Coverage 1

What is taxation?

The inherent power of the State to raise revenue to defray the necessary expenses of government, exercised through Congress.

What are taxes?

Enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty, for the support of government and public needs.

What is the twofold nature of the power of taxation?

It is inherent in sovereignty and legislative in character.

Under CUPS, what does Comprehensive mean?

The taxing power covers persons, property, activities, professions, rights, and privileges, and is generally all embracing.

Under CUPS, what does Unlimited mean?

A tax does not become invalid merely because it regulates, discourages, or burdens the activity taxed.

Under CUPS, what does Plenary mean?

The BIR may avail of the full range of remedies to ensure tax collection, though ambiguity in a taxing statute is resolved against the taxing authority.

Under CUPS, what does Supreme mean?

The power is superior only as to the selection of the subject or object of taxation, since the State may tax anything within its jurisdiction.

What is the source of the power to tax LGUs?

Direct constitutional grant under the policy of local autonomy, or valid delegation through statute such as the Local Government Code.

Can Congress abrogate the taxing power granted to LGUs by the Constitution?

No, Congress may only provide guidelines and limitations consistent with local autonomy.

What are the essential characteristics of a tax?

It is enforced, generally payable in money, proportionate, levied on persons, property, or privilege, levied for a public purpose, levied at regular intervals, levied by the lawmaking body, and personal to the taxpayer.

Can a corporations tax delinquency be enforced against its stockholders?

Generally no, except where corporate assets have passed into the stockholders hands or the stockholders have unpaid stock subscriptions.

Who pays estate tax and can heirs be assessed directly?

The executor or administrator pays out of the net estate; heirs cannot be assessed directly, except each becomes subsidiarily liable proportionate to his distributive share if the estate was distributed before payment.

What are the requisites of a valid tax?

Public purpose, uniformity, jurisdiction over the person or property taxed, guarantee against injustice through notice and hearing, and no impingement on constitutional or inherent limitations.

How are taxes classified as to subject matter?

Personal tax, property tax, excise tax, and customs duties.

What is a personal tax?

A fixed amount imposed on all persons of a certain class, regardless of property, occupation, or business.

What is an excise tax?

A tax imposed on the exercise of a right or privilege, such as income tax, VAT, or estate tax.

What is the difference between a direct and an indirect tax?

In a direct tax, the liability and burden fall on the same person; in an indirect tax, the liability falls on one person but the burden may be shifted to another.

What is the difference between a specific and an ad valorem tax?

A specific tax is fixed by law based on a physical unit of measurement; an ad valorem tax is based on the value of the article, requiring appraisal.

What is a progressive tax?

A tax whose rate increases as the tax base increases.

What is a regressive tax?

A tax whose rate decreases as the tax base increases.

What is a toll and how does it differ from a tax?

A toll is a sum paid for use of a public improvement, a demand of proprietorship rather than sovereignty, and may be imposed by government or private entities.

What is a special assessment?

A levy on land only, based on the direct and special benefit accruing to the land from a public improvement, exceptional in time and locality, and not a personal liability.

What is the test to determine if an imposition is a tax or a license fee?

If the purpose is primarily to raise revenue, it is a tax; if primarily regulatory, it is a license fee even if revenue is incidentally produced.

What case held motor vehicle registration fees to be a tax measure?

Philippine Airlines, Inc. v. Edu.

What case held the videogram tax to be both regulatory and a revenue measure?

Tio v. Videogram Regulatory Board.

Distinguish tax from a debt as to assignability.

A tax is not assignable, while a debt is assignable.

Distinguish tax from a debt as to effect of nonpayment.

Nonpayment of a tax is punishable by imprisonment except for a poll tax, while nonpayment of a debt does not carry imprisonment.

What is the Doctrine of Equitable Recoupment?

It is not followed in the Philippines; a prescribed tax presently being assessed may not be set off against a previously overpaid tax whose refund is also barred by prescription.

What is the primary purpose of taxation?

Revenue raising, to provide funds for the State to promote general welfare and protection of citizens.

What are the secondary purposes of taxation?

Regulation, reduction of social inequality, encouragement of economic growth, protection of local industries, and implementation of police power such as sin taxes.

What are the three inherent powers of the State?

Taxation, police power, and eminent domain.

As to compensation, what does a taxpayer receive under taxation?

Protection and general benefits from the government.

As to nonimpairment of contracts, how does taxation differ from police power and eminent domain?

Under taxation, contracts may not generally be impaired, while under police power and eminent domain, contracts may be impaired.

What is the LifeBlood Doctrine?

Taxes are the lifeblood of government, the indispensable price of civilized society, without which government would be paralyzed.

Give one practical consequence of the LifeBlood Doctrine regarding injunctions.

As a rule, an injunction does not lie to restrain the collection of taxes.

Give one practical consequence of the LifeBlood Doctrine regarding setoff.

Taxes are not subject to setoff or legal compensation.

What is the Necessity Theory of taxation?

The power to tax is an attribute of sovereignty emanating from necessity, being the means by which the State provides for defense, public service, and public improvements.

What is the BenefitsProtection Theory or Doctrine of Symbiotic Relationship?

Taxes are paid in exchange for the benefits and protection citizens receive from government, though no special or direct benefit to a particular taxpayer is required.

What is the Marshall Dictum?

The power to tax is the power to destroy, referring to the unlimited degree with which the taxing power may be employed to raise revenue.

What is the Holmes Dictum?

The power to tax is not the power to destroy while the Supreme Court sits, meaning the taxing power knows no limit except those expressly stated in the Constitution.

What is the extent of judicial review over the wisdom of a tax measure?

Courts cannot inquire into the wisdom, policy, or motives behind a tax as long as constitutional limitations are not violated.

What does the Constitution direct Congress to do regarding taxation?

To evolve a progressive system of taxation, in which the tax rate increases as income or resources increase.

Is progressivity of taxation absolute?

No, regressive taxes like VAT are still permitted; the Constitution merely directs greater emphasis on direct rather than indirect taxation.

What is vertical equity?

Those who are financially better off should be taxed more relative to those who have less.

What is horizontal equity?

Those similarly situated should be taxed similarly.

What is double taxation?

Taxing the same property, subject, or activity twice when it should be taxed only once.

Is double taxation prohibited in the Philippines?

There is no express constitutional prohibition; it is not favored but is permissible unless it violates equal protection or uniformity.

What are the elements of direct duplicate or obnoxious taxation?

Same property or subject taxed twice, same purpose, same taxing authority, same jurisdiction, same taxing period, and same kind or character of tax.

What is indirect duplication?

Double taxation lacking one or more elements of direct duplicate taxation, and therefore not legally objectionable.

Distinguish domestic from international double taxation.

Domestic double taxation is imposed by taxing authorities within the same State, while international double taxation is the imposition of comparable taxes by two or more states on the same taxpayer for the same subject and period.

What is the Tax Sparing Rule?

A reduced final withholding tax rate on dividends earned by a nonresident foreign corporation from a domestic corporation, on condition that its home country allows a credit for taxes deemed paid in the Philippines.

What are the modes of eliminating or minimizing double taxation?

Tax sparing rule, tax deductions, tax credits, tax exemptions, principle of reciprocity, and tax treaties.

Under the Exemption Method of eliminating double taxation, what is the focus?

The income or capital itself, which is exempted in the state of residence though it may still affect the rate applied to remaining income.

Under the Credit Method of eliminating double taxation, what is the focus?

The tax paid on the income or capital, which is credited against the tax due in the state of residence.

Between the exemption and credit methods, which generally gives the taxpayer a greater benefit?

The credit method.

Under the deduction method versus the credit method for foreign taxes paid, what is the key difference?

Under the deduction method, foreign taxes paid are subtracted from gross income before computing tax due; under the credit method, foreign taxes paid are subtracted directly from the computed tax due.

What are the recognized forms of escape from taxation?

Shifting, capitalization, transformation, tax avoidance, tax evasion, and tax exemption.

What is shifting?

The process of transferring the tax burden from the statutory taxpayer to another person, without violating the law.

Distinguish impact of taxation from incidence of taxation.

Impact is the point on which the tax is originally imposed and who is legally liable to remit it; incidence is the point on which the tax burden finally rests.

What is forward shifting?

When the tax burden is transferred from a factor of production, through the factors of distribution, until it settles on the ultimate consumer.

What is backward shifting?

When the tax burden is transferred from the consumer back to the factors of production.

What is onward shifting?

When the tax is shifted two or more times, either forward or backward.

What is capitalization as a form of escape from taxation?

A mere increase in the value of property is not taxable income until actual sale or disposition of the property.

What is transformation?

When a manufacturer, fearing loss of market, absorbs the tax himself instead of passing it on, and recoups the cost by improving the production process to lower costs.

Is tax avoidance legal?

Yes, it is a legal, taxsaving device within the means sanctioned by law, used in good faith and at arms length.

Is tax evasion legal?

No, it is illegal, using pretenses or forbidden devices to lessen or defeat the tax.

What are the elements of tax evasion?

The end of paying less tax than legally due, a state of mind that is willful and in bad faith, and a course of action that is unlawful.

What is the rule of thumb indicating prima facie fraud in a tax return?

Failure to report sales or income exceeding 30 percent of that declared, or claiming deductions exceeding 30 percent of actual deductions.

What case sustained the conveyance of property to a family corporation as legitimate tax avoidance?

Delpher Trades Corp. v. Intermediate Appellate Court, since the transfer served a genuine business purpose beyond mere tax reduction.

What is a tax exemption?

The grant of immunity to particular persons or corporations, or to a particular class, from a tax that others generally within the same taxing district must pay.

How are tax exemptions construed?

Strictissimi juris, strictly against the taxpayer claiming the exemption, and liberally in favor of the taxing authority.

What is a tax exclusion?

Income, receipts, or items that the law does not treat as part of the tax base at all from the start.

Give an example of a tax exclusion.

Proceeds of life insurance paid by reason of the death of the insured, or a return of capital.

What vote is required in Congress to pass a law granting tax exemption?

The concurrence of a majority of all the members of Congress, not merely a quorum.

As a general rule, are tax exemptions revocable?

Yes, since a tax exemption is an act of legislative liberality and taxation is the rule while exemption is the exception.

What is the exception to the revocability of tax exemptions?

A tax exemption founded on a valid and subsisting contract cannot be unilaterally revoked, as this would impair the obligation of contracts.

How is a tax exemption granted directly by the Constitution revoked?

Only through constitutional amendment.

What is the rule when a special law grants a tax exemption and a later general law is passed?

The general law will not be construed to have repealed the special law, absent manifest legislative intent to do so.

What are the kinds of tax exemption as to source?

Constitutional, statutory, contractual, treaty, and licensing ordinance.

What are the kinds of tax exemption as to form?

Express and implied.

What items are treated like tax exemptions and strictly construed against the taxpayer?

Deductions for income tax purposes, claims for tax refund, tax amnesty, and condonation of unpaid tax liabilities.

When are tax exemptions construed liberally in favor of the grantee?

When the law itself so provides, for special classes of persons, in favor of the government or its instrumentalities, for traditional exemptees such as religious and charitable institutions, and where the exemption refers to public property.

What is a tax amnesty?

A general or intentional overlooking by the State of its authority to impose penalties on those guilty of tax evasion, partaking of absolute forgiveness of the right to collect.

Is the government estopped from questioning a taxpayers liability after amnesty payments are received?

No, the government is never estopped by the mistakes of its agents.

Distinguish the scope of immunity between tax amnesty and tax exemption.

Tax amnesty covers all criminal, civil, and administrative liabilities; tax exemption covers only civil liability, meaning the tax itself.

Distinguish the application in time between tax amnesty and tax exemption.

Tax amnesty applies to past tax periods and is retroactive; tax exemption is generally prospective.

What are the requisites of a taxpayers suit?

Tax money is extracted and spent in violation of constitutional protections, public money is deflected to an improper purpose, and the petitioner seeks to restrain enforcement of an invalid or unconstitutional law.

What is the constitutional exemption for charitable, religious, and educational entities under Article VI Section 28(3)?

Charitable institutions, churches, mosques, nonprofit cemeteries, and lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes are exempt from taxation.

What is the test of exemption under Article VI Section 28(3)?

It is the actual, direct, and exclusive use of the property, not ownership, that determines exemption, per Abra Valley College, Inc. v. Aquino.

What taxes does the exemption under Article VI Section 28(3) cover?

Real property tax only.

What taxes does the exemption under Article XIV Section 4(3) cover?

Income tax, customs duties, and real property tax, for nonstock nonprofit educational institutions.

What is the ruling in CIR v. De La Salle University regarding Section 30 of the NIRC?

Section 30s regardless of disposition clause is void as contrary to the Constitution; income of a nonstock nonprofit educational institution is exempt only if proven to be used actually, directly, and exclusively for educational purposes.

In whose favor are tax laws construed in case of doubt?

Tax laws are construed most strongly against the government and liberally in favor of the taxpayer.

How is a tax exemption construed compared to an ambiguous tax imposition?

A tax exemption is construed strictly against the taxpayer, while an ambiguous tax imposition is construed against the government.

Do tax laws operate prospectively or retroactively?

Prospectively, unless retroactive effect is expressly declared or clearly implied by the legislature.

Are tax laws political or civil in character?

Civil in character, not political, and continue in force even during a change of sovereignty unless expressly repealed.

Are tax laws subject to the constitutional prohibition against ex post facto laws?

No, since tax laws are civil, not penal, in nature.

What is the Global System of income taxation?

A system that treats all categories of a taxpayers income in common, applying a single progressive rate to the aggregate income, with flat rates for certain passive incomes.

What is the Schedular System of income taxation?

A system in which income tax treatment varies depending on the kind or category of the taxpayers income, each itemized and taxed at specifically applicable rates.

What system of income taxation does the Philippines employ?

A mix of both, generally schedular for individual taxpayers and more global for corporate taxpayers.