Basic Taxation Law: General Principles

Taxation Law

XI. Kinds of Taxes Differentiated DI-SA-GS-NL-PP-PR

• Direct and Indirect Taxes
• Direct tax is a tax for which a taxpayer is directly liable on the transaction or business  it engages in. 
• Examples:
• custom duties and ad valorem taxes paid by the oil companies to the Bureau of Customs for their importation of crude oil and 
• the specific and ad valorem taxes they pay to the Bureau of Internal Revenue after converting the crude oil into petroleum products. 
• Indirect tax is a tax primarily paid by persons who can shift the burden upon someone else. 
• Example:
• The excise and ad valorem taxes that oil companies pay to the Bureau of Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer like the NPC, by adding them to the "cash" and/ or "selling price." 
• Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into either direct tax or indirect tax.
• In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them.
• Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden t o someone else. 
• Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the  consumer who ultimately pays for it. 
• When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as par t of the price of goods sold or services rendered. 
• It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods or services, not in the buyer thereof. 
• Thus, one cannot invoke one's exemption privilege to avoid the passing on or the shifting of the VAT to him by the manufacturers/ suppliers of the goods he purchased. 
• Hence, it is important to determine if the tax exemption g ranted to a taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable. 
• Indirect taxes, like VAT and excise tax, are different from withholding taxes. 
• To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it.
• On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. 
• The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government 

• Specific and Ad Valorem 
• A specific tax is imposed and based on weight or volume capacity or any other physical unit of measurement.
• Examples:
• Excise taxes on distilled spirit, tobacco products and petroleum products.
• Ad valorem tax is based on selling price or other specified value of the goods. 
• Examples:
• Excise tax on automobile and non-essential goods. 

• General and Special
• A general tax is imposed solely to raise revenue for the government.
• Examples:
• Income tax
• Donor's tax
• Estate tax
• Value-added tax.
• A special tax is imposed and collected to achieve a particular legitimate object of government. 
• Example:
• Oil price stabilization fund. 
• Osmeña v. Orbos, 220 SCRA 703
• The Supreme Court held that the contribution to OPSF is collected to protect the local consumers by stabilizing and subsidizing domestic pump rates.

• National and Local
• A national tax is imposed by the national government.
• Example:
• revenue taxes under the NIRC and custom duties
• A local tax is levied and collected by the local government
• Example:
• real property tax and business tax
• Meralco Securities Industrial Corporation v. Central Board of Assessment Appeals, 114 SCRA 260
• Classifying real property tax as national tax is deemed superseded by the effectivity of Republic Act No. 7160 on January 1, 1992. 

• Personal and Property 
• A personal tax is of fixed amount imposed on individuals, whether citizens or not, residing within a specified territory, without regard to their property or occupation 
• Example:
• community tax
• A property tax is imposed on property, real or personal, in proportion to its value 
• Example:
• real estate tax
•  An excise tax is a tax on the exercise of right or privilege or performance of an act.
• Examples:
• income tax
• estate tax
• donor's tax 
• value added tax

• Progressive and Regressive -
• A progressive tax is one whereby the rate increases as the tax base (amount) increases. 
• Examples:
• income tax
• estate tax
• donor's tax 
• under the NIRC. 
• A regressive tax is one where the tax rate decreases as the tax base increases. 
• Tolentino, et al. v. Secretary of Finance:
• The Supreme Court ruled that value-added tax is a form of regressive tax.

XII. Concept of Double Taxation 

• There is a double taxation 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 enacted with respect to the same occupation, calling or activity by both the state and the political subdivision thereof.

Kinds of Double Taxation DI-DI

• Direct
• It constitutes double taxation in the objectionable or prohibited sense. 
• This occurs when the same property is taxed twice when it should be taxed but once; both taxes must be imposed on the: PPA-JPK
• 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 of the same kind or character of tax.
• Local Business Tax Based on Gross Revenues Amounts to Direct Double Taxation 
• Ericsson Telecommunications, Inc. vs. City of Pasig:
• The imposition of local business tax based on gross revenue will inevitably result in the constitutionally proscribed double taxation - taxing of the same person twice by the same jurisdiction for the same thing - inasmuch as petitioner's gross revenue or income for a taxable year will definitely include its gross receipt already reported during the previous year and for which local business tax has already been paid.
• Gross revenue covers money or its equivalent actually or constructively received, including the value of service rendered or articles sold, exchanged or leased, the payment of which is yet to be received. 
• This is in consonance with the International Financial Reporting Standards, which defines revenue as the gross inflow of economic benefits (cash, receivables, and other assets) arising from the ordinary operating activities of an enterprise (such a sales of goods, sales of services, interest, royalties, and dividends), which is measured at the fair value of the consideration receivable.

• Indirect
• is permissible double taxation.
• This is allowed if the taxes are of different nature or character, imposed by different taxing authorities. 
• It has been held that a real estate tax and the tenement tax imposed by local ordinance although imposed by the same taxing authoritv, are not of the same kind or character.
• Domestic
• this arises when the taxes are imposed by the local or national government (within the same state).
• International
• refers to the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. 
• 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.

• The tax conventions are drafted with a view towards the elimination of international juridical double taxation. 
• The apparent rationale for doing away with double taxation is to 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.
• Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. 
• The Supreme Court declared that double taxation, in general, is not forbidden by our Constitution since we have not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and some states of the Union.
• Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the city or municipality. 
• Despite the lack of a specific prohibition, however, double taxation will not be allowed if it results in a violation of the equal protection clause. 
• Hence, if certain properties are subjected to an additional tax whereas others similarly  situated are not similarly taxed, the owners of the first properties would have a right to complain. 
• 
  

Tax Treaty as a Mode of Eliminating Double Taxation

• In order to eliminate double taxation, a tax treaty resorts to two methods of relief, to wit:

1. Exemption Method
• the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital.
2. Credit Method 
• the tax paid in the state of source is credited against the tax levied in the State of residence. 

• The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax.
• The intention behind the adoption of the provision on "relief from double taxation" in two tax treaties should be considered in light of the purpose behind the most favored nation clause.
• The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored" among other countries. 
• The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. 
• The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, e.g., royalty income, is the same as that in the tax treaty under which the taxpayer is liable. 

Ferrer Jr. v. Bautista

City of Manila v. Coca-cola Bottlers

• Tax avoidance 
• the tax saving device within the means sanctioned by law
• Tax evasion
• a scheme used outside of those lawful means and when availed of, it subjects the taxpayer to further or additional civil or criminal liabilities.

No Tax Evasion Where There Is No Fraud in the Filing of the Return

• CIR v. Javier, Jr., 199 SCRA 824
• The Supreme Court held that the following taxpayer's notation on his income  tax return was just an "error or mistake of fact or law" not constituting fraud: 
• "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation."
• Negating any bad faith, such notation was practically an invitation for investigation and that the taxpayer had literally laid his cards on the table."

Meaning of Estate Planning as Tax Avoidance Scheme

• Estate planning refers to the preparation for the distribution and management of a person's estate at death through the use of wills, trusts, insurance policies, and other arrangements, especially to reduce administration costs and transfer-tax liability. 
• The Supreme Court, in the case of Delpher Trades Corp. v. Intermediate Appellate Court, 157 SCRA 349, has given judicial imprimatur to estate planning as tax avoidance stratagem. 
• In this case, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. 
• Consequently, the Pachecos became stockholders of the corporation by subscription. 
• 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.
• This legal strategy finds statutory mooring in the National Internal Revenue Code, as amended:
• No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property. 
• CIR v. PASCOR, 309 SCRA 402:
• The Court ruled that an assessment is not necessary before a criminal charge can be filed.
1. Section 205 of the Tax Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously.
2. A criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.
3. The crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax.

XIV. Doctrine of Imprescriptibility

• As a rule, taxes are imprescriptible as they are the lifeblood of the government. 
• However, tax statutes may provide for statute of limitations.
• The rules that have been adopted are as follows:

1. National Internal Revenue Code 
• The statute of limitations for assessment of tax if a return is filed is:
• within three (3) years from the last day prescribed by law for the filing of the return or if filed after the last day, 
• within three (3) years from date of actual filing. 
• If no return is filed or the return filed is false or fraudulent, the period to assess is within 10 years from discovery of the omission, fraud or falsity.
• Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) of Section 222 may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax.
• However, the prescriptive period for assessment does not apply to improperly accumulated earnings tax.
• A tax imposed upon unreasonable accumulation of surplus is in the nature of a penalty. 
• It would not be proper for the law to compel a corporation to report improper accumulation of surplus. 
2. Tariff and Customs Code 
• It does not express any general statute of limitations; it provides, however, that "when articles have been entered and passed free of duty of final adjustments of duties made, with subsequent delivery, such entry and passage free of duty or settlements of duties will, after the expiration of three (3) years from the date of the final payment of  duties, in the absence of fraud or protest or compliance audit pursuant to the provisions of this Code, be final and conclusive upon all parties, unless the liquidation of the import entry was merely tentative." 
3. Local Government Code 
• Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. 
• In case of fraud or intent to evade the payment of taxes, fees or charges the same may be assessed within 10 years from discovery of the fraud or intent to evade payment. 
• They shall also be collected either by administrative or judicial action within five (5) years from date of assessment. (Sec. 194, LGC)
• Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. 
• No action for the collection of such taxes, fees, or charges, whether administrative or judicial, shall be instituted after the expiration of such period. 
• The basic real property tax and any other tax levied under Real Property Taxation shall be collected within five (5) years from the date they become due. 
• No action for the collection of the tax, whether administrative or judicial, shall be instituted after the expiration of such period. 
• In case of fraud or intent to evade payment of the tax, such action may be instituted for the collection o the same within 10 years from the discovery of such fraud or intent to evade payment. (

XV. Nature and Prospectivity of Tax Laws

• Tax laws are civil in nature. 
• Under Article 5 of the Civil Code, acts executed against the mandatory provisions of law are void, except when the law itself authorizes the validity of those acts.
• CIR v. Reyes, 480 SCRA 382, 397:
• The Supreme Court ruled that failure to comply with Section 228 (of the NIRC, as amended by Republic Act No. 8424, requiring that "The taxpayers shall be informed in writing of the laws and the facts on which the assessment is made; otherwise, the assessment shall be void  does not only render the assessment void, but also finds no validation in any provision in the Tax Code. 
• The Court cannot condone errant or enterprising tax officials, as they are expected to be vigilant and law-abiding.
• The general rule under the Civil Code that laws shall have prospective application applies to tax laws. 
• Retroactive application of revenue laws may be allowed if it will not amount to denial of due process. 
• There is violation of due process when the tax law imposes harsh and oppressive tax.
• Republic v. Oasan Vda. de Fernandez, 99 Phil. 934
• It has been held that the retroactive application of War Profits Tax Law may not be considered harsh and oppressive because the force of its impact fell on those who had amassed wealth or increased their wealth during the war, but did not touch the less fortunate. 

Strict Construction of Tax Laws

• Statutes levying taxes or duties are to be construed strongly against the Government and in favor of the subject or citizens, because burdens are not to be imposed or presumed to be imposed beyond what statutes expressly and clearly declare. 
• CIR v. CA, 204 SCRA 182
• No person or property is subject to taxation unless they fall within the terms or plain import of a taxing statute. 

XVI. Taxpayer's Suit, Requisites

• Taxpayer's suit requires illegal expenditure of public money.
• Maceda v. Macaraig, Jr., 197 SCRA 771
• The Supreme Court sustained the right of Senator Maceda as taxpayer  to file a petition questioning the legality of the tax refund to NPC by way of tax credit certificates and use of said assigned tax certificate by oil companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.
• Gonzales v. Marcos, 65 SCRA 624
• The Supreme Court held that the taxpayer has no legal personality to assail the validity of Executive Order No. 30 creating the Cultural Center of the Philippines. 
• Assailed order does not involve the use of public funds. 
• There was finding to the effect that the funds came from donations and contributions and not by taxation. 
• Accordingly, there was that absence of the requisite pecuniary or monetary interest.
• Abaya v. Ebdane, Jr., 515 SCRA 720, 757- 758
• The Supreme Court stressed that the prevailing doctrine in the taxpayer's suits is to allow taxpayers to question contracts entered into by the national government or government-owned and -controlled corporations allegedly in contravention of law. 
• A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law.
• Significantly, a taxpayer need not be a party to the contract to challenge its validity.
• A taxpayer is deemed to have the standing to raise a constitutional issue when it is established that public funds from taxation have been disbursed in alleged contravention of the law or the Constitution
• Dela Llana v. COA, 665 SCRA 176 
• Petitioner claims that the issuance of Circular No. 89-299 has led to the dissipation of public funds through numerous irregularities in government financial transactions.
• These transactions have allegedly been left unchecked by the lifting of the pre-audit performed by COA, which, petitioner argues, is its Constitutional duty.
• Thus, petitioner has standing to file this suit as a taxpayer, since he would be adversely affected by the illegal use of public money.
• Land Bank of the Philippines v. Cacayuran, 696 SCRA 861:
• In sum, for a taxpayer's suit to prosper, two requisites must be met namely, 
1. public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed,
2. the petitioner is directly affected by the alleged act. 

Taxpayer's Suit Differentiated from Citizen's Suit

• In taxpayer's suit, the plaintiff is affected by the expenditure of public funds.
• In citizen's suit, he is but the instrument of the public concern. 

Concept of Locus Standi vis-à-vis Doctrine of Transcendental Importance

• Locus standi is defined as "a right of appearance in a court of justice on a given question." 
• In public suits, the plaintiff who asserts a "public right in assailing an illegal official action does so as a representative of the general public. 
• He may be a person who is affected no differently from any other person.
• He could be suing as a stranger, or in the category of a citizen, or taxpayer. 
• In either case, he has to adequately show that he is entitled to seek judicial protection. 
• In other words, he has to make out a sufficient interest in the vindication of the public order and the securing of relief as a citizen or taxpayer.
• The "direct injury" test in our jurisdiction holds that the person who impugns the validity of a statute must have a personal and substantial interest in the case such that he has sustained, or will sustain direct injury as a result.
• However, being a procedural technicality, the requirement of locus standi may be waived by the Court in the exercise of its discretion.  
• Even where the petitioners have failed to show direct injury, the Court allowed them to sue under the principle of "transcendental importance."
• Significant decisional rules on the principle are as follows:
1. Chavez o. Public Estates Authority
• The Court ruled that the enforcement of the constitutional right to information and the equitable diffusion of natural resources are matters of transcendental importance which clothe the petitioner with locus standi;
2. Bagong Alyansang Makabayan v. Zamora
• The Court held that "given the transcendental importance of the issues involved, the Court may relax the standing requirements and allow the suit to prosper despite the lack of direct injury to the parties seeking judicial review" of the Visiting Forces Agreement;
3. Lim v. Executive Secretary
• While the Court noted that the petitioners may not file suit in their capacity as taxpayers absent a showing that "Balikatan 02-01" involves the exercise of Congress' taxing or spending powers, it reiterated its ruling in Bagong Alyansang Makabayan v. Zamora, that in cases of transcendental importance, the cases must be settled promptly and definitely and standing requirements may be relaxed. (David v. Macapagal-Arroyo, 489 SCRA 160)