Q: What Are the Aspects of Taxation ?

A.GENERAL PRINCIPLES

Q: What are the aspects of taxation ?

A: The aspects of taxation are as follows:

1. levy & imposition which is exercised by the legislature and which includes the power to determine the persons & property subject to tax, the amount & rate of tax, the type of tax, the situs of taxation and the method of collection
2. collection & enforcement which is exercised by the executive, specifically the DOF, BIR and BOC

Q: What is the lifeblood theory of taxation?

A: The lifeblood theory states that the assessment of a tax is enforceable despite its being contested because of the urgency to collect taxes, this being the government’s primary source of revenue. Otherwise, if the payment of taxes could be postponed by questioning their validity, government would be paralyzed. [CIR v. Cebu Portland].

Q: Where is the application of the lifeblood theory illustrated?

A: It is illustrated in the prohibition against set-off of taxes and in the rule that prohibits the issuance of an injunction to restrain the collection of taxes. However, the latter admits of an exception which is provided both under the new (RA 9282) and the old (RA 1125) CTA laws wherein it is provided that “when in the opinion of the Court the collection may jeopardize the interest of the Government and/or the taxpayer, the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court”.

For the prohibition against set-off of taxes, note that the payment of taxes with Tax Credit Certificates is valid as this is expressly provided for in Section 204 (C) of the Tax Code.

Another illustration is in the principle of the presumption of correctness of assessments.

Q: What are the non-revenue or SUMPTUARY objectives of taxation?

A:

a.)Taxation can strengthen anemic enterprises or provide incentive to greater production through the grant of tax exemptions or the creation of conditions conducive to their growth.

b.)Taxes may be increased in periods of prosperity to curb spending power and halt inflation or lowered in periods of slump to expand business and ward off depression.

c.)Taxes on imports may be increased to protect local industries against foreign competition or decreased to encourage foreign trade.

d.)Taxes on imported goods may also be used as a bargaining tool by a country by setting tariff rates first at a relatively high level before trade negotiations are entered into with another country to enhance its bargaining power.

e.)Taxes can discourage certain businessessuch as in the case of the high taxes imposed on alcohol and tobacco products.

f.)Taxes can also minimize inequity.

Q: How do you distinguish between tax from tolls, penalties, special assessments and license?

TAX / TOLL / TAX / LICENSE
A demand of sovereignty / A demand of proprietorship / Enforced contribution assessed / Legal compensation or
Paid for the support of the government / Paid for the use of another’s property / by sovereign authority to defray public expenses / Reward of an officer for specific services
Generally no limit on the / Amount of toll depends upon / Levied for revenue / Imposed for regulation
Amount of tax that may be / the cost of construction or / Exercise of taxing power / Exercise of police power
Imposed / maintenance of the public improvement used / Imposed on persons, property, exercise of right or privilege / Imposed on the right to exercise a privilege only
May be imposed only by the government / May be imposed by the government or private individuals or entities / Generally no limit on the amount of tax that may be imposed / Amount should be limited to the necessary expenses of inspection and regulation
Failure to pay does not necessarily make an act or business illegal / Failure to pay makes the act of business illegal
TAX / SPECIAL ASSESSMENT / TAX / PENALTY
Levied on persons, property, privileges, acts, etc / Levied only on land / Intended to raise revenue / Designated to regulate conduct
Personal liability / Not a personal liability of the person involved, his liability is limited only to the land involved / May be imposed only by the government / May be imposed by the government or private individuals or entities
Based on necessity and benefits / Based wholly on benefits
Has general application / Exceptional both as to the time and place

Q: Is the Universal Charge (‘UC”) imposed on electricity end-users by distributors a tax or a fee?

A: The UC is a regulatory fee as it is levied to ensure viability of the country’s electric power industry.The declaration of policy in the EPIRA law definitely focuses on the public welfare by ENSURING THE VIABILITY OF THE COUNTRY’S ELECTRIC POWER INDUSTRY. The SC also added that it has ruled time and again that taxing power may be used as an implement of police power.

Given that it is a regulatory measure, the objection on it being levied not by Congress has no basis. In addition, the SC ruled that the Energy Regulatory Commission is guidedby sufficient standards provided within the EPIRA law itself to calculate how much to impose as UC and, as such, there is no undue delegation. Finally, it was stated that the imposition redounds to the benefit of the power industry and not the public at large and that the rate is uniformly levied on electricity end-users unlike a tax which is imposed based on a taxpayer’s ability to pay. [Gerochi vs. DOE, July 17, 2007]

Q: Was the Motor Vehicle Registration FEE (“MVRF”) imposed against Philippine Airlines considered a tax or a regulatory fee?

A: The MVRF was considered tax notwithstanding its designation as a fee. The SC upheld the previous decision in the Calalang case and based its ruling on the fact that (1) the legislative intent clearly showed that the imposition was primarily levied as a tax and (2) more importantly, only 1/5 of the amount levied was reserved for the operating expenses of the collecting agency which is a clear indication that the main purpose of MVRF was for revenue.

Q: How were direct taxes and indirect taxes distinguished in the recent case of CIR vs. PLDT ?

A: Direct taxes were defined as “those that are extracted from the very person who, it is intended or desired, should pay them” while indirect taxes are defined as “those that are demanded, in the first instance one person in expectation and intention that he can shift the burden to someone else”.

Q: How are taxes classified?

A:

As to subject matter

a.)Personal – Tax of a fixed amount, imposed on persons within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they are engaged

b.)Property – Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable methods of apportionment

c.)Excise – Any tax which does not fall within the classification of a personal or a property tax. It is a charge imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation, profession or business.

As to who bears the burden

a.)Direct – Demanded from the person who also shoulders the burden of the tax; the taxpayer is directly or primarily liable, and he cannot shift the burden to another.Incidence and burden of tax are on the same person. (Example: income tax)

b.)Indirect – Demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon the ultimate purchaser or consumer. Incidence is on one person but the burden is shifted to another. (Example: VAT)

As to scope

a.)National – Tax imposed by the national government

b.)Local – Tax imposed by municipal corporations or local government units

As to rate

a.)Progressive – The rate increases as the tax base of bracket increases

b.)Regressive – The rate decreases as the tax base or bracket increases

Q: Is a margin fee considered as tax?

A: NO. A fee imposed to curb excessive demands on international reserve, such as the margin fee, is not a tax but a form of exchange control. As such, it may not be considered a deductible expense if it is being claimed as a “tax” under (now) Section 34 (C). [Esso Standard v. CIR]

Q: What is the effect of this distinction?

A: The margin fee will not be considered as a deductible expense as a tax paid since it is not even considered as a tax. Neither is it deductible as a business expense because the expense merely pertained to the ability to remit profits and not the running of the business itself. [Esso Standard v. CIR]

Q: How do we distinguish a fee from a tax?

A: On the one hand, a fee is imposed for purposes of regulation and the amount imposed is related to cost of regulation. It is also an exercise of police power. On the other hand, a tax is imposed for revenue generation purposes and there is no relation of the amount imposed to the cost.

Q: What are the basic principles of a sound tax system?

A:

a.)Fiscal adequacy – Sources of revenue should be sufficient to meet the demands of public expenditure in order to avoid fiscal deficit. It also means that the revenues should be capable of expanding or contracting annually in response to variations in public expenditures. An example is raising taxes to avoid the current fiscal crisis.

b.)Equality or theoretical justice – This is also called the ability-to-pay principle. The tax burden should be in proportion to the taxpayer’s ability to pay. An example is the schedular system of taxation applied in the Philippines.

c.)Administrative Feasibility - Tax laws should be capable of convenient, just and effective administration. An example would be avoiding taxing the government to reduce collection costs.

Q: What are the inherent limitations on the power of taxation?

A: public purpose, international comity, non-delegability, exemption of government, territoriality --- PINET

Q: What principle related to “taxes being levied for a public purpose” was laid down in the case of Planters Products, Inc. vs. Fertiphil Corporation (March 14, 2008)?

A: President Marcos issued an LOI which provided the imposition of a capital recovery component (CRC) on the domestic sales of all fertilizer grades. The same LOI provided that the CRC “shall be collected until adequate capital is raised to make Petitioner PPI (a private company) viable”. When Marcos left, Fertiphil sought a refund of the amounts it paid under the LOI. The SC ruled that:

(1)The LOI is an exercise of the power of taxation. While it is true that the power of taxation can be used as an implement of police power, the primary purpose of the CRC is revenue generation given that the amounts collected were too excessive to serve a mere regulatory purpose given that it was collectible “until adequate capital is raised to make PPI viable”. The case cited PAL vs. Edu.

(2)Given its nature as a tax imposition, the fact that the ultimate beneficiary is PPI, a private company, makes the levy invalid for not serving a public purpose.

Q: Can the power of taxation be delegated? If so, what is the legal basis for this?

A: The power of taxation can be delegated to the local government units, which power to delegate is granted under Art. X, Sec. 5 of the Constitution. The delegation is consistent with the recognition of the LGUs power to create its own sources of revenue. BUT the power is not inherent in the local government unlike in the national government.

Q: What is the doctrine enunciated in the case of John Hay Peoples Alternative ?

A: In the John Hay case, it was stated that the exemption granted under RA 7227 only refers to Subic entities, hence inapplicable to John Hay. The fact that an Administrative Order was passed by President Ramos stating that the tax incentives available under RA 7227 should also apply to John Hay locators is a violation of the requirement that tax exemptions must be strictly and expressly provided for and that the power to grant tax exemption is only within powers of Congress.This same rule applied to the Clark locators in the case of Coconut Oil Refiners Association, Inc. vs. BCDA.

Note that R.A. 9400 was passed in March 2007 granting incentives to locators in Clark, John Hay, Poro Point and Morong economic zones.

Q: Are the land and buildings owned by ManilaInternationalAirport Authority subject to real property tax and leviable ?

A: No. The recent case of MIAA vs. PARANAQUE (July 20, 2006) ruled that since MIAA is not a GOCC but a “government instrumentality vested with corporate powers” or a GOVERNMENT CORPORATE ENTITY(like Philippine Ports Authority, University of the Philippines, Philippine Fisheries Development Authority(2007 case) and Bangko Sentral ng Pilipinas), it is exempt from real property tax. Likewise, since the properties are owned by the government, they are outside the commerce of man and can’t be auctioned. However, the portion of the property leased to private entities (such as the hangars) are subject to real property tax.

Q: Is the Expanded Value Added Tax Law unconstitutional for embodying a regressive system of taxation?

A: Even if the VAT is regressive because it is an indirect tax, it is not prohibited since the Constitution does not prohibit regressive taxes. What it simply provides is that “Congress shall evolve a progressive system of taxation”, which means that direct taxes are to be preferred and indirect taxes minimized. [Tolentino v. Secretary of Finance]

Q: What were the points discussed in the VAT case of ABAKADA GURO PARTY LIST VS. ERMITA?

A: The following points were discussed in this case

(1) There is no undue delegation of legislative power on the provision allowing increase of the VAT rate to 12% since what is delegated is simply “the ascertainment of facts upon which the administration and enforcement of the increase rate under the law is contingent”. Also, the fact that no discretion is exercised by the President is evident in the use of the term “shall”.

(2) Petitioners contention that the 12% VAT rate is an “unfair and unnecessary additional tax burden” is beyond the scope of review of the Court as it is a “question of wisdom of legislation”

(3) The law is equitable as it imposes safeguards/limits in the form of VAT exemption granted to gross sales below P1.5million.

Q: Was the “classification freeze” provision provided under RA 9334 and discussed in the case of British American Tobacco vs. Camacho (August 20, 2008) constitutional?

A: Yes. The SC ruled that the provision passes the ‘rational basis’ test and addresses (i) concerns on the delegation of too much power to the DOF and BIR; (ii) simplification of tax administration of sin products; (iii) elimination of potential areas for abuse and corruption in tax collection; (iv) buoyant and stable revenue generation; and (v) ease of projection of revenues. It added that even if creates undue advantage to its competitors, it is not enough to declare the law unconstitutional since it does not show that Congress had this in mind but instead was moved by an earnest desire to improve tax administration. Finally, it was ruled that RA 9334 does not violate GATT as it does not discriminate on just imported products.

Q: Is the Attrition Law (RA 9335) constitutional?

A: Yes. In the case of Abakada Guro Party List vs. Purisima (August 14, 2008), the SC ruled that the law giving incentives to BIR/BOC employees if the exceededtheir collections was valid as there are enough safeguard and penalties to ensure that the collectors do not become ‘bounty hunters’. It was also ruled that there was no unequal protection since BIR/BOC are the only revenue collectors and are thus differentiated from other government agencies. Likewise, it was found that sufficient standards existed for the President to determine revenue targets as basis for rewards/penalties and thus did not create any issue on undue delegation. Finally, the SC said that the provision empowering the Congressional Committee to review the law’s implementing rules is an invalid provision since this is a function of the Executive (and review is by the Judiciary and not Legislature) and is thus a violation of separation of powers.

Q: The YMCA is a non-stock, non-profit institution with religious, charitable and educational objectives. It leased part of its premises to small canteen owners and charged parking fees on the lots besides its building. The CIR wanted to tax YMCA for such income; however the latter claimed that it is exempt from such. Which side is correct?

A: The CIR is correct that YMCA is liable to pay income tax. The assessment here was for deficiency INCOME tax on income derived from rental of real property and NOT PROPERTY tax. Section 27 of the NIRC provides that even if non-profitable clubs are exempted, the last paragraph expressly states that profits realized from real property from whatever source and wherever used is taxable (It is also taxable on income from profitable activities). On the other hand, the Constitutional exemption under Art. 6 Sec. 28 (3) of Constitution (“charitable institutions, churches, non-profit cemeteries, etc.) refers to property taxes only. The Constitutional exemption under Art. 14 Sec. 4 (3) which states that non-stock educational institution whose assets are used actually, directly and exclusively for educational purpose is exempt from tax applies to income tax BUT THIS DID NOT APPLY SINCE YMCA WAS UNABLE TO PROVE THAT IT IS AN EDUCATIONAL INSTITUTION.