls for some degree of discretionary powers under sufficient standards expressed by law or implied from the policy and purposes of the Act. (a) There are certain aspects of the taxing process that are not legislative and they may, therefore, be vested in an administrative body. The powers which are not legislative include: (1) the power to value property for purposes of taxation pursuant to fixed rules; (2) the power to assess and collect the taxes; and (3) the power to perform any of the innumerable details of computation, appraisement, and adjustment, and the delegation of such details. (b) The exercise of the above powers is really not an exception to the rule as no delegation of the strictly legislative power to tax is involved. (c) The powers which cannot be delegated include the determination of the subjects to be taxed, the purpose of the tax, the amount or rate of the tax, the manner, means, and agencies of collection, and the prescribing of the necessary rules with respect thereto. TERRITORIAL Rule: A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercise and enjoyed. (51 Am.Jur. 87-88). Reasons: (1) Tax laws (and this is true of all laws) do not operate beyond a country’s territorial limits. (2) Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be a compensation. Note: Where privity of relationship exists. - It does not mean, however, that a person outside of state is no longer subject to its taxing powers. The fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. A person may be taxed where there is between him and the taxing state, a privity of the relationship justifying the levy. Thus, the citizen’s income may be taxed even if he resides abroad as the personal (as distinguished from territorial) jurisdiction of his government over him remains. In this case, the basis of the power to tax is not dependent on the source of the income nor upon the location of the property nor upon the residence of the taxpayer but upon his relation as a citizen to the state. As such citizen, he is entitled, wherever he may be, inside or outside of his country, to the protection of his government Osmena v. Orbos, Etc., Etal, supra With regard to the alleged undue delegation of legislative power, the Court finds that the provision conferring the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by which the authority must be exercised. In addition to the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic pump rates, § 8(c) of P.D. 1956 expressly authorizes the ERB to impose additional amounts to augment the resources of the "Fund. 3

For a valid delegation of power, it is essential that the law delegating the power must be (1) complete in itself, that is it must set forth the policy to be executed by the delegate and (2) it must fix a standard—limits of which are sufficiently determinate or determinable—to which the delegate must conform. c. Situs of Taxation Situs of taxation literally means the place of taxation. The basic rule is that the state where the subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question. Within the territorial jurisdiction, the taxing authority may determine the situs. Factors that Determine Situs: (1) Nature of the tax; (2) Subject matter of the tax (person, property, act or activity); (3) Possible protection and benefit that may accrue both to the government and the taxpayer; (4) Citizenship of the taxpayer; (5) Residence of the taxpayer; (6) Source of income. Philippine Guaranty Co., Inc. V. Commissioner of Internal Revenue, L-22074 Where the reinsurance contracts show that the activities that constituted the undertaking to reinsure a domestic insurer against losses arising from the original insurances in the Philippines were performed in the Philippines, the reinsurance premiums are considered as coming from sources within the Philippines and are subject to Philippine Income Tax. Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income Reagan v. Commissioner of Internal Revenue, G.R. No. L-26379, December 27, 1969 The Clark Air Force Base is not a foreign soil or territory for purposes of income tax legislation. There is nothing in the Military Bases Agreement that lends support to such assertion, It has not become foreign soil or territory. The Philippine's jurisdictional rights therein, certainly not excluding the power to tax, have been preserved. As to certain tax matters, an appropriate exemption was provided for. The exemption clause in the Military Bases Agreement by virtue of which a "national of the United States serving in or employed in the Philippines in connection with the construction, maintenance, operation or defense of the bases and residing in the Philippines only by reason of such employment" is not to be taxed on his income "unless derived from Philippine sources or sources other than the United States sources," does not apply to income derived in the bases which are clearly derived in the Philippines. For income tax purposes, the Clark Air Force Base is not outside Philippine territory. d. Exemption of Government from Taxes If the taxing authority is the National Government: 4

General Rule: Agencies and instrumentalities of the government are exempt from tax. Note: Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers. With respect to government-owned or controlled corporations performing proprietary (not governmental) functions, they are generally subject to tax in the absence of tax exemption provisions in their charters or the law creating them. Reasons for the exemption: (1) To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over for itself. (2) This immunity also rests upon fundamental principles of government, being necessary in order that the functions of government shall not be unduly impeded. (1 Cooley 263). (3) The practical effect of an exemption running to the benefit of the government is merely to reduce the amount of money that has to be handled by the government in the course of its operations: For these reasons, provisions granting exemptions to government agencies may be construed liberally in favor of non-tax liability of such agencies. [Maceda v. Macaraig, Jr., 197 SCRA 771, 1991] Exception: When it chooses to tax itself. Nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. [Mactan Cebu Airport v Marcos, G.R. No. 120082 September 11, 1996] There is no constitutional prohibition against the government taxing itself. [Coll. v. Bisaya Land Transportation, 105 Phil. 338, 1959]. If the taxing authority is the local government unit: RA 7160 expressly prohibits LGUs from levying tax on the National Government, its agencies and instrumentalities and other LGUs. [Local Government Code, Sec. 133 (o)] Social Security System vs. City of Bacolod et.al., G.R. No. L-35726, July 21, 1982 What is decisive is that the properties possessed by the SSS, albeit devoted to private or proprietary purpose, are in fact owned by the government of the Philippines. As such they are exempt from realty taxes. It is axiomatic that when public property is involved, exemption is the rule and taxation, the exception. In connection with the issue at hand, it would not be amiss to state that Presidential Decree No. 24, which amended the Social Security Act of 1954, has already removed all doubts as to the exemption of the SSS from taxation. e. International Comity International Comity Comity - respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a foreign state or government may not be the subject of taxation by another state. Reasons: (1) In par in parem non habet imperium. As between equals there is no sovereign (Doctrine of Sovereign Equality among states under international law). One state cannot exercise its sovereign powers over another.) (2) In international law, a foreign government may not be sued without its consent→ useless to impose a tax which could not be collected.

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(3) Usage among states that when a foreign sovereign enters the territorial jurisdiction of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the other. (4) Rule in international law that a foreign government may not be sued without its consent so that it is useless to assess the tax anyway since it cannot be collected. Section 159, Local Government Code 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. B. Constitutional Limitations on Taxing Power a. Due Process of Law Art III, Sec 1, 1987 Constitution – 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. (1) Substantive Due Process – An act is done under the authority of a valid law or the Constitution itself. (2) Procedural Due Process – An act is done after compliance with fair and reasonable methods or procedure prescribed by law. Due (1) (2) (3)

Process in Taxation requirements: public purpose imposed within taxing authority’s territorial jurisdiction assessment or collection is not arbitrary or oppressive

The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown to amount to the confiscation of property. [Sison v. Ancheta, 130 SCRA 654,1984] Instances of violations of the due process clause: (1) If the tax amounts to confiscation of property; (2) If the subject of confiscation is outside the jurisdiction of the taxing authority; (3) If the tax is imposed for a purpose other than a public purpose; (4) If the law which is applied retroactively imposes just and oppressive taxes. (5) If the law violates the inherent limitations on taxation. Province of Abra vs. Hernando, G.R. NO. L 49336, August 31, 1981 Province of Abra is therefore fully justified in invoking the protection of procedural due process. If there is any case where proof is necessary to demonstrate that there is compliance with the constitutional provision that allows an exemption, this is it. Instead, respondent Judge accepted at its face the allegation of private respondent. All that was alleged in the petition for declaratory relief filed by private respondents, after mentioning certain parcels of land owned by it, are that they are used "actually, directly and exclusively" as sources of support of the parish priest and his helpers and also of private respondent Bishop. In the motion to dismiss filed on behalf of petitioner Province of 6

Abra, the objection was based primarily on the lack of jurisdiction, as the validity of a tax assessment may be questioned before the Local Board of Assessment Appeals and not with a court. There was also mention of a lack of a cause of action, but only because, in its view, declaratory relief is not proper, as there had been breach or violation of the right of government to assess and collect taxes on such property. It clearly appears, therefore, that in failing to accord a hearing to petitioner Province of Abra and deciding the case immediately in favor of private respondent, respondent Judge failed to abide by the constitutional command of procedural due process. b. Equal Protection of the Law Art III, Sec 1, 1987 Constitution - 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. All persons subject to legislation shall be treated alike under similar circumstances and conditions both in the privileges conferred and liabilities imposed. [1 Cooley 824-825; See Sison v. Ancheta,1984] The doctrine does not require that persons or properties different in fact be treated in laws as though they were the same. Indeed, to treat them the same or alike may offend the Constitution. What the Constitution prohibits is class legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for so doing, Congress may, therefore, group the persons or properties to be taxed and it is sufficient “if all of the same class are subject to the same rate and the tax is administered impartially upon them.” [1 Cooley 608]. The equal protection clause is subject to reasonable classification. Tiu v Court of Appeals, G.R. No. 127410, January 20, 1999 The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class. Classification is valid as long as: (1) classification rests on substantial distinctions which make real differences, (2) classification is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class.

Sison vs. Ancheta, G R. No.L-59431, July 25, 1984 It is undoubted that 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.

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Uniformity in taxation quite similar to the standard of equal protection. Taxpayers may be classified into different categories where it rests on real differences.— Ormoc Sugar vs. Treasurer of Ormoc City, G.R. No. L-23794, February 17, 1968 When the taxing ordinance was enacted, Ormoc Sugar Co., Inc. was the only sugar central in the City. A reasonable classification should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central from the coverage of the tax. A subsequently established sugar central cannot be subject to tax because the ordinance expressly points to Ormoc Sugar Company, Inc. as the entity to be levied upon. c. Freedom of Speech and of the Press American Bible Society v. City of Manila, April 30, 1957 The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent" It is true the price asked for the religious articles was in some instances a little bit higher than the actual cost of the same, but this cannot mean that plaintiff was engaged in the business or occupation of selling said "merchandise" for profit. For this reasons, the provisions of City Ordinance No. 2529, as amended, which requires the payment of license fee for conducting the business of general merchandise, cannot be applied to plaintiff society, for in doing so, it would impair its free exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination of religious beliefs. It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not applicable to plaintiff-appellant and defendant-appellee is powerless to license or tax the business of plaintiff Society involved herein for, as stated before, it would impair plaintiff's right to the free exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination of religious beliefs, We find that Ordinance No. 3000, as amended is also inapplicable to said business, trade or occupation of the plaintiff. -Lladoc vs. Commissioner of Internal Revenue, June 16, 1965 Section 22(3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as property taxes, as contradistinguished from excise taxes.

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A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution. d. Non-Infringement of Religious Freedom Art III, Sec 5, 1987 Constitution – No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. (non-establishment clause) The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. (free exercise clause) No religious test shall be required for the exercise of civil or political rights. The free exercise clause is the basis of tax exemptions. The imposition of license fees on the distribution and sale of bibles and other religious literature by a non-stock, nonprofit missionary organization not for purposes of profit amounts to a condition or permit for the exercise of their right, thus violating the constitutional guarantee of the free exercise and enjoyment of religious profession and worship which carries with it the right to disseminate religious beliefs and information. [American Bible Society v. City of Manila, L-9637 April 30, 1957]It is actually in the nature of a condition or permit for the exercise of the right. This is different from a tax in the income of one who engages in religious activities or a tax on property used or employed in connection with those activities. It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax for the privilege of delivering a sermon. [American Bible Society v. City of Manila] The Constitution, however, does not prohibit imposing a generally applicable tax on the sale of religious materials by a religious organization. [Tolentino v. Secretary of Finance, 235 SCRA 630,1994]. e. Non-Impairment of Contracts Art III, Sec 10, 1987 Constitution – No law impairing the obligation of contracts shall be passed. Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. The Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration. [Tolentino v. Secretary of Finance (1994)] -Casanovas v. Hord, 8 Phil. 125, March 22, 1907

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Section 134 of the Internal Revenue Law of 1904 (Act No. 1189) is void because it impairs the obligation of the contracts contained in the concessions of mines made by the Spanish Government. -Meralco v. Province of Laguna, G.R. No. 131359 A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.

While the Court has referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Tax exemptions of this kind may not be revoked without impairing the obligations of contracts. However, they are not to be confused with tax exemptions granted under franchises. -Cagayan Electric Power and Light Co. V. Commissioner of Internal Revenue The Tax Court acted correctly in holding that the exemption was restored by the subsequent enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption. Hence, the petitioner is liable only for the income tax for the period from January 1 to August 3, 1969 when its tax exemption was modified by Republic Act No. 5431. However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The Commissioner at the outset was not certain as to petitioner’s income tax liability. It had reason not to pay income tax because of the tax exemption in its franchise. For this reason, it should be liable only for tax proper and should not be held liable for the surcharge and interest. f. Non-Imprisonment for Debt or Non-Payment of Poll Tax Art III, Sec 20, 1987 Constitution- No person shall be imprisoned for debt or non-payment of a poll tax. g. Origin of Appropriation, Revenue and Tariff Bills

h. Uniformity, Equitability and Progressivity of Taxation Uniformity and equality of taxation Art VI, Sec 28(1), 1987 Constitution- The rule of taxation shall be uniform and equitable. Congress shall evolve a progressive system of taxation.

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Uniformity- All taxable articles or properties of the same class shall be taxed at the same rate. [City of Baguio v. de Leon, 25 SCRA 938]. (1) Uniformity of operation throughout tax unit - The rule requires the uniform application and operation, without discrimination, of the tax in every place where the subject of it is found. This means, for example, that a tax for a national purpose must be uniform and equal throughout the country and a tax for a province, city, municipality, or barangay must be uniform and equal throughout the province, city, municipality or barangay. (2) Equality in burden – Uniformity implies equality in burden, not equality in amount or equality in its strict and literal meaning. The reason is simple enough. If legislation imposes a single tax upon all persons, properties, or transactions, an inequality would obviously result considering that not all persons, properties, and transactions are identical or similarly situated. Neither does uniformity demand that taxes shall be proportional to the relative value or amount of the subject thereof. Taxes may be progressive. Equity – 1) Uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under the Constitution must be equitable. “Equitable” means fair, just, reasonable and proportionate to the taxpayer’s ability to pay. Taxation may be uniform but inequitable where the amount of the tax imposed is excessive or unreasonable. (2) The constitutional requirement of equity in taxation also implies an approach which employees a reasonable classification of the entities or individuals who are to be affected by a tax. Where the “tax differentiation is not based on material or substantial differences,” the guarantee of equal protection of the laws and the uniformity rule will likewise be infringed. Taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation. –Classification to be valid, must, be reasonable and this requirement is not deemed satisfied unless: (a) it is based upon substantial distinctions which make real differences; (b) these are germane to the purpose of the legislation or ordinance; (c) the classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the present; and (d) the classification applies equally to all those who belong to the same class. [Pepsi-Cola v. Butuan City, 24 SCRA 789] The progressive system of taxation would place stress on direct rather than indirect taxes, on non-essentiality rather than essentiality to the taxpayer of the object of taxation, or on the taxpayer’s ability to pay. Example is that individual income tax system that imposes rates progressing upwards as the tax base (taxpayer’s taxable income) increases. A progressive tax, however, must not be confused with a progressive system of taxation. While equal protection refers more to like treatment of persons in like circumstances, uniformity and equity refer to the proper relative treatment for tax purposes

Villegas vs. Hiu Chiong Tsai Pao Hao, G.R. No. L-29646, November 10, 1978 The P50.00 fee is unreasonable not only because it is excessive but because it fails to consider valid substantial differences in situation among individual aliens who are required to pay it. Although the equal protection clause of the Constitution does not forbid classification, it is imperative that the classification should be based on real and substantial differences having a reasonable relation to the subject of the particular legislation. The same amount of

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P50.00 is being collected from every employed alien whether he is casual or permanent, part time or full time or whether he is a lowly employee or a highly paid executive Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion. It has been held that where an ordinance of a municipality fails to state any policy or to set up any standard to guide or limit the mayor's action, expresses no purpose to be attained by requiring a permit, enumerates no conditions for its grant or refusal, and entirely lacks standard, thus conferring upon the Mayor arbitrary and unrestricted power to grant or deny the issuance of building permits, such ordinance is invalid, being an undefined and unlimited delegation of power to allow or prevent an activity per se lawful. Association of Customs Brokers, Inc. Vs. Municipal Board of Manila et. Al It is also our opinion that the ordinance infringes the rule of the uniformity of taxation ordained by our Constitution. Note that the ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It does not distinguish between a motor vehicle 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 another place but occasionally comes to Manila and uses its streets and public highways. The distinction is important if we note that the ordinance intends to burden with the tax only those registered in the City of Manila as may be inferred from the word "operating" used therein. The word "operating" denotes a connotation which is akin to a registration, for under the Motor Vehicle Law no motor vehicle can be operated without previous payment of the registration fees. There is no pretense that the ordinance equally applies to motor vehicles who come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public highway. The fact that they are benefited by their use they should also be made to share the corresponding burden. And yet such is not the case. This is an inequality which we find in the ordinance, and which renders it offensive to the Constitution. i. Non-delegation of legislative power -Abakada Guro Party List v. Ermita, G.R.168056, October 30, 1995 , the general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions: (1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution; (2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution; (3) Delegation to the people at large; (4) Delegation to local governments; and (5) Delegation to administrative bodies. In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate and (b) fixes a standard the limits of which are sufficiently determinate and determinable to which the delegate must conform in the performance of his functions. The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire 12

operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed. Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.

j. Delegation of Legislative Authority to Fix Tariff Rates, Import and Export Quotas Grant by Congress of authority to the President to impose tariff rates Delegation of Tariff powers to the President under the flexible tariff clause [Art VI, Sec 28(2)], 1987 Constitution], which authorizes the President to modify import duties. [Sec. 401, Tariff and Customs Code] k. Tax Exemption of Properties Actually, Directly and Exclusively Used for Religious, Charitable and Educational Purposes Prohibition against taxation of religious, charitable entities, and educational entities Art VI, Sec 28(3), 1987 Constitution: (a) Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, (b) actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. (c) The tax exemption under this constitutional provision covers property taxes only and not other taxes [Lladoc v. Commissioner, 14 SCRA 292, 1965]. In general, special assessments are not covered by the exemption because by nature they are not classified as taxes. [Apostolic Prefect v. City Treasurer of Baguio] To be entitled to the exemption, the petitioner must prove that: (1) it is a charitable institution (2) its real properties are actually, directly and exclusively used for charitable purposes. Revenue or income from trade, business or other activity, the conduct of which is not related to the exercise or performance of religious, educational and charitable purposes or functions shall be subject to internal revenue taxes when the same is not actually, directly or exclusively used for the intended purposes. [BIR Ruling 046-2000]

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Test: whether an enterprise is charitable or not: whether it exists to carry out a purpose recognized in law as charitable or whether it is maintained for gain, profit, or private advantage. A charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. “Exclusive" - possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; "Exclusively" - "in a manner to exclude; as enjoying a privilege exclusively.” If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. [Lung Center of the Philippines v. Quezon City (2004)]

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Note: Lung Center did not necessarily overturn the case of Abra Valley College v. Aquino (1988). Lung Center just provided a stricter interpretation. In Abra Valley, the court held: The primary use of the school lot and building is the basic and controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof. Under the 1935 Constitution, the trial court correctly held that the school building as well as the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes (incidental to its educational purpose), but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved. Abra Valley College y. Aquino, June 15, 1988 It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, 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. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purpose—educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education.

Commissioner of Internal Revenue v. Court of Tax Appeals and YMCA The term educational institution or institution of learning has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such term refers to schools. The school system is synonymous with formal education, which refers to the hierarchically structured and chronological graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels. The Court has examined the Amended Articles of Incorporation and By-Laws of the YMCA, but found nothing in them that even hints that it is a school or an educational institution. m. Voting Requirements in Connection with the Legislative Grant of Tax Exemption SECTION 24. All appropriation, revenue or tariff bills, bills authorizing 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. SECTION 28. (4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

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n. Tax Exemption of Revenues and Assets, including Grants Endowments, Donations orContributions to Educational Institutions Art. XIV, Sec. 4, 1987 Constitution xxx (3) 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. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment. (4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. This provision covers only non-stock, non-profit educational institutions The exemption covers income, property, and donor’s taxes, custom duties, and other taxes imposed by either or both the national government or political subdivisions on all revenues, assets, property or donations, used actually, directly and exclusively for educational purposes. (In the case of religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax.) The exemption does not cover revenues derived from, or assets used in, unrelated activities or enterprise. Similar tax exemptions may be extended to proprietary (for profit) educational institutions by law subject to such limitations as it may provide, including restrictions on dividends and provisions for reinvestment. The restrictions are designed to insure that the tax-exemption benefits are used for educational purposes. Lands, buildings, and improvements actually, directly and exclusively used for educational purposes are exempt from property tax [Sec. 28[3], Art. VI, 1987 Constitution], whether the educational institution is proprietary or non-profit. Art. VI Sec.28, 1987 Constitution xxx (4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress. Basis: The inherent power of the state to impose taxes carries with it the power to grant tax exemptions. Exemptions may be created by: (1) the Constitution or (2) statute subject to constitutional limitations Vote required for the grant of exemption: Absolute majority of the members of Congress (at least ½ + 1 of ALL the members voting separately) Vote required for withdrawal of such grant of exemption: Relative majority is sufficient (majority of the quorum). The provision guaranteeing equal protection of the laws and that mandating the rule of taxation shall be uniform and equitable likewise limit, although not expressly, the legislative power to grant tax exemption. Grants in the nature of tax exemptions: (1) Tax amnesties (2) Tax condonations (3) Tax refunds Note: (1) Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. [Sec. 192, LGC] 16

(2) The President of the Philippines may, when public interest so requires, condone or reduce the real property tax and interest for any year in any province or city or a municipality within the Metropolitan Manila Area. [Sec. 277, LGC] C. Double Taxation and Tax Exemptions a. Double Taxation Defined DOUBLE TAXATON Means taxing twice the same taxpayer for the same tax period upon the same thing or activity, when it should be taxed but once, for the same purpose and with the same kind of character of tax. Victorias Milling Co., Inc. V. Municipality of Victorias, G.R. NO. L-21183 Double taxation has been otherwise described as "direct duplicate taxation." For double taxation to exist, "the same property must be taxed twice, when it should be taxed but once." Double taxation has also been "defined as taxing the same person twice by the same jurisdiction for the same thing." With the foregoing precepts in mind, we find no difficulty in saying that plaintiff's argument on double taxation does not inspire assent. First. The two taxes cover two different objects. Section 1 of the ordinance taxes a person operating sugar centrals or engaged in the manufacture of centrifugal sugar. While under Section 2, those taxed are the operators of sugar refinery mills. One occupation or business is different from the other. Second. The disputed taxes are imposed on occupation or business. Both taxes are not on sugar. The amount thereof depends on the annual output capacity of the mills concerned, regardless of the actual sugar milled. Plaintiff's argument perhaps could make out a point if the object of taxation here were the sugar it produces, not the business of producing it. b. Elements of Double Taxation a. Subject matter is taxed twice when it should be taxed only once b. Both taxes are levied for the same purpose c. Imposed by the same taxing authority within the same jurisdiction, during the same taxing period and covering the same kind of tax -Villanueva v. City of lloilo, G.R. No. L-26521, December 28, 1968 In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax."23 It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the sametaxing authority, are not of the same kind or character. At all events, there is no constitutional prohibition against double taxation in the Philippines. 24 It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform."

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Procter and Gamble Philippines Manufacturing Corp. V. Municipality of Jagna, G.R. No. L-24265, December 28, 1979 Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question does not amount to double taxation. For double taxation to exist, the same property must be taxed twice, when it should be taxed but once. Double taxation has also been defined as taxing the same person twice by the same jurisdiction for the same thing. 9 Surely, a tax on plaintiff's products is different from a tax on the privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality. c. Kinds of Double Taxation 1. Direct Double Taxation

2. Indirect Double Taxation

3. International Juridical Double Taxation

d. Means Employed to Avoid Double Taxation 1. Tax Credits amounts subtracted from the computed tax in order to arrive at taxes payable. 2. Tax Deductions Deductions are items or amounts which the law allows to be deducted from the gross of income of a taxpayer in order to arrive at taxable income. In general, deductions or allowable deductions are business expenses and losses incurred which the law allows to reduce gross business income to arrive at net income subject to tax. [Sec. 65, Rev. Reg. No. 2]. Deductions are in the nature of an exemption from taxation; they are strictly construed against the claimant, who must point to a specific provision allowing them and who has the burden of proving that they falls within the purview of such 18

provision. Thus, all deductions must be substantiated, except when the law dispenses with the records, documents or receipts to support the deductions. If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of the exemption by clear legislative intent [Commissioner of Customs v. Philippine Acetylene Co., G.R. No. L-22443 May 29, 1971] However, if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction will not apply. [Commissioner v. Anoldus Caprentry Shop, G.R. No. 71122 March 25, 1988] The purpose of deductions from gross income is to provide the taxpayer a just and reasonable tax amount as the basis of income tax. It is because many taxpayers spend adequate expenditures in order to obtain a legitimate income. 3. Tax Exemptions The grant of immunity to particular persons or corporations or to person 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 freedom from a financial charge or burden to which others are subjected. It is strictly construed against the taxpayer. Taxation is the rule; exemption is the exception. He who claims exemption must be able to justify his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to be misinterpreted.” If not expressly mentioned in the law, it must at least be within its purview by clear legislative intent. 4. Tax Treaties

c. Tax Avoidance, Tax Evasion and Tax Fraud Tax avoidance (Tax Minimization) The exploitation by the taxpayer 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 “tax minimization” and is not punishable by law. Example: A person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental taxation or to lower his tax bracket for a taxable year. Transformation TRANSFORMATION – method of escape in taxation whereby the manufacturer or producer upon whom the tax has been imposed pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. The taxpayer escapes by a transformation of the tax into a gain through the medium of production. Tax evasion (Tax Dodging) 19

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. Example: Deliberate failure to report a taxable income or property; deliberate reduction of income that has been received. Elements of Tax Evasion (a) 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. (b) An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate and not accidental.” (c) A course of action (or failure of action) which is unlawful. Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. Thus: (1) The failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two consecutive years has been held as an indication of his fraudulent intent to cheat the government of its due taxes. [Republic v. Gonzales, 13 SCRA 633, 1965] (2) The substantial underdeclaration of income in the income tax returns of the taxpayer for four (4) consecutive years coupled with his intentional overstatement of deductions justifies the finding of fraud. [Perez v. CTA and Collector, 103 Phil. 1167, 1958]

Delpher Trades Corporation v. Intermediate Appellate Court et. al., G.R. No. L 69259, January 26, 1988 The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." -Commissioner of Internal Revenue vs. Estate of Benigno Toda Jr., G.R. No. 147188, September 14, 2004 Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and (3) a course of action or failure of action which is unlawful. All these factors are present in the instant case.

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