Chapter I GENERAL PRINCIPLES I. TAXATION DEFINED Taxation is a mode of raising revenue for public purposes. 1 Taxes, on the other hand, are enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of the government and for all its public needs. ("Cooley's definition," 1 Cooley 62) They are not arbitrary exactions but contributions levied by authority of law, and by some rule of proportion which is intended to insure uniformity of contribution and a just apportionment of the burdens of government. 2 Thus: a. Taxes are enforced contributions. Taxes are obligations created by law. (Vera v. Fernandez, L-31364, March 30, 1979) Taxes are never founded on contract or agreement, and are not dependent for their validity upon the individual consent of the persons taxed. (1 Cooley 68) b. Taxes are proportional in character, since taxes are based on one's ability to pay. c. Taxes are levied by authority of the law. '1 Cooley Taxation, 4th Ed., p. 72. l Cooley 64; Question No. 1(A), 2004 Bar Examination. J 1 TAX PRINCIPLES AND REMEDIES The power to impose taxes is a legislative power; it cannot be imposed by the executive department nor by the courts. 1 d. Taxes are for the support of the government and all its public needs. BASIS OF TAXATION A. Taxation and the Lifeblood Doctrine 4 Taxation has been defined as the power by which the sovereign raises revenue to defray the necessary expenses of government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy the benefits and must therefore bear its burdens. (51 Am. Jur. 34) The power of taxation is essential because the government can neither exist nor endure without taxation. Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. (Bull v. United States, 295 U.S. 247,15 APTR 1069, 1073) The collection of taxes must be made without hindrance if the state is to maintain its orderly existence. Government projects and infrastructures are made possible through the availability of funds provided through taxation. The government's ability to serve and protect the people depends largely upon taxes. Taxes are what we pay for a civilized society. 5 CASES FOR STUDY CIR v. BPI 521 SCRA 373,387-388 x x x (T)he public will suffer if taxpayers will not be held liable for the proper taxes assessed against them: "Taxes are the lifeblood of the government, for without '1 Cooley 69. •Question No. 2,1991 Bar Examination. KZommissioner v. Algue, Inc., 158 SCRA 9. CHAPTER I G E N E R A L PRINCIPLES 3 taxes, the government can neither exist nor endure." A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and wellbeing of the people. CIR v. PINEDA 21 SCRA 105* The Government resorted to the administrative remedy of enforcement of tax lien in trying to collect deficiency income tax of the estate of Atanasio Pineda. Manuel B. Pineda, the eldest son of the deceased, who was made to pay the full amount of the taxes assessed questioned the assessment on the ground that as an heir he is liable for unpaid income tax due the estate only up to the extent of and in proportion to any share he received. HELD: The Government can require Manuel B. Pineda to pay the full amount of the taxes assessed. Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir, he is individually answerable for the part of the tax proportionate to the share he received from the inheritance. His liability, however, cannot exceed the amount of his share. As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount of the property in his possession. The reason is that the 'Question No. 4 , 1 9 9 9 Bar Examination. TAX PRINCIPLES A N D REMEDIES 4 Government has a lien on the P2,500 received by him from the estate as his share in the inheritance for unpaid taxes for which the estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code (now Section 219, NIRC). By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500 to satisfy the income tax assessment in the amount of P760.28. XXX The second remedy (tax lien) is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above-quoted, because TAXES ARE THE LIFEBLOOD OF THE GOVERNMENT AND THEIR PROMPT AND CERTAIN AVAILABILITY IS AN IMPERIOUS NEED. MISAEL P. VERA, et al. v. HON. JOSE F. FERNANDEZ, et al. 89 SCRA 199 The Government of the Republic of the Philippines claimed deficiency income taxes against the Estate of the late Luis D. Tongoy. The Administrator argued that the claim was barred under Section 5, Rule 86 of the Rules of Court. Hence, the issue as to whether or not the Statute of Non-Claims — Sec. 5, Rule 86 of the New Rules of Court — barred the claim of the government for unpaid taxes, though it was filed within the period of limitation prescribed in Sections 331 and 332 of the NIRC. HELD: The Supreme Court ruled in the negative, citing the case of Pineda v. CFI ofTayabas which gave exception 7 7 5 2 Phil. 803. CHAPTER I GENERAL PRINCIPLES 5 to the claim for taxes from being filed as other claims. The reason for the more liberal treatment of claims for taxes against a decedent's estate is because (T)axes are the lifeblood of the Government and their prompt and certain availability are an imperious need."Upon taxation depends the Government's ability to serve the people for whose benefit taxes are collected." (Commissioner of Internal Revenue v. Pineda, G.R. No. L-22734, September 15,1967, 21 SCRA 105) Furthermore, as held in CIR v. Pineda, supra, payment of income tax shall be a lien in favor of the Government of the Philippines from the time the assessment was made by the Commissioner of Internal Revenue until paid with interests, penalties, etc. By virtue of such lien, the SC held that the property of the estate already in the hands of an heir or transferee may be subject to the payment of the tax due the estate. CIR v. CTA" 234 SCRA 348 A petition for review of the decision of the BIR denying the tax refund of Citytrust was filed with the CTA. It was submitted for decision based solely on the pleadings and evidence submitted by Citytrust. CIR could not present any evidence by reason of the repeated failure of the Tax Credit/Refund Division of the BIR to transmit the records of the case, as well as the investigation report thereon, to the Solicitor General. The CTA rendered its decision ordering BIR to grant a refund to Citytrust in the amount of PI3,314,506.14. The CA affirmed the judgment of the CTA. HELD: It is a long and firmly settled rule of law that the Government is not bound by the errors committed "Question 1(d), 2005 Bar Examination. 6 TAX PRINCIPLES AND REMEDIES by its agents. In the performance of its government functions, the State cannot be estopped by the neglect of its agents and officers. Although the Government may generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public duties as exemplified in this case will not and should not produce that effect. Nowhere is the aforestated rule more true than in the field of taxation. It is axiomatic that the Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopardize the Government's financial position, especially in the case at bar where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy. Judgment of CA is SET ASIDE and the case is REMANDED to the CTA for further proceedings and appropriate action. COMMISSIONER v. ALGUE, INC. 158 SCRA 9 The Commissioner of Internal Revenue contends that the claimed deduction was properly disallowed because it was not an ordinary, reasonable or necessary business expense. The Court of Tax Appeals, however, agreed with Algue, Inc. in holding that the said amount had been legitimately paid by Algue, Inc. as promotional fees for their work in the formation of Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Corporation. CHAPTER I G E N E R A L PRINCIPLES 7 HELD: Ruling in favor of Algue, Inc., the Supreme Court held that Algue, Inc. has proved that the payment of fees was necessary and reasonable in the light of efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is, therefore, necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (See also 'The Doctrine of Symbiotic Relationship') YMCA v. CIR' 298 SCRA 83 YMCA, a welfare, educational and charitable non-profit corporation, leased its facilities to small shop owners, restaurants and canteen operators, and collected parking fees. YMCA contends that its rental income is not subject to tax. The contention is not tenable. Since taxes are the lifeblood of the nation, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. The claimed exemption must expressly be granted in a statute stated in a language too clear to be mistaken. 'Question No. 6(A), 2002 Bar Examination. TAX PRINCIPLES AND REMEDIES DAVAO GULF LUMBER CORP. v. CIR 293 SCRA 77 Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. FERDINAND R. MARCOS II v. CA, et al 273 SCRA 47" Ferdinand R. Marcos II assailed the decision of the Court of Appeals declaring the deficiency income tax assessments and estate tax assessments upon the estate and properties of his late father final despite the pendency of the probate proceedings of the will of the late President. On the other hand, the BIR argued that the State's authority to collect internal revenue taxes is paramount. HELD: The approval of the court, sitting in probate or as a settlement tribunal over the deceased's estate, is not a mandatory requirement in the collection of estate taxes. The enforcement of tax laws and the collection of taxes are of paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is, therefore, necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real "•Question No. 1(c), 2005 Bar Examination; Question No. 9(A), 2004 Bar Examina- CHAPTER I G E N E R A L PRINCIPLES purpose of taxation, which is the promotion of common good, may be achieved. JOSE REYES v. PEDRO ALMANZOR 196 SCRA 322 Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (CIR v. Algue, Inc., 158 SCRA 9 [1988]) Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (R.A. No. 6359 and P.D. No. 20) under the same principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties. PHILIPPINE BANK OF COMMUNICATIONS v. CIR 302 SCRA 250 Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. 10 TAX PRINCIPLES AND REMEDIES From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters. PHILIPPINE GUARANTY CO., INC. v. CIR 13 SCRA 775 The defense of reliance in good faith on rulings of the CIR requiring no withholding of the tax due on reinsurance premiums may free the taxpayer from the payment of surcharge or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents. PHILEX MINING CORPORATION v. CIR 294 SCRA 687 Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. NORTH CAMARINES LUMBER CO. v. CIR 109 Phil. 511 As the petitioner had consumed thirty-three days, its appeal was clearly filed out of time. It is argued, however, that in computing the 30-day period CHAPTER I GENERAL PRINCIPLES 11 fixed in Section 11 of Republic Act No. 1125, the letter of the respondent Collector dated January 30, 1956, denying the second request for reconsideration, should be considered as the final decision contemplated in Section 7, and not the letter of demand dated August 30,1955. This contention is untenable. We cannot countenance the theory that would make the commencement of the statutory 30-day period solely dependent on the will of the taxpayer and place the latter in a position to put off indefinitely and at his convenience the finality of the tax assessment. Such an absurd procedure would be detrimental to the interest of the Government, for 'taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need.' (Bull v. U.S. 295, U.S. 247) B. Theories on Taxation Taxation, as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner, is a power predicated upon necessity (Necessity Theory). It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State's territory and facilities and protection which a government is supposed to provide. 11 The Benefits-Protection Theory, on the other hand, bases the power of the State to demand and receive taxes on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his property that is demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized society. Thus, the taxpayer cannot question the validity of the tax law " 1 3 S C R A 775. TAX PRINCIPLES AND REMEDIES 12 on the ground that payment of such tax will render him impoverished, or lessen his financial or social standing, because the obligation to pay taxes is involuntary and compulsory, in exchange for the protection and benefits one receives from the government. This theory spawned the DOCTRINE OF SYMBIOTIC RELATIONSHIP, a term culled from the ruling of the Supreme Court in the celebrated case of Commissioner of Internal Revenue v. Algue, Inc., supra," which stressed that: 'Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the burden of running the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values." C. Liabilities Involved TAXES ARE PERSONAL TO THE TAXPAYER. A corporation's tax delinquency cannot, for instance, be enforced against its stockholders because not only would this run counter to the principle that taxes are personal, but it would also not be in accord with the rule that a corporation is vested by law with a personality that is separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 13 Nevertheless, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears ,3 Sunio v. NLRC, L-57767, January 31, 1984. 13 CHAPTER I GENERAL PRINCIPLES that the corporate assets have passed into their hands. (Doctrine of Piercing the Corporate Veil)'* A tax creates CIVIL LIABILITY on the part of the delinquent taxpayer although the non-payment thereof (due to failure or refusal to pay) creates a CRIMINAL LIABILITY which could be the subject of criminal prosecution under existing laws. To sum, in taxation, it is one's failure to comply with the civil liability to pay taxes which gives rise to the criminal liability. 15 III. NATURE OF THE TAXING POWER A. Taxation as an Inherent Attribute of Sovereignty 16 The power of taxation is an incident of sovereignty as it is inherent in the State, belonging as a matter of right to every independent government. It does not need of constitutional conferment. Constitutional provisions do not give rise to the power to tax but merely impose limitations on what would otherwise be an invincible power. No attribute of sovereignty is more pervading and at no point does the power of government affect more constantly and intimately all the relations of life than through the exactions made under it. 17 Taxation being an attribute of sovereignty, its relinquishment is never presumed. 18 It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty. 14 Tan v. Commissioner, L-15778, April 23, 1962. "Republic v. Patanao, L-22356, July 2 1 , 1 9 6 7 . "Question No. 1(2), 1996 Bar Examination. "Churchill and Tail v. Concepcion, 34 Phil. 9 6 9 . " L u z o n Stevedoring Co. v. CTA, L-30232, July 2 9 , 1 9 8 8 . TAX PRINCIPLES A N D REMEDIES belonging as a matter of right to every independent State or government. No sovereign State can continue to exist without the means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax." B. Taxation as Legislative in Character The power to tax is inherent in the State, and the State is free to select the object of taxation, such power being exclusively vested in the legislature, EXCEPT where the Constitution provides otherwise. (Art. VI, Sec. 28[2]; Art. X, Sec. 5) This is based upon the principle that "taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must remain and be exercised." 20 ASPECTS, PROCESSES, PHASES OF TAXATION" A. Levy/Imposition The term "levy" or "imposition" refers to the enactment of tax laws or statutes. In the case of Tolentino, et al. v. Secretary of Finance, the Supreme Court emphasized that: 22 Courts have no power to inquire into or interfere in the wisdom, objective, motive or expediency in the passage of a tax law, as this is purely legislative in character. To do so would be tantamount to a violation of both the letter and the spirit of the organic laws by which the Philippine Government was brought into existence to invade a coordinate and independent department of the Government, and to interfere with the legitimate powers and functions of the Legislature. "51 Am. Jur. 42; Question No. 1, 2003 Bar Examination. "1 Cooley Taxation, 3rd Ed., p. 43. "Question No. 1(1), 2006 Bar Examination. " 2 3 5 SCRA 630. 15 CHAPTER I G E N E R A L PRINCIPLES Scope of the legislative power to tax (1) Discretion as to purposes for which taxes shall be levied The sole arbiter of the purposes for which taxes shall be levied is the legislature, provided the purposes are public. The courts may review the levy of the tax to determine whether the purpose is a public one but once that is determined, the courts can make no other inquiry as to the purpose of the tax, as it affects the power to impose it. 23 CASES FOR STUDY WALTER LUTZ v. J. ANTONIO ARANETA 98 Phil. 148 Plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C.A. 567, which provided for an increase of the existing tax on the manufacture of sugar, alleging such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. As 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. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power. u l Cooley Taxation, 4th Ed., 171. TAX PRINCIPLES AND REMEDIES 16 (2) Discretion as to subjects of taxation The legislature has unlimited scope as to the persons, property or occupation to be taxed, where there are no constitutional restrictions, provided the property is within the territorial jurisdiction of the taxing state. 24 In the case of Walter Lutz v. J. Antonio Araneta, supra, ' plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C.A. No. 567 which provided for an increase of the existing tax on the manufacture of sugar. The Supreme Court ruled that: "It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.'" 1 BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner questions the constitutionality of the statute, claiming that R.A. No. 1635, otherwise known as the Anti-TB Stamp Law, is violative of the equal protection clause of the Constitution because it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even among postal patrons the statute discriminatorily grants exemptions. HELD: It is settled that the legislature has the inherent power to select the subject of taxation and to grant exemptions. The classification of mail users is based "1 Cooley Taxation, 4th Ed., 176-178. " 9 8 Phil. 148. CHAPTER I G E N E R A L PRINCIPLES 17 on the ability to pay, the enjoyment of a privilege and on administrative convenience. Tax exemptions have never been thought of as raising issues under the equal protection clause. SILVESTRE PUNSALAN v. THE MUN. BOARD OF THE CITY OF MANILA 95 Phil. 46 Plaintiffs sought the annulment of Ordinance No. 3398 of the City of Manila which imposes a municipal occupation tax on persons exercising various professions in the city and penalizes non-payment of the tax, enacted pursuant to Sec. 18(1) of the Revised Charter of the City of Manila which empowers the Mun. Board of said city to impose a municipal occupation tax, not to exceed P50 per annum, on persons engaged in various professions. The burden of plaintiffs' complaint is not that the professions to which they respectively belong have been singled out for the imposition of this municipal occupation tax; and in any event, the Legislature may, in its discretion, select what occupations shall be taxed, and in the exercise of that discretion it may tax all. Or it may select for taxation certain classes and leave the others untaxed. (Cooley on Taxation, Vol. 4,4th Ed., pp. 3393-3395) Plaintiffs' complaint is that while the law has authorized the City of Manila to impose the said tax, it has withheld that authority from other chartered cities, not to mention municipalities. HELD: It is not for the courts to judge what particular cities or municipalities should be empowered to impose occupation taxes in addition to those imposed by the National Government. That matter is peculiarly within the domain of the political departments and the courts would do well not to encroach upon it. TAX PRINCIPLES AND REMEDIES 18 (3) Discretion as to amount or rate of tax The legislature has the right to finally determine the amount or rate of a tax, in the absence of constitutional prohibitions. It may levy a tax of any amount it sees fit. Not only is the power to tax unlimited in its reach as to subjects, but in its very nature, it acknowledges no limits and may be carried even to the extent of exhaustion and destruction, thus becoming in its exercise a power to destroy. (4) Discretion as to the manner, means and agencies of collection of taxes The discretion of the legislature in imposing taxes extends to the mode, method or kind of tax. As to the kind of taxes which may be imposed, the legislature has power to levy one or more of the following: Property tax, excise, license or occupation tax, a poll or capitation tax, franchise tax, income tax, inheritance tax, stock transfer tax, etc. 16 Is the Power to Tax the Power to Destroy? Justice Malcolm believed that the power to tax "is an attribute of sovereignty. It is the strongest of all the powers of government." This led Chief Justice Marshall of the U.S. Supreme Court, in the celebrated case of McCulloch v. Maryland, to declare: "The power to tax involves the power to destroy." This might well be construed to mean that the power to tax includes the power to regulate even to the extent of prohibition or destruction, (1 Cooley on Taxation, 4th Ed., p. 67) since the inherent power to tax vested in the legislature includes the power to determine who to tax, what to tax and how much tax is to be imposed. " 27 2 ^W&l Bar Examination; Question No. 1, 2000 Bar Examination. U.S. 4 Wheat, 316, 4 I / E d . 579. ^Tolentino, et al. v. Secretary of Finance, 235 SCRA 630. 27 CHAPTER I G E N E R A L PRINCIPLES 19 However, instead of being regarded as a blanket authorization of the unrestrained use of the taxing power for any and all purposes, it is more reasonable to say that the maxim "the power to tax is the power to destroy" is to describe not the purposes for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue. (1 Cooley, 179-181) The power to tax includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare, x x x But where the power to tax is used solely for the purpose of raising revenues, the modem view is that it cannot be allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully attacked as an inordinate and unconstitutional exercise of the discretion that is usually vested exclusively in the legislature in ascertaining the amount of the tax. (Cruz, Constitutional Law, 2000 Ed., p. 87) It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise. Taxpayer, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate business. As aptly held in Roxas, et al. v. CTA, et al.: "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the propriety rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the golden egg.'" Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counter- 20 TAX PRINCIPLES AND REMEDIES productive and ultimately subversive of the nation's thrust towards a better economy which will ultimately benefit the majority of our people. (Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, 600 SCRA 413, 442-444, [2009]) Judicial Review of Taxation While taxation is said to be the power to destroy, it is by no means unlimited. When a legislative body having the power to tax a certain subject matter actually imposes such a burdensome tax as effectually to destroy the right to perform the act or to use the property subject to the tax, the validity of the enactment depends upon the nature and character of the right destroyed. If so great an abuse is manifested as to destroy natural and fundamental rights which no free government could consistently violate, it is the duty of the judiciary to hold such an act unconstitutional. (Ibid.) Hence, the modification: "The power to tax is not the power to destroy while the Supreme Court sits." So it is in the Philippines. The Constitution as the fundamental law overrides any legislative or executive act that runs counter to it. In any case, therefore, where it can be demonstrated that the challenged statutory provision fails to abide by its command, then the court must so declare and adjudge it null. " 2 In the exercise of such a delicate power, however, the admonition of Cooley on inferior tribunals is wellworth remembering. Thus: "It must be evident to any one that the power to declare a legislative enactment void is one which the judge, conscious of the fallibility of the human judgment, will shrink from exercising in any case where he can conscientiously and with due regard to . duty and official oath decline the "Antero Sison, Jr. v. Ancheta, et al., 130 SCRA 654. 21 CHAPTER I G E N E R A L PRINCIPLES responsibility." (Cooley on Constitutional Limitations, Vol. 1,8th Ed., 332,11927]) While it remains undoubted that such a power to pass on the validity of the ordinance alleged to infringe certain constitutional rights of a litigant exists, still it should be exercised with due care and circumspection, considering not only the presumption of validity but also the relatively modest rank of a city court in the judicial hierarchy. 30 B. Assessment and Collection The act of assessing and collecting taxes is administrative in character, and therefore can be delegated. Nonetheless, the legislative body has laid down certain rules governing the assessment and collection of taxes in order to prevent its abuse. First, the tax law must designate which agency will collect the taxes. Usually, the Bureau of Internal Revenue and/or the Secretary of Finance wield this power. Second, the circulars or regulations issued by the Secretary of Finance or the Commissioner of the Internal Revenue must be in accordance with the tax measures imposed by Congress. Note that the power of taxation should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." (Antonio Roxas, et al. v. Court of Tax Appeals, L-25043, April 26, 1968, 23 SCRA 276) C. Payment This signifies an act of compliance by the taxpayer. " C i t y of Baguio v. De Leon, 25 S C R A 938. TAX PRINCIPLES AND REMEDIES PURPOSES OF TAXATION A. The primary purpose of taxation is to raise revenues. "For the support of government and for all public needs," is according to Judge Cooley, the purpose of taxes." And so it has been widely believed that the primary purpose of taxation is to raise funds or property to enable the State to promote the general welfare and protection of its citizens. (52 Am. Jur. 34) This was emphasized anew in the renowned case of Hon. Ramon Bagatsing, et al. v. Hon. Pedro Ramirez,* where the tax ordinance enacted by the Municipal Board of Manila was assailed as not being a "tax ordinance," because the imposition of rentals, permit fees, tolls and other fees is not strictly a taxing power but a revenue raising function. The Supreme Court observed that the pretense bore its own marks of fallacy. Precisely, the raising of revenues is the principal object of taxation. B. Secondary or non-revenue purposes 33 But, must an imposition, in order to be a tax, be levied solely for the purposes of revenue? The answer is a resounding NO. Other than to answer the ever-present need for revenues, taxation also seeks to: (1) reduce social inequality, (2) encourage the growth of local industries, (3) protect our local industries against unfair competition, (4) implement the police power of the state (regulatory purpose). (1) Reduction of Social Inequality 34 Our present tax system has adopted the progressive system of taxation, i.e., the tax rate increases as the tax base increases. This system "1 Cooley 66. " 7 4 SCRA 306. "Question No. 1,1991 Bar Examination. 1 9 7 6 Bar Examination. M 23 CHAPTER I G E N E R A L PRINCIPLES aims at reducing the inequality in the distribution of wealth by preventing its undue concentration in the hands of a few individuals. To illustrate: An estate tax is imposed upon the property left by the decedent. The proceeds of that tax will be used to finance the projects of the government such as building low-cost houses for the less privileged. (2) Encourage the Growth of Local Industries It is a settled rule that the power to tax carries with it the power to grant tax exemptions. Tax exemptions and tax reliefs serve as incentives to encourage investment in our local industry and thereby promote economic growth. (3) Protect our Competition Local Industry Against Unfair The Tariff and Customs Code allows the imposition of certain taxes (countervailing and dumping duties) upon imported goods or articles to further protect our local industry. R.A. 8752 (Anti-Dumping Act) imposes stricter conditions. (4) As an Implement of the Police Power of the State (Regulatory Measure) The power of taxation may be used as an implement of the police rJbwer of the State through the imposition of taxes with the end in view of regulating a particular activity. In the case of Tio v. Videogram Regulatory Board* the Supreme Court maintained the validity of the challenged statute (P.D. 1987 entitled "An Act Creating the Videogram Regulatory Board"), seeing the need to impose taxes upon the video industry as a regulatory measure, " 1 5 1 S C R A 208. 24 TAX PRINCIPLES AND REMEDIES considering "the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government due to the drop in theatrical attendance." Likewise, in the case of Manila Race Horse Trainers Association v. De La Fuente* the Court upheld the validity of an ordinance taxing boarding stables of race horses because "(R)ace horses are devoted to gambling, if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision." 37 Still, in the celebrated case of Lutz v. Araneta which challenges the constitutionality of Sees. 2 and 3, C.A. 567, providing for an increase in the existing tax on the manufacture of sugar in issue, it was held that: the tax is levied with a regulatory purpose — to provide means for the rehabilitation and stabilization of the threatened sugar industry. As 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. Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued " 8 8 Phil. 60. "Supra. CHAPTER I G E N E R A L PRINCIPLES 25 or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power. But it must be stressed that the power of taxation, sometimes also called the "power to destroy," should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." (Antonio Roxas, et al. v. Court of Tax Appeals, L-25043, April 26,1968, 23 SCRA 276) May the power of taxation be used as an implement of the power of eminent domain? YES. The Supreme Court in the case of CIR v. Central Luzon Drug Corp. [456 SCRA 414, 445] held: Tax measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose. In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. While it is declared commitment under Section 1 of R.A. No. 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [CJonstitution [is] not intended to take away rights from a person and give them to another who is not entitled thereto. For this reason, a just compensation for income that is taken away from respondent (Central Luzon Drug Corp.) becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter the fact." TAX PRINCIPLES AND REMEDIES . EXTENT OF THE TAXING POWER* The power of taxation reaches to every trade or occupation; to every object of industry, use, enjoyment; to every species of possession, and it imposes a burden which in case of failure to discharge the same may be followed by seizure, confiscation or forfeiture of the property. Taxation is said to be — — COMPREHENSIVE, as it covers persons, businesses, activities, professions, rights and privileges. — UNLIMITED. The taxing power's reign is illustrated in the case of Tio v. Videogram Regulatory Board, where the Supreme Court upheld the constitutionality of a law, ruling that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. 39 — PLENARY, as it is complete. Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes. (This shall be discussed in a separate chapter on Remedies.) — SUPREME. Taxation, although referred to as the strongest of all the powers of the government, cannot be interpreted to mean that it is superior to the other inherent powers of the government. It is supreme insofar as the selection of the subject of taxation is concerned. 40 "Question 1(a), 2005 Bar Examination; Question No. 1, 2000 Bar Examination. "Supra. "Supra. CHAPTER I G E N E R A L PRINCIPLES 27 VII. PRINCIPLES OF A SOUND TAX SYSTEM" 1. Fiscal Adequacy Sources of revenues must be adequate to meet government expenditures (Chavez v. Ongpin, 186 SCRA 331), and other public needs. This is in consonance with the doctrine that taxes are the lifeblood of the government. 2. Theoretical Justice A sound tax system must take into consideration the taxpayers' ability to pay. Our laws mandate that taxes must be reasonable, just, fair, conscionable. Under Art. VI, Section 28(1) of the Constitution, the rule of taxation must be uniform and equitable. The State must evolve a progressive system of taxation. Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. 42 3. Administrative Feasibility Tax laws must be capable of effective and efficient enforcement. They must not obstruct business growth and economic development. In Kapatiran Ng Mga Naglilingkod sa Pamahalaan v. Tan,° the Supreme Court, in upholding the validity of the VAT law, held that the law "is principally aimed to rationalize the system of taxes on goods and services; simplify tax administration, and make the system more equitable to enable the country to attain economic recovery." The principle requires that each tax should be clear and plain to the taxpayers, capable of enforcement by 4, 1 9 7 3 Bar Examination. ^Fernando, The Constitution of the Philippines, 2nd Ed., p. 221. *»163 S C R A 3 7 1 . TAX PRINCIPLES AND REMEDIES an adequate and well-trained staff of public officials, convenient as to time and manner of payment, and not duly burdensome upon or discouraging to business activity. (Report of the Tax Commission of the Philippines, February 1939, Vol. 1, pp. 23-31) Q. Will a violation of these principles invalidate a tax law? IT DEPENDS. A tax law will retain its validity even if it is not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so. These principles are only designed to make our tax system sound. However, if a tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. (Sec. 28[1], Art. VI, 1987 Constitution) VIII. TAXATION DISTINGUISHED FROM OTHER INHERENT POWERS AND IMPOSITIONS A. Taxation distinguished from Police Power (1) As to PURPOSE Taxation is levied for the purpose of raising revenues; Police power is exercised to promote public welfare through regulation. (2) As to AMOUNT OF EXACTION The amount gathered in the exercise of Taxation contemplates of no limits; in Police power, the exaction is limited to the cost of regulation, issuance of the license, or surveillance. (3) As to the BENEFITS RECEIVED BY THE TAXPAYER In Taxation, no special or direct benefit is received by the taxpayer other than the fact that the government secures to the citizen that general CHAPTER I G E N E R A L PRINCIPLES 29 benefit resulting from the protection of his person and property and the welfare of all. (51 Am. Jur. 42-43) Similarly, no direct benefits are received through the exercise of Police power, yet a healthy economic standard of society is maintained. (4) As to SUPERIORITY OF CONTRACTS Taxation recognizes the obligations imposed by contracts. (Art. Ill, Sec. 10, Constitution) This limitation does not apply to Police power. (5) As to TRANSFER OF PROPERTY RIGHTS In Taxation, the taxes paid form part of the public funds, whereas Police power allows merely the restraint on the exercise of property rights. B. Taxation and the Power of Eminent Domain (1) As to PURPOSE Taxation is exercised in order to raise public revenue; Eminent domain or expropriation is the taking of property for public use. (2) As to COMPENSATION Payment of taxes accrue to the general benefit of the citizens of the taxing state; in Eminent domain, just compensation is given the owner of the expropriated property. (3) As to PERSONS AFFECTED Taxation applies to all persons, property and excises that may be subject thereto; in Eminent domain, only particular property is comprehended. C. Taxes Distinguished from Other Impositions 1. Tax and Special Assessment A special assessment is in the nature of a tax upon property levied according to benefits TAX PRINCIPLES AND REMEDIES conferred on the property. The whole theory of a special assessment is based on the doctrine that the property against which it is levied derives some special benefit from the improvement. The distinctions between a special assessment and a tax are: a) a special assessment can be levied only on land; b) a special assessment cannot, as a rule, be made a personal liability of the persons assessed; c) a special assessment is based wholly on benefits; and d) a special assessment is exceptional both as to time and locality. The imposition of a charge on all property, real and personal, in a prescribed area, is a tax, not an assessment, although the purpose is to make a local improvement on a street or highway. A charge imposed only on property owners benefited is a special assessment rather than a tax. The power to levy such assessments is undoubtedly an exercise of the taxing power, but the exercise of the taxing power in imposing an assessment does not necessarily make the assessment a tax. (1 Cooley, 106107) Tax and License a) A Tax is levied in the exercise of the taxing power; License fees emanate from the police power of the state; b) The purpose of the tax is to generate revenues; License fees are imposed for regulatory purposes. (Victorias Milling Co. v. Municipality of Victorias, L-21183, September 27,1968) CHAPTER I G E N E R A L PRINCIPLES 3. 31 c) The amount of the exaction or charge if it is to be a license fee must only be of sufficient amount to include expenses of issuing a license; cost of necessary inspection or police surveillance. (Cu Unjeng v. Patstone, 42 Phil. 818; City oflloilo v. Villanueva, 105 Phil. 337) d) The imposition is a tax, if its primary purpose is to generate revenue, and regulation is merely incidental; but if regulation is the primary purpose, the fact that incidental revenue is also obtained does not make the imposition a tax. (PDC v. Quezon City, 172 SCRA 629) e) In Gerochi v. Department of Energy [527 SCRA 696, 715-717], the Supreme Court held that in exacting the Universal Charge through Section 34 of the Electric Power Industry Reform Act of 2001 (EPIRA), the State's police power, particularly its regulatory dimension is invoked. Such can be deduced from Section 34 which enumerates the purposes for which the Universal Charge is imposed and which can be amply discerned as regulatory in character. From the said purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power. Tax and Toll Toll is a demand of proprietorship, an amount charged for the cost and maintenance of the property used; Tax is a demand of sovereignty for the purpose of raising public revenues. 4. Tax and Penalty Tax is a civil liability. A person is criminally liable in taxation only when he fails to satisfy his civil obligation to pay taxes. (Republic v. Patanao, L-22356, July 21, 1967) TAX PRINCIPLES AND REMEDIES 32 A Penalty is a punishment for the commission of a crime. 5. Tax and Debt A tax is not a debt for the reason that a tax does not depend upon the consent of the taxpayer and there is no express or implied contract to pay taxes. Taxes: (1) are not contracts between the parties, either expressed or implied; but they are the positive acts of the government through its various agents, binding upon the inhabitants, and to the making and enforcing of which their personal consent individually is not required; (2) cannot be assigned as debts, or be proved in bankruptcy as such; nor, if uncollected, are the assets which can be seized by attachment or other judicial processes, and subjected to the payment of municipal indebtedness; (3) are not the subject of set-off either on behalf of the state or the municipality for which they are imposed, or of the collector, or on behalf of the person taxed, as against such state, municipality or collector; 44 (4) do not draw interest, as do sums of money owing upon a contract. 45 According to Judge Cooley, the proceedings to collect taxes are not barred by the ordinary statutes of limitation; the law abolishing imprisonment for debt has no application to taxes and the remedies for their collection may include an arrest if the legislature so provides. "Question 1(b), 2005 Bar Examination. "1 Cooley 88-92. CHAPTER I G E N E R A L PRINCIPLES 33 CASES FOR STUDY (On Tax and Debt) FRANCIA v. INTERMEDIATE APPELLATE COURT, et al 162 SCRA 753" Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15,1977. There is no legal basis for the contention. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that: "A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise «»t of the contract or transaction sued on ...(80 C.J.S. 73-74). '•Question 3(b), 1996 Bar Examination. 34 TAX PRINCIPLES AND REMEDIES "The general rule based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required..."' This rule was reiterated in the case of Cordero v. Gonda (18 SCRA 331) where we stated that: " . . . internal revenue taxes can not be the subject of compensation." REASON: Government and taxpayer 'are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off." MELECIO R. DOMINGO v. LORENZO C. GARLITOS 8 SCRA 443 The court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law. (R.A. 2700) Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount. CHAPTER I G E N E R A L PRINCIPLES 35 PHILEX MINING CORP. v. CIR 294 SCRA 687" There is a material distinction between a tax and a debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. xxx In the instant case, the claim of Philex for VAT refund is still pending litigation, and still has to be determined by the CTA. A fortiori, the liquidated debt of Philex to the government cannot, therefore, be set-off against the unliquidated claim which Philex conceived to exist in its favor. DC. LIMITATIONS ON THE TAXING POWER As the areas which "used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than any private individual or group of individuals' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times," there arises a need for more revenues in order to meet the needs of an ever-widening scope of state activity. 48 And with this pervasive power comes the realization that taxation may mean the ruin or the prosperity of a nation, if no limitation for its use is exercised. Thus the power of taxation, for all its plenitude, is not without restrictions. These limitations are classified as Inherent Limitations and Constitutional Limitations. "Question No. 1, 2001 Bar Examination. "Chief Justice Makalintal, quoted from the case of Antero M. Sison, jr. v. Ruben Ancheta, et al., supra, p. 660. 4 TAX PRINCIPLES AND REMEDIES 36 A. Inherent Limitations on the Power to Tax These limitations proceed from the very nature of the taxing power itself. These are: public purpose, international comity, territoriality, non-delegation of the power to tax, and the various tax exemptions granted government agencies or instrumentalities. 1. PUBLIC PURPOSE Taxes are exacted only for a public purpose An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old United States case bluntly put it: "To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation." The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. [Planters Products, Inc. v. Fertiphil Corporation, 548 SCRA 485 (2008)] CHAPTER I G E N E R A L PRINCIPLES 37 A revenue measure must stand the first requisite of a lawful taxation — that the purpose for which it is laid be a public purpose. The legislature is bereft of power to appropriate revenues for anything other than a public purpose. Where an assailed tax measure is not for a public purpose, such an act is tantamount to confiscation of property, though done in the guise of law, and the taxpayer may rightly invoke the law for his protection. This appeal to the law for the protection of the individual's property would then place the issue within the ambit of the judiciary. Justice Isagani Cruz defines 'public purpose' as embracing not merely direct public benefit or advantage but also indirect public benefit. Who may determine 'public purpose' This is a legislative prerogative. The power to determine whether the purpose of taxation is public or private resides in Congress. The independence of die Legislature is an axiom in government; to be independent, it must act on its own good time, on its own judgment, influenced by its own reason, restrained only as the people may have seen fit to restrain the grant of legislative power in making it.*" However, this will not prevent the court from questioning the propriety of such a statute on the ground that the law enacted is not for a public purpose; but once it is settled that the law is for a public purpose, the court may no longer inquire into the wisdom, expediency or necessity of such tax measure. Purpose when deemed 'public' It is the purpose which determines the public character of the tax law, not the number of persons benefited. As long as the ultimate result favors the *1 Cooley Taxation, 395-398. TAX PRINCIPLES A N D REMEDIES 38 welfare of the public in general, the appropriation of a public revenue is deemed done for a public purpose. Upon this point, the 20% discount privilege (mandated by R.A. 7432, as amended by R.A. 9257) to which senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. (CIR v. Central Luzon Drug Corporation, 456 SCRA 414, 444) Cases of "Public Purpose" a. Public Improvement b. Unemployment relief c. Buildings and roads / Infrastructure d. Local police forces (subsidies) under R.A. 6141 e. Industries classified as indispensable under P.D. 1987 f. Construction of home sites g. Promotion of science and invention h. Upliftment of the underprivileged i. Rehabilitation of the sugar industry j. Pensions to deserving retirees k. Oil industry's protection 1. Socialized housing m. Educational subsidy CASES FOR STUDY BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner questions the constitutionality of R.A. 1635 mandating the bearing of Anti-TB stamps on CHAPTER I G E N E R A L PRINCIPLES 39 envelopes, as well as its implementing administrative orders, contending that it is not for a public purpose. HELD: R.A. 1635 is valid. The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes. The money raised from the sale of the Anti-TB stamps is spent for the benefit of the Philippine Tuberculosis Society, a private organization, without appropriation by law. But as the Solicitor General points out, the society is not really the beneficiary but only the agency through which the State acts in carrying out what is essentially a public function. The money is treated as a special fund and as such need not be appropriated by law. WALTER LUTZ v. J. ANTONIO ARANETA 98 Phil. 148 Plaintiff Lutz assailed the constitutionality of Sections 2 and 3, C.A. 567 which provided for an increase of the existing tax on the manufacture of sugar, alleging such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. HELD: 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. TAX PRINCIPLES AND REMEDIES 40 Here, the legislative discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the State's police power. VALENTIN TIO v. VIDEOGRAM REGULATORY BOARD 151 SCRA 208 The Supreme Court held the levy of 30% tax under P.D. 1987 as for a public purpose, and therefore a valid imposition. The law, according to the Court, was imposed primarily for answering the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. Hence, while the direct beneficiaries of the said decree is the movie industry, the citizens are held to be its indirect beneficiaries. CITY OF BAGUIO v. FORTUNATO DE LEON 25 SCRA 938 Defendant-appellant De Leon, a real estate dealer, assailed the validity of an ordinance of the City of Baguio imposing a license fee on any person, firm, entity, or corporation doing business in the City of Baguio. HELD: Republic Act No. 329 was enacted amending Section 2553 of the Revised Administrative Code, empowering the City Council not only to impose a license fee but also to levy a tax for purposes of CHAPTER I G E N E R A L PRINCIPLES 41 revenue. Thus, the City Council of Baguio now has the power to tax, to license, and to regulate all businesses, trades, and occupations therein. The ordinance under consideration, therefore, cannot be considered ultra vires. HON. RAMON BAGATSING, et al. v. HON. PEDRO RAMIREZ, et al. 74 SCRA 306 The delegation of the collection of market stall fees to a private corporation affect the public purpose of the imposition. In upholding the validity of the tax ordinance, the Supreme Court held that, "The fees collected do not go direct to the private coffers of the corporation. Ordinance No. 7522 was not made for the corporation but for the purpose of raising revenues for the city. That is the object that it serves. The entrusting of the collection of the fees does not destroy the public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through which the money is dispensed is public or private. The right to tax depends upon the ultimate use, purpose and object for which the fund is raised. It is not dependent on the nature or character of the person or corporation whose intermediate agency is to be used in applying it. The people may be taxed for a public purpose, although it be under the direction of an individual or private corporation." PASCUAL v. SECRETARY OF PUBLIC WORKS 110 Phil. 331 Nevertheless, in the case of Pascual v. Secretary of Public Works which challenges the law appropriating a certain amount for the construction of a feeder road on a land owned by a private individual, the Court held the law to be an invalid imposition since it results in the promotion of a private enterprise, it benefits the property of a particular individual. The provision that TAX PRINCIPLES AND REMEDIES 42 the land shall thereafter be donated to the government does not cure this defect. The rule is that, if the public advantage or benefit is merely incidental in the promotion of a particular enterprise, such defect shall render the law invalid. On the other hand, if what is incidental is the promotion of a private enterprise, the tax law shall be deemed "for a public purpose." 2. INTERNATIONAL COMITY Basis of this Rule Under Section 2, Article II of our Constitution, the Philippines "adopts the generally accepted principles of international law as part of the law of the land, and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations." One principle of international law which has attained wide recognition is the principle of Sovereign Equality Among States. According to this principle, "states are juridically equal, enjoy the same rights, and have equal capacity in their exercise. The rights of each one do not depend upon the power which it possesses to assure its exercise, but upon the simple fact of its existence as a person under international law." This principle, in turn, finds its roots in the rule of par in parem non habet imperium, where even the strongest state cannot assume jurisdiction over another state, no matter how weak, or question the validity of its acts in so far as they are made to take effect within its own territory. All states, including the smallest and least influential, are also entitled to their dignity and the protection of their honor and reputation. 50 To illustrate: If a tax law is passed imposing taxes on the income of foreign ambassadors or imposing real property tax upon foreign embassies, this is NOT " A provision from the Montevideo Convention of 1933, as culled from the book of Justice Isagani Cruz, International Law, 1993 Edition (Quezon City; Central Lawbook Publishing Co., Inc.), p. 106. CHAPTER I G E N E R A L PRINCIPLES 43 a valid law because the imposition is in violation of the universal principles of international law. Under international laws, foreign embassies are considered extensions of the territoriality of the foreign states; to impose taxes upon them would be tantamount to an exercise of jurisdiction over these foreign states. 3. TERRITORIALITY Since laws cease to operate beyond a country's jurisdictional limits, the taxing power of a country is likewise limited to person and property within and subject to its jurisdiction. This same rule applies to the taxing power of a territory. Rules Observed in Fixing Tax Situs 1. POLL/CAPITATION/COMMUNITY TAX Poll or capitation, or community taxes are based upon the residence of the taxpayer, regardless of the source of income or location of the property of the taxpayer. 2. PROPERTY TAX Real Property, where taxable Real estate is subject to taxation in the state or country where it is located, regardless of whether the owner is a resident or a non-resident. (First National Bank v. Maine, 284 U.S. 312. 77 ALR 401) Personal property, where taxable On the other hand, the situs of personal property, wherever it was actually kept or located, was held to be at the domicile of its owner, following the age-old doctrine of mobilia sequuntur personam. Domicile The domicile of a person is the place which constitutes the principal seat of his residence, 44 TAX PRINCIPLES AND REMEDIES his business, his pursuits, his connections, his attachments and his political relations. It embraces the fact of residence at a place with the intent to regard it and make it a home and live there for an indefinite time. To establish a domicile, the act and the intent must concur. There must be the fact of living in a place with the intent to make it one's home. (26 R.C.L., pp. 274-275) Mobilia Sequuntur Personam" Movables follow the person. Although a mere fiction of law, without any constitutional foundation, it is nevertheless applied when convenient, provided it is not inconsistent with express provisions of the law, or when its application would result in injustice, or unless such property has acquired an actual situs elsewhere. To acquire a situs in a state other than the domicile of the owner, tangible property must have a definite location there, accompanied by some degree of permanency; mere temporary or transient presence in the state is not sufficient. (26 R.C.L. pp. 278-279; 51 Am. Jur. 466-468; Union Trust v. Collector) Thus, in cases of shares of stock, its situs for the purposes of taxation is the state in which they are permanently kept regardless of the domicile of the owner or the state in which the corporation was organized. (51 Am. Jur. 502) This is best illustrated in the case of Wells Fargo Bank v. Collector- where the Supreme Court ruled that the shares of stock left by a non-resident alien decedent in an anonymous partnership in the Philippines are subject to Philippine inheritance tax notwithstanding the mobilia rule. According to the Court, the mobilia rule should yield to reason. The shares of stock are also taxable in the situs of their actual location, i.e., the Philippines. 1 "Question No. 2, 1994 Bar Examination. °70 Phil. 235. CHAPTER I G E N E R A L PRINCIPLES 45 NOTE: Section 104, Republic Act 8424 enumerates certain properties which have acquired actual situs in the Philippines, viz.: a. franchise exercised in the Philippines; b. shares of stock, obligations, bonds issued by domestic corporations organized and constituted in accordance with Philippine laws; c. shares, obligations, bonds issued by a foreign corporation where 85% of its business is located in the Philippines. It is subject to donor's tax and estate tax; d. Shares, obligations, bonds issued by foreign corporations which has acquired business situs, when such have been used in the furtherance of the business of the foreign corporation; e. Shares/rights in a partnership business or industry established in the Philippines. These properties are considered as situated, thus taxed, in the Philippines; the residence of their owners is immaterial. Thus, the RULE: Irrespective of the owner, donor's tax or estate tax can be imposed upon these properties. EXCEPT where the foreign country grants exemption or does not impose taxes on intangible properties of Filipino citizens. TO ILLUSTRATE: As a general rule, donation of shares of stocks made by a foreign corporation are not subject to tax. However, if the transaction falls under paragraph c or d (see enumeration above), the donation shall be subject to tax." " Q u e s t i o n No. 5 , 1 9 % Bar Examination. TAX PRINCIPLES AND REMEDIES The income of intangible properties like royalties and dividends are subject to taxes. (Sees. 24[c], 25, 27, 28, Republic Act 8424) EXCISE TAX Excise taxes are taxes imposed on the exercise of a right or privilege. A. Income Tax (Section 23, R.A. 8424) (CRITERIA: DENCE) • — • — • — PLACE, NATIONALITY, RESI- Place — applied to a. Non-resident alien b. Non-resident foreign corporations c. Non-resident citizen taxed upon sources of income derived from within the Philippines. Nationality — applied to a. Resident citizen b. Domestic corporation taxed upon sources of income derived from within and without the Philippines Residence — applied to a. Resident alien b. Resident Foreign Corporation taxed upon income derived from sources within the Philippines COMMISSIONER v. BOAC 149 SCRA 395 "The source of an income is the property, activity or service that produces the income. For the source of income to be considered as coming from the Philip- CHAPTER I G E N E R A L PRINCIPLES 47 pines, it is sufficient that the income is derived from activity within the Philippines, x x x" B. Donor's Tax (Sections 98,104, RA.. 8424) (CRITERIA: DENCE) • Non-resident alien — tax based upon properties situated within the Philippines Resident and non-resident citizen — tax based upon properties wherever situated Residence a. C. RESI- Nationality a. • NATIONALITY, Place a. • PLACE, Resident alien — tax based upon properties wherever situated Estate tax (Sections 85,104, RA. 8424) (CRITERIA: DENCE) • PLACE, NATIONALITY, RESI- Place a. • Non-resident aliens — are taxed on properties situated within the Philippines Nationality a. • Residence a. D. Resident and non-resident citizen — are taxed upon their properties wherever situated Resident alien — taxes imposed upon properties wherever situated Value Added Tax (Section 105, R J \ . 8424) Its tax situs is the place where the transaction is made. If the transaction is made (perfected and TAX PRINCIPLES AND REMEDIES consummated) outside of the Philippines, we can no longer tax such a transaction. CASE FOR STUDY ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE 524 SCRA 73,103 (2007) x x x According to the Destination Principle, goods and services are taxed only in the country where these are consumed. In connection with the said principle, the Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT while those destined for use or consumption within the Philippines shall be imposed with 10% VAT (Now 12% under R.A. No. 9337). Export processing zones are to be managed as a separate customs territory from the rest of the Philippines and, thus, for tax purposes, are effectively considered as foreign territory. For this reason, sales by persons from the Philippine customs territory to those inside the export processing zones are already taxed as exports. NON-DELEGATION OF THE POWER TO TAX The power to tax is exclusively vested in the legislative body. Exceptions A. Article VI, Section 28(2) of the Constitution The Congress may, by law, authorize the President to impose tariff rates, import and export quotas, etc. [custom duties], subject to the limitations and guidelines as the Congress may CHAPTER I G E N E R A L PRINCIPLES 49 impose, consistent with the national development program of the government. B. Article X, Section 5 of the Constitution Each local government unit shall have the power to create its own sources of revenue, fees, charges, subject to such guidelines and limitations as the Congress may provide consistent with the basic policy of local autonomy. Such taxes, fees and other charges shall accrue exclusively to the local government. (See Sec. 133, R.A. 7160) In Abakada Guro Party List v. Ermita [469 SCRA 1, 122,123-124], the Supreme Court sustained the constitutionality of R.A. 9337 authorizing the President to increase the VAT rate from 10% to 12% effective January 1, 2006 upon recommendation of the Secretary of Finance on the existence of either of the two conditions. It ruled that the law leaves the entire operation or nonoperation 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, x x x In making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. TAX PRINCIPLES AND REMEDIES 50 CASES FOR STUDY BOARD OF ASSESSMENT APPEALS OF LAGUNA v. CTA 8 SCRA 224 In the absence of constitutional provision, the power to tax may be delegated to local government units in accordance with the well-settled doctrine that the power to create local government units by implication confers upon it the power to tax. So even if no constitutional provision exists, local government units still possess the power to tax. PEPSI-COLA BOTTLING CO. OF THE PHILS, v. CITY OF BUTUAN 24 SCRA 789 Petitioners assail the constitutionality of Municipal Ordinance No. 110, as amended by Mun. Ord. No. 122, on the ground that Sec. 2 of R.A. 2264, upon the authority of which it is delegated, is an unconstitutional delegation of legislative powers. HELD: The general principle against delegation of legislative powers, in consequence of the theory of separation of powers (U.S. v. Bull, 15 Phil. 7,27; Kilbourn v. Thompson, 103 U.S. 168, 26 I. ed. 377) is subject to one well-established exception, namely: legislative powers may be delegated to local governments. PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. v. MUNICIPALITY OF TANAUAN, LEYTE 69 SCRA 460 Pepsi-Cola challenges the power of taxation delegated to municipalities under the Local Autonomy Act. HELD: The power of taxation granted to municipalities under the Local Autonomy Act is constitutional. CHAPTER 1 G E N E R A L PRINCIPLES 51 The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. (Cooley, The Law of Taxation, Vol. I, 4th Ed.) It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial power of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. (Pepsi-Cola Bottling Co. of the Phils., Inc. v. City of Butuan, 24 SCRA 793) This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of self-government carries with it the power to confer on such local government agencies the power to tax. (Cooley, 190) x x x The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellanf s pretense, would not suffice to invalidate the said law as confiscatory and oppressive. 'In delegating the authority, the State is not limited to the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient.' Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes. JOHN H. OSMENA v. OSCAR ORBOS 220 SCRA 703 The Supreme 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. TAX PRINCIPLES AND REMEDIES 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. . . . As pointed out in Edu v. Ericta: To avoid the taint of unlawful delegation, there must be a standard, which implies at the very least that the legislature itself determines matters of principle and lays down fundamental policy. Otherwise, the charge of complete abdication may be hard to repel. A standard, thus, defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected. It is the criterion by which the legislative purpose may be carried out. Thereafter, the executive or administrative office designated may in pursuance of the above guidelines promulgate supplemental rules and regulations. The standard may either be express or implied. If the former, the non-delegation objection is easily met. The standard though does not have to be spelled out specifically. It could be implied from the policy and purpose of the act considered as a whole. Where the standards set up for the guidance of an administrative officer and the action taken are in fact recorded in the orders of such officer, so that Congress, the courts and the public are assured that the orders in the judgment of such officer conform to the legislative standard, there is no failure in the performance of the legislative functions. MAYOR ANTONIO J. VILLEGAS v. HIU CHIONG TSAl PAO HO and JUDGE ARCA 86 SCRA 270 (1978) Respondent Hui Chiong Tsai Pao Ho challenged the validity of Ordinance No. 6537 passed by the Mu- CHAPTER I G E N E R A L PRINCIPLES 53 nicipal Board of Manila. The said ordinance prohibited aliens from being employed or to engage or participate in any position, occupation or business enumerated therein, whether permanent, temporary or casual, without first securing an employment permit from the Mayor of Manila and paying the permit fee. Respondent judge declared the ordinance null and void. HELD: Ordinance No. 6537 is VOID because it does not contain or suggest any standard or criterion to guide the mayor in the exercise of the power which has been granted to him in the ordinance. 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. BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner's letter was returned because it did not bear the special Anti-TB stamp required by R.A. 1635 as implemented by several administrative orders. Petitioner questions the constitutionality of the statute as well as the implementing administrative orders issued. The Supreme Court held that administrative orders are not undue delegation of legislative powers. TAX PRINCIPLES AND REMEDIES Although the law does not expressly authorize the collection of five centavos except through the sale of Anti-TB stamps, such authority may be implied in so far as may be necessary to prevent a failure of the undertaking. The authority given to the Postmaster General to raise funds through the mails must be liberally construed, consistent with the principle that where the end is required the appropriate means is given. HON. RAMON BAGATSING, et al v. HON. PEDRO RAMIREZ, et al 74 SCRA 306 Nor does the delegation of the collection of market stall fees to a private corporation affect the public purpose of the imposition. The entrusting of the collection of the fees does not destroy the public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through which the money is dispensed is public or private. The right to tax depends upon the ultimate use, purpose and object for which the fund is raised. It is not dependent on the nature or character of the person of corporation whose intermediate agency is to be used in applying it. The people may be taxed for a public purpose, although it be under the direction of an individual or private corporation. EXEMPTION FROM TAXATION OF GOVERNMENT AGENCIES/INSTRUMENTALITIES Properties of the national government as well as those of the local government units are not subject to tax, otherwise it will result in the absurd situation of the government "taking money from one pocket and putting it in another." (Cooley on Taxation, Sec. 621, 4th Ed., as cited in Board of Assessment Appeals ofhaguna v. Court of Tax Appeals, 8 Phil. 227) CHAPTER I G E N E R A L PRINCIPLES May the government tax itself? The Constitution is silent on whether Congress is prohibited from taxing the properties of the agencies of the government. However, Chief Justice Hilario G. Davide, Jr. has stated that "nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax."'* Agencies performing governmental functions and proprietary functions distinguished A distinction has been made between agencies performing governmental functions and those performing proprietary functions. As a rule, agencies performing governmental functions are tax-exempt unless expressly taxed. On the other hand, agencies performing proprietary functions are subject to tax unless expressly exempted. Government-owned and -controlled corporations perform proprietary functions; hence, they are subject to taxation. However, certain corporations have been granted exemption under Section 27(C) of R.A. 8424 as amended by R.A. 9337 which took effect on 1 July 2005, to wit: 1. Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3. Philippine Health Insurance Corporation (PHIC) 4. Philippine Charity Sweepstakes Office (PCSO) Instrumentality of the National Government is exempt from local taxation In Manila International Airport Authority v. Court of Appeals [495 SCRA 591, 615], the Supreme Court held " M C I A A v. Marcos, 261 S C R A 667. 56 TAX PRINCIPLES AND REMEDIES that the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which states — xxx, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx (o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local government units. This has been echoed in the recent case of Philippine Fisheries Development Authority v. The Municipality of Navotas [G.R. No. 150301, October 2, 2007, 534 SCRA 490] wherein the Supreme Court ruled that PFDA, being an instrumentality of the national government, is exempt from real property tax but the exemption does not extend to the portions of the Navotas Fishing Port Complex (NFPC) that were leased to taxable or private persons and entities for their beneficial use. The Pasay properties of MIAA are exempt from real property tax The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of the Adrninistrative Code of 1987 uses the phrase "includes x x x government-owned or controlled corporations" which means that a government "instrumentality" may or may not be a "government-owned or controlled corporation." Obviously, the term government "instrumentality" is broader than the term "government-owned or controlled corporation." Section 2(10) provides: SEC. 2. General Terms Defined. — x x x (10) Instrumentality refers to any agency of the national Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and CHAPTER I G E N E R A L PRINCIPLES 57 enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government-owned or controlled corporations. The term "government-owned or controlled corporation" has a separate definition under Section 2(13) of the Introductory Provisions of the Administrative Code of 1987: SEC. 2. General Terms Defined.- x x x (13) Government-owned orcontrolled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock: Provided, That government-owned or controlled corporations may further be categorized by the Department of Budget, the Civil Service Commission, and the Commission on Audit for the purpose of the exercise and discharge of their respective powers, functions and responsibilities with respect to such corporations. The fact that two terms have separate definitions means that while a government "instrumentality" may include a "government-owned or controlled corporation," there may be a government "instrumentality" that will not qualify as a "government-owned or controlled corporation." A close scrutiny of the definition of "governmentowned or controlled corporation" in Section 2(13) will show that MIAA would not fall under such definition. MIAA is a government "instrumentality" that does not qualify as a "government-owned or controlled corporation." (Manila International Airport Authority v. City ofPasay, Sangguniang Panglungsod ng Pasay, et al, 583 SCRA 234 [2009]) 58 TAX PRINCIPLES AND REMEDIES CASES FOR STUDY STANDARD OIL COMPANY OF NEW YORK v. JUAN POSADAS, JR. 55 Phil. 715 The Standard Oil Company of New York sold and delivered in the Philippines fuel oil and asphalt, to the Quartermaster Dept. of the US Army, for the use of the said Army. The CIR of the Philippine government imposed taxes of about 1 1/2% of the value of the merchandise. At the same time, the Standard Oil Company delivered fuel oil in the Philippines for the use of the US Navy, which was likewise taxed by the CIR. The Standard Oil Company paid the taxes assessed under protest and sued to recover the corresponding refunds. HELD: The assessment and collection by the Philippine Government of the tax on sales of merchandise made in the Philippines to the US Army and the US Navy is illegal. Sales made in the Philippines to the US Army and the US Navy are made to instrumentalities of the US Government, and therefore, are not subject to tax by the Philippine Government. BOARD OF ASSESSMENT APPEALS, PROVINCE OF LAGUNA v. COURT OF TAX APPEALS and NATIONAL WATERWORKS AND SEWERAGE AUTHORITY 8 Phil. 227 The question involved in this case is whether the water pipes, reservoir, intake and buildings used in the operation of its waterworks system in the province of Laguna are subject to real estate tax. It is submitted that the law — Sec. 3 of Republic Act 470 — exempting from taxation "property owned CHAPTER I G E N E R A L PRINCIPLES 59 by the Republic of the Philippines, any province, city, municipality or municipal district . . ." makes no distinction between property held in a sovereign, government or political capacity and those possessed in a private, proprietary and patrimonial character. And where the law does not distinguish, neither may we. x x x Moreover, taxes are financial burdens imposed for the purpose of raising revenues with which to defray the cost of the operation of the Government, and a tax on the property of the government, whether national or local, would merely have the effect of taking money from one pocket to put it in another pocket. (Cooley on Taxation, Sec. 621,4th Ed.) Hence, it would not serve, in the final analysis, the main purpose of taxation. NATIONAL DEVELOPMENT COMPANY v. CEBU CITY and AUGUSTO PACIS 215 SCRA 382 Is a public land reserved by the President for warehousing purposes in favor of a governmentowned or -controlled corporation, as well as the warehouse subsequently erected thereon, exempt from real property tax? RE: The land The Supreme Court answered in the affirmative. The Republic, like any individual, may form a corporation with personality and existence distinct from its own. The separate personality allows a governmentowned and -controlled corporation to hold and possess properties in its own name and thus permit greater independence and flexibility in its operations. It may, therefore, be stated that tax exemption of "property owned by the Republic of the Philippines" refers to properties owned by the Government and by its agencies which do not have separate and distinct personalities (unincorporated entities). 60 TAX PRINCIPLES AND REMEDIES In this case, what appears to have been ceded to NDC was merely the administration of the property while the government retains ownership of what has been declared for warehousing purposes. The land remains "absolute property of the government. The government does not part with its title by reserving them (lands), but simply gives notice to all the world that it desires them for a certain purpose." As its title remains with the Republic, the reserved land is clearly covered by tax exemption. RE: The warehouse As regards the warehouse constructed on a public reservation, a different rule should apply because "(t)he exemption of public property from taxation does not extend to improvements on the public land made by preemptioners, homesteaders and other claimants, or occupants, at their own expense, and these are taxable by the State x x x." Consequently, the warehouse constructed on the reserved land by NDC should properly be assessed real estate tax as such improvement does not appear to belong to the public. ESSO STANDARD EASTERN, INC. v. ACTING COMMISSIONER OF CUSTOMS 18 SCRA 488 Petitioner is engaged in the industry of processing gasoline, and manufacturing lubricating oil, grease and tin containers. Petitioner owns gasoline stations with pumps, which are leased to and operated by gasoline dealers. It sells gasoline to these dealers. The pump parts imported by petitioner in 1956 were intended, installed and actually used by gasoline dealers in pumping gasoline from underground tanks into customers' motor vehicles. These pump parts, in other words, are used in the sale at retail of gasoline — not by petitioner but by lessees of gasoline stations. In this factual environment, it is quite evident that the pump parts are not used in petitioner's industry of CHAPTER I G E N E R A L PRINCIPLES 61 processing gasoline, or manufacturing lubricating oil, grease and tin containers, hence taxable. Since the law (R.A. 1394) states that, to be tax exempt, equipment and spare parts should be "for the use of industries," the coverage herein should not be enlarged to include equipment and spare parts for use in dispensing gasoline at retail. In comparable factual backdrop, this Court has held that tax exemption in connection with the manufacture of asbestos roof does not extend to the installation thereof. (Collector v. Eternit Corporations, 57 Off. Gaz., No. 6, pp. 1043,1045) Exemption from taxation is not favored and exemptions in tax statutes are never presumed. Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Where the State has granted in express terms certain exemptions, those are the exemptions to be considered, and no more. B. Constitutional Limitations on the Power to Tax The Constitution provides for certain restrictions on the power of taxation, among them: (1) due process of law; (2) equal protection of laws; (3) uniformity; (4) progressive system of taxation; (5) non-impairment of contracts; (6) non-imprisonment for non-payment of poll tax; (7) appropriation, revenue and tariff bills must originate exclusively in the House of Representatives; (8) presidential veto; (9) presidential power to fix tariff rates; (10) freedom of the press; 62 TAX PRINCIPLES AND REMEDIES (11) freedom of religion; (12) exemption from property tax of properties of religious, educational, charitable institutions; (13) tax exemptions granted to non-stock, non-profit educational institutions; (14) no public money or property used for a particular sect, priest, religious minister, etc.; (15) grant of tax exemptions; (16) grant of power of taxation to local government units; (17) money collected for a special purpose shall be considered a special fund; (18) exclusive appellate jurisdiction of the Supreme Court over judgments of lower courts involving the legality of taxes, imports, assessment, fees, penalty. 1. DUE PROCESS OF LAW "No person shall be deprived of life, liberty or property without due process of law . . . " (Art. Ill, Sec. 1) Due process mandates that no person shall be deprived of life, liberty, or property without due process. The implication is that one may be deprived of property as long as the requirement of due process — notice and hearing — have been complied with. To illustrate, in the case of Mayor Antonio Villegas v. Hiu Chiong Tsai Pao Ho, the Court held: 55 Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may withhold or refuse it at will is tantamount to denying " 8 6 SCRA 270. 63 CHAPTER I G E N E R A L PRINCIPLES him the basic right to engage in a means of livelihood. While it is true that the Philippines as a state is not obliged to admit aliens within its territory, once an alien is admitted, he cannot be deprived of life without due process of law. This guarantee includes the means of livelihood. The shelter of protection under the due process and equal protection clause is given to all persons, both aliens and citizens. Due process is usually violated where the tax imposed is for a private purpose as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extra-territorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in injury rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or the amount to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law. (Cooley, 334) * 1 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 a confiscation of property. (Reyes v. Almanzor, 196 SCRA 322) However, to justify the nullification of a tax law, mere allegation is not enough. There must be a clear and unequivocal breach of the Constitution; there must be proof of arbitrariness. The law must be unreasonable and unjust, not merely hypothetical, argumentative or of doubtful implication. *As cited in Pepsi-Cola Bottling Co. of the Philippines, Inc. v. Municipality of Tanauan. Leyte, 6 9 S C R A 460. 64 TAX PRINCIPLES AND REMEDIES The following situations are illustrative of violations of the due process clause: a. If the tax amounts to a confiscation of property; b. If the subject of confiscation is outside the jurisdiction of the taxing authority; c. If the law is imposed for a purpose other than a public purpose; d. If the law which is applied retroactively imposes unjust and oppressive taxes; e. Where the law is in violation of inherent limitations. The Classification Freeze Provision under R.A. 9334 does not violate due process clause British American Tobacco (BAT) did not clearly demonstrate the exact extent of such impact. It has not been shown that the net retail prices of other older brands previously classified under this classification system have already pierced their tax brackets, and, if so, how this has affected the overall competition in the market. Further, it does not necessarily follow the newer brands cannot compete against older brands because price is not the only factor in the market as there are other factors like consumer preference, brand loyalty, etc. In other words, even if the newer brands are priced higher due to the differential tax treatment, it does not mean that they cannot compete in the market especially since cigarettes contain addictive ingredients so that a consumer may be willing to pay a higher price for a particular brand solely due to its unique formulation. It may also be noted that in 2003, the BIR surveyed 29 new brands that were introduced in the market after the effectivity of R.A. 8240 on January 1, 1997, thus negating the sweeping generalization of BAT that the classification freeze provision has become an insurmountable barrier to the entry of new brands. Verily, where there is a claim of breach of the due CHAPTER I G E N E R A L PRINCIPLES 65 process and equal protection clauses, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. It is clear that Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations 9-2003, and Revenue Memorandum Order No. 6-2003 unjustifiably emasculate the operation of Section 145 of the NIRC because they authorize the Commissioner of Internal Revenue to update the tax classification of new brands every two years or earlier subject only to its issuance of the appropriate Revenue Regulations, when nowhere in Section 145 is such authority granted to the Bureau. Unless expressly granted to the BIR, the power to reclassify cigarette brands remains a prerogative of the legislature which cannot be usurped by the former. (British American Tobacco v. Camacho, 562 SCRA 511, 517-518 [2008]) MCIT Is Not Violative of Due Process CREBA contends that the MCIT under Section 27(E) of R.A. 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account. Thus, pegging the tax base of the MCIT to a corporation's gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain." The contention holds no water. Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. 66 TAX PRINCIPLES AND REMEDIES The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good. Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. It other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed. As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality. The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al., the Supreme Court held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, the SC also explained that it will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer. There must be a factual foundation to such an unconstitutional taint. This merely adheres to the authoritative CHAPTER I G E N E R A L PRINCIPLES 67 doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, mere is a need for proof of such persuasive character. CREBA is correct in saying that income is distinct from capital. Income means all the wealth which flows into the taxpayer other than a mere return of capital. Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. Income is gain derived and severed from capital. For income to be taxable, the following requisites must exist: (1) there must be gain; (2) the gain must be realized or received; and (3) the gain must not be excluded by law or treaty from taxation. Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation's gross income. Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible 68 TAX PRINCIPLES AND REMEDIES items and at the same time reducing the applicable tax rate. Statutes taxing the gross "receipts," earnings," or "income" or particular corporations are found in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirements as to uniformity of taxation. (CREBA v. Romulo, 614 SCRA 605 625-628) CASES FOR STUDY CARLOS SUPERDRUG CORP. v. DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT (DSWD) 526 SCRA 130,140,143-145 (2007) Petitioners assert that Section 4(a) of the Expanded Senior Citizens Act (R.A. 9257) is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because (1) drugstores impose mark up only 5% to 10% on branded medicines; and (2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. HELD: R.A. 9257 is constitutional. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable CHAPTER I G E N E R A L PRINCIPLES 69 of powers, extending as it does to all the great public needs." It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the same." For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare. Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor. Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their business, because petitioners have not taken time to calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage. JOSE REYES v. PEDRO ALMANZOR 196 SCRA 322 Petitioner questions the method of tax assessment, citing violation of the due process clause. The Court ruled thus: The due process clause may be invoked where a taxing statute is so arbitrary that it finds 70 TAX PRINCIPLES A N D REMEDIES no support in the Constitution, as where it can be shown to amount to a confiscation of property. The taxing power has the authority to make reasonable and natural classification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed. (Sison v. Ancheta, supra) COMMISSIONER OF INTERNAL REVENUE v. HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO CORPORATION 261 SCRA 236 Prior to the effectivity of R.A. 7654, cigarette brands Hope Luxury, Premium More and Champion were considered local brands subjected to an ad valorem tax at the rate of 20-45%. However, on 1 July 1993 or two (2) days before R.A. 7654 took effect, petitioner Commissioner of Internal Revenue issued RMC 3793 reclassifying "Hope, More and Champion being manufactured by Fortune Tobacco Corporation . . . (as) locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes." A copy of RMC 37-93 was sent to Fortune Tobacco via telefax, but it was addressed to no one in particular. On 15 July 1993, Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93. Respondent corporation sought a review, reconsideration and recall of RMC 37-93 but was forthwith denied by the Appellate Division of the Bureau of Internal Revenue. As a consequence, on 71 CHAPTER I G E N E R A L PRINCIPLES 30 July 1993, private respondent was assessed an ad valorem tax deficiency. Respondent corporation went to the Court of Tax Appeals (CTA) on a petition for review. The CTA held that petitioner Commissioner of Internal Revenue failed to observe due process of law in issuing RMC 37-93 as there was no prior notice and hearing. The Supreme Court upheld the CTA, holding that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, as in the case at bar, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. 2. EQUAL PROTECTION OF THE LAW 57 " . . . nor shall any person be denied the equal protection of the law." (Art. Ill, Section 1) Our Constitution requires uniformity, not equality, in taxation. Equality of taxation is accomplished when the burden of the tax falls equally and impartially upon all persons and property subject to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon others similarly situated or of like character. Whereas, "Question No. 2, 2000 Bar Examination; Question Nos. 2 & 10, 2004 Bar Examination. 72 TAX PRINCIPLES AND REMEDIES uniformity requires that all taxable property subjected to the tax, shall be alike and this requirement is violated if particular kinds, species, or items of property are selected to bear the whole burden of the tax, while others, which should be equally subject to it, are left untaxed. Further, it is implied that each tax shall be uniform throughout the taxing district involved. A state tax must be apportioned uniformly throughout a state, a country tax throughout the country, and a city tax throughout the city. (Vol. 37, Encyclopedia of Law and Procedure, pp. 735-736) "EQUAL PROTECTION OF THE LAW" CLAUSE, as applied to Taxation. "Equal protection" does not require equal rates of taxation on different classes of property, nor prohibit unequal taxation so long as the inequality is not based upon arbitrary classification. Legislation which, in carrying out a public purpose, is limited in its application, does not violate the provisions if, within the sphere of its operation, it affects alike all persons similarly situated. It does not prohibit special legislation or legislation that is limited either in the objects to which it is directed, or by the territory within which it is to operate. It merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed* ABSOLUTE EQUALITY IMPOSSIBLE Inequality of taxes means substantial differences. Practical equality is constitutional equality. There is no imperative requirement that taxation shall be absolutely equal, only that tax laws be framed with a view to apportioning the burdens of government so that each person enjoying government protection shall be required to w l Cooley Taxation, 534-535. 73 CHAPTER I G E N E R A L PRINCIPLES contribute so much as is his reasonable proportion, and no more. "Perfect equality in taxation," it has been said, "will remain an unattainable goal as long as laws and government and man are imperfect." On the other hand, while perfect equality is impossible, yet there are cases where there are such glaring inequality, either intentional or otherwise, as to clearly violate the uniformity and equality rule. Let it reach all of a class, either of persons or things, it matters not whether those included in it be one or many, or whether they reside in any particular locality or are scattered all over the state. But when for any reason, it becomes discriminative between individuals of a class taxed, and selects some for an exceptional burden, the tax is deprived of the necessary element of legal equality, and becomes inadmissible. 59 UNIVERSAL APPLICATION IS NOT REQUIRED The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the grouping of persons or things similar to each other in certain particulars and different from all others in these same particulars. {Abakada Guro Party List v. Ermita, 469 SCRA 1,140) CLASSIFICATION, WHEN PROPER The power to select the subjects of taxation and apportion the public burden among them includes the power to make classifications. The inequalities which result from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. 60 " 1 Cooley 558-562. •"Lutz v. Araneta, G.R. No. L-7859, December 2 2 , 1 9 5 5 , 98 Phil. 148. 74 TAX PRINCIPLES AND REMEDIES However, for classification to be valid, the following requisites must concur: a. it must be based on substantial distinction; b. it must apply both to present and future conditions; c. it must be germane to the purposes of the law; d. it must apply equally to all members of the same class. (Ormoc Sugar Company, Inc. v. The Treasurer ofOrmoc City, et al., 22 SCRA 603) The principle of equality admits of classification or distinction as long as they are based upon real and substantial differences between the persons, property, or privileges and those not taxed must bear some reasonable relation to the object of purpose of legislation, or to some permissible governmental policy or legitimate end of government. (Matic, Jr., Taxation in the Philippines, Vol. 1, pp. 79-80) Classification freeze provision under R.A. 9334 does not violate the equal protection and uniformity of taxation clauses under the Constitution A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws. The classification is considered valid and reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being equal, to both present and future conditions; and (4) it applies equally to all those belonging to the same class. The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in the law for reasons of practicality and expediency. That is, since a new brand was not yet in existence at the time of the passage of R.A. 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify the brands under Annex "D" as of October 1, 1996, was thus the logical and practical choice. Further, with the amendments introduced by R.A. 9334, the freezing of the tax classifications now CHAPTER I G E N E R A L PRINCIPLES 75 expressly applies not just to Annex "D" brands but to newer brands introduced after the effectivity of R.A. 8240 on January 1, 1997 and any new brand that will be introduced in the future. xxx xxx The classification freeze provision uniformly applies to all newly introduced brands in the market, whether imported or locally manufactured. It does not purport to single out imported cigarettes in order to unduly favor locally produced ones. Further, BAT's evidence was anchored on the alleged unequal tax treatment between old and new brands which involves a different frame of reference vis-a-vis local and imported products. BAT has, therefore, failed to clearly prove its case, both factually and legally, within the parameters of the GATT. At any rate, even assuming arguendo that BAT was able to prove that the classification freeze provision violates the GATT, the outcome would still be the same. The GATT is a treaty duly ratified by the Philippine Senate and under Article VII, Section 21 of the Constitution, it merely acquired the status of a statute. Applying the basic principles of statutory construction in case of irreconcilable conflict between statutes, R.A. 8240, as amended by R.A. 9334, would prevail over the GATT either as a later enactment by Congress or as a special law dealing with the taxation of sin products. [British American Tobacco v. Camacho, 562 SCRA 511 (2008)] CASES FOR STUDY BENJAMIN GOMEZ v. ENRICO PALOMAR, et al. 25 SCRA 827 Petitioner questions the constitutionality of the statute as well as the implementing administrative orders issued implementing the special Anti-TB stamp required by R.A. 1635, contending that it violates the equal protection clause of the Constitution as well as the rule of uniformity and equality in taxation. 76 TAX PRINCIPLES AND REMEDIES HELD: R.A. 1635 is valid. It is claimed that R.A. 1635, otherwise known as the Anti-TB Stamp Law, is violative of the equal protection clause of the Constitution because it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even among postal patrons the statute discrirninatorily grants exemptions. HELD: It is settled that the legislature has the inherent power to select the subject of taxation and to grant exemptions. The classification of mail users is based on the ability to pay, the enjoyment of a privilege and on administrative convenience. Tax exemptions have never been thought of as raising issues under the equal protection clause. Moreover, the imposition of a flat rate rather than a graduated tax does not infringe the rule of uniformity and equality of taxation. A tax need not be measured by the weight of the mail or the extent of the service rendered. Considerations of administrative convenience and cost afford an adequate ground for classification. The same considerations may induce the legislature to impose a flat tax which in effect is a charge for the transaction, operating equally on all persons within the class regardless of the amount involved. EASTERN THEATRICAL CO. v. VICTOR ALFONSO 83 Phil. 852 Twelve corporations, engaged in the motion picture business, contest the validity of Ord. No. 2958 of the City of Manila, which reads as follows: "An ordi- CHAPTER I G E N E R A L PRINCIPLES 77 nance imposing a fee on the price of every admission ticket sold by Cinematographers, etc." Appellants point out to the fact that the ordinance in question does not tax "many more kinds of amusements" than those therein specified, such as "race tracks, cockpits, cabarets, concert halls, circuses, and other places of amusement." HELD: The argument has absolutely no merit. The fact that some places of amusement are not taxed while others, such as cinematographs, theaters, etc. are taxed, is no argument at all against the equality and uniformity of tax imposition. Equality and uniformity means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation; and the appellants cannot point out what places of amusement taxed by the ordinance do not constitute a class by themselves and which can be confused with those not included in the ordinance. MANILA RACE HORSE TRAINERS ASSN., INC. v. DE LA FUENTE 88 Phil. 60 The Manila Race Horses Trainers Association, Inc., a non-stock corporation maintaining boarding stables for horses, challenges the validity of Ordinance No. 3065 of the City of Manila. Plaintiffs maintain that the ordinance under consideration is a tax on race horses as distinct from boarding stables. HELD: From the viewpoint of economics and public policy the taxing of boarding stables for race horses to 78 TAX PRINCIPLES AND REMEDIES the exclusion of boarding stables for horses dedicated to other purposes is not indefensible. The owners of boarding stables for race horses and, for that matter, the race horse owners themselves, who in the scheme of shifting may carry the taxation burden, are a class by themselves and appropriately taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in taxation is generally conceived in terms of ability to pay in relation to the benefits received by the taxpayer and by the public from the business or property taxed. Race horses are devoted to gambling if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision. Taking eveiything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution. SILVESTRE PUNSALAN v. THE MUN. BOARD OF THE CITY OF MANILA 95 Phil. 46 Plaintiffs sought the annulment of Ordinance No. 3398 of the City of Manila which imposes a municipal occupation tax on persons exercising various professions. In upholding the validity of the tax law, the Supreme Court held that there is no discrimination or class legislation if a statute authorizes the City of Manila to levy occupation taxes while that same authority is withheld from other cities and municipalities. It is not for the court to decide what cities or municipalities should be so authorized for such is a matter of judicial determination. There was a substantial distinction between them and other professionals as practitioners in Manila CHAPTER I G E N E R A L PRINCIPLES 79 could expect a more lucrative income than those in other parts of the country. CITY OF BAGUIO v. FORTUNATO DE LEON 25 SCRA 938 (1968) Defendant-appellant De Leon, a real estate dealer, assailed the validity of an ordinance of the City of Baguio imposing a license fee on any person, firm, entity, or corporation doing business in the City of Baguio. The ordinance is valid. Equality and uniformity in taxation means that all taxable articles or kind of property of the same class be taxed at the same rate. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found. Where the statute or ordinance in question applies equally to all persons, firms and corporations placed in similar situation, there is no infringement of the rule on equality. Inequalities which result from the singling out of one particular class for taxation or exemption infringe no constitutional limitation. ANTERO SISON v. ANCHETA 130 SCRA 654 The State has the inherent power to select the subjects of taxation, and inequalities which result from the singling out of one particular class for taxation or tax exemption infringe no constitutional limitation. Consequently, the Supreme Court ruled that the schedular income tax which imposes graduated taxes of 0% to 35% without deductions on compensation income of individuals and a rate scheme of 5% to 60% on business and other income with deductions does not violate the rule on equal protection since there is no infirmity if classifications are based on substantial distinctions. 80 TAX PRINCIPLES AND REMEDIES JUAN LUNA SUBDIVISION, INC. v. SARMIENTO, et al. 91 Phil. 371 Juan Luna Subdivision, Inc. brought a suit against the City Treasurer and the Philippine Trust Company as defendants in the alternative to determine which of the two defendants is liable for plaintiff's check. It appears that plaintiff issued to the City Treasurer of Manila a check to be applied to plaintiff's land tax for the second semester of 1941, the exact amount of which was yet undetermined. On February 20,1942, after the amount had been verified, which was P341.60, the balance of Pl,868.92, covered by voucher no. 1487 of the City Treasurer's Office, was noted in the ledger as a credit to the Juan Luna Subdivision, Inc. Thereafter, the books of the Philippine Trust Company revealed that plaintiff's check was deposited by the City Treasurer with the Philippine National Bank, and the latter was paid the cash equivalent thereof by the Philippine Trust Company which debited the amount against Juan Luna Subd., Inc. However, the City Treasurer refused after liberation to refund the plaintiff's deposit or apply it to such future taxes as might be found due. The plaintiff claims the whole amount of the check contending that taxes for the last semester of 1941 had been remitted by C.A. No. 703. HELD: The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes is a class by itself, and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike. They are not. As to the justification of the measure, the confinement of the condonation to delinquent taxes was not without good reason. The property owners CHAPTER I G E N E R A L PRINCIPLES 81 who had paid their taxes before liberation and those who had not were not on the same footing on the need of material relief. It is true that the ravages and devastations brought by war operations had rendered the bulk of the people destitute or impoverished and that it was this situation which prompted the passage of C.A. 703. But it is also true that the taxpayers who had been in arrears in their obligation would have to satisfy their liability with genuine currency, while the taxes paid during the occupation had been satisfied in Japanese military notes, many of them at a time when those notes were well-nigh worthless. To refund those taxes with the restored currency, even if the government could afford to do so, would be to unduly enrich many of the payers at a greater expense of the people at large. What is more, the process of refunding would entail a tremendous amount of work and difficulties, what with the destruction of the tax records and the great number of claimants who would take advantage of such grace. It is said that the plaintiff's check was in the nature of a deposit, held in trust by the City Treasurer, and that, for this reason, plaintiff's taxes are to be regarded as still due and payable. The argument is well-taken, but only to the extent of Pl,868.92. The amount of P341.60 as early as February 20,1942, had been applied to the second half of plaintiff's 1941 tax and become part of the general fund of the city treasury. From that date that tax was legally and actually paid and settled. ASSOCIATION OF CUSTOM BROKERS, INC. v. MUN. BOARD, CITY OF MANILA, et al. 93 Phil. 107 Plaintiffs Association of Customs Brokers, Inc. challenge the validity of Ord. No. 3379 which confers upon the municipal board the power to tax motor and other vehicles operating within the City of Manila on 82 TAX PRINCIPLES AND REMEDIES the ground that said ordinance offends against the rule of uniformity of taxation. HELD: The ordinance infringes upon the rule of uniformity. 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. There is no pretense that the ordinance equally applies to motor vehicles which 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 highways. As they are benefited by their use they should also be made to share the corresponding burden. This inequality renders the ordinance in question offensive to the Constitution. ORMOC SUGAR COMPANY, INC. v. THE TREASURER OF ORMOC CITY, et al. 22 SCRA 603 Ormoc Sugar Company alleged that Ordinance No. 4, Series of 1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar Co., Inc., in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the USA and other foreign countries" is unconstitutional for being violative of the equal protection clause (Sec. Ill], Art. Ill, Constitution) and the rule on uniformity of taxation. (Sec. 28111 Art. VI, Constitution) HELD: Ord. No. 4 is declared unconstitutional. The Bill of Rights in the Constitution provides: "x x x nor shall any person be denied the equal CHAPTER I G E N E R A L PRINCIPLES 83 protection of the laws." (Sec. Art. Ill) In Felwa v. Salas, L-26511, October 29, 1966, the SC ruled that the equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of taxation, and a classification is reasonable where: (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purposes of the law; (3) the classification applies not only to present conditions but also to future conditions which are substantially identical to those of the present; (4) the classification applies only to those who belong to the same class. A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Co., Inc. and none other. At the time of the taxing Ordinance's enactment, Ormoc Sugar Company, it is true, was the only sugar central in the City of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any substantially established sugar central, of the same class as plaintiff, from the coverage of the tax. JOSE REYES v. PEDRO ALMANZOR 196 SCRA 322 Petitioners question the method used in the assessment of the properties. HELD: Under Art. VIII, Sec. 17(1) of the 1973 Constitution, then enforced, the Rule of Taxation must not only be uniform but must also be equitable and progressive. Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class shall be taxed at the same rate. (Churchill v. Conception. 34 Phil. 96911916]) 84 TAX PRINCIPLES AND REMEDIES Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. (Fernando, "The Constitution of the Phils.," 2nd Ed., p . 221) VILLEGAS v. HSIU CHIONG CHAI PAO 86 SCRA 270 The imposition of license fee on all aliens desiring to seek employment in Manila, regardless of the nature of employment (whether casual, permanent, parttime or full-time, lowly paid employee or highly paid executive), was declared unconstitutional. The tax ordinance is discriminatory because it fails to consider valid substantial differences in situation among aliens required to pay it. Classification should be based on real and substantial differences having a reasonable relation to the subject of legislation. MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC. v. DEPARTMENT OF FINANCE SECRETARY, et al. 238 SCRA 63 Petitioner Misamis Oriental Association of Coco Traders, Inc., engaged in the buying and selling of copra in Misamis Oriental, questions the validity of Revenue Memorandum Circular 47-91 which classified copra as an agricultural non-food product and declared it "exempt from VAT only if the sale is made by the primary producer pursuant to Section 103(a) of the Tax Code, as amended." Petitioner claims that RMC No. 47-91 is discriminatory and violative of the equal protection clause of the Constitution because while coconut farmers and copra producers are exempt, traders and dealers are not, although both sell copra in its original state. HELD: The argument has no merit. There is a material or substantial difference between coconut farmers and CHAPTER I G E N E R A L PRINCIPLES 85 copra producers, on the one hand, and copra traders and dealers, on the other. The former produce and sell copra, the latter merely sell copra. The Constitution does not forbid the differential treatment of persons so long as there is a reasonable basis for classifying them differently. TOLENTINO, et al. v. SECRETARY OF FINANCE 235 SCRA 630 The PPI contends that by withdrawing the exemption previously granted to print media transactions involving printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled out the press for discriminatory treatment and that within the class of mass media the law discriminates against print media by giving broadcast media favored treatment. HELD: We are unable to find a differential treatment of the press by the law, much less any censorial motivation for its enactment. If the press is now required to pay a valueadded tax on its transactions, it is not because it is being singled out, much less targeted, for special treatment but only because of the removal of the exemption previously granted to it by law. The withdrawal of exemption is all that is involved in these cases. The law would perhaps be open to the charge of discriminatory treatment if the only privilege withdrawn had been that granted to the press. But that is not the case. In Grosjean v. American Press Co., 297 U.S. at 250,80 L. Ed. at 669, the law imposed a license tax equivalent to 2% of the gross receipts derived from advertisements only on newspapers which had a circulation of more than 20,000 copies per week. Because the tax was not based on the volume of advertisement alone but was measured by the extent of its circulation as well, the law applied only to the thirteen large newspapers in 86 TAX PRINCIPLES AND REMEDIES Louisiana, leaving untaxed four papers with circulation of only slightly less than 20,000 copies a week and 120 weekly newspapers which were in serious competition with the thirteen newspapers in question. It was well known that the thirteen newspapers had been critical of Senator Huey Long, and the Long-dominated legislature of Louisiana responded by taxing what Long described as the "lying newspapers" by imposing on them "a tax on lying." The effect of the tax was to curtail both their revenue and their circulation. As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in virtue of the constitutional guaranties." The case is a classic illustration of the warning that the power to tax is the power to destroy. In Minneapolis Star v. Minnesota Commissioner of Revenue, 460 U.S. 575, 75 L. Ed. 2d 295 (1983), the press was also found to have been singled out because everything was exempt from the "use tax" on ink and paper, except the press. Minnesota imposed a tax on the sales of goods in that state. To protect the sales tax, it enacted a complementary tax on the privilege of "using, storing or consuming in that state tangible personal property" by eliminating the residents' incentive to get goods from outside states where the sales tax might be lower. The Minnesota Star Tribune was exempted from both taxes from 1967 to 1971. In 1971, however, the state legislature amended the tax scheme by imposing the "use tax" on the cost of paper and ink used for publication. The law was held to have singled out the press because (1) there was no reason for imposing the "use tax" since the press was exempt from the sales tax and (2) the "use tax" was laid on an "intermediate transaction rather than the ultimate retail sale." Minnesota had a heavy burden of justifying the differential treatment and it failed to do so. In addition, the U.S. Supreme Court found the law CHAPTER I G E N E R A L PRINCIPLES 87 to be discriminatory because the legislature, by again amending the law so as to exempt the first $100,000 of paper and ink used, further narrowed the coverage of the tax so that "only a handful of publishers pay any tax at all and even fewer pay any significant amount of tax." The discriminatory purpose was thus very clear. In Arkansas Writers' Project, Inc. v. Ragland, it was held that a law which taxed general interest magazines but not newspapers and religious, professional, trade and sports journals was discriminatory because while the tax did not single out the press as a whole, it targeted a small group within the press. What is more, by differentiating on the basis of contents (i.e., between general interest and special interests such as religion or sports) the law became "entirely incompatible with the First Amendment's guarantee of freedom of the press." These cases come down to this: That unless justified, the differential treatment of the press creates risks of suppression of expression. In contrast, in the cases at bar, the statute applies to a wide range of goods and services. The argument that, by imposing the VAT only on print media whose gross sales exceeds P480,000 but not more than P750,000, the law discriminates it without merit since it has not been shown that as a result the class subject to tax has been unreasonably narrowed. The fact is that this limitation does not apply to the press alone but to all sales. Nor is impermissible motive shown by the fact that print media and broadcast media are treated differently. The press is taxed on its transactions involving printing and publication, which are different from the transactions of broadcast media. There is thus a reasonable basis for the classification. The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are immune from any forms of ordinary taxation." The license tax in the Grosjean case was declared invalid because it was "one single in kind, with a long history 88 TAX PRINCIPLES AND REMEDIES of hostile misuse against the freedom of the press." On the other hand, Minneapolis Star acknowledged that "The First Amendment does not prohibit all regulation of the press [and that] the States and the Federal Government can subject newspapers to generally applicable economic regulations without creating constitutional problems." 3. UNIFORMITY OF TAXATION" The rule of taxation shall be uniform and equitable. (Art. VI, Sec. 28[1] of the Constitution) Uniformity in taxation — says Black on Constitutional Law — means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. It does not mean that lands, chattels, securities, occupations, franchises, privileges, necessities and luxuries shall all be taxed or assessed at the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere, with all people and at all times. A tax is uniform when it operates with the same form and effect in every place where the subject of it is found. (State Railroad Tax Case, 92 U.S. 575; Patton v. Brady, 184 U.S. 608)" UNIFORMITY, NOT EQUALITY The Constitution requires uniformity, not equality in taxation. The reason is obvious. The imposition of a single tax upon all persons, properties or transactions would result in inequality. It is manifestly impractical. It was held that "a system which imposes the same taxation upon every species of property, irrespective of its nature or condition or class," is well said to be "destructive of the principle of uniformity and equality of taxation, and of a just adaptation "Question No. 1,1998 Bar Examination. "Churchill and Tait v. Concepcion, 34 Phil. 69. CHAPTER I G E N E R A L PRINCIPLES 89 of property to its burdens." (Pacific Exp. Co. v. Seibert, 142 U.S. 339, 351; 35 L. Ed. 1035,12 Sup. Ct. 250; 1 Cooley 610) EQUALITY AND UNIFORMITY DISTINGUISHED Equality in taxation is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon others similarly situated or of like character. Uniformity requires that all taxable property shall be alike subjected to the tax, and this requirement is violated if particular kinds, species or items of property are selected to bear the whole burden of the tax, while others, which should be equally subject to it, are left untaxed. (Vol. 37, Encyclopedia of Law and Procedure, pp. 735-736) CASE FOR STUDY KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS v. TAN 163 SCRA 371 Petitioners seek to nullify E.0.273 which adopted the Value Added Tax (VAT) for being unconstitutional, claiming that it is oppressive, discriminatory, unjust and regressive, in violation of the provisions of Art. VI, Sec. 28(1) of the 1987 Constitution: "Sec. 28(1). The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation." HELD: E.O. 273 satisfies all the requirements of a valid tax law. It is uniform. "A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." (Philippine Trust Company v. Yatco, 69 Phil. 420) TAX PRINCIPLES AND REMEDIES "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation." (Eastern Theatrical Company v. Alfonso, 83 Phil. 852, 862) "Taking everything into account, the differentiation against which plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution." (Manila Race Horses Trainers Assn. v. De la Fuente, 88 Phil. 60, 65) "The statute or ordinance in question 'applies equally to all persons, firms and corporations placed in similar situation.'" (Uy Matias v. City ofCebu, 93 Phil. 300) "Inequalities which result from the singling out of one particular class for taxation or exemption infringe no constitutional limitation." (Carmichael v. Southern Coal and Coke Co., 301 U.S. 495) 4. PROGRESSIVE TAXATION Congress shall evolve a progressive system of taxation. (Art. VI, Sec. 2811]) Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected. (Fernando, "The Constitution of the Phils.," 2nd Ed., p. 221) Is a tax law adopting a regressive system of taxation valid? The Constitution does not really prohibit the imposition of regressive taxes. What it simply provides is that Congress shall evolve a progressive system of taxation. The constitutional provision should be construed to mean simply that "direct taxes are to be preferred and indirect taxes, as much as possible, should be minimized." (E. Fernando, Con- CHAPTER I G E N E R A L PRINCIPLES 91 stitution of the Philippines, 221 [Second Ed., 1977]) Indeed, the mandate to Congress is not to prescribe, but to evolve progressive tax system. This is a mere directive upon Congress, not a justiciable right or a legally enforceable one. We cannot avoid regressive taxes but only minimize them. (EVAT En Banc Resolution, Tolentino, et al. v. Secretary of Finance, October 30,1995) [EJxrise tax on cigarettes which is a form of indirect tax, and thus, regressive in character. While there was an attempt to make the imposition of the excise tax more equitable by creating a four-tiered taxation system where higher priced cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor, of a cigarette brand within a specific tax bracket pays the same tax rate. To this extent, the tax does not take into account the person's ability to pay. Nevertheless, this does not mean that the assailed law may be declared unconstitutional for being regressive in character because the Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress shall evolve a progressive system of taxation. Tolentino v. Secretary of Finance instructs: "[Regressive is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities [Art. XIII, Section 1] or for the promotion of the right to "quality education" [Art. XIV, Section 1]. These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights." [British American Tobacco v. Camacho, 585 SCRA 36,51-52 (2009)] 5. NON-IMPAIRMENT CLAUSE No law shall be passed impairing the obligations of contracts. (Art. Ill, Section 10, Constitution) 92 TAX PRINCIPLES AND REMEDIES A contract is the law between the contracting parties. The obligation of a contract is the law which binds the parties to perform their agreement. This law must govern and control the contract in every shape in which it is intended to bear upon it, whether it affects its validity, construction or discharge. Any law which enlarges, or in any manner changes the intention of the parties discoverable in it, necessarily impairs the contract itself. The manner or the degree in which this change is effected can in no respect influence this conclusion; for, whether the law affects the validity, the construction, the duration, the mode of discharge or the evidence of the agreement, it impairs the contract, though it may not do so to the same extent in all the supposed cases. There is no room for any stipulation, therefore, that when the state has stipulated by contract to give exemption from taxation, or has commuted the uncertain taxes for a definite and fixed sum or sums, and afterwards undertakes to tax, in the same manner as it taxes other subjects, the persons, corporations or property which were the subject of the exemption or commutation, the obligation of the contract is impaired. (2 Cooley 1494) The constitutional prohibition against the impairment of the obligation of contracts only applies, however, where it is claimed that the obligation of a contract is impaired by a law of the state — a statute or constitutional provision of the state. It does not apply to mere decisions of courts construing a contract. (2 Cooley 1496) IS A TAX EXEMPTION REVOCABLE?" IT DEPENDS. If the grant of an exemption does not constitute a contract, but is merely "a spontaneous concession by the "Question No. 3,1997 Bar Examination; Question No. 2(B), 2004 Bar Examination. CHAPTER I G E N E R A L PRINCIPLES 93 legislature, not connected with any service or duty imposed" it is REVOCABLE by the power which made the grant. A state may, at its pleasure, withdraw an exemption which is a mere gratuity possessing no element of a contract, even though the corporation may have incurred expense on the faith thereof. Thus, a statute passed after a corporation has been created, and exempting it wholly or partially from taxation, without the payment of any consideration or the assumption of any new burden by the corporation, is a mere gratuity on the part of the state, and the exemption may be revoked at any time. An exemption from taxation does not confer a vested right, and hence, it may be modified or repealed by the legislature unless such modification or repeal would impair the obligation of a contract. (2 Cooley 1469-1473) Similarly, if the basis of the tax exemption is by virtue of a franchise granted by Congress, the exemption may be revoked. (Art. Xll, Sec. 11) On the other hand, if the tax exemption constitutes a binding contract and for valuable consideration, the government cannot unilaterally revoke the tax exemption. The charter of a private corporation is a contract between the corporation and the state, based on a consideration and accepted by a corporation. However, the grant of a franchise to a corporation does not imply a contract exempting the property from taxation or from increased taxation; and there is no contract created by a provision in a charter or franchise that the corporation shall pay annually a certain tax. When the government enters into a contract, it descends to the level of an ordinary individual. It cannot invoke state immunity. While the Court has too infrequently, 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 94 TAX PRINCIPLES AND REMEDIES from being 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. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes of the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11 of the 1987 Constitution, like its precursor provisions in the 1935 and 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 when the common good so requires. 64 WITHDRAWAL OF TAX EXEMPTIONS UNDER THE LOCAL GOVERNMENT CODE; EXCEPTIONS In Mactan Cebu International Airport Authority v. Marcos, the Supreme Court held that Section 193 of the LGC prescribes the general rule, viz., the tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons are withdrawn upon the effectivity of the LGC except with respect to those entities expressly enumerated. In the same vein, the Court must hold that the express withdrawal upon effectivity of the LGC of all exemptions except only as provided therein, can no longer be invoked by MERALCO to disclaim liability for the local tax. 65 "Manila Electric Company v. City Government of San Pablo, Laguna, 306 SCRA 750. "City Government of San Pablo Laguna v. Reyes, 305 SCRA 353. CHAPTER I G E N E R A L PRINCIPLES 95 CASES FOR STUDY CASANOVAS v. HORD 8 Phil. 125 In January 1897, the Spanish government, pursuant to the Royal Decree of May 14,1867, granted the plaintiff certain mining claims in Ambos, Camarines. The Royal Decree provided that plaintiff shall pay 40 escudos (about P40.00), on each mining claim referred to in the first paragraph of Art. 13 thereof, and 20 escudos (about P10.00) on claims described in the second paragraph thereof. The grantee shall also pay an ad valorem tax equal to 8 per centum of his gross earnings. Article 81 of said Royal Decree, however, provides that no other taxes shall be imposed on these mining claims. Thereafter, the Internal Revenue Act (Act No. 1189) was passed and Sec. 134 thereof provides an annual tax of PI 00 on each mining claim containing an area of 60,000 square meters, and at the same rate proportionally for claims in excess of, or less than, said area. The grantee shall further pay an ad valorem tax equal to 3 per centum of the actual market value of its gross output. Plaintiff paid the tax demanded by defendant CIR, pursuant to the Revenue Act, under protest and filed this suit for recovery. HELD: The grant by the Spanish Government to the plaintiff constituted a contract the obligation of which declares that no other taxes be imposed on those mining claims. TOLENTINO, et al. v. SECRETARY OF FINANCE 235 SCRA 630 CREBA contends that the imposition of the VAT on the sales and leases of real estate by virtue of con- % TAX PRINCIPLES AND REMEDIES tracts entered into prior to the effectivity of the law would violate the constitutional provision that "No law impairing the obligation of contracts shall be passed." HELD: It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. 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. EXCEPTION: CAGAYAN ELECTRIC POWER AND LIGHT CO., INC. v. COMMISSIONER G.R. No. 60126, September 25,1985 The non-impairment clause does not apply to public utility franchises. Art. XII, Sec. 11 of the 1987 Constitution mandates that no public utility franchise or right shall 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." PHIL. POWER AND DEVELOPMENT CO. v. COMMISSIONER CTA Case No. 1152, October 31,1965 The Court of Tax Appeals held that the rule on non-impairment is not disregarded with the impo- CHAPTER I G E N E R A L PRINCIPLES 97 sition of a higher tax rate on an existing franchise, it appearing that said franchise was granted with the express understanding and upon the condition that it shall be subject to amendment, alteration and repeal. 6. NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX No person shall be imprisoned for non-payment of a debt or poll tax. (Art. Ill, Section 20, Constitution) While a person may not be imprisoned for nonpayment of a cedula or poll tax (People v. Linsangan, 62 Phil. 646), he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides. 7. BILLS TO ORIGINATE FROM THE HOUSE OF REPRESENTATIVES All appropriation, revenue or tariff bills, bills authorizing the 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. (Art. Ill, Section 24, Constitution) Both Houses of Congress may initiate bills, but only the Lower House may propose tax measures. CASE FOR STUDY ARTURO M. TOLENTINO v. SECRETARY OF FINANCE, et al. 235 SCRA 630" Petitioners assail the constitutionality of R.A. 7716 imposing a value-added tax (VAT) on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to " Q u e s t i o n No. 2 , 1 9 9 7 Bar Examination. TAX PRINCIPLES AND REMEDIES 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. The contention of petitioners is that in enacting R.A. 7716, or the Expanded Valued-Added Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated in the House of Representatives, it was not passed by the Senate but was simply consolidated with the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the President signed into law. In support of this theory, petitioners cited: Art. VI, Sec. 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. Id., Sec. 26(2): No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal. It appears that on various dates between July 22, 1992 and August 31, 1993, several bills were introduced in the House of Representatives seeking to amend certain provisions of the National Internal CHAPTER I G E N E R A L PRINCIPLES 99 Revenue Code relative to the value-added tax or VAT. These bills were referred to the House Ways and Means Committee which recommended for approval a substitute measure, H. No. 11197, entitled: AN ACT RESTRUCTURING THE VALUEADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF TITLE IV, 112,115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED. The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on November 17, 1993, it was approved by the House of Representatives after third and final reading. It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on Ways and Means. On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No. 1630, entitled: AN ACT RESTRUCTURING THE VALUEADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES. It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into consideration PS. Res. No. 734 and H.B. No. 11197." 100 TAX PRINCIPLES AND REMEDIES On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates on the bill and approved it on second reading on March 24, 1994. On the same day, it approved the bill on third reading by the affirmative votes of 13 of its members, with one abstention. House Bill No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee which, after meeting four times (April 13, 19, 21 and 25,1994), recommended that "House Bill No. 11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as reconciled and approved by the conferees." The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was thereafter approved by the House of Representatives on April 27, 1994 and by the Senate on May 2, 1994. The enrolled bill was then presented to the President of the Philippines who, on May 5, 1994, signed it. It became Republic Act No. 7716. Petitioners' contention is that R.A. 7716 did not "originate exclusively" in the House of Representatives as required by Art. VI, Sec. 24 of the Constitution, because it is in fact the result of the consolidation of two distinct bills, H. No. 11197 and S. No. 1630. HELD: This argument will not bear analysis. To begin with, it is not the law — but the revenue bill — which is required by the Constitution to "originate exclusively" in the House of Representatives. A bill originating in CHAPTER I G E N E R A L PRINCIPLES 101 the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. To insist that a revenue statute — and not only the bill which initiated the legislative process culminating in the enactment of the law — must substantially be the same as the House bill would be to deny the Senate's power not only to "concur with amendments" but also to "propose amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate. Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House Bill. 8. VETO POWER OF THE PRESIDENT The President shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill but the veto shall not affect the item or items to which he does not object. (Article VI, Section 27[2], Constitution) The item or items vetoed shall be returned to the Lower House of Congress together with the objections of the President. If after a reconsideration 2 / 3 of all the members of such House shall agree to pass the bill, it 102 TAX PRINCIPLES AND REMEDIES shall be sent, together with the objection, to the other House by which it shall likewise be reconsidered, and if approved by 2 / 3 of all the Members of that House, it shall become a law. 9. PRESIDENT'S POWER TO TAX 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. (Article VIII, Section 2812], Constitution) The President is vested with authority by law to increase tariff rates, even for revenue purposes only. Article VI, Section 8(2) of the Constitution expressly grants permission to Congress to authorize the President "to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates xxx and other duties and imposts xxx." Custom duties which are assessed at the prescribed tariff rates are very much like taxes which are imposed for both revenue raising and regulatory purpose. (Garcia v. Executive Secretary, 211 SCRA 219) However, it bears stressing that the statutory power of the President to fix tariff rates, import or export quotas, and tonnage or wharfage dues must be subject to limitations and restrictions indicated within the law itself. Furthermore, such delegation must be in accord with the framework of the national development program of the government. 67 The term "flexible tariff clause" refers to the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the •'Question No. 18, 2000 Bar Examination. CHAPTER I G E N E R A L PRINCIPLES 103 delegation of the taxing power to the President under the Constitution. TAXATION AND THE FREEDOM OF THE PRESS No law shall be passed abridging the freedom of speech, of expression, or of the press... (Article III, Section 4, Constitution) CASE FOR STUDY TOLENTINO, et al. v. SECRETARY OF FINANCE 235 SCRA 630 The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of newspaper publishers established for the improvement of journalism in the Philippines. On the other hand, petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is a nonprofit organization engaged in the printing and distribution of bibles and other religious articles. Both petitioners claim violations of their rights under Sections 4 and 5 of the Bill of Rights as a result of the enactment of the VAT Law. The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press under Section 103(f) of the NIRC. Although the exemption was subsequently restored by administrative regulation with respect to the circulation income of newspapers, the PPI presses its claim because of the possibility that the exemption may still be removed by mere revocation of the regulation of the Secretary of Finance. On the other hand, the PBS goes so far as to question the Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance has no power to grant tax exemption because this is vested in Congress and requires for its exercise the vote of a majority of all its members, and (2) the Secretary's duty is to execute the law. 104 TAX PRINCIPLES AND REMEDIES HELD: We find no violation of press freedom in these cases. The PPI's claim is simply that, as applied to newspapers, the law abridges press freedom. Even with due recognition of its high estate and its importance in a democratic society, however, the press is not immune from general regulation by the State. It has been held that the publisher of a newspaper has no immunity from the application of general laws. He has no special privilege to invade the rights and liberties of others. He must answer for libel. He may be punished for contempt of court. Like others, he must pay equitable and nondiscriminatory taxes on his business. 11. TAXATION AND FREEDOM OF RELIGION No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship without discrimination or preference shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. (Article III, Section 5, Constitution) In the case of American Bible Society v. City of Manila,"' the Supreme Court ruled that a municipal license tax on the sale of bibles and religious articles by a non-stock, non-profit missionary organization at minimal profit constitutes a curtailment of religious freedom and worship which is guaranteed by the Constitution. However, the income of such organizations from any activity conducted for profit or from any of their property, real or personal, regardless of the disposition made of such income, is taxable. (See Notes under Exemption) "101 Phil. 386. CHAPTER I G E N E R A L PRINCIPLES 12. 105 TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY AND EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL PURPOSES Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. (Article VI, Section 28[3], Constitution) REASON FOR THE RULE: Cemeteries are exempt from the payment of taxes because of the difficulty of collecting a tax thereon and the obvious impropriety of selling the graves of the dead to defray the expenses of carrying on the government of the living. Churches and parsonages or convents appurtenant thereto, etc., are exempt from taxation because such institutions perform work which would otherwise have to be carried on by the public at the expense of the taxpayers and that the expenses of such institutions from taxation lessens rather than increases the burden upon other taxpayers. (26 R.C.L. 316) "ACTUALLY, DIRECTLY AND EXCLUSIVELY USED" It would seem, however, that to be entitled to the exemption, lands, buildings and improvements of religious and charitable institutions should be "actually, directly and exclusively used" for religious and charitable purposes. In the case of Province of Abra v. Harold Hernando and the Roman Catholic Archbishop of Bangued, Abrar the Court ruled that it was not in accordance with the Constitution for the lower court to declare in a declaratory relief action that the properties of the Roman Catholic Church in Bangued, Abra are w 1 0 7 S C R A 104. TAX PRINCIPLES AND REMEDIES tax-exempt without first conducting a hearing thereon to determine whether it was actually, directly and exclusively used for religious purposes. The test of exemption from taxation is the use of the property for the purposes mentioned in the Constitution. (Abra Valley College v. Hon. Juan Aquino, L-39086, June 15,1988,162 SCRA 106) EXCLUSIVE BUT NOT ABSOLUTE USE The term "exclusively used" does not necessarily mean total or absolute use for religious, charitable and educational purposes. Even if the property is incidentally used for said purposes, the tax exemption will apply. Corollarily, if a property, although actually owned by a religious, charitable and educational institution is used for a non-exempt purpose, the exemption from tax shall not attach. CONTROLLING DOCTRINE ON EXEMPTION FROM TAXATION OF REAL PROPERTY OF RELIGIOUS, CHARITABLE AND EDUCATIONAL INSTITUTIONS 70 However, in the recent case of Lung Center of the Philippines v. Quezon City and Constantino P. Rosas, City Assessor of Quezon City, G.R. No. 144104, June 29, 2004, 433 SCRA 119, the prevailing rule on the application of tax exemption to properties incidentally used for religious, charitable and educational purposes, as enunciated in the case of Herrera v. QC-BAA, 3 SCRA 187, has now been abandoned. In resolving the issue of whether or not the portions of the real property of Lung Center that are leased to private entities are exempt from real property taxes, the Supreme Court reexamined the intent of the constitutional provision granting tax exemption of properties ACTUALLY, DIRECTLY AND EXCLUSIVELY USED FOR RELI""Quesrion No. 10, 2005 Bar Examination. CHAPTER I G E N E R A L PRINCIPLES 107 GIOUS, CHARITABLE AND EDUCATIONAL PURPOSES. Thus, the records of the Constitutional Commission reveal that what is exempted is not the institution itself; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes. Citing the case of St. Louis Young Men's Christian Association v. Gehner, 47 S.W.2d 776 which held that 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 Supreme Court concluded that "What is meant by actual, direct and exclusive use of the property for charitable institutions is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes." In sum, the Court ruled that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from taxes. Meaning of actually, directly and exclusively "Actually is opposed to seemingly, pretendedly, or feignedly, as actually engaged in farming means, truly in fact." "Directly. In a direct way without anything intervening; not by secondary, but by direct means." "Exclusively. Apart from all others; without admission of others to participation; in a manner to exclude." [Black's Law Dictionary, Third Edition, cited in National Power Corporation v. Central Board of Assessment Appeals (CBAA), 577 SCRA 418, 424-425 (2009)] 108 TAX PRINCIPLES AND REMEDIES CASES FOR STUDY ABRA VALLEY COLLEGE, INC. represented by PEDRO V. BORGONIA v. HON. JUAN P. AQUINO 162 SCRA 106 For non-payment of real estate taxes, the properties of the Abra Valley Junior College, Inc. was sold at public auction for the satisfaction of the unpaid real property taxes thereon. At issue is whether or not the lot and building in question are used exclusively for educational purposes. "used exclusively for educational purposes." Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental use thereof, determines the exemption from property taxes under Section 22(3), Article VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void. On the other hand, private respondents maintain that the college lot and building in question which were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial purposes because the ground floor of the college building is being used and rented by a commercial establishment. Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, expressly grants exemption from realty taxes for "cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, 109 CHAPTER I G E N E R A L PRINCIPLES buildings, and improvements used exclusively for religious, charitable or educational purposes . . . " Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409, otherwise known as the Assessment Law, provides: "The following are exempted from real property tax under the Assessment Law: xxx xxx xxx (c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, scientific or educational purposes. xxx xxx xxx" In this regard petitioner argues that 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. HELD: The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil. 54711941]) It must be stressed however, that the exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. 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 110 TAX PRINCIPLES AND REMEDIES thereof to the Northern Marketing Corporation cannot by any stretch of imagination be considered incidental to the purpose of education. 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. REV. FR. CASIMIRO LLADOC v. The CIR and The CTA 14 Phil. 292 M.B. Estate donated P10,000.00 to Rev. Fr. Ruiz, parish priest of Victorias, Negros Occidental, for the construction of a new Catholic Church in the locality. Respondent CIR issued an assessment for donee's gift tax against the Catholic Parish of Victorias, of which petitioner was then the priest. Petitioner lodged a protest and requested the withdrawal thereof, asserting that the assessment of the gift tax, even against the Roman Catholic Church, is a clear violation of the Constitution. HELD: Section 22(3), Art. VI of the Constitution 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 contra-distinguished from excise taxes. In the present case, what the Collector assessed was a donee's gift tax; the assessment was not on the properties themselves. A gift tax is not a property tax, but an excise tax imposed on the transfer of the 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. CHAPTER I G E N E R A L PRINCIPLES 111 YMCA OF MANILA v. COLLECTOR OF INTERNAL REVENUE 33 Phil. 217 [1916] The Supreme Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, still, these do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for religious, charitable and educational purposes, and as such, it is entitled to be exempted from taxation. BISHOP OF NUEVA SEGOVIA v. PROVINCIAL BOARD OF ILOCOS NORTE 51 Phil. 352 [1972] The Supreme Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified that the term "used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of the convent includes, not only the land actually occupied by the building but also the adjacent garden devoted to the incidental use of the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place, also qualifies for exemption because this constitutes incidental use in religious functions. HERRERA v. QUEZON CITY BOARD OF ASSESSMENT APPEALS, 3 SCRA 186" [1961] and COMMISSIONER OF INTERNAL REVENUE v. BISHOP OF THE MISSIONARY DISTRICT 14 SCRA 991 [1965] The Supreme Court ruled thus — "Moreover, the exemption in favor of property used exclusively for charitable or educational 1 Question No. 8 , 1 9 9 6 Bar Examination. 112 TAX PRINCIPLES AND REMEDIES purposes is 'not limited to property actually indispensable' therefore (Cooley on Taxation, Vol. 2, p . 1430), but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of hospitals, 'a school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns, and residents' (84 C.J.S. 6621), such as 'Athletic fields' including 'a firm used for the inmates of the institution.' (Cooley on Taxation, Vol. 2, p. 1430) PROVINCE OF ABRA v. HERNANDO 107 SCRA 104* To be exempt from realty taxation, there must be proof of the actual and direct USE of the lands, buildings, and improvement for religious or charitable purposes. 13. TAX EXEMPTIONS GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS" Section 4. (3) All revenues and assets of nonstock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution and cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. 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 reinvestments. 72 Question No. 3(b), 2000 Bar Examination. "Question No. 9,2000 Bar Examination; Question No. 3(A), 2004 Bar Examination. 113 CHAPTER I G E N E R A L PRINCIPLES (4) Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax. (Article XIV, Section 413] and [4], Constitution) "ACTUALLY, DIRECTLY AND EXCLUSIVELY USED" The use of the term "actually, directly and exclusively used" referring to religious institutions cannot be applied to this above article. The provision of Article VI, Section 28(3) applies to three institutions — religious, charitable and educational institutions — while Article XIV applies solely to non-stock, non-profit educational institutions. Hence, in this case, we should apply its literal interpretation —"solely"— in consonance with the principle of strictissimi juris. The word "exclusively" is an "exclusive word," which is indicative of an intent that the provision is mandatory. (SeeMcGee v. Republic, 94 Phil. 821 [1954]) Article XIV and Article VI compared GRANTEE: TAXES COVERED: Art. XIV, Sec. 4(3) Art. VI, Sec. 28(3) non-stock, nonprofit educational institution religious, educational, charitable income tax property tax Custom Duties Property tax (DECS Order No. 137-87) DECS ORDER No. 137-87 The implementing regulations of DECS Order No. 13787 dated December 16, 1987 underscored the following: (1) The exemption granted refers to internal revenue taxes and custom duties imposed by the National Government on all revenues and assets of nonstock, non-profit educational institutions. TAX PRINCIPLES A N D REMEDIES (2) The exemption is not only limited to revenues and assets derived from strictly school operations like income from tuition and other miscellaneous fees such as matriculation, library, ROTC, etc., but also extends to incidental income derived from canteen, bookstore and dormitory facilities. (3) In the case, however, of incidental income, the facilities mentioned must not only be owned and operated by the school itself but such facilities must be located inside the school campus. Canteens operated by mere concessionaires are taxable. (4) Income which is unrelated to school operations like income from money market placements, time and other bank deposits are taxable. (5) The use of the school's income or assets must be in consonance with the purposes for which the school is created; in short, the use must be school-related like the grant of scholarships, faculty equipment, establishment of professorial chairs, etc. Under the Old Tax Code, educational institutions were not considered among tax-exempt corporations. Under Section 30(h) of Republic Act 8424, non-stock, non-profit educational institutions are now included among taxexempt corporations. A careful analysis of the last paragraph of Section 30 of the NIRC, as amended by Republic Act 8424, would reveal that the income of whatever kind or character derived by non-stock and non-profit educational institutions from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition thereof, shall be subject to tax. However, under Article XIV, Section 4(3) of the Constitution, revenues and assets actually, directly and exclusively USED for educational purposes shall be exempt from taxes and duties. Last paragraph of Section 30 of the CHAPTER I G E N E R A L PRINCIPLES 115 NIRC disregarded this requisite of use and instead used the phrase: "regardless of the disposition." Ergo, Section 30(h) in relation to the last paragraph of the NIRC appears to be unconstitutional. R.A. 8424 (NIRC) must yield to the provision of the 1987 Constitution granting tax exemption to non-stock, non-profit educational institutions. The Constitution is the basic and paramount law to which all other laws must conform. DONOR'S TAX Article XIV, Section 4(4) provides: Subject endowments, directly and exempt from to conditions prescribed by law, all grants, donations or contributions used actually, exclusively for educational purposes shall be tax. The foregoing Constitutional provision is not self-executing as it requires a legislative enactment providing certain conditions for exemption. However, Section 101(a)[3] of R.A. 8424, has declared these donations TAX EXEMPT. ESTATE TAX Non-stock, non-profit educational institutions are not included under the coverage of Section 87 of R.A. 8424; hence, they are NOT TAX EXEMPT. Only transfers to social welfare, cultural and charitable institutions are exempt from estate tax. VALUE ADDED TAX Under Rev. Reg. No. 6-97, once non-stock, nonprofit educational institutions engage in business, they are subject to value added tax. Pursuant to Section 109(m) of the Tax Code of 1987, private educational institutions shall be exempt from value-added tax provided they are accredited as such either by the Department of Education, Culture 116 TAX PRINCIPLES AND REMEDIES and Sports or by the Commission on Higher Education. However, this exemption does not extend to their other activities involving the sale of goods and services. However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions (Sec. 2, Finance Department Order No. 137-87 as amended by Finance Department Order No. 92-88) i.e., rental payment from their building/premises. Unlike non-stock, non-profit corporations, their interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposes as an educational institution, are exempt from the 20% final tax and 7 1/2% tax on interest income under the expanded foreign currency deposit system imposed under Section 27(D)[1] of the Tax Code of 1997, subject to compliance with the conditions that as a tax-exempt educational institution, they shall on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: (a) Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 1/2% tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)[1] of the Tax Code of 1997; (b) Certification of actual utilization of the said income; and (c) Board Resolution by the school administration on proposed projects (i.e., construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to CHAPTER I G E N E R A L PRINCIPLES 117 be funded out of the money deposited in banks or placed in money markets, on or before the 14th day of the fourth month following the end of its taxable year. (Sec. 3, Finance Department Order No. 137-87) Finally, the exemption does not cover withholding taxes. As an educational institution, they are constituted as withholding agents for the government required to withhold the tax on compensation income of their employees, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997. In both cases, in order to monitor the activities being conducted by these institutions, it is mandatory that they should maintain their respective set of books of accounts as prescribed in Section 235 of the Tax Code of 1997. Furthermore, both institutions are subject to the payment of the annual registration fee of P500.00 as prescribed in Section 236(B) of the Tax Code of 1997. They are also required under Section 6(C) in relation to Section 237 of the same Code to issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for services rendered which are not directly related to the activities for which they are registered. 74 14. APPROPRIATION OF PUBLIC MONEY No public money or property shall be appropriated, applied, paid or employed directly or indirectly for the use, benefit or support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such EXCEPT when such priest, preacher, minister or dignitary is assigned to the 4 ' R e v e n u e Memorandum Circular No. 76-2003. 118 TAX PRINCIPLES AND REMEDIES armed forces or to any penal institution or government orphanage or leprosarium. (Article VI, Section 29[l] Constitution) This is in consonance with the inviolable principle of separation of the Church and State. The rule is subject to an exception. A particular money may be set aside for a particular sect, priest or religious minister or dignitaries if they are assigned to the following institutions: leprosarium, orphanage, penal institution and the armed forces. 15. GRANT OF TAX EXEMPTIONS 75 The inherent power of the state to impose taxes naturally carries with it the power to grant tax exemptions. The power to exempt from taxation, as well as the power to tax, is an essential attribute of sovereignty, and may be exercised in the constitution, or in a statute, unless the Constitution expressly or by implication prohibits action by the legislature on the subject. Exemptions from taxation may be created directly by the Constitution, e.g., Art. VI, Sec. 28(3) of the Constitution granting tax exemptions to properties actually, directly and exclusively used for religious, charitable and educational purposes, or by an act of the legislature, subject to the limitations as the constitution may place, expressly or by implication, upon the power of the legislature. LEGAL BASIS OF THE GRANT OF EXEMPTIONS Art. VI, Section 28(4) of the Constitution provides that: No law granting any tax exemption shall be passed without the concurrence of a.majority of all the members of Congress. ''Question No. 6, 2004 Bar Examination. CHAPTER I G E N E R A L PRINCIPLES 119 Note that in granting tax exemptions, an absolute majority vote of the Members of Congress is required, while in cases of withdrawal of such tax exemption, a relative majority vote is sufficient. Tax amnesties, tax condonations, and tax refunds are in the nature of tax exemptions. Such being the case, a law granting tax amnesties, tax condonations, and tax refunds requires the vote of an absolute majority of the Members of Congress. GENERAL RULE: NO EXEMPTION A constitutional grant of exemption may be selfexecuting or may require an act of Congress for its operation. Where a constitutional provision granting tax exemption is self-executing, the legislature can neither add nor detract from it; it may however, prescribe a procedure to determine whether a claimant is entitled to the constitutional exemption. The intent to grant tax exemption must be clear, otherwise the rule of construction applies that exemption from taxation are to be strictly construed against exemption and in favor of the right to tax. STATUTORY EXEMPTIONS, WHEN VALID Where the Constitution confers upon the legislature authority to grant exemptions within certain limits, statutes granting such exemptions shall be VALID if they do not exceed the constitutional limits, and VOID if they do. THE RULE ON CONSTRUCTION OF EXEMPTIONS The intention of the legislature to grant tax exemptions must be expressed in clear and unmistakable terms, it can never be implied from language that will admit of any other reasonable construction. Exemptions are never presumed, the burden is upon the claimant to establish his right to exemption beyond reasonable doubt. 120 TAX PRINCIPLES AND REMEDIES Since taxation is the rule and exemption the exception, the intention to make an exception ought to be expressed in clear and unambiguous terms; it cannot be taken to have been intended when the language of the statute on which it depends is doubtful or uncertain; and the burden of establishing it is upon him who claims it. Moreover, if an exemption is found to exist, it must not be enlarged by the construction, since the reasonable presumption is that the state has granted in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of the statute, the favor would be extended beyond dispute in ordinary cases. It applies not only to the power to grant exemptions, which must be strictly construed, but also to the exemption's construction as irrevocable, to the period of duration of the exemption, to the amount of the exemption, to the scope of the exemption, to charter or contract exemptions as well as other exemptions, and to a statute exempting property from retroactive assessments. Since an exemption will never be presumed, the fact that the charter of a corporation contains no provision at all for taxation, and that there is no reservation of the power to alter, amend or repeal the same, does not prevent the state from afterwards taxing the corporation. (2 Cooley Taxation, 1403-U14) However, there are exceptions to the strict construction rule, to wit: (1) The rule of strict construction does not apply where the statute granting the exemption expressly provides for a liberal interpretation; (2) The rule of strict construction does not apply to special taxes relating to special cases and affecting only special classes of persons; (3) While in some cases it is held that the strict construction rule applies equally well to alleged exemptions of municipal property, the better rule CHAPTER I G E N E R A L PRINCIPLES 121 is that strict construction of exemption statutes applies to exemptions of property held in private ownership but not to exemptions of public property. In case of property owned by the state or the city or other public corporation, an express exemption should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property "exemption is the rule and taxation the exemption;" (2 Cooley Taxation, 1414-1415) (4) Exemptions to traditional exemptees, such as those in favor of religious and charitable institutions; (Ibid.) (5) Exemptions in favor of the government, its political subdivisions or instrumentalities. In Maceda v. Macaraig, Jr., 197 SCRA 771, the Supreme Court held: "it is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a governmental political subdivision or instrumentality." The basis for applying the rule of strict construction granting exemptions or deductions, even more obvious than with reference to the affirmative or levying provisions of tax statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of treatment among taxpayers. The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such a case, the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations; (6) If the taxpayer falls within the purview of exemption by clear legislative intent. (CIR v. Arnoldus Carpentry Shop, G.R. No. 71122, March 25, 1988) 122 TAX PRINCIPLES A N D REMEDIES MEANING OF STRICT CONSTRUCTION RULE When it is said that exemptions must be strictly construed in favor of the taxing power, this does not mean that if there is a possibility of a doubt it is to be at once resolved against the exemption. It simply means that if, after the application of all rules of interpretation for the purpose of ascertaining the intention of the legislature, a well founded doubt exists, then the ambiguity occurs which may be settled by the rule of strict construction. (2 Cooley, 1415-1418) Tax exemption and tax amnesty distinguished: 76 Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive application. (People v. Castaneda, G.R. No. L-46881, 1988) On the other hand, tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365) It is generally prospective in application. CASES FOR STUDY ESSO STANDARD EASTERN, INC. v. ACTING COMMISSIONER OF CUSTOMS 18 SCRA 488 Exemption from taxation is not favored and exemptions in tax statutes are never presumed. Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Where the State has granted in express terms certain exemptions, those are the exemptions to be considered, and no more. Since the law (R.A.1394) states that, to be tax exempt, equipment and spare parts should be "for the '"Question No. 2(a), 2001 Bar Examination. CHAPTER I G E N E R A L PRINCIPLES 123 use of industries," the coverage herein should not be enlarged to include equipment and spare parts for use in dispensing gasoline at retail. In comparable factual backdrop, this Court has held that tax exemption in connection with the manufacture of asbestos roof does not extend to the installation thereof. (Collector v. Eternity Corporations, 57 Off. Gaz., No. 6, pp. 1043,1045) MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC. v. DEPARTMENT OF FINANCE SECRETARY, et al. 238 SCRA 63 Petitioner contends that the Bureau of Food and Drug of the Department of Health and not the BIR is the competent government agency to determine the proper classification of food products. On the other hand, the respondents argue that the opinion of the BIR, as the government agency charged with the implementation and interpretation of the tax laws, is entitled to great respect. HELD: The SC agreed with respondents. In interpreting Section 103(a) and (b) of the NIRC, the Commissioner of Internal Revenue gave it a strict construction consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the state. Moreover, as the government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight. Indeed, the ruling was made by the Commissioner of Internal Revenue in the exercise of his power under Section 245 of the NIRC to "make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including rulings on the classification of articles for sales tax and similar purposes." 124 TAX PRINCIPLES AND REMEDIES 16. LOCAL TAXATION Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. (Article X, Section 5, Constitution) The general principle against the delegation of legislative powers as a consequence of the principle of separation of powers is subject to one well-established exception: legislative powers may be delegated to local government units. (Pepsi Cola v. City ofButuan, L-22814, August 28,1968) Included in this grant of legislative power is the grant of local taxing power. Delegation of legislative taxing power to local governments is justified by the necessary implication that the power to create political corporations for purposes of local self-government carries with it the power to confer on such local government agencies the authority to tax. (Pepsi-Cola v. Municipality ofTanauan, Leyte, L-31156, February 27,1976) However, despite the grant of taxing power to local governments, judicial admonition is given to the effect that the tax so levied must be for a public purpose, uniform, and must not transgress any constitutional provision nor repugnant to a controlling statute. (Villanueva v. City oflloilo, L-26521, December 28, 1968) Nevertheless, Congress cannot abolish the local government's power to tax as it cannot abrogate what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local government's exercise of the power to tax. 77 "Question No. 2, 2003 Bar Examination. CHAPTER I G E N E R A L PRINCIPLES 125 R.A. 7160 (Local Government Code) gives flesh to the guidelines and limitations mentioned in the aforesaid constitutional provision as follows: SECTION 130. Fundamental Principles. — The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units: (a) Taxation shall be uniform in each local government unit; (b) Taxes, fees, charges and other impositions shall: (1) be equitable and based as far as practicable on the taxpayer's ability to pay; (2) be levied and collected only for public purposes; (3) not be unjust, excessive, oppressive, or confiscatory; (4) not be contrary to law, public policy, national economic policy, or in restraint of trade; (c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; (d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and (e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation. SECTION 133. Common Limitations on the Taxing Powers of Local Government Units. — Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: 126 TAX PRINCIPLES AND REMEDIES (a) Income tax, except when levied on banks and other financial institutions; (b) Documentary stamp tax; (c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein; (d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned; (e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges of wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise; (f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; (g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) months and four (4) years, respectively from the date of registration; (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products; (i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; (j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code; CHAPTER I G E N E R A L PRINCIPLES 127 (k) Taxes on premiums paid by way of reinsurance or retrocession; (I) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles; (m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein; (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and R.A. No. 6938 otherwise known as the "Cooperatives Code of the Philippines" respectively; and (o) Taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. SECTION 198. Fundamental Principles. — The appraisal, assessment, levy and collection of real property tax shall be guided by the following fundamental principles: (a) Real property shall be appraised at its current and fair market value; (b) Real property shall be classified for assessment purposes on the basis of its actual use; (c) Real property shall be assessed on the basis of a uniform classification within each local government unit; (d) The appraisal, assessment, levy and collection of real property tax shall not be let to any private person; and (e) The appraisal and assessment of real property shall be equitable. 128 TAX PRINCIPLES AND REMEDIES The local government's power to tax is the most effective instrument to raise the needed revenues The right of local government units to collect taxes due must always be upheld to avoid severe tax erosion. This consideration is consistent with the State policy to guarantee the autonomy of local governments and the objective of the Local Government Code that they enjoy genuine and meaningful local autonomy to empower them to achieve their fullest development as self-reliant communities and make them effective partners in the attainment of national goals. The power to tax is the most potent instrument to raise the needed revenues to finance and support myriad activities of the local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. (National Power Corporation v. Central Board of Assessment Appeal [CBAA], 577 SCRA 418, 440 [2009]) CASES FOR STUDY EUSEBIO VILLANUEVA, et al. v. CITY OF ILOILO, 26 SCRA 578 Section 2 of the Local Autonomy Act confers on local governments broad taxing authority which extends to almost "everything, excepting those which are mentioned therein" provided that the tax so levied is "for public purposes, just and uniform," and does not transgress any constitutional provision or is not repugnant to a controlling statute. Thus, when a tax, levied under the authority of a city or municipal ordinance, is not within the exceptions and limitations, the same comes within'rhe ambit of the general rule pursuant to the rules of expressio unius est exclusio alterius and exception format regulum in casibus non except. CHAPTER I G E N E R A L PRINCIPLES 129 PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC. v. MUNICIPALITY OF TANAUAN, LEYTE 69 SCRA 460 Pepsi-Cola challenges the power of taxation delegated to municipalities under the Local Autonomy Act. HELD: The power of taxation granted municipalities under the Local Autonomy Act is constitutional. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. (Cooley, The Law of Taxation, Vol. I, 4th Ed.) It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial power of the government without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal corporations, to which said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. (Pepsi-Cola Bottling Co. of the Phils., Inc. v. City of Butuan, 24 SCRA 793) This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of self-government carries with it the power to confer on such local government agencies the power to tax. (Cooley, 190) x x x The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited to the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem TAX PRINCIPLES A N D REMEDIES expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes. PEPSI-COLA BOTTLING CO. OF THE PHILS, v. CITY OF BUTUAN 24 SCRA 789 Petitioners assail the constitutionality of Municipal Ordinance No. 110, as amended by Mun. Ord. No. 122, on the ground that Sec. 2 of R.A. 2264, upon the authority of which it is delegated, is an unconstitutional delegation of legislative powers. HELD: Independently of whether or not a tax imposed pursuant to Sec. 2 of R.A. 2264 amounts to a double taxation — double taxation, in general, is not forbidden by our fundamental law. We have not adopted, as part thereof, the injunction against double taxation found in the US Constitution and of some states of the Union. Then again, the general principle against delegation of legislative powers, in consequence of the theory of separation of powers (U.S. v. Bull, 15 Phil. 7,27; Kilbourn v. Thompson, 103 U.S. 168,26 L. Ed. 377) is subject to one well-established exception, namely: legislative powers may be delegated to local governments. SPECIAL FUND All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the government. (Art. VI, Section 2913], Constitution) CASE FOR STUDY JOHN H. OSMENA v. OSCAR ORBOS 220 SCRA 703 On October 10, 1984, a Special Account in the General Fund, designated as the Oil Price Stabilization CHAPTER I G E N E R A L PRINCIPLES 131 Fund (OPSF), was created to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from exchange rate adjustments and from increases in the world market prices of crude oil. Subsequently, the OPSF was reclassified into a "trust liability account," by virtue of E.O. 1024, and ordered released from the National Treasury to the Ministry of Energy. The same Executive Order also authorized the investment of the fund in government securities, with the earnings from such placements accruing to the fund. The instant petition avers that the creation of the trust fund violates Section 29(3), Article VI of the Constitution. The petitioner argues that "the monies collected pursuant to P.D. 1956 as amended, must be treated as a 'SPECIAL FUND,' not as a 'trust account/ or a 'trust fund,' and that "if a special tax is collected for a specific purpose the revenue generated therefrom shall 'be treated as a special fund' to be used only for the purpose indicated, and not channeled to another government objective." Petitioner further points out that since "a 'special fund' consists of monies collected through the taxing power of a State, such amounts belong to the State, although the use thereof is limited to the special purpose/objective for which it was created." He also contends that the "delegation of legislative authority" to the ERB violates Section 28(2) Article VI of the Constitution, and inasmuch as the delegation relates to the exercise of the power of taxation, the law must not only specify how to tax, who (shall) be taxed (and) what the tax is for, but also impose a specific limit on how much to tax. The petitioner does not suggest that a "trust account" is illegal per se, but maintains that the monies collected, which form part of the OPSF should be maintained in a special account 132 TAX PRINCIPLES AND REMEDIES of the general fund for the reason that the Constitution so provides, and because they are, supposedly, taxes levied for a special purpose. He assumes that the Fund is formed from a tax undoubtedly because a portion thereof is taken from collections of ad valorem taxes and the increases thereon. HELD: The petitioner's perceptions are, in the Court's view, not quite correct. The OPSF is a 'Trust Account' which was established "for the purpose of minimizing the frequent price changes brought about by exchange rate adjustment and/or changes in world market prices of crude oil and imported petroleum products." It was established precisely to protect local consumers from the adverse consequences that such frequent oil price adjustments may have upon the economy. Thus, the OPSF serves as a pocket, as it were, into which a portion of the purchase price of oil and petroleum products paid by consumers as well as some tax revenues are inputted and from which amounts are drawn from time to time to reimburse oil companies, when appropriate situations arise, for increases in, as well as under recovery of, costs of crude importation. The OPSF is thus a buffer mechanism through which the domestic consumer prices of oil and petroleum products are stabilized, instead of fluctuating every so often, and oil companies are allowed to recover those portions of their costs which they would not otherwise recover given the level of domestic prices existing at any given time. To the extent that some tax revenues are also put into it, the OPSF is in effect a device through which the domestic prices of petroleum products are subsidized in part. It appears to the Court that the establishment and maintenance of the OPSF is well within that pervasive and non-waivable power and responsibility CHAPTER I G E N E R A L PRINCIPLES 133 of the government to secure the physical and economic survival and well-being of the community, that comprehensive sovereign authority we designate as the police power of the State. The stabilization, and subsidy of domestic prices of petroleum products and fuel oil "— clearly critical in importance considering, among other things, the continuing high level of dependence of the country on imported crude oil — are appropriately regarded as public purposes." Hence, while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a "special fund." Indeed, the practice is not without precedent. SUPREME C O U R T S JURISDICTION OVER TAX CASES ART. VIII, SEC. 2: The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Section 5 hereof. ART. VIII, SEC. 5: The Supreme Court shall have the following powers: Review, revise, reverse, modify or affirm on appeal or certiorari as the law or the Rules of Court may provide, final judgments or orders of lower courts in: TAX PRINCIPLES A N D REMEDIES (b) All cases involving the legality of any tax, impost, assessment or toll, or any penalty imposed in relation thereto. The Supreme Court exercises exclusive appellate jurisdiction over certain judgments or orders of the lower courts involving the legality of a tax impost, assessment, fee, or penalty imposed in relation thereto. Decisions of the Bureau of Internal Revenue are appealable to the Court of Tax Appeals. The decisions of the Court of Tax Appeals may be appealed to the Court of Appeals. (DBP v. CA, 180 SCRA 609) Decisions rendered by the Court of Appeals may be elevated to the Supreme Court. Congress may not pass a law declaring that decisions of the Court of Appeals on tax cases shall be final and executory. However, a law making decision of the Court of Tax Appeals appealable directly to the Supreme Court is valid. Congress cannot deprive the Supreme Court of its power to review, revise, modify or affirm the decisions of lower courts. KINDS OF TAXES DIFFERENTIATED (1) 78 Direct and Indirect — A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in. Examples are the 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. On the other hand, indirect tax is a tax primarily paid by persons who can shift the burden upon someone else. For 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 '"Question 1(2), 2006 Bar Examination; Question No. 2, 2001 Bar Examination. CHAPTER I G E N E R A L PRINCIPLES 135 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 to 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 part 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 granted 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. (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, 478 SCRA 61 [2005]) (2) Specific and ad valorem — A specific tax is imposed and based on weight or volume capacity or any other physical unit of measurement, whereas ad valorem 136 TAX PRINCIPLES A N D REMEDIES tax is based on selling price or other specified value of the goods. (Sec. 129, NIRC) Examples of specific tax are excise taxes on distilled spirits, tobacco products and petroleum products. Examples of ad valorem tax include excise tax on automobiles and non-essential goods. (3) General and special — A general tax is imposed solely to raise revenue for the government, such as: income tax, donor's tax, estate tax and value-added tax. On the other hand, special tax is imposed and collected to achieve a particular legitimate object of government. An example of special tax is oil price stabilization fund. In Osmefia v. Orbos, supra, the Supreme Court held that the contribution to OPSF is collected to protect the local consumers by stabilizing and subsidizing domestic pump rates. (4) National and local — A national tax is imposed by the national government (e.g., revenue taxes under the NIRC and custom duties), while local tax is levied and collected by the local government (e.g., real property tax and business tax). The Supreme Court ruling laid down in the case of Meralco v. CBAA (L-46245, May 3, 1982) classifying real property tax as national tax is deemed superseded by the effectivity of R.A. 7160 on January 1,1992. (5) 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 (e.g., community tax), while property tax is imposed on property, real or personal, in proportion to its value (e.g., real estate tax). A tax on the exercise of right or privilege or performance of an act is generally regarded as excise tax (e.g., income tax, estate tax, donor's tax and valueadded tax). CHAPTER I G E N E R A L PRINCIPLES (6) 137 Progressive and regressive — A progressive tax is one whereby the rate increases as the tax base (amount) increases. Examples are income tax, estate and donor's tax under the NIRC. On the other hand, regressive tax is one where the tax rate decreases as the tax base increases. In Tolentino, et al. v. Secretary of Finance, EVAT En Banc Resolution, October 30, 1995, the Supreme Court ruled that value-added tax is a form of regressive tax. CONCEPT OF DOUBLE TAXATION" There is 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. (Cooley on Taxation, 4th Ed. p. 492; and 51 Am. Jur. 341) 1) Kinds of Double Taxation a) DIRECT — 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 same property or subject matter, for the same purpose, by the same State, Government, or taxing authori/tv, within the same jurisdiction or taxing district, during the same taxing period, and they must be of the same kind or character of tax. (84 C.J.S. 131-132) Local Business Tax Based on Gross Revenues amounts to direct double taxation The imposition of local business tax based on gross revenue will inevitably result in the constitutionally pros- 7 *Queshon No. 1,1997 Bar Examination; Question No. 4(B), 2004 Bar Examination. 138 TAX PRINCIPLES A N D REMEDIES cribed 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 receipts 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 services 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 as sales of goods, sales of services, interest, royalties, and dividends), which is measured at the fair value of the consideration or receivable. (Ericsson Telecommunications, Inc. v. City ofPasig, 538 SCRA 99,114-115 [2007]) b) 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 authority, are not of the same kind or character. (Villanueva v. Upilo City, 26 SCRA 578) c) DOMESTIC — this arises when the taxes are imposed by the local or national government (within the same state). d) 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. (CIR v. S.C. Johnson and Sons, Inc., 309 SCRA 102) The Supreme Court declared that double taxation, in general, is not forbidden by our Constitution since we have CHAPTER I G E N E R A L PRINCIPLES 139 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. (Pepsi-Cola Bottling Co. v. Municipality of Tanauan, Leyte, 69 SCRA 460) 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. (Cruz, Constitutional Law, 2000 Edition, p. 91) 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. (Baker, Double Taxation Conventions and International Tax Law 11994], pp. 70-72) 140 TAX PRINCIPLES A N D REMEDIES XII. TAX EVASION GUISHED" AND TAX AVOIDANCE DISTIN- Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes. On the other hand, tax avoidance is a legal means used by the taxpayer to reduce taxes. (Benny v. Commr., 25 TCI. 78) The intention to minimize taxes, when used in the context of fraud, must be proven by clear and convincing evidence amounting to more than mere preponderance. Mere understatement of tax in itself does not prove fraud. (Yutivo Sons Hardware Co. v. CTA, 1 SCRA 160) A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. Therefore, a man may perform an act that he honestly believes to be sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient. (Court Holding Co. v. Commr., 2 TCI. 531) Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by taxpayer to be legally due, or the nonpayment 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," "willful," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful. 81 Did the tax planning scheme adopted by Cibeles Insurance Corporation (CIC) constitute tax evasion that would justify an assessment of deficiency income tax? This was the query which the Supreme Court passed upon in a recently promulgated decision entitled Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr.* •Question No. 3,1996 Bar Examination. "'De Leon, Fundamentals of Taxation 53 (1988 Ed.), citing Batter, Fraud under Federal Tax Law 15 (1953 Ed.) "G.R. No. 147188, September 14, 2004, 438 SCRA 290. CHAPTER I G E N E R A L PRINCIPLES 141 On March 2, 1989, CIC authorized Benigno P. Toda, Jr., President and owner of99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million. On August 30,1989, Toda sold the property for P100 million to Rafael A. Altonaga who sold the same property on the same day to Royal Match, Inc. (RMI) for P200 million. For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million. On April 16, 1990, CIC filed its corporate annual income tax return for the year 1989, declaring its gain from the sale of real property in the amount of P75,728.021. On July 12, 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for PI 2.5 million. Three and half years after the sale, Toda died. Thereafter in 1994, the BIR sent an assessment notice and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22. As the new CIC is now owned by an entirely different set of stockholders, the Commissioner of Internal Revenue, on January 9, 1995, issued a Notice of Assessment to the Estate of Benigno P. Toda, Jr. for the above-mentioned deficiency tax. The Commissioner of Internal Revenue dismissed the protest which the Estate of Toda subsequently filed stating that a fraudulent scheme was deliberately perpetuated by the CIC which was wholly owned and controlled by Toda by covering up the additional gain of PI 00 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%. To bolster his position, the Commissioner of Internal Revenue, in an Answer and Amended Answer to the petition for review filed before the Court of Tax Appeals by the Estate of Toda argued thus: 1. The two transactions actually constituted a single sale of the property by CIC to RMI and that 142 TAX PRINCIPLES AND REMEDIES Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI; 2. The additional gain of PI 00 million (the difference between the second simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC; 3. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Holding that the Commissioner of Internal Revenue failed to prove that CIC committed fraud to deprive the government of taxes due it and that even assuming that a preconceived scheme was adopted by CIC, the same constituted mere tax avoidance and not tax evasion, the Court of Tax Appeals denied the petition. In its challenged Decision, the Court of Appeals affirmed the decision of the of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to deteirnine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate." The Supreme Court reversed the decision of the Court of Appeals on the following grounds: 1. Tax avoidance is the tax saving device within the means sanctioned by law while tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it subjects the taxpayer to further or additional civil or criminal liabilities. 2. All the three factors of tax evasion are present in this case. As early as May 4, 1989, prior to the purported sale of the Cibeles property by CIC to CHAPTER I G E N E R A L PRINCIPLES 143 Altonaga on August 30, 1989, CIC received P40 million from RMI, and not from Altonaga. This P40 million was debited by RMI and reflected in its trial balance as "other inv. — Cibeles Bldg." In addition, as of July 31, 1989, another P40 million was reflected in RMI's trial balance as "other inv. — Cibeles Bldg." These showed that the real buyer of the properties was RMI, and not the intermediary Altonaga. 3. That Altonaga was a mere conduit finds support in the admission of the Toda Estate that the sale to him was part of the tax planning scheme of CIC. 4. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme being tainted with fraud. 5. The intermediary transaction — the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. 6. To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of the tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes and the two sale transactions should be treated as a single direct sale by CIC to RMI. 7. The tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended [now 27(A) of the Tax Reform Act of 1997]. CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5%; individual capital gains tax provided for in Section 34(h) of the NIRC of 1986 (now 6% under Section 24(D)[1] of the Tax 144 TAX PRINCIPLES A N D REMEDIES Reform Act of 1997) is inapplicable. Thus, the assessment for the deficiency income tax issued by the BIR must be upheld. CASE FOR STUDY UNGAB DOCTRINE" SUSTAINED IN CIR v. PASCOR 309 SCRA 402 In Ungab v. Cusi, 97 SCRA 877, the Supreme Court held that while there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Tax Code. In the subsequent case of CIR v. CA, 257 SCRA 200, it was held that before one is prosecuted for willful attempt to evade or defeat any tax under Sections 253 and 255 of the Tax Code, the fact that a tax due must first be proved. However, in the recent case of CIR v. PASCOR, 309 SCRA 402, the Court ruled that an assessment is not necessary before a criminal charge can be filed. First — Section 205 of the Tax Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. Second — A criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code. Third — The crime is complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part of all of the tax. (Guzikv. U.S. 54 F 2d. 618) •"Question 14(2), 2005 Bar Examination; Question No. 2 0 , 1 9 9 8 Bar Examination. CHAPTER I G E N E R A L PRINCIPLES XIII. 145 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: a) National Internal Revenue Code — The statute of limitation 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 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 ten 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 Sec. 222 may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. b) Tariff and Customs Code — It does not express any general statute of limitation; 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." (Sec. 4, R.A. 9135) c) 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 "Question No. 4 , 1 9 9 7 Bar Examination. 146 TAX PRINCIPLES AND REMEDIES assessed within ten (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) XIV. NATURE AND PROSPECTTVITY 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. In CIR v. Reyes [480 SCRA 382, 397], the Supreme Court ruled that failure to comply with Section 228 (of the NIRC, as amended by R.A. 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. 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. (Republic v. Oasan Vela. De Fernandez, 99 Phil. 934) 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. No person or property is subject to CHAPTER I G E N E R A L PRINCIPLES 147 taxation unless they fall within the terms or plain import of a taxing statute. (Commissioner of Internal Revenue v. Court of Appeals, 204 SCRA 182,189 [1991]) XV. TAXPAYER'S SUIT, REQUISITES* Taxpayer's suit requires illegal expenditure of public money. In 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. However, in the case of 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. In the recent case of 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. "Question No. 4(b), 1996 Bar Examination. Chapter II TAX REMEDIES I. REMEDIES OF THE GOVERNMENT Remedies have been allowed, in every age and country, for the collection by the government of its revenues. They have been considered a matter of state necessity. The existence of the government depending on the regular collection of revenue must, as an object of primary importance, be insured. With this objective in mind, promptness in collection is always desirable, if not imperative. A. Assessment and Collection Assessment precedes collection except when the unpaid tax is a tax due per return as in the case of a self-assessed income tax under the pay-as-youfile system in which case collection may be instituted without need of assessment pursuant to Section 56 of the NIRC. Sec. 56. Payment and Assessment of Income Tax for Individuals and Corporations. — (A) Payment of Tax. — (1) In General. — The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or 148 CHAPTER II TAX REMEDIES 149 captains to hie the return and pay the tax, the Bureau of Customs is hereby authorized to hold vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. (2) Installment Payment — When the tax due is in excess of Two Thousand Pesos (P2,000.00), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. In cases where assessment is necessary, the primordial consideration is its final and unappealable nature. Collectibility of the tax liability attaches only when the assessment becomes final and unappealable. An assessment contains not only a computation of tax liabilities but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by taxpayer. (CIR v. PASCOR, 309 SCRA 402) Commissioner's recommendation letter cannot be considered as formal assessment of tax liability In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A written communication containing a computation by a rev- TAX PRINCIPLES AND REMEDIES enue officer of the tax liability of a taxpayer and giving him an opportunity to contest or disprove the BIR examiner's findings is not an assessment since it is yet indefinite. The recommendation letter of the Commissioner cannot be considered a formal assessment. Even a cursory perusal of the said letter would reveal three key points: 1. It was not addressed to the taxpayers. 2. There was no demand made on the taxpayers to pay the tax liability nor a period for payment set therein. 3. The letter was never mailed or sent to the taxpayers by the Commissioner. In fine, the said recommendation letter served merely as the prima facie basis for filing criminal informations that the taxpayers had violated Section 45 (a) and (d), and 110, in relation to Section 100, as penalized under Section 255, and for violation of Section 253, in relation to Section 252 9(b) and (d) of the Tax Code. (Adamson v. Court of Appeals, 588 SCRA 27 [2009]) Presumption of Regularity of Assessment CASES FOR STUDY COMMISSIONER OF INTERNAL REVENUE v. HON. COURT OF APPEALS, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION AND COURT OF TAX APPEALS G.R. No. 104151 and ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION v. COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS 242 SCRA 289 FACTS: On April 9, 1980, the Commissioner of Internal Revenue, acting on the basis of the report of the examiners of the Bureau of Internal Revenue (BIR), caused CHAPTER II TAX REMEDIES 151 the service of an assessment notice and demand for payment of the amount of P12,391,070.51 representing deficiency ad valorem percentage and fixed taxes, including increments, for the taxable year 1975 against Atlas Consolidated Mining and Development Corporation (ACMDC). Likewise, on the basis of the BIR examiner's report in another investigation separately conducted, the Commissioner had another assessment notice, with a demand for the payment of the amount of P13,531,466.80 representing the 1976 deficiency ad valorem and business taxes with P5,000.00 compromise penalty, served on ACMDC on September 23,1980. ACMDC protested both assessments but the same were denied. Assailing the tax liability imposed by the BIR, ACMDC elevated the matter to the Supreme Court, where one of the issues raised was the assessed contractor's tax. ACMDC claimed that the leasing out of its personal properties was a mere isolated transaction, hence should not be subjected to contractor's tax. HELD: ACMDC cannot validly claim that the leasing out of its personal properties was merely an isolated transaction. Its book of accounts shows that several distinct payments were made for the use of its personal properties such as its plane, motorboat and dump truck. The series of transactions engaged in by ACMDC for the lease of its aforesaid properties could also be deduced from the fact that for the tax years 1975 and 1976 there were profits earned and reported therefor. It received a rental income of P630,171.56 for tax year 1975 and P2,450,218.62 for tax year 1976. The allegation of ACMDC that it did not realize any profit from the leasing out of its said personal properties, since its income therefrom covered only the costs of operation such as salaries and fuel, is not supported by any documentary or substantial evidence. We are not, therefore, convinced by such disavowal. 152 TAX PRINCIPLES A N D REMEDIES Assessments are prima facie presumed correct and made in good faith. Contrary to the theory of ACMDC, it is the taxpayer and not the BIR who has the duty of proving otherwise. It is an elementary rule that in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Verily, failure to present proof of error in assessments will justify judicial affirmance of said assessment. Follow-up Letter Reiterating Demand for Payment Con-sidered Notice of Assessment REPUBLIC OF THE PHILIPPINES v. COURT OF APPEALS, and NIELSON & COMPANY, INC 149 SCRA 351 FACTS: In a demand letter dated 16 July 1955, the Commissioner of Internal Revenue assessed Nielson & Company deficiency taxes for the years 1949 to 1952, totaling P14,449.00. This demand was reiterated in three (3) more letters dated 24 April 1956, 19 September 1956, and 9 February 1960. On the theory that the assessment had become final and executory, the Commissioner filed a complaint for collection of the said amount with the then Court of First Instance. The court a quo rendered a decision against Nielson & Company. On appeal to the Court of Appeals, the decision was reversed, on the ground that there was no proof of receipt by Nielson & Co. of the 16 July 1955 assessment. The BIR filed a petition for review on certiorari, asserting that the assessment letter must be presumed to have been received by Nielson in the ordinary course of mail. HELD: [W]hile the contention of the petitioner (BIR) is correct that a mailed letter is deemed received by 153 C H A P T E R II TAX REMEDIES the addressee in the ordinary course of mail, still, this is merely a disputable presumption, subject to the controversy, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee, x x x Since the petitioner has not adduced proof that private respondent (Nielson & Co.) had in fact received the demand letter of 16 July 1955, it cannot be assumed that private respondent received said letter. Records, however, show that petitioner wrote private respondent a follow-up letter dated 19 September 1956, reiterating its demand for the payment of taxes as originally demanded in petitioner's letter dated 16 July 1955. This follow-up letter is considered a notice of assessment in itself which was duly received by private respondent in accordance with its own admission. Under Section 7 of R.A. 1125, the assessment is appealable to the Court of Tax Appeals within thirty (30) days from receipt of the letter. The taxpayer's failure to appeal in due time, as in the case at bar, makes the assessment in question final, executory and demandable. Thus, private respondent is now barred from disputing the correctness of the assessment or from invoking any defense that would reopen the question of its liability on the merits. Assessment Deemed Made An assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. A revenue officer's Affidavit merely contained a computation of respondents' tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers. 1 'CIR v. Pascor, 309 SCRA 402. 154 TAX PRINCIPLES A N D REMEDIES Meaning of best evidence The "best evidence" envisaged in Section 16 of the 1977 NIRC (now Section 6 of the present NIRC), as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission. The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayer's records in whatever form they may be kept. Such records include computer tapes of the said records prepared by the taxpayer in the course of business. In this era of developing information-storage technology, there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayer's return. In Campbell, Jr. v. Guetersloh, the United States (U.S.) Court of Appeals (5th Circuit) declared that it is the duty of the Commissioner of Internal Revenue to investigate any circumstance which led him to believe that the taxpayer had taxable income larger than reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer; he may take the testimony of third parties; he may examine and subpoena, if necessary, trad- CHAPTER 0 TAX REMEDIES 155 ere' and brokers' accounts and books and the taxpayer's book accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any practicable proof that is available in the circumstances of the particular situation. Citing its ruling in Kenny v. Commissioner, the U.S. Appellate Court declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question. (Commissioner of Internal Revenue v. Hantex Trading Co., Inc., 454 SCRA 301, 325-327 [2005]) Existing Revenue Procedures and Jurisprudence Governing Assessment Based on the Best Evidence Obtainable In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. 2 Section 6(B) of the National Internal Revenue Code provides: Failure to Submit Required Returns, Statements, Reports and other Documents. — When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. 'Revenue Memorandum Circular No. 23-2000. 156 TAX PRINCIPLES AND REMEDIES In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes. However, the best evidence obtainable does not include mere photocopies of records/documents. The BIR, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer. Indeed, in United States v. Davey, the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a taxpayer's return is being checked, the government is entitled to use the original records rather than be forced to accept purported copies which present the risk of error or tampering. (CIR v. Hantex Trading, Co., Inc., 454 SCRA 301,327) Assessment Based on Estimate: 50% Rule, In the Absence of Receipts to Prove Actual Amount of Expense Deduction If there is showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that may be allowable in computing the taxpayer's taxable income bearing heavily against the taxpayer whose inexactitude is of his own making. That disallowance of 50% of the taxpayer's claimed deduction is valid. 3 ^Supra. 157 CHAPTER II TAX REMEDIES Networth Method of Investigation Determination of the taxpayer's taxable income through the networth method of investigation is valid. This is authorized under Section 43 of the NIRC which provides: The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year. If a taxpayer commits a violation of the law, hiding his income to evade payment of taxes, the Government must be permitted to resort to all evidence or sources available to detemune his said income, so that the tax may be collected for public purposes. There is and there should be a presumption of regularity accorded this action of the Collector of Internal Revenue in assessing the tax on the best evidence obtainable otherwise, it would be impossible to assess taxes due from a dishonest taxpayer. 4 B. Remedies for Collection of Delinquent Taxes Some of the important remedies of the government in collecting taxes under the National Internal Revenue Code are the following: 1. Distraint of personal property such as goods, chattels, or effects, including stocks and other securities, debts, credits, bank ac- 101 DaLmatians *Supra. 101 tax collectible, Distraint and Levy, can already apply. 158 TAX PRINCIPLES A N D REMEDIES counts and interest in and rights to personal property, and levy upon real property and interest in or rights to real property (Sec. 205); 1. 2. Civil or criminal action (Sec. 205); 3. Compromise (Sec. 204); 4. Tax lien (Sec. 219); 5. Forfeiture (Sec. 224); 6. Civil penalties (Sec. 248). Distraint and Levy Distraint is a remedy whereby the collection of the tax is enforced on the goods, chattels, or effects of the taxpayer including other personal property of whatever character as well as stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property. On the other hand, levy refers to the seizure of real properties and interest in or rights to such properties for the satisfaction of taxes due from the delinquent taxpayer. Levy can be made before, simultaneously, or after the distraint of personal property. Both remedies are summary in nature and either may be pursued in the discretion of the authorities charged with the collection of tax independently, or simultaneously with civil and criminal action once the assessment becomes final and demandable. (Central Cement Corp. v. Commissioner, CTA Case No. 4312, December 21,1988) It bears to stress, however, that the remedy of distraint and levy shall not be availed of where the amount of the tax involved is not more than one hundred pesos (P100). (a) Actual and Constructive Distraint. — Under Section 206, the Commissioner, to safeguard CHAPTER D TAX REMEDIES 159 the interest of the Government, may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is: 1. retiring from any business subject to the tax; 2. intending to leave the Philippines or to remove his property therefrom or to hide or conceal his property; 3. intending to perform any act tending to obstruct the proceedings for collecting the tax due or which may be due from him. Specific Cases When a Notice or Warrant of Constructive Distraint over the Property/ies of a Taxpayer may be Issued a) When a taxpayer who applies for retirement from business has a huge amount of assessment pending with the Bureau of Internal Revenue (BIR). An assessment is huge if the amount thereof is equal to or bigger than the networth or equity of the taxpayer; b) When a taxpayer who is under tax investigation has a record of leaving the Philippines at least twice a year unless such trips are justified and/ or connected with his business, profession or employment; c) When a taxpayer, other than a banking institution, who is under tax investigation has a record of transferring his bank deposits and other valuable personal property/ies from the Philippines to any foreign country; d) When the taxpayer uses aliases in bank accounts, other than the name for which he is legally and/ or popularly known; e) When the taxpayer keeps bank deposits and owns other property/ies under the name of other persons, whether or not related to him, and the 160 TAX PRINCIPLES A N D REMEDIES same are not under any lawful fiduciary or trust capacity; f) When a taxpayer's big amount of undeclared income is known to the public or to the BIR by credible means and there is a strong reason to believe that the taxpayer, in the natural course of events, will have a great tendency to hide or conceal his property/ies. For this purpose, the term "big amount of undeclared income" means an amount exceeding thirty percent (30%) of the gross sales, gross receipts or gross revenue declared per return; g) When the BIR receives information or complaint pertaining to undeclared income in an amount exceeding 30% of gross sales, gross receipts or gross revenue declared per return of a particular taxpayer and there is enough reason to believe that the said information is correct as when the complaint or information is supported by substantial and credible evidence. 5 The constructive distraint of personal property shall be effected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever without the express authority of the Commissioner. (Ibid.) In case the taxpayer or the person having the possession and control of the property sought to be placed under constructive distraint refuses or fails to sign the receipt referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and, in the presence of two (2) witnesses, leave a copy thereof in the premises where ^Revenue Memorandum Circular No. 5-2001. CHAPTER II TAX REMEDIES 161 the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint. (Ibid.) Actual distraint, upon the other hand, is resorted to upon the failure of the person owing any delinquent tax or delinquent revenue to pay the same at the time required. It consists of the seizure of the goods, chattels, or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property of such persons in sufficient quantity to satisfy the tax, or charge, together with any increment thereto incident to delinquency, and the expenses of the distraint and the cost of the subsequent sale. [Section 207(A)] Distraint shall be instituted by the Commissioner or his duly authorized representative if the amount involved is in excess of one million pesos (PI ,000,000.00), or the Revenue District Officer if the amount involved is one million pesos (PI,000,000.00) or less. (Ibid.) A report on the distraint shall, within ten (10) days from receipt of the warrant, be submitted by the distraining officer to the Revenue District Officer, and to the Revenue Regional Director: Provided, That the Commissioner or his duly authorized representative shall, subject to rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, have the power to lift such order of distraint: Provided, further, That a consolidated report by the Revenue Regional Director may be required by the Commissioner as often as necessary. (Ibid.) PROCEDURE FOR ACTUAL DISTRAINT The steps or procedure for actual distraint are outlined under Sections 208 to 212 of the NIRC, viz.: Sec. 208. Procedure for Distraint and Garnishment. — The officer serving the warrant of distraint 162 TAX PRINCIPLES AND REMEDIES shall make or cause to be made an account of the goods, chattels, effects or other personal property distrained, a copy of which, signed by himself, shall be left either with the owner or person from whose possession such goods, chattels, or effects or other personal property were taken, or at the dwelling or place of business of such person and with someone of suitable age and discretion, to which list shall be added a statement of the sum demanded and note of the time and place of sale. Stocks and other securities shall be distrained by serving a copy of the warrant of distraint upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the corporation, company or association, which issued the said stocks or securities. Debts and credits shall be distrained by leaving with the person owing the debts or having in his possession or under his control such credits, or with his agent, a copy of the warrant of distraint. The warrant of distraint shall be sufficient authority to the person owning the debts or having in his possession or under his control any credits belonging to the taxpayer to pay to the Commissioner the amount of such debts or credits. Bank accounts shall be garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government. (208) Sec. 209. Sale of Property Distrained and Disposition of Proceeds. — The Revenue District Officer or his duly authorized representative, other than the officer referred to in Section 208 of this Code shall, according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification to be exhibited in not less than two (2) public places in the municipality or city where the distraint is CHAPTER n TAX R E M E D I E S 163 made, specifying the time and place of sale and the articles distrained. The time of sale shall not be less than twenty (20) days after notice to the owner or possessor of the property as above specified and the publication or posting of such notice. One place for the posting of such notice shall be at the Office of the Mayor of the city or municipality in which the property is distrained. At the time and place fixed in such notice the said revenue officer shall sell all the goods, chattels, or effects, or other personal property, including stocks and other securities so distrained, at public auction, to the highest bidder for cash, or with the approval of the commissioner, through duly licensed commodity or stock exchanges. In the case of stocks and other securities, the officer making the sale shall execute a bill of sale which he shall deliver to the buyer, and the copy thereof furnished the corporation, company or association which issued the stocks or other securities. Upon receipt of the copy of the bill of sale, the corporation, company or association shall make the corresponding entry in its books, transfer the stocks or other securities sold in the name of the buyer, and issue, if required to do so, the corresponding certificates of stock or other securities. Any residue over and above what is required to pay the entire claim, including expenses, shall be returned to the owner of the property sold. The expenses chargeable upon each seizure and sale shall embrace only the actual expenses of seizure and preservation of the property pending the sale, and no charge shall be imposed for the services of the local internal revenue officer or his deputy. Sec. 210. Release of Distrained Propety Upon Payment Prior to Sale. — If at any time prior to the consummation of the sale all proper charges are paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner. Sec. 211. Report of Sale to Bureau of Internal Revenue. —Within two (2) days after the sale, the officer making the 164 TAX PRINCIPLES AND REMEDIES same shall make a report of his proceedings in writing to the Commissioner and shall himself preserve a copy of such report as an official record. Sec. 212. Purchase by Government at Sale Upon Distraint. — When the amount bid for the property under distraint is not equal to the amount of the tax or is very much less than the actual market value of the articles offered for sale, the Commissioner or his deputy may purchase the same in behalf of the National Government for the amount of taxes, penalties and costs due thereon. Property so purchased may be resold by the Commissioner or his deputy, subject to the rules and regulations prescribed by the Secretary of Finance, the net proceeds therefrom shall be remitted to the National Treasury and accounted for as internal revenue. CASE FOR STUDY COLLECTOR OF INTERNAL REVENUE v. ROBERTA FLORES VDA. DE CODINERA, WENCESLAO CODINERA, PIO CODINERA AND COURT OF TAX APPEALS 102 Phil. 1165 FACTS: Appeal from the decision of the Court of Tax Appeals. The case hinges on whether the attachment levied upon in Civil Case No. 4862 barred the enforcement of the warrant of distraint issued by the Collector of Internal Revenue. HELD: Property levied upon by the order of a competent court may, with the consent thereof, be subsequently distrained, subject to the prior lien of the attachment creditor. The attachment merely deprives the Collector of Internal Revenue or his agents of the power to divest the Court of its jurisdiction over said property. It does CHAPTER n TAX REMEDIES 165 not impair such rights as the Government may have for the collection of taxes. While the lien for taxes must be recognized and enforced, the orderly administration of justice requires this to be done by and under the sanction of the court. PROCEDURE ON LEVY OF REAL PROPERTY Sec. 207(B). Levy on Real Property. — After the expiration of the time required to pay the delinquent tax or delinquent revenue as prescribed in this Section, real property may be levied upon, before, simultaneously, or after the distraint of personal property belonging to the delinquent. To his end, any internal revenue officer designated by the Commissioner or his duly authorized representative shall prepare a duly authenticated certificate showing the name of the taxpayer and the amounts of the tax and penalty due from him. Said certificate shall operate with the force of a legal execution throughout the Philippines. Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or the city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question. Sec. 213. Advertisement and Sale. — Within twenty (20) days after the levy, the officer conducting the proceedings shall proceed to advertise the property or a usable portion thereof as may be necessary to satisfy the claim and cost of sale; and such advertisement shall cover a period of at least thirty (30) days. It shall be effectuated by posting a notice at the main entrance of the municipal building or city hall and in a public and conspicuous place in the barrio or district in which the real estate lies and by publication once a week for three (3) consecutive weeks in a newspaper of general circulation in the municipality or city where the property 166 TAX PRINCIPLES AND REMEDIES is located. The advertisement shall contain a statement of the amount of taxes and penalties so due and the time and place of sale, the name of the taxpayer against whom taxes are levied, and a short description of the property to be sold. At any time before the day fixed for the sale, the taxpayer may discontinue all the proceedings by paying the taxes, penalties and interest. If he does not do so, the sale shall proceed and shall be held either at the main entrance of the municipal building or city hall, or on the premises to be sold, as the officer conducting the proceedings shall determine and as the notice of sale shall specify. Within five (5) days after the sale, a return by the distraining or levying officer shall be entered upon the records of the Revenue Collection Officer, the Revenue District Officer and the Regional Director. The Revenue Collection Officer, in consultation with the Revenue District Officer, shall then make out and deliver to the purchaser a certificate from his records, showing the proceedings of the sale, describing the property sold, stating the name of the purchaser and setting out the exact amount of all taxes, penalties and interest: Provided, however, That in case the proceeds of the sale exceeds the claim and cost of sale, the excess shall be turned over to the owner of the property. The Revenue Collection Officer, upon approval by the Revenue District Officer may, out of his collection advance an amount sufficient to defray the costs of collection by means of the summary remedies provided for in this Code, including the preservation or transportation in case of personal property, and the advertisement and subsequent sale, both in cases of personal and real property including the improvements found on the latter. In his monthly collection reports, such advances shall be reflected and supported by receipts. Sec. 214. Redemption of Property Sold. — Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have the right of paying to the Revenue District Officer the amount of the public taxes, penalties and interest thereon from the date of delinquency to the date of CHAPTER 0 TAX REMEDIES 167 sale, together with interest on said purchase price at the rate of fifteen percent (15%) per annum from the date of purchase to the date of redemption, and such payment shall entitle the person paying to the delivery of the certificate issued to the purchaser and a certificate from the said Revenue District Officer that he has thus redeemed the property, and the Revenue District Officer shall forthwith pay over to the purchaser the amount by which such property has thus been redeemed, and said property thereafter shall be free from the lien of such taxes and penalties. The owner shall not, however, be deprived of the possession of the said property and shall be entitled to the rents and other income thereof until the expiration of the time allowed for its redemption. Sec. 215. Forfeiture to Government for want of Bidder. — In case there is no bidder for real property exposed for sale as hereinabove provided or if the highest bid is for an amount insufficient to pay the taxes, penalties and costs, the Internal Revenue Officer conducting the sale shall declare the property forfeited to the Government in satisfaction of the claim in question and within two (2) days thereafter, shall make a return of his proceedings and the forfeiture which shall be spread upon the record of his office. It shall be the duty of the Register of Deeds concerned, upon registration with his office of any such declaration of forfeiture, to transfer the title of the property forfeited to the Government without the necessity of an order from a competent court. Within one (1) year from the date of such forfeiture, the taxpayer, or any one for him, may redeem said property by paying to the Commissioner or the latter's Revenue Collection Officer the full amount of the taxes and penalties, together with interest thereon and the costs of sale, but if the property be not thus redeemed, the forfeiture shall become absolute. It must be noted that in one case, it was held that as an improvement attached to the land, by express provision of law (Section 9, Act 4166), though not 168 TAX PRINCIPLES AND REMEDIES physically so united, sugar quotas are inseparable therefrom, just like servitudes and other real rights over an immovable, and should be considered as immovable or real property. (Presbitero v. Fernandez, 7 SCRA 627) By implication, the procedure for levy, not distraint, must be followed. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the heir of the decedent. Thus, it follows that the services of the notices of levy in satisfaction of the tax delinquencies upon the heir is not required by law. (Marcos II v. Court of Appeals, G.R. No. 120880, June 5, 1997) CASES FOR STUDY BASILIA CABRERA v. THE PROVINCIAL TREASURER OF TAYABAS AND PEDRO J. CATIGBAC C.A. No. 502, January 29,1946 FACTS: The Provincial Treasurer of Tayabas issued a notice for the sale at public auction of numerous real properties forfeited for tax delinquency "on December 15, 1940 at 9 a.m. and everyday thereafter, at the same place and hour until all the properties shall have been sold to the highest bidder." Copy of the notice was sent by registered mail to Nemesio Cabrera, but the envelope containing the same was returned with the remark "Unclaimed," undoubtedly because Nemesio Cabrera had died in 1935. The sale of the land involved herein was executed on May 12, 1941. Thereafter, Basilia Cabrera filed a complaint in the then Court of First Instance of Tayabas attacking the validity of the sale on the grounds that she was not notified thereof, and that although the land had C H A P T E R II TAX REMEDIES 169 remained in the assessment booking the name of Nemesio Cabrera, a former owner, she has become the registered owner since 1934 when a Torrens title was issued to her by the register of deeds of Tayabas. HELD: Under Commonwealth Act No. 470, Section 35, the Provincial Treasurer is enjoined to set forth in the notice, among other particulars, the date of the tax sale. We are of the opinion that this mandatory requirement was not satisfied in the present case, because the announcement that the sale would take place on December 15,1940 and everyday thereafter, is as general and indefinite as a notice for the sale "within this or next year" or "some time within the month of December." In order to enable a taxpayer to protect his rights, he should at least be apprised of the exact date of the proceeding by which he is to lose his property. When we consider the fact that the sale in favor of the appellant was executed on May 12, 1941, or nearly five months after December 15, 1940, the violation of the mandatory requirement becomes more obvious. Likewise, the appellee was admittedly not notified of the auction sale, and this also vitiates the proceeding. She is the registered owner of the land, and since 1934, has become liable for taxes thereon. For all purposes, she is the delinquent taxpayer "against whom the taxes were assessed," referred to in Section 34 of Commonwealth Act No. 470. It cannot be Nemesio Cabrera for the latter's obligation to pay ended where the appellee's liability began. ANTONIA VALENCIA y ORUS v. JUAN JIMENEZ y MIJARES AND GABRIEL FUSTER y FUSTER No. 4406, October 23,1908 FACTS: An action to set aside a sale of real estate to defendant Jimenez for unpaid taxes and the transfer of 170 TAX PRINCIPLES AND REMEDIES a one-half interest therein by him to defendant Fuster was brought before the then Court of First Instance of Manila on the ground that the tax sale was invalid by reason of defects in the proceedings to impose the tax. The most serious of these irregularities are the following: 1) the error in the name of the owner in the assessment; and 2) defect in the description of the property. HELD: 1) In Marx v. Hanthorn (148 U.S., 172), where it does not even appear that under the law of the State of Oregon the tax was a personal one, the tax sale was held bad because the owner's name had been written in the roll as "Ida F. Hawthorn" instead of "Ida J. Hanthorn." Under the Municipal Law of the Philippines, Sections 74 to 78, the tax is primarily a personal one and is enforceable against realty only in the event of a deficiency of personalty, whereas in the City of Manila its character is somewhat qualified by the provision in Section 47 of the charter making the levy on personalty a cumulative remedy only. Nevertheless, the requirement of the statute is so imperative that the rule of the Hanthom case is manifestly applicable here. 2) The most vital requisite of an assessment that the property shall be so described as to be easily identified both by the owner and by the persons desiring to bid therefore. The description prior to those in the deed are all more or less defective, but those in the assessment roll for 1902 and in the final notice of the tax sale are so confused and inadequate as not only to fail to give notice to a stranger of the location of the property, but as to be incapable of verification by a person familiar with it. This is especially true of the description in the notice of sale, which of all the steps in the procedure is the one calling for a most definite and intelligible description. It is settled doctrine that CHAPTER n TAX REMEDIES 171 where one sale embraces two different taxes, a vital defect in either tax invalidates the whole sale, so that, considered apart from the notice of sale, the rather understandable description in the roll of 1901 does not cure the vice in that of 1902. We are satisfied that the failure to adequately describe the property both in the tax roll and in the notice of sale amounted to an "irregularity, informality and failure that impaired the substantial rights of the taxpayer," within the meaning of Sections 84 and 86 of the Municipal Code, and upon this failure we are content to rest our judgment, affirming that part of the judgment of the Court of First Instance declaring the sale and deed of the assessor and collector of the City of Manila to Juan Jimenez y Mijares, and the deed of the latter to Gabriel Fuster y Fuster invalid and awarding to plaintiff the possession of the property described in the complaint. Similarly, it was held in Velayo v. Ordoreza, et al, G.R. No. L-9061, November 18, 1957 that the owner of property registered under the Torrens System is justified in relying upon the description given in his certificate of title as the one officially identifying the property. The sale for non-payment of tax of the property with a description distinct and different from that which appears in its certificate of tide cannot be sanctioned without impairing the full faith and credence which the title is meant to command and, hence, affects the essence of the Torrens System. SOME PRINCIPLES GOVERNING DISTRAINT AND LEVY (a) The distraint and levy shall be effected anytime the situation so demands but only after reasonable efforts have been exerted to collect the tax by ordinary methods of collection. (b) Distraint and levy should be resorted to before court action although it may be done simultaneously. TAX PRINCIPLES A N D REMEDIES (c) If there is already a court action, a warrant of distraint and levy should be issued simultaneously with such filing. (d) Warrant of distraint and levy shall not be issued for the collection only of a compromise penalty for the violation of internal revenue laws and regulations. (e) A notice of tax lien should be filed with the Office of the Register of Deeds before or simultaneously with the issuance of a warrant of distraint and levy. (See Revenue Memo. Order No. 20-68 dated Feb. 18,1966) (f) Any taxpayer whose property has been placed under constructive distraint, who sells, transfers, encumbers or in any way disposes of said property, or any part thereof, without the knowledge and consent of the Commissioner, shall, upon conviction for each act or omission, be punished by a fine not less than twice the value of the property so sold, encumbered, or disposed of, but not less than five thousand pesos (P5,000.00), or suffer imprisonment of not less than two (2) years and one (1) day but not more than four (4) years or both. (Sec. 276) (g) Any person who fails or refuses to surrender property placed under distraint and levy shall be liable in his own person and estate to the Government in a sum equal to the value of the property or rights not so surrendered but not exceeding the amount of the taxes (including penalties and interest) for the collection of which such warrant had been issued, together with the costs and interest if any, from the date of such warrant. In addition, such person shall, upon conviction for each act or omission, be punished by a fine of not less than five thousand pesos CHAPTER II TAX REMEDIES 173 (P5,000.00), or suffer imprisonment of not less than six (6) months and one (1) day but not more than two (2) years, or both. (Sec. 277) (h) The remedy by distraint of personal property and levy on realty may be repeated if necessary until the full amount due, including all expenses, is collected. (Sec. 217) 2. Civil Action A civil action is resorted to when a tax liability becomes collectible, that is, the assessment becomes final and unappealable, or the decision of the Commissioner has become final, executory, and demandable. This occurs when: 1. A tax is assessed and the taxpayer fails to file an administrative protest by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment (Sec. 228, NIRC); 2. A protest against the assessment is filed by the taxpayer but the Commissioner's decision denying in whole or in part the said protest, was not appealed to the Court of Tax Appeals within thirty (30) days from receipt of such decision. It must be stressed that within sixty (60) days from filing of the protest, all relevant supporting documents should be submitted, otherwise, the assessment shall become final. Failure on the part of the Commissioner to act upon a protest within one hundred eighty (180) days from the submission of the documents shall be considered a denial of the protest; the taxpayer must appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the 180 days; otherwise, the assessment shall become final and demandable. (Ibid.) 174 TAX PRINCIPLES A N D REMEDIES In this connection, the ruling of the Supreme Court in Republic v. Lim Tian Feng Sons, Inc., L-21731, March 31, 1966, 16 SCRA 584, bears significance. In that case, the High Court held that when the Commissioner did not reply to the taxpayer's request for reconsideration and instead referred the case to the Solicitor General for judicial collection, this was indicative of his decision against reinvestigation. This is therefore another instance where the Commissioner's action is in effect a decision of denial which is appealable to the Court of Tax Appeals. Also, in a similar case, it was ruled that the filing of a civil action in court to collect a tax which was the subject of a pending protest in the BIR was a justifiable basis for the taxpayer to appeal to the Court of Tax Appeals and to move for the dismissal in the trial court of the Government's action to collect the tax under dispute. (Yabes v. Flop, 115 SCRA 278> But once an action for collection is filed with the regular court, the taxpayer can no longer assail the legality or validity of the assessment. A disputed assessment falls within the exclusive jurisdiction of the Court of Tax Appeals. (Commissioner v. Lilia Yusay Gonzales, L-19495, November 24, 1966) Likewise, the prescription of the Government's right to assess is no longer available as a defense in a civil action for collection; the same should have been ventilated before the Court of Tax Appeals. (Augusto Basa v. Republic, L-45277, August 5, 1985) But the right of the Government to object to the defense of prescription may be waived if it litigated the issue of prescription and submitted said issue for the resolution of the court. (Republic v. Ker & Co., 1-21609, September 29,1966) A proceeding in court after the collection of tax may be begun without assessment The law is clear. When fraudulent tax returns are involved a proceeding in court after the collection of 'Question No. 4(2), 1999 Bar Examination. CHAPTER II TAX REMEDIES 175 such tax may be begun without assessment. In the case of Adamson v. Court of Appeals, 588 SCRA 27 (2009), the private respondents filed the capital gains tax return and the VAT returns, and paid the taxes they have declared due therefrom. Upon investigation of the examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation of the capital gains taxes due from the sale of two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The examiners also found that the VAT had not been paid for VAT-liable sale of services for the third and fourth quarters of 1990. Arguably, the gross disparity in the taxes due and the amounts actually declared by the private respondents constitutes badges of fraud. Thus, the applicability of Ungab v. Cusi (97 SCRA 877 [1980]) is evident to the cases at bar. In this seminal case, this Court ruled that there was no need for precise computation and formal assessment in order for criminal complaints to be filed against him. It quoted Merten's Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus: An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government's failure to discover the error and promptly to assess has no connections with the commission of the crime. It should be noted that a civil action for tax collection filed with the regular courts cannot be instituted without the approval of the Commissioner. (Sec. 220, NIRC) But in one case, it was held that the approval by the Commissioner of Internal Revenue of a civil action for the collection of taxes is not jurisdictional, but one relating to capacity to sue or affecting the cause of action only. The High Court 176 TAX PRINCIPLES A N D REMEDIES went on saying further that there was no grave abuse of discretion on the part of the municipal court in ruling that the express approval of the Revenue Commissioner himself was not necessary. The court relied upon Memorandum Order No. V-634 of the Revenue Commissioner, approved by the Finance Secretary, wherein the former's functions regarding the administration and enforcement of revenue laws and regulations'— powers broad enough to cover the approval of court actions — were expressly delegated to the Regional Directors. (Arches v. Bellosillo, 20 SCRA 33) As amended by R.A. 8424, the NIRC is now even more categorical. Section 7 of the present Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following: a. The power to recommend the promulgation of rules and regulations by the Secretary of Finance; b. The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau; c. The power to compromise or abate under Section 204 (A) and (B) of this Code, any tax deficiency: Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000.00) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evalua- who represents the govt. CHAPTER U TAX REMEDIES 177 original action = legal officer of bir appelate jurisdiction = solicitor general. tion board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and d. The power to assign or re-assign internal revenue officers to establishments where articles subject to excise tax are produced or kept. None of the exceptions relates to the Commissioner's power to approve the filing of tax collection cases. (Republic of the Philippines v. Salud Hizon, 320 SCRA 574) In the recent case of Oceanic Wireless Network, Inc. v. CIR [477 SCRA 205, 214], the Supreme Court upheld the validity of the demand letter dated January 24, 1991 signed and issued by the Chief of the Accounts Receivable and Billing Division ratiocinating that the issuance thereof does not fall under any of the exceptions that have been mentioned as non-delegable. 3. Criminal Action already delegated. Like in the institution of civil action for collection, a criminal action cannot be instituted without the approval of the Commissioner of Internal Revenue. The remedy of criminal action is resorted to not only for collection of taxes but also for enforcement of statutory penalties of all sorts. (Sec. 221, NIRC) The judgment in the criminal case shall not only impose the penalty but shall also order the payment of the taxes subject of the criminal case as finally decided by the Commissioner. (Sec. 205, ibid.) This civil liability arises not as a consequence of a felonious act but because of the taxpayer's failure to pay taxes. Hence, the extinction of one's criminal liability does not necessarily result in the extinguishment of his civil liability, thus: 178 TAX PRINCIPLES AND REMEDIES "In applying the principle underlying the civil liability of an offender under the Penal Code to a case involving the collection of taxes, the court a quo fell into error. The two cases are circumscribed by factual premises which are diametrically opposed to each other, and are founded on entirely different philosophies. Under the Penal Code, the civil liability is incurred by reason of the offender's criminal act, stated differently, the criminal liability gives birth to the civil obligation such that generally, if one is not criminally liable under the Penal Code, he cannot become civilly liable thereunder. The situation under x x x the tax law is the exact opposite. Civil liability to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any criminal act committed by him. The criminal liability arises upon failure of the debtor to satisfy his civil obligation. The incongruity of the factual premises and foundation principles of the two cases is one of the reasons for not imposing civil indemnity on the criminal infraction of the tax law. (Republic v. Patanao, 20 SCRA 712) In the same manner, the subsequent satisfaction of a tax liability will not operate to extinguish the criminal liability. (People v. Jldefonso Tierra, L-17177-80, December 28, 1964) Moreover, subsidiary imprisonment for failure to pay the tax in case of insolvency cannot be imposed in criminal cases involving violations of the provisions of the Tax Code. (People v. Gregorio Balagtas, L-10210, July 29,1959) Criminal Complaint for Tax Evasion Distinguished from Assessment The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assess- 179 CHAPTER II TAX REMEDIES ment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment but to penalize the taxpayer for violation of the Tax Code. 7 CASE FOR STUDY QUIRICO UNGAB v. HON. VICENTE CUSI, JR. 97 SCRA 877 FACTS: Six informations were filed with the then Court of First Instance of Davao City against Quirico Ungab for violation of the National Internal Revenue Code. Ungab filed a Motion to Quash on the ground that the trial court has no jurisdiction to take cognizance of the cases in view of his pending protest against the assessment made by the BIR examiner. HELD: The contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals but a criminal prosecution for violation of the National Internal Revenue Code, which is within the cognizance of the Court of First Instance. While there can be no civil 7 C I R v. Pascor, supra. 180 TAX PRINCIPLES A N D REMEDIES action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension of the prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for violation of a law. Obviously, the protest of the petitioner against the assessment of the Revenue District Officer cannot stop his prosecution for violation of the National Internal Revenue Code. 4. Compromise A compromise is an agreement between two or more persons who, to avoid a lawsuit, amicably settle their differences on such terms as they can agree on. A compromise by its very nature implies mutual agreement by the parties in regard to the thing or subject matter which is to be compromised. An offer of compromise does not, therefore, assume the category of a compromise until it is voluntarily accepted by the other party, and no obligation arises or is created by a simple offer or suggestion coming from one of the parties without acceptance by the other. (Ben L. Chuy, et al. v. Collector of Internal Revenue, C.T.A. Case, July 16, 1958) A compromise penalty, on the other hand, is a certain amount of money which the taxpayer pays to compromise a tax violation. Compromise penalties are paid in lieu of criminal prosecution, and cannot be imposed in the absence of a showing that the taxpayer consented thereto. If an offer of compromise is rejected by the taxpayer, the compromise penalty cannot be enforced thru an action in court or by distraint and levy. The Commissioner of Internal Revenue should file a criminal action if he believes that the taxpayer is criminally liable for violation of the tax law as the only CHAPTER II TAX REMEDIES 181 way to enforce a penalty. (See Commissioner v. Armando L. Abad, etc., L-19627, June 27,1968) Cases Which May Be Compromised The following cases may upon taxpayer's compliance with the basis set forth under Section 3 of Revenue Regulations No. 7-2001 (as amended by Rev. Reg. No. 30-2002), be the subject matter of compromise settlement, viz.: 1. Delinquent accounts; 2. Cases under administrative protest after issuance of the final assessment notice to the taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office; 3. Civil tax cases being disputed before the courts, e.g., MTC, RTC, CTA, CA, SC; 4. Collection cases filed in courts; 5. Criminal violations other than those already filed in court or those involving criminal tax fraud; and excemption? 6. Cases covered by pre-assessment notices but taxpayer is not agreeable to the findings of the audit office as confirmed by the review office. The Commissioner may compromise any internal revenue tax when: 1. A reasonable doubt as to the validity of the claim against the taxpayer exists; or 2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. (Sec. 204, N1RC)> "Question No. 16,2000 Bar Examination; Question No. 7(B), 2004 Bar Examination. 182 TAX PRINCIPLES A N D REMEDIES Basis for Acceptance of Compromise Settlement The Commissioner may compromise the payment of any internal revenue tax on the following grounds: 1. Doubtful validity of the assessment. — The offer to compromise a delinquent account of disputed assessment under these Regulations on the ground of reasonable doubt as to the validity of the assessment may be accepted when it is shown that: (a) The delinquent account or disputed assessment is one resulting from a jeopardy assessment. (For this purpose, "jeopardy assessment" shall refer to a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer's failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return); or (b) The assessment seems to be arbitrary in nature appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis; or (c) The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment or preliminary assessment and there is reason to believe that the assessment is lacking in legal and/ or factual basis; or (d) The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days 183 CHAPTER II TAX REMEDIES from receipt of final assessment notice and there is reason to believe that the assessment is lacking in legal and/or factual basis; or (e) The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and / or factual basis; or (f) The assessment were issued on or after January 1, 1998, where the demand notice allegedly failed to comply with the formalities prescribed under Sec. 228 of the Tax Code of 1997; or (g) Assessments made based on the "Best Evidence Obtainable Rule" and there is reason to believe that the same can be disputed by sufficient and competent evidence," (h) The assessment was issued within the prescriptive period for assessment as extended by the tax-payer's execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic; 10 (i) The assessment is based on an issue where a court of competent jurisdiction made an adverse decision against the bureau, but for which the Supreme Court has not decided upon with finality. 11 ^Revenue Regulations No. 7-2001. •"Revenue Regulations No. 7-2001 amended by Revenue Regulations No. 30-2002. "Revenue Regulations No. 8-2004, May 19,2004. 184 TAX PRINCIPLES A N D REMEDIES 2. Financial incapacity. — The offer to compromise based on financial incapacity may be accepted upon showing that: (a) The corporation ceased operation or is already dissolved; or (b) The taxpayer is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%; or (c) The taxpayer is suffering from a networth deficit computed by deducting total liabilities (net of deferred credits) from total assets (net of pre-paid expenses, deferred charges, pre-operaring expenses, as well as appraisal increases in fixed assets), taken from the latest audited financial statements; or (d) The taxpayer is a compensation income earner with no other source of income and the family's gross monthly compensation income does not exceed the levels of compensation income provided for under Sec. 4.1.1 of Revenue Regulations 7-2001 and it appears that the taxpayer possesses no other leviable/distrainable assets, other than his family home; or (e) The taxpayer has been granted by the Securities and Exchange Commission (SEC) or by any competent tribunal a moratorium or suspension of payments to creditors, or otherwise declared bankrupt or insolvent. The Commissioner shall not consider any offer for compromise settlement by reason of financial incapacity unless and until the taxpayer waives in writing his privilege of the secrecy of bank deposits under R.A. 1405 or under other general or special laws, and such waiver shall constitute as the authority of the C H A P T E R II TAX REMEDIES 185 Cornmissioner to inquire into the bank deposits of the taxpayer. The compromise settlement is subject to the following minimum amounts: 1. For cases of financial incapacity, a minimum compromise rate of ten percent (10%) of the basic assessed tax; 2. For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic tax assessed. Where the basic tax involved exceeds P1,000,000 or the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board composed of the Commissioner and the four (4) Deputy Commissioners. Prescribed Minimum Percentages of Compromise Settlement The compromise settlement of the internal revenue tax liabilities of taxpayers, reckoned on a per tax type assessment basis, shall be subject to the following minimum rates based on the basic assessed tax: 1. For cases of "financial incapacity" — 1.1 If taxpayer is an individual whose only source of income is from employment and whose monthly salary, if single is PI0,500 or less, or if married, whose salary together with his spouse is P21,000 per month, or less and it appears that the taxpayer possesses no other laviable distiainable assets other than his family home - 10% 1.2 If taxpayer is an individual without any source of income - 10% TAX PRINCIPLES A N D REMEDIES 1.3 Where the taxpayer is under any of the following conditions: 1.3.1 Zero networth computed in accordance with Sec. 3.2(c) hereof -10% 1.3.2 Negative networth computed in accordance with Sec. 3.2(c) hereof -10% 1.3.3 Dissolved corporations -20% 1.3.4 Already non-operating companies for a period of: (a) three (3) years or more as of the date of application for compromise settlement -10% (b) Less than 3 years -20% 1.3.5 Surplus or earnings deficit resulting to impairment in the original capital by at least 50% - 40% 1.3.6 Declared insolvent or bankrupt unless taxpayer falls squarely under any situation as discussed above, thus resulting to the application of the appropriate rate -10% For cases of "doubtful validity"— A minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax. The taxpayer may, nevertheless request for a compromise rate lower than forty percent (40%); Provided, however, that he shall be required to submit his request in writing stating therein the reasons, legal and / or factual why he should be entitled to such lower rate; Provided, further, that for applications of compromise settlement based on doubtful validity of the assessment involving an offer lower than the minimum forty percent (40%) compromise rate, the same shall be subject to the prior approval by the NEB. C H A P T E R II TAX REMEDIES 187 The herein prescribed minimum percentages shall likewise apply in compromise settlement of assessments consisting solely of increments, i.e., surcharge, interest, etc., based on the total amount assessed. The power to compromise is vested in the Commissioner of Internal Revenue. This power is discretionary and once exercised by the Commissioner cannot be reviewed or interfered with by the courts. In other words, it is an exclusive power of the Commissioner. He cannot be compelled to exercise such discretion in one way or another. (See People v. Ignacio Desiderio, L-20805, November 29, 1965) But the Commissioner may delegate his power to the Deputy Commissioners and the Regional Directors subject to such restrictions as may be imposed under rules and regulations to be promulgated for the purpose. (Revenue Regulations 7-2001) A compromise validly entered into between the Commissioner and the taxpayer prior to the institution of the corresponding criminal action arising out of a violation of the provisions of the Tax Code is a bar to such criminal action. (People v. Magdaluyo, L-16235, April 20,1961) Abatement. Compromise is different from abatement which is a cancellation of the entire tax liability. Abatement is authorized when: 1) the tax or any portion thereof appears to be unjustly or excessively assessed; 2) the administration and collection costs involved do not justify the collection of the amount due. (Ibid.) When may violations of tax laws/cases be compromised. — In criminal violations, the compromise must be made prior to the filing of the information in court. Under Section 204, NIRC, criminal violations already filed in court or those involving fraud cannot be compromised. 188 TAX PRINCIPLES AND REMEDIES In civil cases, compromise may be entered into before litigation or at any stage of the litigation, even during appeal, although legal propriety demands that prior leave of court should be obtained. But a compromise can never be entered into after final judgment, because by virtue of such final judgment, the Government had already acquired a vested right. (Roviro v. Amparo, L-5482, May 5, 1952) Cases Which Cannot Be Compromised 1. exception = reasonable doubt as to whether to withhold. Withholding tax cases, unless the applicanttaxpayer invokes provisions of law that cast doubt on the taxpayer's obligation to withhold; 2. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or his duly authorized representative; 3. Criminal violation already filed in court; 4. Delinquent accounts with duly approved schedule of installment payments; 5. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision by signing the required agreement form for the purpose. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (NEB) on a case to case basis; 6. Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful validity of the assessment; and 7. Estate tax cases where compromise is requested on the ground of financial inca- CHAPTER II TAX REMEDIES 189 parity of the taxpayer. (Rev. Regs. No. 302002) 5. Tax Liens "Sec. 219. If any person, corporation, partnership, joint account (cuentas en participation), association or insurance company liable to pay any internal revenue tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the time when the assessment was made by the Commissioner until paid, with interests, penalties, and costs that may accrue in addition thereto upon all property and rights to property belonging to the taxpayer: Provided, That his lien shall not be valid against any mortgagee, purchaser or judgment creditor until notice of such lien shall be filed by the Commissioner in the office of the Register of Deeds of the province or city where the property of the taxpayer is situated or located." A tax lien is a legal claim or charge on property (whether real or personal) established by law as a sort of security for the payment of tax obligations. (Hongkong and Shanghai Banking Corp. v. Rafferty, 39 Phil. 145) It is more extensive in scope than the jus retentionis in Civil Law. (Ibid.) A tax lien created in favor of the government is superior to all other claims or preferences, (see Corazon Velos de Torres v. Collector, No. 48602, February 26,1943; Republic v. Peralta, G.R. No. 56568, May 20,1987) An unpaid internal revenue tax, together with related interest, penalties and costs, constitutes a lien in favor of the government from the time an assessment therefor is made and until paid, upon all property and rights to property belonging to the taxpayer. Under the aforequoted Sec. 219, however, the lien is not valid against any mortgagee, purchaser, or judgment creditor until notice of such lien shall have been filed in the register of deeds of the province or city where 190 TAX PRINCIPLES A N D REMEDIES the property of the taxpayer is located. It has been held however that a buyer in an execution sale acquires the rights of the judgment creditor subject to a NIRC tax lien (which did not appear to have been registered) not only from the moment the warrant of distraint is served but upon the accrual of the tax. 12 Government's Claim Predicated on a Tax Lien is Superior to Claim Based on Judgment" It is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. Besides, the distraint on the subject properties of Maritime Company of the Philippines as well as the notice of their seizure were made by petitioner, through the Commissioner of Internal Revenue, long before the writ of execution was issued by the Regional Trial Court of Manila, Branch 31. There is no question then that the time the writ of execution was issued, the two (2) barges, MCP-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines. The power of the court in execution of judgments extends only to properties unquestionably belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and the purchaser in an auction sale acquires only such rights as the judgment debtor has at the time of sale. It is also well-settled that the sheriff is not authorized to attach or levy on property not belonging to the judgment debtor. 14 6. Forfeiture The forfeiture of chattels and removable fixtures of any sort shall be enforced by the seizure and sale, ,2 C I R v. NLRC, G.R. No. 74965, November 9,1994. "Question No. 5, 1995 Bar Examination. . C I R v. N L R C 238 SCRA 42. ,4 CHAPTER II TAX REMEDIES 191 or destruction, of the specific forfeited property. The forfeiture of real property shall be enforced by a judgment of condemnation and sale in a legal action or proceeding, civil or criminal, as the case may require. (Sec. 224, NIRC) The forfeiture need not be for the whole tax liability which could merely be for the amount equivalent to the fair market value of the property. (Castro v. Collector, 4 SCRA 1193) Forfeiture and seizure distinguished." — In seizure for the enforcement of tax lien, the residue, after deducting the tax liability and expenses, will go to the taxpayer. (Bank of P.I. v. Trinidad, 42 Phil. 220) In forfeiture, all the proceeds of the sale will go to the coffers of the government. (U.S. v. Suria, 20 Phil. 163) A taxpayer in forfeiture or seizure cases to enforce tax lien may still be subject to criminal action even if his property has been forfeited. (Garcia v. Collector, 66 Phil. 441) 7. Civil Penalties "Sec. 248. Civil Penalties. - (A) There shall he imposed, in addition to the tax required to he paid, a penalty equivalent to twenty-five percent (25%) of the amount due in the following cases: (1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or (2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or "1968 Bar Examination. TAX PRINCIPLES AND REMEDIES (4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment. (B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud; Provided, That a substantial underdeclaration of taxable sales, receipt or income, or a substantial overstatement of deductions as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return; Provided further, that failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for overstatement of deductions, as mentioned herein." C. No Injunction to Restrain Tax Collection 16 An injunction is not available to restrain collection of tax. No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee, or charge imposed by the NIRC. (Sec. 218) Rationale of the no injunction rule It is a wise and reasonable precaution for the security of the government. No government could exist that permitted its collection to be delayed by every litigious man or very embarrassed man, to "Question No. 3(b), 2001 Bar Examination. 193 CHAPTER II TAX REMEDIES whom delay was more important than the payment of taxes." (See State of Tennessee v. Sneed 11877], 6 Otto, 69. See also 37 Cyc, 1267,1268) This general rule admits one exception, i.e., when the decision of the Commissioner is pending appeal before the Court of Tax Appeals, the said court may enjoin the collection of taxes if such collection will jeopardize the interest of the government and/or the taxpayer. In such case, the Court at any stage of the proceeding may suspend the collection of the tax 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. The posting of a bond is not an absolute requirement, its imposition lies within the sound discretion of the Tax Court. 17 II. STATUTE OF LIMITATIONS" The right of the government to assess and collect internal revenue taxes is subject to the statute of limitation provided under the Tax Code, as follows: Sec. 203. Period of Limitation Upon Assessment and Collection. — Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. Sec. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. — "Question No. 1 2 . 1 9 % Bar Examination. "Question No. 4 , 1 9 9 7 Bar Examination. TAX PRINCIPLES AND REMEDIES (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof above, may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon, as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5) year period. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding Section and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed C H A P T E R II TAX R E M E D I E S 195 in accordance with the provisions of any tax amnesty law or decree. The defense of prescription is not jurisdictional and must be raised seasonably, otherwise it is deemed waived. (Arches v. Bellosillo, 20 SCRA 32) The prescriptive periods for assessment and collection may be outlined as follows: A. Assessment of the tax liability a) Three (3) years — commences to run after the last day prescribed by law for the filing of the return. This means that if the return is filed before the due date, the prescriptive period begins to run only after said due date, but if the return is filed beyond the period fixed by law or beyond the due date, the three (3)-year period shall be counted from the day the return was filed. But if the return was amended substantially, the period starts from the filing of the amended return. (Commissioner v. Phoenix Assurance Co., Ltd., L-19127, May 20,1965, 14 SCRA 52)» b) Ten (10) years — when 1) no return is filed, or 2) the return is false or fraudulent with intent to evade the tax, the prescriptive period commences from the date of discovery. When the assessment notice or the demand letter of the BIR is sent by mail, the date when the demand letter or notice of assessment is mailed, released or sent to the taxpayer is considered the date of actual assessment (Basilan Estates v. Commissioner, 21 SCRA 17), and as long as the same is released within the prescriptive period, assessment is deemed made on time even though the same is actually received by the taxpayer after the expiration of the prescriptive period. (Ibid.) It was held in one case that since prescription is an affirmative defense, it is incumbent upon the taxpayer "Question No. 1,1999 Bar Examination. 196 TAX PRINCIPLES A N D REMEDIES to prove that a return had been filed by him, otherwise, there is a basis for the BIR to assess the tax within the ten (lO)-year period on the ground that no return was filed by him. (Republic v. Marsman Dev't. Co., L-18986, April 27,1972; see also Taligaman Lumber Co. v. Collector, 4 SCRA 842) If what was filed was a wrong return, the ten (lO)-year prescriptive period will still apply. This is true even if the information embodied in the wrong return could enable the BIR to assess the tax liability of the taxpayer. (Butuan Sawmill, Inc. v. CTA, L-20601, 16 SCRA 277) Demand letter issued by the Bureau of Forestry not an assessment MAMBULAO LUMBER COMPANY v. REPUBLIC OF THE PHILIPPINES 132 SCRA 1 FACTS: On January 15,1949, the Bureau of Forestry demanded from Mambulao Lumber Company the payment of assessed forest charges and surcharges. The company protested the assessment. On August 29, 1958, the Acting Commissioner of Internal Revenue likewise wrote a letter to the company demanding payment, which subsequently requested reinvestigation. The BIR gave the company twenty (20) days within which to submit its verification of payments. For failure of the company to comply, the BIR, on August 25, 1961, filed a complaint for collection with the then Court of First Instance. The company raised the defense of prescription, arguing that from January 15, 1949, when the Bureau of Forestry made an assessment and demand for payment up to the filing of the complaint for collection on August 25, 1961, more than five (5) years had elapsed. HELD: The action for collection is not barred by prescription. The demand letter of the Acting Commissioner of Internal CHAPTER n TAX REMEDIES 197 Revenue dated August 29, 1958, was the basis of the complaint filed in the case and not the demand letter of the Bureau of Forestry dated January 15, 1949. This must be so because forest charges are internal revenue taxes and the sole power and duty to collect the same is lodged with the Bureau of Internal Revenue and not with the Bureau of Forestry. B. Collection of the Tax a) Five (5) years — from assessment; b) Ten (10) years — without assessment, and in case of false or fraudulent returns with intent to evade the tax or failure to file a return. Under paragraph (c) of Section 222, an internal revenue tax which has been assessed within the prescribed period may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. This is likewise true in case of self-assessed taxes like income tax, wherein the date of the actual filing of the return is considered as the date when the tax is said to have been assessed. Collection by judicial action is deemed instituted upon filing of the corresponding complaint in the court of competent jurisdiction, and in the case of summary remedies, upon service of the distraint and levy on the taxpayer or persons or entity authorized to receive the same. CSee Clara Diluangco v. Commissioner, 4 SCRA 263) Filing of answer to taxpayer's petition for review considered as institution of judicial action FERNANDEZ HERMANOS, INC. v. COMMISSIONER OF INTERNAL REVENUE 29 SCRA 552 FACTS: Upon verification of the taxpayer's income tax returns for the years 1950 to 1954 and for the year 1957, the Commissioner of Internal Revenue assessed against the taxpayer alleged deficiency income taxes for the said period. The as- 198 TAX PRINCIPLES A N D REMEDIES sessment was assailed before the Court of Tax Appeals, and was eventually elevated to the Supreme Court. One of the main issues raised was whether or not the government's right to collect the deficiency income taxes in question has already prescribed. The taxpayer contented that the prescription has set in for failure on the part of the Commissioner to file a complaint for collection against it in an appropriate civil action. HELD: [This] Court has consistently held that "a judicial action for the collection of a tax is begun by the filing of the complaint with the proper Court of First Instance or where the assessment is appealed to the Court of Tax Appeals, by filing an answer to the taxpayer's petition for review wherein the payment of the tax is prayed for." This is but logical for where the taxpayer avails of the right to appeal the tax assessment to the Court of Tax Appeals, the said court is vested with authority to pronounce judgment as to the taxpayer's liability to the exclusion of any other court. Where the tax obligation is secured by a bond, the prescriptive period for the action for the forfeiture of the bond is governed by the Civil Code REPUBLIC OF THE PHILIPPINES v. AMADO ARANETA, et al. 2 SCRA 144 FACTS: On February 22, 1957, the Republic filed before the then Court of First Instance of Manila an action against J. Amado Araneta and J. Amado Araneta & Company, Inc., as principals, and the Manila Surety & Fidelity Company, Inc., as surety to recover from them internal revenue taxes including surcharge, the payment of which was guaranteed by a bond executed on March 18, 1949, including interest from December 6,1951, when the first extrajudicial demand CHAPTER D TAX REMEDIES 199 was made. Defendants argued that the five-year period of limitation provided for in Section 332, paragraph (now Section 222) of the National Internal Revenue Code already had elapsed, hence the Government's action was barred; and that granting that the said bond was valid, the enforcement of the principal obligation having been barred, it follows that the enforcement of the obligation undertaken in the said bond was also barred. HELD: Defendants cannot invoke prescription under the provisions of Section 331 of the NIRC because the Government is suing on the bond executed and filed by them to guarantee payment in six (6) monthly installments of the tax liability due from 1946 to 1948, which is a separate and distinct obligation of the parties thereto. The action to enforce the obligation on the bond executed on March 18, 1949, having been filed in court on February 22, 1957, was within the ten-year prescriptive period to enforce a written contractual obligation. But in a case where the government sought to recover erroneously refunded revenue taxes, the Supreme Court said that the prescriptive period for tax assessments should apply because the demand of the Government on the taxpayer to pay the erroneously refunded tax is in effect an assessment for deficiency tax. (Guagua Electric Co., Inc. v. Commissioner, 19 SCRA 790) Approval of the court sitting in probate not a mandatory requirement in the collection of estate taxes. FERDINAND E. MARCOS II v. COURT OF APPEALS 273 SCRA 47 FACTS: After the death of the former president Ferdinand Marcos in Honolulu, Hawaii, U.S.A. on September 29, 1989, a Special Tax Audit Team was created to conduct TAX PRINCIPLES AND REMEDIES investigations and examinations of the tax liabilities and obligations of the late president, as well as his family, associates and cronies. The investigation disclosed that the Marcoses failed to file a written notice of the death of the decedent, an estate tax return, as well as several income tax returns covering the years 1982 to 1986. The BIR thereby caused the issuance of deficiency income tax assessments against the Spouses Marcos and Ferdinand Marcos II, and deficiency estate tax assessment against the estate of the decedent on July 26, 1991. Despite personal and constructive notice, the heirs of the decedent did not protest these deficiency tax assessments. In 1993, the BIR Commissioner caused the collection of the deficiency estate and income tax delinquencies by resorting to the summary remedy of levy on real properties. Ferdinand R. Marcos II questioned the actuations of the Commissioner in assessing and collecting through the summary remedy of levy upon the estate and properties of his father, despite the pendency of the proceeding on probate of his will. He asserted that the summary tax remedy is precluded by the pendency of the special proceeding for the allowance of the will, which placed all properties forming part of the decedent's estate in custodia legis to the exclusion of all other courts and administrative agencies. He further argued that the Notices of Levy were issued beyond the allowed period, and are therefore null and void. HELD: The nature of the process of estate tax collection has been described as follows: Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's estate, although it may be viewed as an incident to the complete settlement of an estate, and, under some statutes, it is made the duty of the probate court to make the amount of the inheritance tax a part of the final decree of distribution of the estate. It is CHAPTER n TAX REMEDIES 201 not against the property of decedent, nor is it a claim against the estate as such, but it is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. Further, under some statutes, it has been held that it is not a suit or controversy between the parties, nor is it an adversary proceeding between the state and the person who owes the tax on the inheritance. However, under other statutes it has been held that the hearing and determination of the cash value of the assets and the determination of the tax are adversary proceedings. The proceeding has been held to be necessarily a proceeding in rem. (85 C.J.S. 1191, pp. 1056-1057) In the Philippine experience, the enforcement and collection of estate tax, is exclusive in character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue, x x x Thus it was in Vera v. Fernandez that the court recognized the liberal treatment of claims for taxes charged against the estate of the decedent. Such taxes, we said, were exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the life blood of the government. Vectigalia nervi sunt rei publicae — taxes are the sinews of the state, x x x Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution of the estate's properties, x x x From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws, that implies the necessity of the 202 TAX PRINCIPLES A N D REMEDIES probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected. On the issue of prescription, the omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under Section 223, NIRC, (now Sec. 222) in case of failure to file a return, the tax may be assessed at anytime within ten (10) years after the omission, and any tax so assessed may be collected by levy upon real property within three (3) years (now within five [5] years) following the assessment of the tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as regards protesting the validity of the said assessment, there is now no reason why the BIR cannot continue with the collection of the said tax. Fraudulent or False Return. — The difference between a "false" return and a "fraudulent" return is that a false return merely implies a deviation from the truth or fact whether intentional or not, whereas a fraudulent return is intentional and deceitful with the aim of evading the correct tax due. (Aznar v. Commissioner, L-20569, 58 SCRA 529)*' As earlier discussed, when what was filed was a false or fraudulent return, the ten (lO)-year prescriptive period applies. The ten (10-year period is counted from the discovery of fraud or falsity, not from the filing of the return. Within this prescriptive period, the Government has two options: either to assess the correct tax liability, and later on collect the same within the period of five (5) years by distraint, levy, or by a proceeding in court (Section 222[c]), or to file a proceeding in court for the collection of such tax without assessment. (Section 222[a)) What constitutes fraud. — Fraud is a question of fact that cannot be presumed but must be sufficiently established. Mere understatement of the income in itself does not constitute fraud. "Question No. 7 , 1 9 % Bar Examination. CHAPTER D TAX REMEDIES 203 (Gomez v. Domingo, CTA Case No. 1168, February 15, 1964) It must be proven as a fact that there was intentional and substantial understatement of tax liability. Fraud was likewise found to exist in a case where there was substantial and intentional overstatement of deductions or exemptions, like the presence of fictitious expenses which were claimed by the taxpayer as deductions from gross income. (Tan Guan v. CTA, L-23676, April 27,1967) Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the court below. The finding of the trial court as to its existence and non-existence is final and cannot be reviewed by the Supreme Court unless clearly shown to be erroneous. Fraud is never lightly to be presumed because it is a serious charge. (Commissioner of Internal Revenue v. Ayala Securities Corporation, L-29485, March 31,1976) The fraud contemplated by law is actual and not constructive. It must amount to intentional wrongdoing with the sole object of avoiding the tax. (Aznar v. Collector, 8 SCRA 519) It necessarily follows that a mere mistake cannot be considered as fraudulent intent and if both the taxpayer and the Commissioner of Internal Revenue committed mistakes in making the entries in the returns and in the assessment respectively under the inventory method of determining tax liability (the Commissioner upon reinvestigation concluded that the tax liability should be reduced), it would be unfair to treat the mistakes of the taxpayer as tainted with fraud. (Ibid.) C. Criminal Liability a) Five (5) years — from commission or discovery of the violation, whichever is later. (Section 281, NIRC) The cause of action for willful failure to pay deficiency tax occurs when the final notice and demand for the payment thereof is served on the taxpayer. The five (5)-year prescriptive period commences to run only after receipt of the final notice and demand and the taxpayer refuses to pay. In case of a protested 204 TAX PRINCIPLES A N D REMEDIES assessment, the five (5)-year period starts from the receipt of the final notice and demand disposing of the protest. SUSPENSION OF PRESCRIPTIVE PERIODS a) If before the expiration of the time prescribed for the assessment of the tax, both the Commisssioner and the taxpayer have agreed in writing to its assessment after such time, the tax maybe assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (Section 222[b]) Note that the waiver must be executed within the three (3)-year prescriptive period prescribed under Section 203, otherwise said waiver shall be ineffectual. (Republic v. Felix Acebedo, L-204207, March 29,1968) A taxpayer's renunciation of the right to invoke prescription as a defense, although executed beyond the prescriptive period, is binding upon the taxpayer. (Sinforoso Alca v. CTA and Commissioner, L-24624, November 27,1968) b) The mnning of the prescriptive period on the making of an assessment and collection of taxes is likewise suspended: i) when the Commissioner of Internal Revenue is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter, such as when there is a pending petition for review in the CTA from the decision on the protested assessment, the filing of such petition interrupts the ranning of the prescriptive period for collection. (Republic v. Ker & Co., 25 SCRA 208) But the filing of a criminal case against the taxpayer does not suspend the prescriptive period; the criminal actions for the tax violation is entirely separate and distinct from the civil action. CHAPTER n T A X REMEDIES ii) 205 when the taxpayer requests for a reinvestigation which is granted by the Commissioner. (Collector v. Suyoc Consolidated Mining Co., 104 Phil. 819) Generally the prayer for reinvestigation must be favorably acted upon (Republic v. Acebedo, supra), but in one case, the Court's ruling was to the effect that the prescriptive period is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment. (Commissioner v. Wyeth Suaco Laboratories, Inc., 202 SCRA 125) iii) when the taxpayer cannot be located in the address given by him in the return. iv) when the warrant of distraint and levy is duly served and no property could be located. v) when the taxpayer is out of the Philippines. Prescription: Suspension of the Statutory Period for Collection REPUBLIC OF THE PHILIPPINES v. SALUD H. HIZON 320 SCRA 574 FACTS: On July 18, 1986, the BIR issued to Salud Hizon a deficiency income tax assessment covering the fiscal year 1981-1982. Hizon not having contested the assessment, the BIR, on January 12, 1989, served warrants of distraint and levy to collect the tax deficiency. However, it did not proceed to dispose of the attached properties. More than three (3) years later, or on November 3,1992, Hizon wrote the BIR requesting a reconsideration of her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a case with the RTC to collect the tax deficiency. The complaint was dismissed on the ground of prescription. HELD: The BIR's contention that respondent's request for reinvestigation of her tax deficiency assessment on Novem- 206 TAX PRINCIPLES A N D REMEDIES ber 3, 1992 effectively suspended the running of the period of prescription has no merit. Section 229 (now 228) of the Code mandates that a request for reconsideration must be made within 30 days from the taxpayer's receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and therefore demandable. The notice of assessment for tax deficiency was issued on July 18,1986. On the other hand, respondent made her request for reconsideration only on November 3,1992, without stating when she received the notice of tax assessment, x x x Hence, her request for reconsideration did not suspend the running of the prescriptive period provided under Section 223(c). Although the Commissioner acted on her request by eventually denying it on August 11,1994, this is of no moment and does not detract from the fact that the assessment had long become demandable. Nonetheless, it is contended that the mnning of the prescriptive period under Section 223 was suspended when the BIR timely served the warrants of distraint and levy on respondent on January 12, 1989. Petitioner cites for this purpose our ruling in Advertising Associates, Inc. v. Court of Appeals. Because of the suspension, it is argued that the BIR could still avail of the other remedy under Section 223(c) of filing a case in court for collection of the tax deficiency, as the BIR in fact did on January 1, 1997. Petitioner's reliance on the Court's ruling in Advertising Associates, Inc. v. Court of Appeals, 133 SCRA 765, is misplaced. What the Court stated in that case and, indeed, in the earlier case of Palanca v. Commissioner of Internal Revenue, 114 Phil. 203, is that the timely service of a warrant of distraint or levy suspends the running of the period to collect the tax deficiency in the sense that the disposition of the attached properties might well take time to accomplish, extending even after the lapse of the statutory period for collection. In those cases, the BIR did not file any collection case but merely relied on the summary remedy of distraint and levy to collect the tax deficiency. Petition DENIED. reply of the taxpayer on the pre assessment notice is not indispensable. CHAPTER D 207 TAX REMEDIES III. TAXPAYER'S REMEDIES There are two remedies accorded to the taxpayer under the Tax Code: 1) administrative protest which is a protest against the assessment and is filed before payment; and 2) claim for refund filed with the Commissioner of Internal Revenue after payment. A. Protest Against Assessment "Sec. 228. Protesting of Assessment. — When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: (a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) When the taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or id) When the excise tax due on excisable articles has not been paid; or (e) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void. 208 TAX PRINCIPLES A N D REMEDIES Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable." Request for reconsideration distinguished from request for reinvestigation The main difference between these two types of protests lies in the records or evidence to be examined by internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-evaluation of existing records which results from a request for reconsideration does not toll the running of the prescriptive period for the collection of an assessed tax. Section 271 (now Section 223) distinctly limits the suspension of the running of the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted by the CIR. x x x The distinction between a request for reconsideration and a request for reinvestigation is significant. It bears repetition that a request for reconsideration, unlike a request for reinvestigation, cannot suspend the statute of limitations on the collection of an assessed tax. If both types of protest can effectively interrupt the running of the statute of CHAPTER n TAX REMEDIES 209 limitations, an erroneous assessment may never prescribe. If the taxpayer fails to file a protest, then the erroneous assessment would become final and unappealable. On the other hand, if the taxpayer does file the protest on a patently erroneous assessment, the statute of limitations would automatically be suspended and the tax thereon may be collected long after it was assessed. (CIR v. Philippine Global Communication, Inc., 506 SCRA 427, 442, 446-447 [2006]) The procedural steps in protesting an assessment may be outlined as follows: 1. Issuance of a pre-assessment notice by the BIR informing the taxpayer that taxes ought to be assessed against him, except under the circumstances enumerated in paragraphs [a] to [e] of Section 228. The taxpayer is given fifteen (15) days from receipt of the pre-assessment notice, extendible for not more than ten (10) days, within which to respond to the pre-assessment notice. 2. If the taxpayer fails to respond, or despite the response, the BIR still opines that the taxpayer ought to be assessed for deficiency taxes, the BIR will issue the assessment notice. 3. The taxpayer may file an administrative protest against the assessment within thirty (30) days from receipt of the assessment. Within sixty (60) days from filing the protest, all the relevant documents should be submitted; otherwise, the assessment shall become final and unappealable. 4. From the receipt of the adverse decision of the Commissioner, or from the lapse of the one hundred eighty (180) days from the submission of the documents, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days; otherwise, the decision or the assessment shall become final. (See Rev. Reg. No. 12-99) 210 TAX PRINCIPLES A N D REMEDIES What may be the subject of a judicial review is the decision of the Commissioner on the protest against assessment, not the assessment itself COMMISSIONER OF INTERNAL REVENUE v. VILLA 22 SCRA 3 FACTS: The spouses Villa filed joint income tax returns for the years of 1951,1952,1953,1954,1955 and 1956 on April 2,1952, March 30, 1953, February 26, 1954, March 31, 1955, April 2, 1956 and March 23, 1957, respectively. Using the networth method, the Bureau of Internal Revenue determined the income of the Villa spouses and accordingly issued on February 23, 1961 assessments for deficiency income tax for the years 1951 to 1956 and residence tax for 1951 to 1957. The husband received the assessments on April 7,1961. Without contesting the said assessments in the Bureau of Internal Revenue, he filed on May 4,1961 a petition for review in the Court of Tax Appeals. The CTA took cognizance of the appeal, tried the case on the merits and rendered judgment holding the spouses liable only for residence taxes. From this judgment, the BIR appealed to the Supreme Court. HELD: The word "decisions" in paragraph 1, Section 7 of Republic Act 1125 has been interpreted to mean the decision of the Commissioner of Internal Revenue on the protest of the taxpayer against the assessments. Definitely, said word does not signify the assessment itself, x x x Since in the instant case the taxpayer appealed from the assessment of the Commissioner of Internal Revenue without previously contesting the same, the appeal was premature and the Court of Tax Appeals had no jurisdiction to entertain said appeal. For as stated, the jurisdiction of the Tax Court is to review by appeal the decisions of the Commissioner of Internal Revenue on disputed assessments. CHAPTER II TAX REMEDIES 211 The tax court is a court of special jurisdiction. As such, it can take cognizance only of such matters as are clearly within its jurisdiction. The assessment notice and the demand letter should state the facts and the law on which they are based; otherwise, they are deemed void While administrative agencies, like the BIR, were not bound by procedural requirements, they were still required by law and equity to observe substantive due process. On this score, the assessment should state the facts and the law on which it is based. The rationale behind this requirement was to ensure that taxpayers would be duly apprised of — and could effectively protest — the basis of tax assessments against them. A void assessment renders any subsequent proceedings invalid and any order emanating from it could never attain finality. (CIR v. Reyes, 480 SCRA 382,390-391) Presumption of correctness in case of taxpayer's failure to protest the assessments Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. (CIR v. BPI, 521 SCRA 373, 386) In one case, the Supreme Court held that where a taxpayer questions an assessment, and asks the Collector to reconsider or cancel the same because he believes he is not liable therefor, the assessment becomes a "disputed assessment" that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on the disputed assessment. (St. Stephen's Association and St. Stephen's Chinese Girl's School v. Collector of Internal Revenue, No. L-11238, August 21,1958) 212 TAX PRINCIPLES A N D REMEDIES The act of the Commissioner in filing an action for allowance of the claim for estate and inheritance taxes may be considered an outright denial of the request for reconsideration. The taxpayer's remedy is to appeal to the Court of Tax Appeals within thirty (30) days from the date he is notified thereof. (Dayrit v. Cruz, 165 SCRA 571) As a rule, the warrant of distraint and levy is proof of the finality of the assessment and renders hopeless a request for reconsideration, being tantamount to an outright denial thereof and makes the said request deemed rejected. The receipt of the warrant therefore commences the running of the thirty (30)-day period to appeal. The case of Commissioner of Internal Revenue v. Algue, Inc., No. L-28896, February 17, 1988, takes exception to this rule. In the said case, the proven fact is that four days after the private respondent received the BIR's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued. It could not be located in the office of the Commissioner and it was only after the taxpayer's counsel gave the BIR a copy of the protest that it was considered by the authorities. The protest not being pro forma, it had the effect of suspending the 30-day reglementary period, which started to run again when the taxpayer was definitely informed of the implied rejection (in this case an information that the BIR was not taking any action on the protest) of the protest and the warrant was finally served. In the same vein, the Supreme Court held that the reviewable decision of the BIR Commissioner is that letter where he clearly directed the taxpayer to appeal to the Court of Tax Appeals, and not the warrant of distraint and levy. The directive is in consonance with the dictum that the Commissioner should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment. That procedure is demanded by the pressing need for fair play, regularity and orderliness in administrative action. (Advertising Associates, Inc. v. Court of Appeals, 133 SCRA 766) CHATTER n TAX REMEDIES 213 The Collector of Internal Revenue, after appeal from his decision to the Court of Tax Appeals has been perfected, and after the Tax Court has acquired jurisdiction over the appeal, but before the answer is filed with the court, may still modify his assessment, subject of the appeal, by increasing the same. (Collector of Internal Revenue v. Batangas Trans. Co., et al., No. L-9692, January 6,1958) In a much recent case however, the Supreme Court ruled that an amended assessment would no longer be proper before the Court of Tax Appeals, not being the "disputed assessment" appealed from. (Commissioner v. Guerrero, 19 SCRA 205) The former appears to be a much better view as it avoids multiplicity of suits. Mandamus does not lie to compel the Commissioner of Internal Revenue to impose a tax assessment not found by him to be proper. A judge of a regular court has no jurisdiction to take cognizance of a mandamus case raising the question of whether or not to impose a deficiency tax assessment. This undoubtedly comes within the purview of the words "disputed assessment" or "of other matters arising under the National Internal Revenue Code," thus belonging to the jurisdiction of the Court of Tax Appeals. (Meralco Securities Corporation v. Savellano, 117 SCRA 805) B. Claim for Refund "Sec. 229. Recovery of Tax Erroneously or Illegally Collected. — No suit or proceeding shall be maintained in any court for the recovery of any national revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of a penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration oftiuo (2) years from the date of payment 214 TAX PRINCIPLES A N D REMEDIES of the tax or penalty, regardless of an supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid." Two-fold purpose of tax refund The law clearly stipulates that after paying the tax, the taxpayer must submit a claim for refund before resorting to the courts. The idea probably, is first, to afford the collector an opportunity to correct the action of subordinate officers; and second, to notify the Government that such taxes have been questioned, and the notice should then be borne in mind in estimating the revenue available for expenditure. Previous objections to the tax may not take the place of that claim for refund, because there may be some reason to believe that, in paying, the taxpayer has finally come to realize the validity of the assessment. Anyway, strict compliance with the conditions imposed for the return of revenue collected is a doctrine consistently applied here and in the United States. [Bermejo v. Collector of Internal Revenue, 87 Phil. 96, 97 (1950)] Tax refunds are not founded principally on legislative grace Tax refunds (or tax credits) are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person's unjust enrichment at the expense of another. The dynamic of erroneous payment of tax fits to a tee the prototypic quasicontract, solutio indebiti, which covers not only mistake in fact but also mistake in law. Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract principle, a claim for tax refund may be based on the following: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed without authority; and (c) any sum alleged to have CHAPTER II TAX REMEDIES 215 been excessive or in any manner wrongfully collected. ICIR v. Fortune Tobacco Corporation, 559 SCRA 160 (2008)] Tax Refund and Tax Credit Distinguished. — In tax refund, there is actual reimbursement of the tax while in tax credit, the reimbursable amount is applied against the sum that may be due or collectible from the taxpayer. Under the aforecited provision, tax refund covers: 1) erroneously or illegally assessed or collected internal revenue taxes; 2) penalties imposed without authority; and 3) any sum alleged to have been excessive or in any manner wrongfully collected. A. Requirements for Refund Claims. — A claim for refund partakes of the nature of an exemption which cannot be allowed unless granted in the most categorical language. This being so, a claim for refund must be strictly construed against the claimant and such claimant has the burden of proving that the following requirements were met: 1. There must be a written claim for refund filed by the taxpayer with the Commissioner. — This is a mandatory requirement; in the absence of this requirement, the Commissioner is without any authority to refund. (Andrea Vda. de Aguinaldo v. Commissioner, 13 SCRA 269) As regards indirect taxes, recent jurisprudence holds that the proper party to question, or seek a refund of, the tax is the statutory taxpayer, the person on whom the tax is imposed by law and paid the same even if he shifts the burden thereof to another. Even if Perron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. (Silkair [Singapore] PTE, LTD. v. CIR, G.R. No. 173594, February 6,2008) This revoked the ruling in CIR v. American Rubber Co. [18 SCRA 842], 216 TAX PRINCIPLES A N D REMEDIES insofar as it held that the refunded taxes should constitute a trust fund in favor of the paying customers who advanced payment thereof. In the recent case of Contex Corporation v. CIR, 433 SCRA 376, the Supreme Court held that petitioner (Contex), a NON-VAT registered taxpayer is not the proper party to claim VAT refund. However, in Seagate Technology (Phils.), 451 SCRA 132, the Court ruled that respondent (Seagate), a VAT registered enterprise is entitled to VAT refund. As pointed out by the Court, the distinction between the two cases (Contex and Seagate) is that "Contex was registered as a NON-VAT taxpayer while Seagate was a VATregistered." In case the taxpayer is a foreign company, may its withholding agent file a written claim for refund? Interestingly, the Supreme Court answered this question differently in two cases promulgated on the same day, April 15,1988. In Commissioner of Internal Revenue v. Procter and Gamble PMC, No. L-66838, April 15,1988, PMCPhil., as a wholly-owned subsidiary of Procter & Gamble, U.S.A. filed for a refund or tax credit representing the alleged overpaid withholding tax on the dividend it declared in favor of its parent corporation for the taxable years 1974 and 1975. The Second Division of the Supreme Court held that PMC-Phil, is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged overpaid taxes, the real party-in-interest being the mother corporation in the United States, and should have been the claimant of the tax refund. In Commissioner of Internal Revenue v. Wander Philippines, Inc., No, L-68375, April 15, 1988, which presented almost the same factual milieu CHAPTER II TAX REMEDIES 217 and raised the same issue, the Third Division of the Supreme Court ruled otherwise. It said that Wander Philippines is first and foremost a wholly owned subsidiary of the parent foreign company, and the fact that it became a withholding agent of the government which was not by choice but by compulsion under the Tax Code, cannot by any stretch of imagination, be considered as an abdication of its responsibility to its mother company. It went on to say that Wander may in fact be assessed for deficiency withholding tax at source. As the Philippine counterpart, it is therefore the proper entity who should claim for the refund. It is believed that the ruling in Wander case is the better view. It reiterates the ruling in Phil. Guaranty Co., Inc. v. Commissioner, 15 SCRA 5, "the withholding agent is constituted the agent of both the Government and the taxpayer." With respect to the collection and/or withholding of the tax, he is the Government's agent, and in regard to the filing of the necessary income tax and the payment of the tax to the Government, he is the agent of the taxpayer. The claim for refund must be a categorical demand for reimbursement. — While payment under protest is not necessary, the claim for refund must categorically demand for the reimbursement of the overpaid amount. The claim for refund must be filed within two (2) years from date of payment of the tax or penalty regardless of any supervening cause. The ruling of the Supreme Court in Commissioner v. Insular Lumber Lumber Co., No. L-24221, December 11, 1967 that if the tax sought to be recovered was paid legally but becomes refundable upon the happening of a supervening cause, the 218 TAX PRINCIPLES A N D REMEDIES reckoning of the two (2)-year period commences from the happening of the supervening cause, no longer finds application under the present law. The two (2)-year period is always to be reckoned from the date of the payment regardless of any supervening cause. The two (2)-year period applies only to suits or proceedings for the recovery of taxes or penalties erroneously, excessively, illegally or wrongfully collected. Accordingly, an ordinary claim for tax credit would prescribe in ten (10) years under Article 1144 of the Civil Code. In claims for refund, it is necessary that the tax be paid in full, and that the claim for refund in the Bureau of Internal Revenue as well as the proceeding in the Court of Tax Appeals be commenced within two (2) years counted from the payment of the tax. Unlike in administrative protest cases under Section 228 where from the lapse of one hundred eighty (180) days of inaction on the part of the BIR, the taxpayer is given a period of thirty (30) days within which to appeal to the CTA, in claims for refund, the thirty (30)day period to appeal should be within the two (2)-year prescriptive period. As elucidated by the High Court in Gibbs v. Collector of Internal Revenue and Court of Tax Appeals, No. L-13453, February 29, 1960: "A taxpayer who has paid the tax, whether under protest or not, and who is claiming a refund of the same, must comply with the requirements of both Section 306 (now Section 229) of the National Internal Revenue Code and Section 11 of Republic Act No. 1125; that is, he must file a written claim for refund with the Collector of Internal Revenue within 2 years from the date of his payment of the tax, as required under Section (306) of the National Internal Revenue Code, and CHAPTER II TAX REMEDIES 219 appeal to the Court of Tax Appeals within 30 days from receipt of the Collector's decision or ruling denying his claim for refund, as required by said Section 11 of Republic Act No. 1125. If, however, the Collector takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of the Collector. This is so because of the positive requirement of Section (306) and the doctrine that delay of the Collector in rendering decision does not extend the peremptory period fixed by the statute." Computation of the two-year period When a tax is paid in installments, the prescriptive period of two (2) years should be counted from the date of the final payment. (Collector of Internal Revenue v. Prieto, No. L-11976, August 29,1961) In case of payments effected through the withholding tax system, the tax liability is deemed paid when the same falls due at the end of the tax year. This is because a taxpayer, resident or non-resident, who contributes to the withholding tax system, does not really deposit an amount to the Commissioner of Internal Revenue, but, in truth, performs and extinguishes his tax obligation for the year concerned. It is from the end of the taxable year then, or when the tax liability falls due, that the two (2)-year prescriptive period starts to run. (Gibbs v. Commissioner of Internal Revenue, No. L-17406, November 29,1965) This ruling has been explained in a case involving corporate quarterly income tax (ACCRA Investment Corporation v. Court of Appeals, 204 SCRA 957), in this wise: "The (aforequoted ruling) presents two alternative reckoning dates, i.e., (1) the end of the tax year; and (2) when the tax liability falls due. In the instant case, it is undisputed that the petitioner corporation's withholding agents had paid 220 TAX PRINCIPLES AND REMEDIES the corresponding taxes withheld at source to the Bureau of Internal Revenue from February to December 1981. In having applied the first alternative date — "the end of the tax year" in order to determine whether or not the petitioner corporation's claim for refund had been seasonably filed, the respondent appellate court failed to appreciate properly the attending circumstances of this case. The petitioner corporation is not claiming a refund of overpaid withholding taxes, per se. It is asking for the recovery of the sum of P82,751.91.00, the refundable or creditable amount determined upon the petitioner corporation's filing of its final adjustment tax return on or before 15 April 1982 when its tax liability for the 1981 fell due. The distinction is essential in the resolution of this case for it spells the difference between being barred by prescription and entitlement to a refund. xxx The petitioner corporation's taxable year is on a calendar year basis, hence, with respect to the 1981 taxable year, ACCRAIN had until 15 April 1982 within which to file its final adjustment return, xxx Clearly, there is a need to file a return first before a claim for refund can prosper inasmuch as the respondent Commissioner by his own rules and regulations mandates that the corporate taxpayer opting to ask for a refund must show in its final adjustment return the income it received from all sources and the amount of withholding taxes remitted by its withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed its final adjustment return for its 1981 taxable year on April 15,1982. In our Resolution dated April 10,1989 in the case of Commissioner of Internal Revenue v. Asia Australia Express. Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which to claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return." Therefore, the filing of quarterly income tax returns required in Section 85 (now Section 75, NIRC) and imple- CHAPTER n TAX REMEDIES 221 merited per BIR Form 1702-Q and payment of quarterly income tax should only be considered mere installments of the annual tax due. These quarterly tax payments which are computed based on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year. (Commissioner of Internal Revenue v. TMX Sales, Inc., G.R. No. 83736, January 15, 1992, reiterated in Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 117254, January 21,1999) In CIR v. CA, 301 SCRA 435, the Supreme Court held that private respondent BPI's claim for refund was barred by prescription. It having filed its corporate annual tax return on April 2, 1986, the two (2)-year period of prescription for filing tax refund should be counted from the payment of tax. Hence, the written claim for refund filed on April 14, 1988 was considered filed out of time. In the recent case of BPI v. CIR, G.R. No. 144653, August 28, 2001, 363 SCRA 840, the Court held that in corporate dissolution, the two (2)-year prescriptive period should be counted thirty (30) days from the approval by the SEC of its plan for dissolution. Since the FBTC's plan for dissolution was approved by SEC on July 30, 1985 (the two [2]-year period of prescription ended on July 30, 1987), the BPI's claim for tax refund filed on December 29, 1987 was barred by prescription. As regards income subject to withholding tax system, a taxpayer will be deemed to have paid his tax liability when the same falls due at the end of the taxable year. It is from this latter date then or when the tax liability falls due that the two (2)-year period in Section 292 (now 229 of the NIRC, as amended) starts to run. (Fibbs v. CIR, L-17406, November 29, 1965) This settled rule was reiterated in the recent case of Citibank, N.A. v. CA, 280 SCRA 459, wherein the Court held that creditable withholding taxes are subject to adjustment upon detennination of the correct income tax liability after 222 TAX PRINCIPLES A N D REMEDIES the filing of the corporate tax return, as at the end of the taxable year. In the recent case of Banco Filipino Savings and Mortgage Bank v. CA [519 SCRA 93, 96], the Supreme Court ruled that there are three conditions for the grant of a claim for refund of creditable withholding tax: 1) the claim is filed with the Commissioner of Internal Revenue within the two (2)-year period from the date of payment of the tax; 2) it is shown on the return of the recipient that the income payment received was declared as part of the gross income; and 3) the fact of withholding is established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld therefrom. The two-year prescriptive period for the filing of tax refund is reckoned from the filing of the final adjusted return. How should the two-year period be computed? Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987 deal with the same subject matter — the computation of legal periods. Under the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative Code of 1987, the number of days is irrelevant. There obviously exists a manifest incompatibility in the manner of computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law, governs the computation of legal periods. Lex posteriori derogat priori. (CIR v. Primetown Property Group, Inc., 531 SCRA 436 12007]) Claim for refund for unutilized input VAT payments must be made within two years from the close of the taxable quarter Section 112(A), NIRC clearly provides in no uncertain terms that unutilized input VAT payments not otherwise CHAPTER n TAX REMEDIES 223 used for any internal revenue tax due the taxpayer must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT regardless of whether said tax was paid or not. x x x "[Prescriptive period commences from the close of the taxable quarter when the sales were made and not from the time the input VAT was paid nor from the time the official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the filing of a claim therefor. Notably, the said provisions also set a two-year prescriptive period, reckoned from date of payment of the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply only to instances of erroneous payment or illegal collection of internal revenue taxes. [Commissioner of Internal Revenue v. Mirant Pagbilao Corporation, 565 SCRA 164 (2008)] Application for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to zero-rated sales must be filed with the Commissioner of Internal Revenue within two years after the close of the taxable quarter. Subsection (A) of Section 112 of the NIRC states that "any VAT-registered person, whose sales are zero-rated or effectivety zero-rated may, within two years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales." The phrase 224 TAX PRINCIPLES AND REMEDIES "within two (2) years x x x apply for the issuance of a tax credit certificate or refund" refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is of the same provision, which states that the CIR has "120 days from the submission of complete documents in support of the application filed in accordance with Subsections (A) and (B)" within which to decide on the claim. In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) (now Section 112 (C)) of the NIRC), which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the CIR. The second paragraph of Section 112(C) of the NIRC, as amended, envisions two scenarios: (1) when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal with the CTA. Indeed, the 120-day period is crucial in filing an appeal with the CTA. (See Commissioner of Internal Revenue v. AICHI Forging Company of Asia, Inc., G.R. No. 184823, 6 October 2010) Corporate taxpayer has two alternative options Section 76 offers two options: (1) filing for tax refund and (2) availing of tax credit. The two options are alternative and the choice of one precludes the other. However, in Philam Asset Management, Inc. v. Commissioner of Internal Revenue, 447 SCRA 772 (2005), the Court ruled that failure to indicate a choice, however, will not bar a valid request for a refund, should this option be chosen by the taxpayer later on. The requirement is only for the purpose of easing tax administration particularly the self-assessment and collection aspects. "Section 76 remains clear and unequivocal. Once the carry-over option is taken, actually or constructively, it becomes irrevocable." It mentioned no exception or qualification to the irrevocability rule. The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and apply the excess quarterly CHAPTER II TAX REMEDIES 225 income tax against income tax due for the taxaole quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor." The phrase "for that taxable period" merely identifies the excess income tax, subject of the option, by referring to the taxable period when it was acquired by the taxpayer. (CIR v. PERF Realty Corporation, 557 SCRA 165 [2008]) The proper parry to seek a refund of indirect tax is the statutory taxpayer The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. Section 130(A)(2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption "from the same customs duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party." It invokes Maceda v. Macaraig, Jr. which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes. Silkair's argument does not persuade. In Commissioner of Internal Revenue v. PLOT, the Court clarified that xxx an exemption from "all taxes" excludes indirect taxes unless the exempting statute, like the NPC's charter, is so couched as to include indirect tax from the exemption. The exemption granted under Section 135(b) of the NIRC 226 TAX PRINCIPLES A N D REMEDIES of the 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction. (Silkair [Singapore) PTE, Ltd. v. Commissioner of Internal Revenue, 544 SCRA 100 [2008]) Perron Corporation is the proper party to seek a refund even if it passed on the indirect tax to Silkair When Petron removes its petroleum products from its refinery in Limay, Bataan, it pays the excise tax due on the petroleum products thus removed. Petron, as manufacturer or producer, is the person liable for the payment of the excise tax as shown in the Excise Tax Returns filed with the BIR. Stated otherwise, Petron is the taxpayer that is primarily, directly and legally liable for the payment of the excise taxes. However, since an excise tax is an indirect tax, Petron can transfer to its customers the amount of the excise tax paid by treating it as part of the cost of the goods and tacking it on to the selling price. Even if the consumers or purchasers ultimately pay for the tax, they are not considered the taxpayers. The fact that Petron, on whom the excise tax is imposed, can shift the tax burden to its purchasers does not make the latter the taxpayers and the former the withholding agent. Silkair, as the purchaser and end-consumer, ultimately bears the tax burden, but this does not transform its status into a statutory taxpayer. The person entitled to claim a tax refund is the statutory taxpayer. Section 22(N) of the NIRC defines a taxpayer as "any person subject to tax." In Commissioner of Internal Revenue v. Procter and Gamble Phil. Mfg. Corp., 204 SCRA 377 (1991), the Court ruled that: A "person liable for tax" has been held to be a "person subject to tax" and properly con- CHAPTER II TAX REMEDIES 227 sidered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote a legal obligation or duty to pay a tax. Even if the tax is shifted by Petron to its customers and even if the tax is billed as a separate item in the aviation delivery receipts and invoices issued to its customers, Petron remains the taxpayer because the excise tax is imposed directly on Petron as the manufacturer. Hence, Petron, as the statutory taxpayer, is the proper party that can claim the refund of the excise taxes paid to the BIR. [Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, 571 SCRA 141 (2008)] Creditable value-added tax (VAT) withheld from a taxpayer in excess of its output VAT liability may be the subject of a tax refund in place of a tax credit Excess creditable VAT withheld is much unlike excess income taxes withheld. In the latter case, Section 76 and 58(D) of the NIRC specifically make the option to seek a refund available to the taxpayer, x x x The ruling in Citibank N.A. v. Court of Appeals, while dealing with excessive income taxes withheld, is also applicable to this case: "Consequently and clearly, the tax withheld during the course of the taxable year, while collected legally under the aforesaid revenue regulation, became untenable and took on the nature of erroneously collected taxes at the end of the taxable year." Even if the law does not expressly state that Ironcon's excess creditable VAT withheld is refundable, it may be the subject of a claim for refund as an erroneously collected tax under Sections 204(C) and 229. It should be clarified that this ruling only refers to creditable VAT withheld pursuant to Section 114 prior to its amendment. After its amendment by R.A. 9337, the amount withheld under Section 114 is now treated as a final VAT, no longer under the creditable withholding tax system. (Commissioner of Internal Revenue v. Ironcon Builders and Development Corporation, 612 SCRA 39, 43-44 [2010]) TAX PRINCIPLES A N D REMEDIES The two-year period is not jurisdictional In Commissioner of Internal Revenue v. Philamlife, 244 SCRA 446, 453 (1995), the Supreme Court held that even if the two-year period had already lapsed, the same is not jurisdictional and may be suspended for reasons of equity and other special circumstances. This has been echoed in the case of Commissioner of Internal Revenue v. PNB, 474 SCRA 303, 319. Founded on moral and equitable grounds, the following circumstances may stay the two-year period: 1. Assurance on the part of the BIR that steps were being taken to credit taxpayer with the amount sought to be refunded. 2. An agreement or understanding with the BIR that they await the result of a pending case involving similar issue raised in the claim for refund. (See Panay Electric Co., Inc. v. The Collector of Internal Revenue, 103 Phil. 819, 828) Chapter III THE NEW COURT OF TAX APPEALS Created under Republic Act 1125, the Court of Tax Appeals is a highly specialized body which reviews tax cases. The proceedings therein are judicial in nature although it is not bound by the technical rules of evidence. (Perez v. Araneta, 103 Phil. 1167) SALIENT FEATURES OF R.A. 9282 ["AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA), ELEVATING ITS RANK TO THE LEVEL OF A COLLEGIATE COURT WITH SPECIAL JURISDICTION AND ENLARGING ITS MEMBERSHIP, AMENDING FOR THE PURPOSE CERTAIN SECTIONS OF R.A. 1125, AS AMENDED, OTHERWISE KNOWN AS THE LAW CREATING THE COURT OF TAX APPEALS, AND FOR OTHER PURPOSES"]: EXPANDED JURISDICTION OF THE CTA 1. Exclusive original jurisdiction over criminal cases arising from violations of the NIRC or the Tariff and Customs Code and other laws administered by the BIR and the BOC where the principal amount of taxes and penalties involved is PI million or more and appellate jurisdiction in lieu of the Court of Appeals over decisions of the Regional Trial Court where the amount is less than PI million; 2. Exclusive original Jurisdiction over tax collection cases where the principal amount of taxes and penalties involved is PI million or more and the appellate jurisdiction over decisions of the Regional Trial Court where the amount is less than PI million; 229 230 TAX PRINCIPLES A N D REMEDIES 3. Appellate jurisdiction over decisions of the Regional Trial Courts in local tax cases; and 4. Appellate jurisdiction over decisions of the Central Board of Assessment Appeals over cases involving the assessment of taxation of real property. COMPOSITION To complement its expanded jurisdiction, the CTA's membership is increased from one (1) division of three (3) Judges comprised of the Presiding Judge and Associate Judges to three (3) divisions of nine (9) Justices composed of a Presiding Justice and eight (8) Associate Justices (R.A. 9503) The law expanded the organization and, most importantly, its level is raised to that of the Court of Appeals. APPEALS Another significant feature of R.A. 9282 is that decisions of the Court of Tax Appeals are no longer appealable to the Court of Appeals. Under the modified appeal procedure, the decision of a division of the CTA may be appealed to the CTA en banc. The decision of the CTA en banc may in turn be directly appealed to the Supreme Court only on a question of law. This is expected to facilitate court proceedings in tax cases since the CTA has the necessary expertise in tax matters. In addition, there will be less divisive rulings on tax matters since the appeal shall be made only to the CTA en banc instead of the Court of Appeals with its many divisions. ASSUMPTION TO OFFICE Corollary to the reorganization of the CTA is a provision providing for the automatic assumption of the incumbent Presiding Judge and Associate Judges to the positions of Presiding Justice and Associate Justices respectively without the need for new appointments. CTA PROCEEDINGS The CTA may sit en banc or in three (3) Divisions, each Division consisting of three (3) Justices. CHAPTER III THE NEW COURT OF TAX APPEALS 231 "Five (5) Justices shall constitute a quorum for sessions en banc and two (2) Justices for sessions of a Division. When the required quorum cannot be constituted due to any vacancy, disqualification, inhibition, disability, or any other lawful cause, the Presiding Justice shall designate any Justice of other Divisions of the Court to sit temporarily therein." "The affirmative votes of five (5) members of the Court en banc shall be necessary to reverse a decision of a Division but a simple majority of the Justices present necessary to promulgate a resolution or decision in all other cases or two (2) members of a Division, as the case may be, shall be necessary for the rendition of a decision or resolution in the Division Level." (R.A. 9503) JURISDICTION OVER BOTH CIVIL AND CRIMINAL ASPECTS The vesting of jurisdiction over both the civil and criminal aspects of a tax case in one court will likewise effectively enhance and maximize the development of jurisprudence and judicial precedence on tax matters which is of vital importance to revenue administration. The concentration of tax cases in one court will enhance the disposition of these cases since it will take them out of the jurisdiction of regular courts which, admittedly, do not have expertise in the field of taxation. CTA shall not be Governed by the Technical Rules of Evidence Strict procedural rules generally frown upon the submission of the Return after the trial. The law creating the Court of Tax Appeals, however, specifically provides that proceedings before it "shall not be governed strictly by the technical rules of evidence." The paramount consideration remains the ascertainment of truth. Verily, the quest for orderly presentation of issues is not an absolute. It should not bar courts from considering undisputed facts to arrive at a just determination of a controversy. In the present case, the Return attached to the Motion for Reconsideration clearly showed that petitioner suffered a net loss in 1990. Contrary to the holding of the CA and the CTA, petitioner could not have applied the amount as a tax 232 TAX PRINCIPLES A N D REMEDIES credit. In failing to consider the said Return, as well as the other documentary evidence presented during the trial, the appellate court committed a reversible error. 1 The findings of fact of the Court of Tax Appeals are entitled to the highest respect. The language used by the Court of Tax Appeals as to the existence of fraud must be given its due weight and force. It found such nefarious intent on the part of the vendor from whom petitioner obtained this vehicle not merely proved by preponderance of evidence but "without any shadow of doubt." Time and again, the Supreme Court had made clear in categorical language that the findings of fact of the Court of Tax Appeals are entitled to the highest respect."(Raymundo v. De Joya, 101 SCRA 495) As a court of record, CTA is bound by the rules on documentary evidence Under Section 8 of R.A. 1125, the CTA is described as a court of record. As cases filed before it are litigated de novo, party litigants should prove every minute aspect of their cases. No evidentiary value can be given to the purchase invoices or receipts submitted to the BIR as the rules on documentary evidence require that these documents must be formally offered before the CTA. In the case of Commissioner of Internal Revenue v. Manila Mining Corporation, 468 SCRA 571 (2005), the Supreme Court thus notes with approval the following findings of the CTA: [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax but this does not ipso facto mean that [the seller] is entitled to the amount of refund sought as it is required by law to present evidence showing the input taxes it paid during the year in question. What is being claimed in the instant petition is the refund of the input taxes paid by the herein petitioner on its purchase of goods and services. Hence, it is necessary for the Petitioner to show proof that it had indeed paid the said input taxes during the year 1991. In the case at bar, Petitioner failed to discharge this duty. It did not adduce in evidence the sales •BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507, 515-516. CHAPTER ID THE NEW COURT O F TAX APPEALS 233 invoice, receipts or other documents showing the input value added tax on the purchase of goods and services, x x x Section 8 ot R.A. 1125 (An Act Creating the Court of Tax Appeals) provides categorically that the Court of Tax Appeals shall be a court of record and as such it is required to conduct a formal trial (trial de novo) where the parties must present their evidence accordingly if they desire the Court to take such evidence into consideration. While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are not ends in themselves but are primarily intended as tools in the administration of justice, the presentation of the purchase receipts and / or invoices is not mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of respondent's claims. OUTLINE OF JURISDICTION (Sec. 7, R.A. 9282) I. Exclusive appellate jurisdiction to review by appeal — (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by the BIR (via a petition for review under Rule 42). (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered by the BIR, where the NIRC provides a specific period for action, in which case the inaction shall be deemed a denial (via a petition for review under Rule 42). (3) Decisions, orders or resolutions of the RTC in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction (via a petition for review under Rule 43). 234 TAX PRINCIPLES A N D REMEDIES (4) Decisions of the Commissioner of Customs in cases involving liability of custom duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs (via a petition for review under Rule 42). (5) Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals (via a petition for review under Rule 43). (6) Decisions of the Secretary of Finance on customs cases elevated to them automatically for review from decisions of the Commissioner of Customs which are adverse to the government under Section 2315 of the Tariff and Customs Code (via a petition for review under Rule 42). Purpose and rationale of the automatic review in customs cases. The Commissioner of Customs in his Customs Memorandum Order No. 20-87, enjoined all collectors to follow strictly Section 12 of the Integrated Reorganization Plan (P.D. No. 1) which is intended to protect the interest of the Government in the collection of taxes and customs duties in those seizure and protest cases which, without the automatic review provided therein, neither the Commissioner of Customs nor the Secretary of Finance would probably ever know about. Without the automatic review by the Commissioner of Customs and the Secretary of Finance, a collector in any of our country's far-flung ports, would have absolute and unbridled discretion to determine whether goods seized by him are locally produced, hence, not dutiable, or of foreign origin, and therefore subject to payment of customs duties and taxes. His decision, unless appealed by the aggrieved party (the owner of the goods), would become final with no one CHAPTER III THE NEW COURT OF TAX APPEALS 235 the wiser except himself a n d the owner of the goods. The owner of the goods cannot be expected to appeal the collector's decision when it is favorable to him. A decision that is favorable to the taxpayer would correspondingly be unfavorable to the Government, but who will appeal the collector's decision in that case? Certainly not the collector. Evidently, it was to cure this anomalous situation (which may have already defrauded our government of huge amounts of uncollected taxes), that the provision for automatic review by the Commissioner of Customs and the Secretary of Finance of unappealed seizure and protest cases was conceived to protect the government against corrupt and conniving customs collectors. (Yaokasin v. Commissioner of Customs, 180 SCRA 591 [1989]) (7) II. Decisions of the Secretary of Trade and Industry, in cases of nonagricultural product, commodity or article, and the Secretary of Agriculture in cases of agricultural product, commodity or article involving dumping and countervailing duties under Sections 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under R.A. 8808, where either party may appeal the decision to impose or not to impose said duties (via a petition for review under Rule 42). Criminal and Civil cases — The criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all time be simultaneously instituted with and jointly deteiTriined in the proceeding before the CTA. The filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, no right to reserve the filing of such civil action separately from the criminal action will be recognized. (1) Exclusive ORIGINAL jurisdiction (a) violations of NIRC, Tariff and Customs Code and other laws administered by the BIR or the Bureau of Customs, where the principal amount of taxes 236 TAX PRINCIPLES A N D REMEDIES and fees, exclusive of charges and penalties claimed is PI million and above. xxx (2) Exclusive APPELLATE jurisdiction; (a) violations of NIRC, Tariff and Customs Code and other laws administered by the BIR and the Bureau of Customs originally decided by the regular court where the principal amount of taxes and fees is less than PI million or u& specified amount claimed. (b) judgments, resolutions or orders of the RTC in tax cases originally decided by them. (c) judgments, resolutions or orders of the RTC in the exercise of their appellate jurisdiction over tax cases originally decided by the MeTC, MTC and MCTC via a petition for review. (d) tax collection cases — a. from judgments, resolutions or orders of the RTC originally decided by them, via an appeal. b. from judgments, resolutions or orders of the RTC in the exercise of its appellate jurisdiction in tax collection cases originally decided by the MeTC, MTC and MCTC, via a petition for review. Who may appeal? Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Regional Trial" Court, may file an appeal with the CTA: n a. within thirty (30) days after receipt of such decision or ruling; OR b. after the expiration of the period fixed by law for action referred to in Section 7(a)[l\ of R.A. 9282, in which case the inaction shall be deemed a denial. CHAPTER ID T H E NEW COURT OF TAX APPEALS 237 What is the mode of appeal? 1. Appeal may be made by filing a petition for review under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure, within thirty (30) days from the receipt of the decision or ruling or from the expiration of the period fixed by law for the official concerned to act, in cases of inaction, before the CTA. A Division of the CTA shall hear the appeal. All other cases involving rulings, orders or decisions filed with the CTA as provided for in Section 7 of R.A. 9282 shall be raffled to its Divisions. A party adversely affected by a ruling, order or decision of a Division of the CTA may file a motion for reconsideration or new trial before the same Division. 2. Appeals with respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction, may be made by filing a petition for review under a procedure analogous to that provided for under Rule 43 of the 1997 Rules of Civil Procedure, with the CTA, which shall hear the case en banc. A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc. 3. Petition for Review on Certiorari may be filed by a party adversely affected by a decision or ruling of the CTA en banc, through a verified petition before the Supreme Court, pursuant to Rule 45 of the 1997 Rules of Civil Procedure. When distraint of personal property/levy on real property shall issue? Upon the issuance of any ruling, order or decision by the CTA favorable to the national government, the CTA shall issue an order authorizing the BIR, through the Commissioner to seize and 238 TAX PRINCIPLES A N D REMEDIES distraint any goods, chattels, or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property and/ or levy the real property of such persons in sufficient quantity to satisfy the tax or charge together with any increment thereto incident to delinquency. This remedy shall not be exclusive and shall not preclude the Court from availing of other means under the Rules of Court. Appeal to the CTA shall not suspend the payment, levy, distraint and sale of taxpayer's property No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the RTC, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture, as the case may be, shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law. When in the opinion of the Court, the collection by the aforementioned government agencies may jeopardize the interest of the Government and /or 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. Final Notice Before Seizure constitutes as a decision on a disputed or protested assessment, hence, appealable to the CTA In Commissioner of Internal Revenue v. Isabela Cultural Corporation, the Supreme Court defined the nature of the Final Notice Before Seizure. It held that a final demand letter from the Bureau of Internal Revenue, reiterating to the taxpayer the immediate payment of a tax deficiency assessment previously made, is tantamount to a denial of the taxpayer's request for reconsideration. Such letter amounts to a final decision on a 2 '361SCRA71. CHAPTER FII THE NEW COURT OF TAX APPEALS 239 disputed assessment and is thus appealable to the Court of Tax Appeals. In so holding, the Court ratiocinated that in the normal course, the revenue district officer sends the taxpayer a notice of delinquent taxes, indicating the period covered, the amount due including interest and the reason for the delinquency. If the taxpayer intends to protest the assessment, it sends a letter to the BIR indicating its protest, stating the reasons therefor, and submitting such proof as may be necessary. This letter is now considered as the taxpayer's request for reconsideration of the delinquent assessment. After the request is filed and received by the BIR, the assessment becomes a disputed assessment on which it must render a decision. That decision is appealable to the Court of Tax Appeals for review. Based on the facts, the Final Notice Before Seizure should be considered as the Commissioner's decision disposing of the request for reconsideration. The very title expressly indicated that it was the final notice prior to the seizure of the property. The letter itself clearly stated that respondent was being given "this LAST OPPORTUNITY" TO PAY; otherwise, its properties would be subjected to distraint and levy. In addition, jurisprudence dictates that a final demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. In Commissioner of Internal Revenue v. Ayala Securities Corporation,' the Court ruled that the letter of February 18, 1963 is tantamount to a denial of the reconsideration or respondent corporation's protest of the assessment made by the petitioner since the said letter was in itself a reiteration of the demand by the BIR for the settlement of the assessment already made. This being so, the said letter amounted to a decision on a disputed or protested assessment. In Surigao Electric Co., Inc. v. Court of Tax Appeals,* the Supreme Court held that the letter of demand constitutes the final action taken by the Commissioner on the petitioner's several 7 0 S C R A 204. *57 SCRA 523. 240 TAX PRINCIPLES A N D REMEDIES requests for reconsideration and recomputation. In this letter, the Commissioner not only demanded that the petitioner pay the delinquent tax but also gave warning that if it failed to pay, the Commissioner would be constrained to enforce the collection thereof by means of the remedies provided by law. The tenor of the letter, specifically the statement regarding the resort to legal remedies, indicates the final nature of the determination made by the Commissioner of the petitioner's deficiency franchise tax liability. In the same vein, in CIR v. Union Shipping,* the Supreme Court reiterated the dictum that the BIR should always indicate to the taxpayer, in clear and unequivocal language, what constitutes final action on a disputed assessment. The object of this policy, the Court explained, is to avoid repeated requests for reconsideration by the taxpayer, thereby delaying the finality of the assessment and, consequently, the collection of the taxes due. A demand letter for tax deficiency assessments issued and signed by the Chief of the BIR Accounts Receivable and Billing Division is deemed final and executory and subject to an appeal to the Court of Tax Appeals In Oceanic Wireless Network, Inc. v. CIR [477 SCRA 205, 212], the Supreme Court held that the letter of demand dated January 24, 1991, unquestionably constitutes the final action taken by the Bureau of Internal Revenue on petitioner's request for reconsideration when it reiterated the tax deficiency assessments due from petitioner, and requested its payment. Failure to do so would result in the "issuance of a warrant of distraint and levy to enforce its collection without further notice." In addition, the letter contained a notation indicating that petitioner's request for reconsideration had been denied for lack of supporting documents. Anent the propriety of the subject assessment, the Supreme Court rulecl that the act of issuance of the demand letter by the Chief of the Accounts Receivable and Billing Division does not 5 185 SCRA 547. CHAPTER III THE NEW COURT OF TAX APPEALS 241 fall under any of the exceptions that have been mentioned in Section 7 of R.A. 8424 as non-delegable. A formal Letter of Demand with Assessment Notices stating that it is BIR's final decision based on investigation is appealable to the CTA Allied Banking Corporation received the Formal Letter of Demand with Assessment Notices, which partly reads: "It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency. This is our final decision based on investigation. If you disagree, you may appeal the final decision within thirty (30) days from receipt hereof, otherwise said deficiency tax assessment shall become final, executory and demandable." A careful reading of the Formal Letter of Demand with Assessment Notices leads us to agree with Allied Banking Corporation that the instant case is an exception to the rule on exhaustion of administrative remedies, i.e., estoppel on the part of the administrative agency concerned. In this case, records show that Allied Banking Corporation disputed the PAN but not the Formal Letter of Demand with Assessment Notices. Nevertheless, we cannot blame petitioner for not filing a protest against the Formal Letter of Demand with Assessment Notices since the language used and the tenor of the demand letter indicate that it is the final decision of the respondent on the matter. We have time and again reminded the CIR to indicate, in a clear and unequivocal language, whether his action on a disputed assessment constitutes his final determination thereon in order for the taxpayer concerned to determine when his or her right to appeal to the tax court accrues. Viewed in the light of the foregoing, respondent is now estopped from claiming that he did not intend the Formal Letter of Demand with Assessment Notices to be a final decision. (Allied Banking Corporation v. Commissioner of Internal Revenue, 611 SCRA 692, 695, 700, 702 [2010]) 242 TAX PRINCIPLES A N D REMEDIES The jurisdiction of the Court of Tax Appeals has been expanded to include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue In Rizal Commercial Banking Corporation v. CIR [522 SCRA 144, 152-153], the Supreme Court emphasized that it is clear that the jurisdiction of the Court of Tax Appeals has been expanded to include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The decisions, rulings or inaction of the Commissioner are necessary in order to vest the Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within 30 days after the receipt of such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day period within which to file an appeal is jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same. In case the Commissioner failed to act on the disputed assessment within the 180-day period from date of submission of documents, a taxpayer can either: 1) file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day period; or 2) await the final decision of the Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. However, these options are mutually exclusive, and resort to one bars the application of the other. The CTA has jurisdiction over dispute between PNB and BIR relative to deficiency withholding tax assessment PNB sought the suspension of the proceedings in CTA Case No. 4249, after it contested the deficiency withholding tax assessment against it and the demand for payment thereof before the DOJ, pursuant to P.D. No. 242. The CTA, however, correctly sustained its jurisdiction and continued the proceedings in CTA Case No. 4249; and, in effect, rejected DOJ's claim of jurisdiction CHAPTER m THE NEW COURT OF TAX APPEALS 243 to administratively settle or adjudicate BIR's assessment against PNB. The CTA assumed jurisdiction over the Petition for Review hied by private respondent Savellano based on the following provision of R.A. 1125, the Act Creating the Court of Tax Appeals: Section 7. Jurisdiction. — The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided — (1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue;. .. (Italics ours.) In his Petition before the CTA, private respondent Savellano requested a review of the decisions of then BIR Commissioner Tan to enter into a compromise agreement with PNOC and to reject his claim for additional informer's reward. He submitted before the CTA questions of law involving the interpretation and application of (1) E.O. No. 44, and its implementing rules and regulations, which authorized the BIR Commissioner to compromise delinquent accounts and disputed assessments pending as of 31 December 1985; and (2) Section 316(1) of the National Internal Revenue Code of 1977 (NIRC of 1977), as amended, which granted to the informer a reward equivalent to 15% of the actual amount recovered or collected by the BIR. These should undoubtedly be considered as matters arising from the NIRC and other laws being administered by the BIR, thus, appealable to the CTA under Section 7(1) of R.A. 1125. PNB, however, insists on the jurisdiction of the DOJ over its appeal of the deficiency withholding tax assessment by virtue of P.D. No. 242. The PNB and DOJ are of the same position that P.D. No. 242, the more recent law, repealed Section 7(1) of R.A. 1125, based on the pronouncement of the Supreme Court in Development Bank of the Philippines v. Court of Appeals [180 SCRA 609, 617]. 244 TAX PRINCIPLES A N D REMEDIES In the said case, it was expressly declared that P.D. No. 242 repealed Section 7(2) of R.A. 1125, which provides for the exclusive appellate jurisdiction of the CTA over decisions of the Commissioner of Customs. PNB contends that P.D. No. 242 should be deemed to have likewise repealed Section 7(1) of R.A. 1125, which provides for the exclusive appellate jurisdiction of the CTA over decisions of the BIR Commissioner. After re-examining the provisions on jurisdiction of R.A. 1125 and P.D. No. 242, the Supreme Court finds itself in disagreement with the pronouncement made in Development Bank of the Philippines v. Court of Appeals, et al., and refers to the earlier case of Lichauco & Company, Inc. v. Apostol, et al, [44 Phil. 138,149], for the guidelines in determining the relation between the two statutes in questions. Sustained herein is the contention of private respondent Savellano that P.D. No. 242 is a general law that deals with administrative settlement or adjudication of disputes, claims and controversies between or among government offices, agencies and instrumentalities, including government-owned or controlled corporations. Its coverage is broad and sweeping, encompassing all disputes, claims and controversies. It has been incorporated as Chapter 14, Book IV of E.O. No. 292, otherwise known as the Revised Administrative Code of the Philippines. On the other hand, R.A. 1125 is a special law dealing with a specific subject matter — the creation of the CTA, which shall exercise exclusive appellate jurisdiction over the tax disputes and controversies enumerated therein. Following the rule on statutory construction involving a general and a special law previously discussed, then P.D. No. 242 should not affect R.A. 1125. R.A. 1125, specifically Section 7 thereof on the jurisdiction of the CTA, constitutes an exception to P.D. No. 242. Disputes, claims and controversies, falling under Section 7 of R.A. 1125, even though solely among government offices, agencies, and instrumentalities, including governmentowned and controlled corporations, remain in the exclusive appellate jurisdiction of the CTA. Such a construction resolves the alleged inconsistency or conflict between the two statutes, CHAPTER III THE NEW COURT OF TAX APPEALS 245 and the fact that P.D. No. 242 is the more recent law is no longer significant. (Philippine National Oil Company v. Court of Appeals, 457 SCRA 32, 76-81) CTA has jurisdiction to review rulings of the Commissioner of Internal Revenue set forth in RMO The jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the RTC. The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of pawnshops. This is clear from petitioner's RMO No. 15-91, pertinent portion of which reads: "A restudy of P.D. 114 (the Pawnshop Regulation Act) shows that the principal activity of pawnshops is lending money at interest and incidentally accepting a 'pawn' of personal property delivered by the pawner to the pawnee as security for the loan (Sec. 3, ibid.). Clearly, this makes pawnshop business akin to lending investor's business activity which is broad enough to encompass the business of lending money at interest by any person whether natural or juridical. Such being the case, pawnshops shall be subject to the 5% lending investor's tax based on their gross income pursuant to Section 116 of the Tax Code, as amended." Such revenue orders were issued pursuant to Commissioner's powers under Section 245 of the Tax Code, which states: SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. - The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code. "The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax under certain category enumerated in Sections 163 and 165 of this Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make rulings 246 TAX PRINCIPLES A N D REMEDIES or opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and similar purposes." (emphasis added) Under R.A. 1125 (An Act Creating the Court of Tax Appeals [CTA for brevity]), as amended, such rulings of the Commissioner of Internal Revenue are appealable to the CTA. (See Commissioner of Internal Revenue v. Leal, 392 SCRA 9,15 [2002]) APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 1 QUESTION: For S.C. Johnson (Phils.) to use the trademark and technology of S.C. Johnson and Sons, USA, it was obliged to pay the U.S. counterpart royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments. Subsequently, it filed a claim for refund of overpaid withholding tax on royalties arguing that it is entitled to the concessional rate of 10% withholding tax pursuant to the MostFavored-Nation Clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Petitioner CIR contends that S.C. Johnson (Phils.) is not entitled to avail of the concessional rate of 10% tax on royalties under Art. 13(2)(b)(iii) of the RP-US Tax Treaty since the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to those in the RP-West Germany Tax treaty since there is no provision for a 20% matching credit in the former convention. DECIDE. ANSWER: S.C. Johnson (Phils.) is not entitled to the concessional rate of 10%. Tax conventions, such as the RP-US Tax Treaty, are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect to the same subject matter and for identical periods. 247 248 TAX PRINCIPLES A N D REMEDIES Given the purpose underlying tax treaties and the rationale for the most-favored-nation clause, the concessional rate of 10% provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-West Germany Tax Treaty are paid under similar circumstances. However, since the RP-US Tax Treaty does not give a matching credit of 20% for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty S.C. Johnson (Phils.) cannot be deemed entitled to the 10% rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. (CIR v. S.C. Johnson and Sons, Inc., 309 SCRA 87) 2. QUESTION: What is double taxation? How does a Tax Treaty eliminate double taxation? ANSWER: Double taxation usually takes place when a person is a resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. FIRST, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. The SECOND method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief — the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 249 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. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. 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. (Ibid.) 3 QUESTION: Petitioner CIR contends that an exchange transaction is tantamount to "cancellation" under Section 73(b), making the proceeds thereof taxable. Further, CIR claims that under the "net effect test," it is the duty of ANSCOR to withhold the tax-atsource arising from the said transaction. ANSCOR, however, avers that it has no duty to withhold any tax on the transactions involving the redemption of shares of stock and exchange of common with preferred shares because the same were done for legitimate business purposes. DECIDE. ANSWER: Redemption and cancellation are generally considered capital transactions, and as such, they are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such transactions. Having realized gain from the redemption, the income earner cannot escape income tax. Simply put, depending on the circumstances, the proceeds of the redemption of stock dividends are essentially equivalent to the distribution of taxable dividends, making the proceeds thereof "taxable income" "to the extent it represents profits." ANSCOR invoked the existence of legitimate business purposes in support of the redemption. However, the existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. The test of taxability is whether the redemption resulted into a flow of wealth. The redemption converts into money the stock dividends 250 TAX PRINCIPLES A N D REMEDIES which become a realized profit or gain and consequently the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from income tax when the redemption is supported by legitimate business reasons would defeat the very purpose of imposing tax on income. HENCE, as income, the proceeds from the redemption of stock dividends are subject to income tax which is required to be withheld at source. On the Exchange of Common With Preferred Shares Exchange of shares, without more produces no realized income to the subscriber. There is only a modification of the subscriber's rights and privileges — which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when there is still maintenance of proprietary interest. (CIR v. CA, CTA and A. Soriano Corp., G.R. No. 108576, January 20,1999) 4 QUESTION: The CIR sent an assessment letter to Cyanamid and demanded payment of deficiency income-tax on accumulated earnings. Cyanamid protested the assessment, claiming that the said profits were retained to increase its working capital and that it would be used for reasonable business needs of the company. RESOLVE. ANSWER: In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts. APPENDIX "A" SIGNIFICANT JURISPRUDENCE A N D DOCTRINES IN TAXATION 251 Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable year. In the instant case, Cyanamid did not establish, by clear and convincing evidence, that such accumulation of profit was for the immediate needs of the business (IMMEDIACY TEST). In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current assets to current liabilities. The working capital needs of a business depend upon the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit to the business, and similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with the required definiteness envisioned by the statute. The SC held that the burden of proof to establish that the profits accumulated were not beyond the reasonable needs of the company, remained on the taxpayer. NOTES: "Bardahl" Formula The "Bardahl" formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into inventory, and inventory into sales, including the time it takes to collect payment for the sales... As stressed by American authorities, although the "Bardahl" formula is well-established and routinely applied by the courts, it is not a precise rule. It is used only for administrative convenience. (Cyanamid Philippines, Inc. v. CA, 322 SCRA 639) 5. QUESTION: YMCA, a "welfare, educational and charitable non-profit corporation," leased its facilities to small shop owners, restaurants and canteen operators, and collected parking fees. TAX PRINCIPLES AND REMEDIES 252 Is the rental income of YMCA from its real estate subject to tax? YMCA invokes exemption under the NIRC and the Constitution. ANSWER: THE RENTAL INCOME IS SUBJECT TO TAX. A. Under the NIRC A reading of the last paragraph of Section 27 ineludibly shows that the income from any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. Verba legis non est recedendum. Hence, the CA committed reversible error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real property, on the solitary but unconvincing ground that the said income is not collected for profit but is merely incidental to its operation. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we. Because taxes are the lifeblood of the nation, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption "must expressly be granted in a statute stated in a language too clear to be mistaken." B. Under the Constitution YMCA submits that Article VI, Section 28(3) of the 1987 Constitution exempts "charitable institutions" from payment not only of property taxes but also of income tax from any source. Justice Vitug, in his treatise on taxation, states that "(t)he tax exemption covers property taxes only." Hence, (the SC) reiterates that YMCA is exempt from the payment of property tax, but not income tax on the rentals from its property. APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 6. 253 QUESTION: Is YMCA an educational institution within the purview of Art. XIV, Sec. 4(3) of the Constitution? ANSWER: IT IS NOT. It is settled that the term "educational institution," when used in laws granting tax exemptions, refers to a "xxx school seminary, college or educational establishment xxx." The YMCA cannot be deemed one of the educational institutions covered by the constitutional provision under consideration. Moreover, the Court also notes that it did not submit proof of the proportionate amount of the subject income that was actually, directly and exclusively used for educational purposes. 7. QUESTION: Tokyo Shipping Co., Ltd., a foreign corporation engaged in shipping cargoes, paid income and common carriers' taxes amounting to P75,000 and P50,000, respectively, based on the expected gross receipt of vessel M/V Gardenia which it owns and operates under a Charter Agreement with NASUTRA. NASUTRA chartered M/V Gardenia to unload 16,500 metric tons of raw sugar in the Philippines. The vessel found no sugar for loading upon arrival at the Guimaras Port of Iloilo. Claiming that the prepayment of taxes was erroneous since no receipt was realized from the charter agreement, Tokyo Shipping instituted a claim for refund of the taxes paid. The BIR having failed to act on the claim, Tokyo Shipping filed a petition for review before the CTA. The BIR contested the petition on the grounds that taxes are presumed to have been collected in accordance with law, and that claims for refund are construed strictly against the claimants. Will the petition prosper? ANSWER: THE PETITION WILL PROSPER. A resident foreign corporation engaged in the transfer of cargo is liable for taxes 254 TAX PRINCIPLES A N D REMEDIES depending on the amount of income which it derives from sources within the Philippines. Thus, before such tax liability can be enforced, the taxpayer must [be shown to] have earned income from sources within the Philippines. It appearing that the vessel found no sugar to unload and returned to Japan without any cargo laden on board, the Tokyo Shipping Co. derived no receipt from its charter agreement with NASUTRA. Hence, refund is proper. (CIR v. Tokyo Shipping Co., Ltd., May 26, 1995, 244 SCRA 333) 8. QUESTION: PICOP obtained loans from foreign creditors in order to finance the purchase of machinery and equipment needed for its operations. It claimed interest payments amounting to P42,840,131.00 on these loans as deduction from its gross income. CIR disallowed the deduction upon the ground that the interest payment thereon should have been capitalized instead and claimed as depreciation deduction therefor. Is PICOP entitled to deduct interest payments on the said loans from its gross income? ANSWER: YES. Interest payments on loans incurred by a taxpayer (whether BOI registered or not) are allowed by the NIRC as deductions against the taxpayer's gross income. Thus, the general rule is that interest expenses are deductible against gross income, and this certainly includes interest paid under loans incurred in connection with the carrying-on of the business of the taxpayer. In the instant case, the CIR does not dispute that the interest payments were made by PICOP on loans incurred in connection with the carrying-on of the registered operations of PICOP, i.e., the financing of the purchase of machinery and equipment actually used in the registered operations of PICOP. (PICOP v. CA, 250 SCRA 434) 9. QUESTION: A. What is meant by theoretical interest? APPENDIX "A" S I G N I F I C A N T JURISPRUDENCE A N D DOCTRINES I N T A X A T I O N 255 ANSWER: It is an interest "calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity cost" of investing funds in a given business. Such theoretical or computed interest does not arise from a legally demandable interest-bearing obligation incurred by the taxpayer who, however, wishes to find out, e.g., whether he would have been better off by lending out his funds and earning interest rather than investing such funds in his business. (Sec. 79, Rev. Reg. No. 2, cited in the PICOP case) B. Is theoretical interest on capital deductible? ANSWER: NO. It is not deductible as it does not represent a charge arising under an interest-bearing obligation. (Sec. 79, Rev. Reg. No. 2, as cited in the PICOP case) 10. QUESTION: PICOP's Books of Accounts reflected higher amount of sales and lower amount of cost of sales than the amount shown in its income tax returns. The CIR relied on the Book of Accounts in determining PICOP's deficiency income tax. Is the CIR correct? ANSWER: THE CIR IS CORRECT. It has made out at least a prima facie case that PICOP had understated its sales and overstated its cost of sales as set out in its Income Tax Returns. The CIR has a right to assume that PICOP's Book of Accounts speak the truth in this case since they embody what must appear to be admissions against PICOP's own interest. (Ibid.) 11. QUESTION: Philippine Refining Co. (PRC) claimed bad debts as deductions from its gross income. In proving the worthlessness of said debts, PRC relied solely on the testimony of its financial accountant without presenting a single documentary evidence to sub- 256 TAX PRINCIPLES A N D REMEDIES stantiate the same. The BIR disallowed the deduction for failure of the PRC to prove the worthlessness of the debts. DECIDE. HELD: THE BIR IS CORRECT IN DISALLOWING THE CLAIM FOR DEDUCTIONS. There was no iota of documentary evidence (e.g., collection letters, reports from investigating fieldmen, police report/affidavit, etc.) to support the allegation of worthlessness. For debts to be considered "worthless" and thereby qualify as "bad debts" making them deductible, the taxpayer should show that: a. There is a valid and subsisting debt; b. The debt must be actually ascertained as worthless and uncollectible during the taxable year; c. year; The debt must be charged off during the taxable d. The debt must arise from the business or trade of the taxpayer; e. The taxpayer must also show that it is indeed uncollectible even in the future. (PRC v. CA, May 8, 1996, 256 SCRA 667) 12. QUESTION: Carnation filed its Corporate Annual Income Tax Return for taxable year ending September 30, 1981. Subsequently, Carnation's Senior Vice President signed three separate waivers of the Statute of Limitations under the NIRC wherein it waives the running of the prescriptive period. The waivers were not signed by the BIR Commissioner or any of his agents. On July 29, 1987, the BIR assessed and claimed deficiency income tax from Carnation. Carnation disputed the assessments as having been issued beyond the 5-year prescriptive period. Whether or not the three (3) waivers signed by Carnation are valid and binding as to toll the running of the prescriptive APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 257 period for assessment and not bar the Government trom issuing the subject deficiency tax assessments. HELD: Subject assessment of July 29, 1987 were issued outside the statutory prescriptive period. Carnation filed its annual income tax and percentage tax returns for the fiscal year ending September 30,1981 on January 15, 1982 and November 20, 1981, respectively. In accordance with Section 318 (now Section 203) of the NIRC, Carnation's income and sales taxes could have been validly assessed only until January 14, 1987 and November 19, 1986, respectively. Hence, the disputed assessments were indeed beyond the 5-year prescriptive period. The waivers will not toll the running of the period as the waivers in question reveal that they are in no wise unequivocal, and therefore necessitates for its binding effect the concurrence of the Commissioner of Internal Revenue. Neither implied consent can be presumed nor can it be contended that the waiver required under Section 319 of the Tax Code is one which is unilateral nor can it be said that concurrence to such an agreement is a mere formality because it is the very signatures of both the Commissioner of Internal Revenue and the taxpayer which give birth to such valid agreement. (CIR v. CA, et al., G.R. No. 115712, February 25,1999) 13. QUESTION: A. Instead of an assessment, the Commissioner of Internal Revenue filed a criminal complaint against PASCOR, alleging evasion of taxes. PASCOR filed a request for reconsideration. The CIR denied the request on the ground that no formal assessment has as yet been issued by the Commissioner. PASCOR appealed to the CTA, which held that the criminal complaint for tax evasion is the assessment issued, and the denial of the request a decision appealable to the CTA. The CA concurred with the CTA's contention. Hence, this petition. 258 TAX PRINCIPLES A N D REMEDIES HELD: THE PETITION IS MERITORIOUS. It is true that neither the NIRC nor the revenue regulations governing the protests of assessments provide a specific definition or form of assessment. However, the NIRC defines the specific functions and effects of an assessment. An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescriptive period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the CTA. To consider the affidavit attached to the complaint as a proper assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers. B. The BIR argues that the filing of the criminal complaint with the DOJ cannot in any way be construed as a formal assessment of PASCOR's tax liabilities, based on Section 205 of the NIRC which provides that remedies for the collection of deficient taxes may be by either civil or criminal action. Likewise, BIR cites Section 223(a) which states that in case of failure to file a return, the tax may be assessed or a proceeding in court may be begun without assessment. Whether an assessment is necessary before criminal charges for tax evasion may be instituted. HELD: AN ASSESSMENT IS NOT NECESSARY BEFORE A CRIMINAL CHARGE CAN BE FILED. (Section 222) PASCOR failed to show that they are entitled to an exception. APPENDIX "A" S I G N I F I C A N T JURISPRUDENCE A N D DOCTRINES I N T A X A T I O N 259 It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code. (CIR v. PASCOR Realty and Development Corp., G.R. No. 128315, June 29,1999) NOTE: In UNGAB v. CUSI, Jr. (97 SCRA 877), the Supreme Court in 1980 emphatically upheld the internationally-held doctrine that an assessment of the tax need not be made before a criminal prosecution for tax evasion may be filed. An assessment of deficiency is not necessary to a criminal prosecution for a willful attempt to defeat and evade the income tax. The crime is complete when the violator has knowingly and willfully filed a fraudulent return with the intent to evade and defeat tax. There is a whale of difference between the UNGAB and the FORTUNE case. There was a willful attempt to evade tax payment in the Ungab because of the taxpayer's failure to declare in his income tax return his income derived from banana saplings. Fortune's situation is quite distinct since the registered wholesale price of the goods, as approved by the BIR, is presumed to be the actual wholesale price, therefore not fraudulent, and unless and until the BIR has made a final determination of what is supposed to be the correct tax assessment, the taxpayer should not be placed in the crucible of criminal prosecution. (CIR v. CA, 257 SCRA 226, 227) 14. QUESTION: A. PBCom, relying in good faith on the formal assurances of the BIR in Revenue Memorandum Circular No. 7-85, did not immediately file its claims for refunds and tax credits of its 198586 excess quarterly income tax payments. Upon filing in 1988, the request for tax refund was denied. PBCom argues that its claims for refund and tax credits are not yet barred by prescription, relying on the applicability of RMC No. 7-85 issued on April 1, 1985. The Circular states that 260 TAX PRINCIPLES AND REMEDIES overpaid income taxes are not covered by the 2-year prescriptive period under the Tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within 10 years under Art. 1144 of the Civil Code. The CIR, however, stressed that PBCom's filing of the case beyond the time fixed by law is fatal to its cause of action. DECIDE. HELD: Section 230 of the NIRC of 1977 (now Section 229, NIRC of 1997) states that the taxpayer may file a claim for refund or credit with the BIR within 2 years after payment of the tax, before any suit in the CTA is commenced. The 2-year prescriptive period should be computed from the time of filing the Adjustment Return and final payment of the tax for the year. When the Acting Commissioner issued RMC 7-85 changing the prescriptive period of 2 years to 10 years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Section 230 of the 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. B. PBCom argues that the government is barred from asserting a petition contrary to its declared circular if it would result to injustice to taxpayers. HELD: Fundamental is the rule that the State cannot be put in estoppel by the mistake or errors of its officials or agents. As pointed out by respondent courts, RMC 7-85 issued by the Acting Commissioner is an administrative interpretation which is not in harmony with Section 230 of the 1977 NIRC for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute. APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 261 15. QUESTION: On May 30,1983, PHILAMLIFE paid to the BIR its final quarterly corporate income tax for 1983 amounting to P3,246,141.00. On August 29,1983, it paid P396,874.00 for the second quarter. For its fourth and final quarter ending December 31, 1983 Philamlife suffered a loss, and thereby no income tax liability was incurred. In 1984, it again suffered a loss and declared "no income tax liability." On December 10, 1985, Philamlife filed a claim for refund in the amount of P3,643,015.00 with the BIR. In denying the claim for refund on the ground of prescription, the BIR argued that the reckoning period of prescription is from the date of payment of the tax regardless of financial loss (the supervening cause). On January 2, 1986, Philamlife filed a petition for review of the denial with the CTA. DECIDE. HELD: In the case of CIR v. PHILAMLIFE, 244 SCRA 446, the Supreme Court held that the period of prescription should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the instant case, the date is April 16, 1984, and two years from this date would be April 16, 1986. The facts show that the claim for refund was filed on December 10,1985 and the petition for review was brought before the CTA on January 2, 1986. Both dates are within the two-year reglementary period. Moreover, even if the two-year period had already lapsed, the same is not jurisdictional, and may be suspended for reasons of equity and other special circumstances. (Oral and Dental College v. CTA, 102 Phil. 192; Panay Electric Co. v. Collector, 103 Phil. 819; cited in CIR v. Philamlife, 244 SCRA 446) 16. QUESTION: In 1979 and 1980, the tenants of Citibank withheld and paid to the BIR 5% of the rentals due to Citibank by way of advance 262 TAX PRINCIPLES A N D REMEDIES payment of the latter's income tax liability as mandated under Section 1(c) of BIR Revenue Regulation No. 13-78. However, Citibank's income tax returns filed at the end of the taxable year showed that its annual operations resulted in a net loss and hence, Citibank did not incur any tax liability at all. Is Citibank entitled to a refund of such withheld amount? ANSWER: CITIBANK IS NOT LIABLE FOR ANY INCOME TAXES; IT IS THEREFORE ENTITLED TO A REFUND OF THE TAX PAID. The taxes withheld, as ruled in Gibbs v. CIR, November 29, 1965, 15 SCRA 318, 325, are in the nature of payment by a taxpayer in order to extinguish his possible tax obligation. They are installments on the annual tax which may be due at the end of the year. Like the corporate quarterly income tax, creditable withholding taxes are subject to adjustment upon deteiTnination of the correct income tax liability after the filing of the corporate income tax return, at the end of the taxable year. In this case, the payment of withholding taxes for 1979 and 1980 were creditable to the income tax liability, if any, of Citibank, determined after the filing of the corporate income tax returns on April 15,1980 and April 15,1981. As Citibank posted net losses in its 1979 and 1980 returns, it was not liable for any income taxes. Consequently, the taxes withheld during the course of the taxable year, while collected legally under the aforesaid revenue regulation, became untenable and took on the nature of erroneously collected taxes at the end of the taxable year. Hence, under the principle of solutio indebiti provided in Art. 2154 of the Civil Code, the BIR received something when "there was no right to demand it," and thus "the obligation to return arises." No one, not even the state, shall enrich himself at the expense of another. (Citibank N.A. v. CA and CIR, G.R. No. 107434, October 10,1997) 17. QUESTION: BPI, as liquidator of Paramount Acceptance Corporation, filed Paramount s Corporate Annual Income Tax Return for 1985 7 APPENDIX "A" SIGNIFICANT JURISPRUDENCE A N D DOCTRINES IN TAXATION 263 on April 2, 1986. However, after deducting Paramounfs total quarterly income tax payments from its income tax, the return showed that Paramount is entitled to a refund. On April 14,1988, BPI, as liquidator of Paramount, claimed refund for overpaid income tax for the calendar year 1985. ANSWER: In the context of Section 230, which provides for a twoyear period of prescription counted "from the date of payment of the tax" for actions for refund of corporate income tax, the 2-year period should be computed from the time of actual filing of the Adjustment Return or Annual Income Tax Return. This is so because at that point, it can already be determined whether there has been an overpayment by the taxpayer. Moreover, under Section 49(a) of the NIRC, payment is made at the time the return is filed. In the case at bar, Paramount filed its corporate annual income tax return on April 2, 1986. However, BPI, as liquidator of Paramount, filed a written claim for refund only on April 14, 1988, and a petition for refund only on April 15,1988. Both claim and action for refund were thus barred by prescription. Other pertinent cases on prescription of refund: Commissioner of Internal Revenue v. TMX Sales, 205 SCRA 184 The 2-year prescriptive period provided in Section 292 (now Section 230 of the Tax Code) should be computed from the time of filing the Adjustment Return or Annual Income Tax Return and final payment of income tax. ACCRA Investments Corporation v. CA, 204 SCRA 957 The 2-year prescriptive period within which to claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return. . . The "date of payment," therefore, in ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final adjustment return. CIR v. Philippine American Life Insurance Co., 244 SCRA 446 264 TAX PRINCIPLES A N D REMEDIES Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. 18. QUESTION: When is smuggling committed? ANSWER: Smuggling is committed when a person — fraudulently imports or brings into the Philippines or assists in transporting or bringing into the Philippines any article contrary to law; or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment or sale of such article after importation, knowing the same to have been imported contrary to law. (Rodriguez, etal. v. CA, G.R. No. 115218, September 10,1995) 19. QUESTION (On Jurisdiction): The Collector of Customs seized allegedly untaxed vehicles and parts, prompting importers Narciso O. Jao and Bernardo M. Empeynado to file a petition for certiorari, prohibition and mandamus, with prayer for a temporary restraining order with the RTC. The RTC granted the injunction and prohibited the respondent from seizing, detaining, transporting, and selling at public auction the disputed articles. Contending that the RTC had no jurisdiction over the subject matter, the Bureau of Customs filed a petition for review with the Court of Appeals. DECIDE. HELD: THE PETITION IS IMPRESSED WITH MERIT. The Regional Trial Courts are devoid of any competence to pass upon the validity or regularity of the seizure and forfeiture proceedings conducted by the Bureau of Customs or to enjoin APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 265 or otherwise interfere with these proceedings. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching upon seizure and forfeiture of dutiable goods. The Regional Trial Courts are precluded from assuming cognizance over said matters even through petitions of certiorari, prohibition or mandamus. (Jao and Empeynado v. CA, G.R. Nos. 104604 and 111223, October 6,1995) 20. QUESTION: The Office of the Treasurer of the City of Cebu, in its letter dated October 11, 1994, demanded payment for realty taxes on several parcels of land belonging to Mactan Cebu International Airport Authority (MCIAA). MCI A A objected to such demand for payment, pronouncing it baseless and without justification. It claimed exemption under Section 14 of R.A. 6958 and cited Section 133 of the Local Government Code of 1991 which puts a limitation on the taxing power of local government units. Its request for cancellation having been denied by Cebu City, MCIAA filed a petition for declaratory relief with the RTC. DECIDE. HELD: THE PETITION SHOULD BE DISMISSED. MCIAA can no longer invoke the general rule in Section 133 — that the taxing power of the local government units cannot extend to the levy of (a) taxes, fees or charges of any kind on the National Government, its agencies or instrumentalities, and local government units. Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the Local Government Code, exemptions from payment of real property taxes granted to natural or juridical persons, including government-owned or controlled corporations, except as provided in the said section, and MCIAA is, undoubtedly, a government-owned corporation, 266 TAX PRINCIPLES A N D REMEDIES it necessarily follows that its exemption from payment of such tax as granted in Section 14 of its Charter, R.A. No. 6952, has been withdrawn. Any claim to the contrary can only be justified if MCIAA can seek refuge under any of the exceptions provided in Section 234, but not under Section 133 as it asserts, since the said section is now qualified by Sections 232 and 234. (MCIAA v. City of Cebu, et al., G.R. No. 120082, September 11,1996, 261 SCRA 667) 21. QUESTION: What real properties are exempted from real property tax? ANSWER: The following properties are exempt from payment of real property tax: a. Real property owned by the Republic of the Philippines or any of its political subdivisions, except when the beneficial use thereof had been granted, for consideration or otherwise, to a taxable person; b. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes; c. All machineries and equipments actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; d. All real property owned by duly registered cooperatives as provided under R.A. 6939; and e. Machinery and equipment used for pollution control and environmental protection. (Section 234, Local Government Code, as cited in the case of MCIAA v. City of Cebu) APPENDIX " A " SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 267 22. QUESTION (On Remedies) In a petition for review on certiorari filed before the Supreme Court, Ferdinand R. Marcos II assailed the decision of the CA declaring the deficiency income tax assessments and estate tax assessments upon the estate and properties of his late father final despite the pendency of the probate proceedings of the will of the late President. On the other hand, the BIR argued that the pendency of the probate proceedings over the estate of the deceased does not preclude the assessment and collection, through summary remedies, of estate taxes over the same, invoking the rule that the State's authority to collect internal revenue taxes is paramount. DECIDE. HELD: THE PETITION IS NOT MERITORIOUS. The approval of the court, sitting in probate, or as a settlement tribunal over the deceased's estate is not a mandatory requirement in the collection of estate taxes. There is nothing in the Tax Code and in pertinent remedial laws which implies the necessity of a probate or estate settlement. The court's approval of the state's claim for estate tax is not required before the same can be enforced and collected. It has been repeatedly observed, and not without merit, that the agreement of the tax laws and the collection of taxes is of paramount importance for the sustenance of the government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. (Marcos II v. CA, June 5,1997,273 SCRA 47) 23. QUESTION: Explain the symbiotic relationship theory. ANSWER: The Supreme Court emphasized the importance of taxation in the following language: TAX PRINCIPLES A N D R E M E D I E S 268 It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. T T I I S symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. 24. QUESTION: In matters involving taxes, is the government bound by the errors committed by its agents? ANSWER: NO. It is axiomatic that the government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the state effects its function for the welfare of its constituents. The errors of certain administrative officers should never be allowed to jeopardize the government's financial position, x x x 25. QUESTION: What are the fundamental principles of sound tax system? ANSWER: Fiscal Adequacy — the proceeds of a tax must be sufficient to meet governmental expenditures. Administrative Feasibility — tax law must be convenient of effective enforcement. Theoretical Justice/Equality — taxes must be just, fair and reasonable. APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 269 26. QUESTION: Explain the dictum "The power to tax includes the power to destroy." ANSWER: It includes the power to destroy if it is used validly as an implement of the police power in discouraging and in effect ultimately prohibiting certain things or enterprises inimical to the public welfare. But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully attacked as an inordinate and unconstitutional exercise of the discretion that is usually vested exclusively in the legislature in ascertaining the amount of the tax. 27. QUESTION: State the Constitutional provisions granting exemptions. ANSWER: a) Art. VI, Sec. 28(3), 1987 Constitution provides: "Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." b) Art. XIV, Sec. 4(3), 1987 Constitution provides: All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. 28. QUESTION: Proclamation No. 430 reserved certain parcel of land in Cebu for warehousing purposes under the administration of the 270 TAX PRINCIPLES A N D REMEDIES National Warehousing Corporation (now NDC). A warehouse was built thereon. Are the land and warehouse subject to real estate taxes? ANSWER: As to the land, it is exempt from taxation because it was simply reserved by the Republic. It is still owned by the Republic. As to the warehouse, it is not exempt since it is owned by NDC which is separate and distinct from the government which is its stockholder. 29. QUESTION: Is the 5% imposition on gross receipts derived from stall rentals an income tax or license? ANSWER: The imposition is a tax, if its primary purpose is to generate revenue, and regulation is merely incidental; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax. It has been ruled that the 5% tax imposed on gross receipts of stall rentals constitutes license fee for the regulation of taxpayer's business and not a tax on income. 30. QUESTION: Are taxes subject to set-off? ANSWER: No. It is settled that a taxpayer may not set-off taxes due from claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such debt, demand, contract or judgment as is allowed to be set-off. 31. QUESTION: Are the tax exemptions strictly construed against government political subdivision or instrumentality? APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 271 ANSWER: No. It is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality. The reason for the strict interpretation does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case, the practical effect of an exemption is merely to reduce the amount that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies (including NPC) may be construed liberally, in favor of non-taxability of such agencies. (Maceda v. Macaraeg, 197 SCRA 771) 32. QUESTION: An informer's confidential report covers tax delinquencies of government agencies. Is the informer entitled to informer's reward? ANSWER: Yes. The informer is entitled to informer's reward. The law on the matter makes no distinction — whether private person or corporation, public or quasi-public agencies. It being sufficient for its operation that the person or entity concerned is subject to, and violated, revenue laws, and the informer's report resulted in the recovery of revenue. It is elementary that where the law does not distinguish, none must be made. 33. QUESTION: What are the requisites for valid BIR rules and regulations? ANSWER: They are as follows: 1. Consistent and in harmony with law; 2. Reasonable; 3. Useful and necessary; and 4. Published in the Official Gazette, or a newspaper of general circulation. 272 TAX PRINCIPLES A N D R E M E D I E S 34. QUESTION: State the general definition of gross income. ANSWER: Gross Income means all income derived from whatever source, including (but not limited to) the following items: 1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, cornmissions, and similar items; 2. Gross income derived from the conduct of trade or business or the exercise of a profession; 3. Gains derived from dealings in property; 4. Interest; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities; 9. Prizes and winnings; 10. Pensions; and 11. Partner's distributive share from the net income of the general professional partnership. 35. QUESTION: Define self-employment income. ANSWER: It consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him, as a sole proprietor or by partnership of which he is a member. 36. QUESTION: Distinguish global system of taxation from schedular system of taxation. APPENDIX "A" SIGNIFICANT JURISPRUDENCE A N D DOCTRINES IN TAXATION 273 ANSWER: A global system of taxation is one where the taxpayer is required to report all income earned during a taxable period in one income tax return, which income shall be taxed under the same rule of income taxation; whereas, schedular system of taxation requires a separate return for each type of income and the tax is computed on a per return or per schedule basis. Schedular system provides for different tax treatment of different types of income. 37. QUESTION: Is the interest on the promissory notes to be treated income from the Philippines considering that all the elements of the main transactions, i.e., payments, execution of the contracts, construction of vessels, were all done in Japan? ANSWER: The interest is considered income from the Philippines. Section 42 of R.A. 8424 provides that the following items of gross income shall be treated as gross income from sources within the Philippines. 1) Interest — interest derived from sources within the Philippines, and interest on bonds, notes, or other interest bearing obligations of residents, corporate or otherwise; x x x The law does not speak of the "activity" which gave rise to the obligation, but solely the residence of the obligor. 38. QUESTION: What are the rules on the taxability of the capital gains from sale of real property? ANSWER: A) Individual taxpayers and estates and trusts. A.1) IN GENERAL. A final tax of six percent (6%) based on the gross selling price or current fair market value (zonal value) as determined in accordance with Section 6(e) 274 TAX PRINCIPLES A N D REMEDIES of the Code, whichever is HIGHER is hereby imposed on capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals including estates and trusts: Provided, that the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24(A) (5%-34%) or under this Subsection, at the option of the taxpayer. (Sec. 24[D]) A.2) EXCEPTION. The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, that the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided further, that the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, that the said tax exemption can only be availed of once every ten (10) years: Provided finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition, subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon. APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 275 39. QUESTION: Define capital asset. ANSWER: Capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include: a) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer; b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; c) property used in the trade or business and subject to the allowance for depreciation; and d) real property used in trade or business of the taxpayer. 40. QUESTION: Explain the meaning of MINIMUM CORPORATE INCOME TAX (MCIT) under R.A. 8424. ANSWER: Minimum Corporate Income Tax on Domestic Corporations A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection [A] of Section 27 for the taxable year. (Sec. 27[E]) Carry Forward of Excess Minimum Tax Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection [A] of Section 27 shall be carried forward and credited against the normal 276 TAX PRINCIPLES A N D REMEDIES income tax for the three (3) immediately succeeding taxable years. (Sec. 27[E][2J) Relief from the Minimum Corporate Income Tax Under Certain Conditions The Secretary of Finance is hereby authorized to suspend the imposition of minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. MCIT On Resident Foreign Corporation A minimum corporate income tax of two percent (2%) of gross income shall be imposed on a resident foreign corporation taxable. (Sec. 28[A][2J) 41. QUESTION: What is the taxable base for the 15% BRANCH PROFIT REMITTANCE TAX (BPRT)? ANSWER: Any profit remitted by a branch to its head office shall be subject to tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority [PEZA]). (Sec. 28[A][5]) 42. QUESTION: State the provision relative to TAX SPARING CREDIT (TSC) under R.A. 8424, as amended by R.A. 9337. ANSWER: Intercorporate Dividends. — A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and / or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 277 non-resident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxed deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends. (Sec. 28[B] I5][b]) (As amended by R.A. 9337) 43. QUESTION: When is the 10% improperly accumulated earnings tax applicable? ANSWER: Tax on Corporations Subject to Improperly Accumulated Earnings Tax 1. In General. — The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. 2. Exceptions. — The improperly accumulated earnings tax as provided for under this section shall not apply to: a. Publicly-held corporations; b. Banks and other nonbank financial intermediaries; c. Insurance companies. (Sec. 29) and 44. QUESTION: What are the tax exempt retirement benefits, pensions and gratuities? 278 TAX PRINCIPLES A N D REMEDIES ANSWER: Retirement benefits received under R.A. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer provided that the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement. Said benefits shall be availed of only once. 45. QUESTION: When is an amount received by an official or employee or by his heirs from the employer as a consequence of separation from service exempt? ANSWER: It is exempt if it is received on account of death, sickness or other physical disability or for any cause beyond the control of the said official or employee. 46. QUESTION: Define FRINGE BENEFIT. ANSWER: FRINGE BENEFIT means any good, services or other benefit furnished or granted in cash or kind by an employer, in addition to basic salaries, to an individual employee (except rank and file employees) such as, but not limited to the following: 1. Housing; 2. Expense account; 3. Vehicle of any kind; 4. others; Household personnel, such as maid, driver and 5. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 279 6. Membership fees, dues, and other expenses borne by the employee in social and athletic clubs or other similar organizations; 7. Expenses for foreign travel; 8. Holiday and vacation expenses; 9. Educational assistance to the employee or his dependents; and 10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. 47. QUESTION: What are tax exempt DE MINIMIS benefits? ANSWER: The term "DE MINIMIS" benefits which are exempt from fringe benefit tax shall be limited to facilities or privileges furnished or offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following: a) Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year AND THE MONETIZED VALUE OF LEAVE CREDITS PAID TO GOVERNMENT OFFICIALS AND EMPLOYEES; b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125.00 per month; c) Rice subsidy of Pl,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than Pl,500.00; d) Uniforms and clothing allowance not exceeding P4,000.00 per annum; e) Actual yearly medical benefits not exceeding P10,000.00 per annum; f) month; Laundry allowance not exceeding P300.00 per 280 TAX PRINCIPLES A N D REMEDIES g) Employee achievement awards, e.g., for length of service or safety achievement, which must be in a form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum; i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. 48. QUESTION: Sanoy and Ana bought two parcels of land from Ponce and three more from Amy. Thereafter, the first two were sold to Torres Development Corporation at a profit of PI65,224.70 and the three to Abungin and Calisin for a profit of P60,000.00. They divided the profits between the two of them. Was an unregistered partnership or joint venture formed between Sanoy and Ana? ANSWER: No. The sharing of returns does not in itself form a partnership whether or not the person sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership. 49. QUESTION: What are exchanges of property/stock where no gain or loss shall be recognized? APPENDIX "A" SIGNIFICANT JURISPRUDENCE A N D DOCTRINES IN TAXATION 281 ANSWER: If in pursuance of a plan of merger or consolidation: a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or b) A share holder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation; or d) If property is transferred to a corporation by a person in exchange for stock or unit of participation in such 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. 50. QUESTION: Is the income derived from rentals of real property owned by welfare, educational and charitable non-profit corporations subject to tax under R.A. 8424? ANSWER: It is subject to tax. Last paragraph of Section 30 of R.A. 8424 provides that x x x the income of whatever kind and character of the tax exempt organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax imposed under this Code. This makes income from the property of the tax exempt organization taxable, regardless 282 TAX PRINCIPLES A N D REMEDIES of how that income is used — whether for profit or for lofty nonprofit purposes. 51. QUESTION: What is meant by theoretical interest? ANSWER: It is an interest "calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity cost" of investing funds in a given business. Such theoretical or computed interest does not arise from a legally demandable interestbearing obligation incurred by the taxpayer who wishes to find out, e.g., whether he would have been better off by lending out his funds and earning interest rather than investing such funds in his business. 52. QUESTION: Is theoretical interest on capital deductible? ANSWER: No. It is not deductible as it does not represent a charge arising under an interest-bearing obligation. 53. QUESTION: Philippine Refining Co. (PRC) claimed bad debts as deductions from its gross income. In proving for the worthlessness of said debts, PRC relied solely on the testimony of its financial accountant without presenting a single documentary evidence to substantiate the same. The BIR disallowed the deduction for failure of the PRC to prove the worthlessness of the debts. Is the disallowance correct? ANSWER: The BIR is correct in disallowing the deductions. There was no iota of documentary evidence {e.g., collection letters, reports from investigating fieldman, police report/affidavit, etc.) to give support to the allegation of worthlessness. For debts to be considered "worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer should show that: APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION a) 283 There is valid and subsisting debt; b) The debt must be actually ascertained to be worthless and uncollectible during the taxable year; c) year; The debt must be charged off during the taxable d) The debt must arise from the business or trade of the taxpayer; e) The taxpayer must also show that it is indeed uncollectible even in the future. 54. QUESTION: Explain the "BOAC Doctrine" as enunciated in the case of Commissioner v. BOAC. ANSWER: It is one which laid down the rule that for the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from the activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. However, under Sec. 28(A)[3], the test is the origin of passengers or cargo, respective of the place of sale and the place of payment. 55. QUESTION: Is stock dividend taxable? ANSWER: A stock dividend representing the transfer of surplus to capital account is not subject to tax. However, if a corporation cancels or redeems stock issued as dividend at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part, essentially equivalent to the distribution of taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered taxable income to the extent that it represents a distribution of earnings or profits. 284 TAX PRINCIPLES A N D REMEDIES 56. QUESTION: What are the purposes of withholding tax system? ANSWER: a) To provide the taxpayer a convenient manner to meet his probable income tax liability; b) To ensure the collection of the income tax which could otherwise be lost or substantially reduced through failure to file the corresponding return; and c) To improve government's cash flow. 57. QUESTION: Define "senior citizen" as dependent of a head of family. ANSWER: Senior citizen means any resident citizen of the Philippines at least sixty (60) years old, including those who have retired from both government offices and private enterprises, and has an income of not more than sixty thousand pesos (P60,000) per annum subject to review by the NEDA every three (3) years. 58. QUESTION: Do funds deposited in a joint saving current account subject of survivorship agreement form part of the gross estate of the decedent (husband)? ANSWER: The funds are considered the exclusive property of the surviving spouse. The survivorship agreement not having executed for unlawful purpose, its "winner-take-all" feature is permitted by the Civil Code which considers the same as a mere obligation with a term. Being the separate property of the wife, they form no part of estate of the deceased husband. 59. QUESTION: What are the requisites of Vanishing Deduction? APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 285 ANSWER: a) The present decedent died within 5 years from the date of death of the prior decedent or date of gift; b) The property involved must have formed part of the gross estate located in the Philippines of the prior decedent, taxable gift of the donor; c) The said property must be identified as the same property received from the prior decedent or donor, or the one received in exchange thereof; d) The estate taxes on the prior succession or the donor's tax thereon have been paid. 60. QUESTION: When are proceeds of life insurance includible in the gross estate of decedent? ANSWER: Includible to the extent of the amount received by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. 61. QUESTION: What are intangible personal properties which should be considered as situated in the Philippines for purposes of donor's tax? ANSWER: a) pines; Franchise which must be exercised in the Philip- b) Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; TAX PRINCIPLES A N D REMEDIES c) Shares, obligations, or bonds issued by any foreign corporation, 85% of the business of which is located in the Philippines; d) Share, obligations, or bonds issued by any foreign corporation if such shares or obligations or both have acquired a business situs in the Philippines; e) Shares or rights in any partnership, business or industry established in the Philippines. QUESTION: What are tax exempt donations under R.A. 8424? ANSWER: (A) In the case of gifts made by a resident — 1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten Thousand Pesos (P10,000); 2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government; and 3) Gifts in favor of an educational and /or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization or research institution or organization: Provided, however, that not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For purposes of this exemption, a "non-profit educational and/or charitable corporation, institution, accredited non-government organization and/or research institution or organization" is a school, college or university and/or charitable corporation, accredited non-government organization, trust or philanthropic organization and/or research institution or organization, incorporated as non- APPENDIX "A" SIGNIFICANT JURISPRUDENCE A N D DOCTRINES IN TAXATION 287 stock entity, paying no dividends,, governed by trustees who receive no compensation, and devoting all its income, whether student's fees or gifts, donations subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. (B) In the case of gift made by a nonresident not a citizen of the Philippines. — 1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. 2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, that no more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. 63. QUESTION: State the fundamental principles underlying local taxation in the Philippines. ANSWER: a) Taxation shall be uniform in each local government b) Taxes, fees, charges and other impositions shall: unit; 1. be equitable and based as far as practicable on the taxpayer's ability to pay; 2. be levied and collected only for public purposes; 3. not be unjust, excessive, oppressive, or confisca- tory; 4. not be contrary to law, public policy, national economic policy or in restraint of trade. 288 TAX PRINCIPLES A N D REMEDIES c) The collection of local taxes, fees, charges and other impositions shall in no case, be let to any private person; d) The revenue collected pursuant to the provision of R.A. 7160 shall inure solely to the benefit of, and be subject to disposition by the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided therein; and e) Each local government unit shall, as far as practicable evolve a progressive system of taxation. 64. QUESTION: The Collector of Customs seized allegedly untaxed vehicles and parts, prompting importers Narciso O. Jao and Bernardo M. Empaynado to file a petition for certiorari, prohibition or mandamus, with prayer for restraining order with the RTC. The RTC granted the injunction and prohibited the respondent from seizing, detaining, transporting and selling at public auction the disputed articles. Contending that the RTC had no jurisdiction over the subject matter, the Bureau of Customs filed a petition for review with the Court of Appeals. DECIDE. ANSWER: The petition is impressed with merit. The Regional Trial Court is devoid of any competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted by the Bureau of Customs and to enjoin or otherwise interfere with its proceedings. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on seizure and forfeiture of dutiable goods. The Regional Trial Courts are precluded from assuming cognizance over said matters even through petitions of certiorari, prohibition or mandamus. APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 289 65. QUESTION: Jose Pascual is the registered owner of M / B "Maria Victoria P" a motor boat of 63.25 gross tonnage duly licensed by the Bureau of Customs to engage in coastwide trade. Said vessel was apprehended by the Philippine Navy five miles off the coast of Naic, Cavite for carrying untaxed 105 cases and 90 packs of Salem cigarettes and 414 cases of Union cigarettes in the vessels. No one claimed the cigarettes. Consequently, they were forfeited in favor of the government. Jose Pascual claimed his vessel alleging that he did not know that his vessel was used for smuggling. Is the motor boat M / B "Maria Victoria P," subject to forfeiture under the Tariff and Customs Code, particularly paragraphs (a) and(b) of Sec. 2530? ANSWER: The vessel is clearly subject to forfeiture in favor of the GOVERNMENT. Forfeiture proceedings are in the nature of proceedings in rem and are directed against the res. The fact that Jose Pascual has no actual knowledge that M / B "Maria P" was used illegally does not render the vessel immune from forfeiture. Jose Pascual's defense that he has no actual knowledge that the vessel was used illegally was personal to him but cannot absolve the vessel from liability of forfeiture. 66. QUESTION: Explain briefly each of the following special customs duties under the Tariff and Customs Code. a. Dumping duty c. Marketing duty b. Countervailing duty d. Discriminatory duty ANSWER: a) Dumping duty — is levied on imported goods where it appears that a specific kind or class of foreign article is being imported into or sold or is likely to be sold in the Philippines at a price less than its fair value; 290 TAX PRINCIPLES A N D REMEDIES b) Countervailing duty — is one equal to the estimated amount of the subsidy or bounty or subvention; manufacturing or exportation into the Philippines of any article likely to injure an industry in the Philippines; c) Marketing duty — is imposed for improperly marked articles. Articles must be marked in any official language of the Philippines and the name of the country of origin of the article; d) Discriminatory duty — is imposed on imported goods whenever it is found as a fact that the country of origin discriminates against the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. 67. QUESTION: What is meant by jeopardy assessment? ANSWER: It is a tax assessment which was made without the benefit of complete or partial audit by an authorized revenue officer who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer's failure to comply with audit and investigation requirements to present his book of accounts and/or pertinent records or to substantiate all or any of the deductions, exemptions or credits claimed in his return. 68. QUESTION: The two (2)-year period for filing refund is mandatory. However, it may be suspended under special circumstances. State these exceptional cases. ANSWER: The two (2)-year prescriptive period may be suspended under the following exceptional cases: a) If the BIR made the taxpayer asking for refund believe that he would be credited for the overpayment; APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 291 b) If there is an agreement between the taxpayer and the agent of the Commissioner that they would wait for a decision of the Supreme Court to guide them in the settlement of the issue/question involved in the refund. 69. QUESTION: Under the Local Government Code, protest is required before a written claim for refund of real property tax may be filed. State the exception to the rule. ANSWER: Protest is not required in order that a taxpayer, who paid under mistaken belief that it is required by law, may claim for refund. In this case, the taxpayer paid the tax through mistake or error and had no knowledge of the fact that it was exempted from payment thereof. The taxpayer should not be held to suffer loss by his good intention to comply with what he believes is his legal obligation, where such obligation does not really exist. 70. QUESTION: Revocation, modification or reversal of BIR rules and regulations shall be given retroactive effect if the same is favorable to the taxpayer. State the exceptions thereto. ANSWER: The exceptions are as follows: a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; b) Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or c) Where the taxpayer acted in bad faith. 71. QUESTION: Explain the extent of the power of the BIR Commissioner a) to compromise; b) to abate/cancel; c) to credit/refund tax. 292 TAX PRINCIPLES A N D REMEDIES ANSWER: The Commissioner may — A) when: Compromise the payment of any internal revenue tax 1. A reasonable doubt as to the validity of the claim against the taxpayer exists; or 2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. The compromise settlement of any tax liability shall be subject to the following minimum amounts: For cases of financial incapacity a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax. Where the basic tax involved exceeds one million pesos (1,000,000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners. B) Abate or cancel a tax liability when: 1. The tax or any portion thereof appears to be unjustly or excessively assessed; or 2. The administration or collection costs involved do not justify the collection of the amount due. All criminal violations may be compromised except: (a) fraud. those already filed in court, or (b) those involving C) Credit or refu nd taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by APPENDIX "A" SIGNIFICANT JURISPRUDENCE AND DOCTRINES IN TAXATION 293 the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided however, that return filed showing an overpayment shall be considered as written claim for credit or refund. 72. QUESTION: Does a regular court have the power to restrain the collection of a tax? ANSWER: NO. Section 218 of R.A. 8424 provides that no court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code. However, the CTA may issue injunctions against administrative collection, i.e., by distraint and levy, when collection could "jeopardize" the interest of the Government or taxpayer but the Court may require the taxpayer to post a bond. The bond requirement lies with the sound discretion of the Tax Court. 73. QUESTION: What constitutes decision appealable to CTA? ANSWER: It is the decision of the Commissioner of BIR on the protest against an assessment but not the assessment itself. APPENDIX "B" REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Quezon City September 6,1999 REVENUE REGULATIONS NO. 12-99 SUBJECT : Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extrajudicial Settlement of a Taxpayer's Criminal Violation of the Code through Payment of a Suggested Compromise Penalty. TO All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. — Pursuant to the provisions of Section 244, in relation to Section 245 of the National Internal Revenue Code of 1997, these Regulations are hereby promulgated to implement the provisions of Sections 6, 7, 204, 228, 247, 248 and 249 on assessment of national internal revenue taxes, fees and charges and to provide the rules governing the extra-judicial settlement of a taxpayer's criminal violation of the said Code or any of its implementing Regulations through payment of a suggested compromise penalty. SECTION 2. General Principles. — 2.1 The surcharge and/or interest herein prescribed shall apply to all taxes, fees and charges imposed under the Code 294 APPENDIX " B " REVENUE REGULATIONS NO. 12-99 295 which shall be collected at the same time, in the same manner, and as part of the tax. 2.2 In the case the tax due from the taxpayer is paid on a partial or installment basis, the interest on the deficiency tax or on the delinquency tax liability of the taxpayer shall be imposed from due date of the tax until full payment thereof. The interest shall be computed based on the diminishing balance of the tax, inclusive of interests. SECTION 3. Due process requirement in the issuance of a deficiency tax assessment. — 3.1 Mode of procedures in the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 2% TAX PRINCIPLES A N D REMEDIES 3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. — The notice for informal conference and the preliminary assessment notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability shall be sufficient: (i) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or (ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (iv) When the excise tax due on excisable articles has not been paid; or APPENDIX " B " REVENUE REGULATIONS NO. 12-99 297 (v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. 3.1.4 Formal Letter of Demand and Assessment Notice. — The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof. 3.1.5 Disputed Assessment. — The taxpayer or his duly authorized representative may protest administratively against the aforesaid formal letter of demand and assessment notice within thirty (30) days from date of receipt thereof. If there are several issues involved in the formal letter of demand and assessment notice but the taxpayer only disputes or protests against the validity of some of the issues raised, the taxpayer shall be required to pay the deficiency tax or taxes attributable to the undisputed issues, in which case, a collection letter shall be issued to the taxpayer calling for payment of the said deficiency tax, inclusive of the applicable surcharge and /or interest. No action shall be taken on the taxpayer's disputed issues until the taxpayer has paid the deficiency tax or taxes attributable to the said undisputed issues. The prescribed period for assessment or collection of the tax or taxes attributable to the disputed issues shall be suspended. 298 TAX PRINCIPLES A N D REMEDIES The taxpayer shall state the facts, the applicable law, rules and regulations, or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect. If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto. The taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final, executory and demandable. The phrase "submit the required documents" includes submission or presentation of the pertinent documents and scrutiny and evaluation by the Revenue Officer conducting the audit. The said Revenue Officer shall state this fact in his report of investigation. If the taxpayer fails to file a valid protest against the formal letter of demand and assessment notice within thirty (30) days from date or receipt thereof, the assessment shall become final, executory and demandable. If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable. In general, if the protest is denied, in whole or in part, by the Commissioner or his duly authorized representative, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable: Provided, however, That if the taxpayer elevates his protest to the Commissioner within thirty (30) days from date of receipt of the final decision of the Commissioner's APPENDIX " B " REVENUE REGULATIONS NO. 12-99 299 duly authorized representative, the latter's decision shall not be considered final, executory and demandable, in which case, the protest shall be decided by the Commissioner. If the Commissioner or his duly authorized representative fails to act on the taxpayer's protest within one hundred eighty (180) days from date of submission, by the taxpayer, of the required documents in support of his protest, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said 180-day period, otherwise, the assessment shall become final, executory and demandable. 3.1.6 Administrative Decision on a Disputed Assessment. — The decision of the Commissioner or his duly authorized representative shall: (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void, in which case, the same shall not be considered a decision on a disputed assessment; and (b) that the same is his final decision. 3.1.7 Constructive Service. — If the notice to the taxpayer herein required is served by registered mail, and no response is received from the taxpayer within the prescribed period from date of the posting thereof in the mail, the same shall be considered actually or constructively received by the taxpayer. If the same is personally served on the taxpayer or his duly authorized representative who, however, refused to acknowledge receipt thereof, the same shall be constructively served on the taxpayer. Constructive service thereof shall be considered effected by leaving the same in the premises of the taxpayer and this fact of constructive service is attested to, witnessed and signed by at least two (2) revenue officers other than the revenue officer who constructively served the same. The revenue officer who constructively served the same shall make a written report of this matter which shall form part of the docket of this case. 300 TAX PRINCIPLES A N D REMEDIES SECTION 4. Civil Penalties: 4.1 Twenty-Five Percent (25%) Surcharge. — There shall be imposed, in addition to the basic tax required to be paid, a penalty equivalent to twenty-five percent (25%) thereof, in any of the following cases: 4.1.1 Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or 4.1.2 Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or 4.1.3 Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or 4.1.4 Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment. 4.2 Fifty Percent (50%) Surcharge. 4.2.1 In case of willful neglect to file the return within the period prescribed by the Code, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud: Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a substantial over-statement of deductions, as determined by the Commissioner or his duly authorized representative, shall constitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty (30) percent of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or APPENDIX " B " REVENUE REGULATIONS NO. 12-99 301 income or for over-statement of deductions, as mentioned herein: Provided, further, That the term "willfull neglect to file the return within the period prescribed by the Code" shall not apply in case the taxpayer, without notice from the Commissioner or his authorized representative, voluntarily files the said return, in which case, only 25% surcharge shall be imposed for late filing and late payment of the tax in lieu of the above 50% surcharge. Conversely, the 50% surcharge shall be imposed in case the taxpayer files the return only after prior notice in writing from the Commissioner or his duly authorized representative. 4.2.2 Section 6(A) of the Code provides that any tax return filed by a taxpayer "may be modified, changed or amended" by the taxpayer "within three (3) years from date of such filing" provided, however, that "no notice for audit or investigation of such return, statement or declaration has, in the meantime, been actually served upon the taxpayer." Thus, if upon investigation, it is determined that the taxpayer's originally filed tax return is false or fraudulent, such taxpayer shall remain liable to the 50% civil penalty regardless that the taxpayer has filed his amended tax return, if the said amended tax return, however, has been filed only after issuance of the Letter of Authority for the investigation of the taxpayer's tax return or such amendment has been made in the course of the said investigation. xxx SECTION 7. Repealing Clause. — Any revenue issuance which is inconsistent herewith shall be considered repealed, amended, or modified accordingly. SECTION 8. Effectivity. — 8.1 General Rule. — In general, the provisions of those Regulations shall be effective beginning January 1,1998 pursuant to the provisions of Section 8 of R.A. No. 8424, otherwise known as the National Internal Revenue Code of 1997. 8.2 Computation of Surcharge and Interest on Deficiency Tax Assessment. — Any deficiency tax assessment issued begin- 302 TAX PRINCIPLES A N D R E M E D I E S ning January 1,1998 shall be governed by the rules prescribed in these Regulations. 8.3 Other Provisions. — Any provision of these Regulations not otherwise specifically provided in the National Internal Revenue Code of 1997 shall take effect fifteen (15) days after publication in any newspaper of general circulation. (Sgd.) EDGARDO B. ESPIRITU Secretary of Finance Recommending Approval: (Sgd.) BEETHOVEN L. RUALO Commissioner of Internal Revenue APPENDIX "C" REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Quezon City 27 November 2000 REVENUE MEMORANDUM CIRCULAR NO. 23-2000 SUBJECT : Existing Revenue Procedures on the Assessment of Deficiency Internal Revenue Taxes Based on the "Best Evidence Obtainable." TO All Internal Revenue Officers and Others Concerned. SECTION 1. Scope. — It has been observed that a very significant number of taxpayers either refuse or fail to present their respective accounting records when demanded for tax audit purposes, thereby resulting to the delay in the submission of the Revenue Officer's report of investigation as required by the existing Audit Program and inconsistency in the determination of the deficiency internal revenue tax that may properly be assessed and demanded from the taxpayer, to the damage and prejudice against the revenue. In the absence of accounting records or other documents necessary for the proper determination of the taxpayer's internal revenue tax liability, Section 6(B) of the National Internal Revenue Code of 1997 requires that the assessment of the tax be determined based on the "Best Evidence Obtainable," as follows: 303 304 TAX PRINCIPLES A N D REMEDIES "When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable." SECTION 2. Prescribed Revenue Procedures. — 2.1 Subpoena Duces Tecum. — All concerned shall strictly implement the prescribed procedures under Revenue Memorandum Order No. 35-90 on the issuance and enforcement of the Subpoena Duces Tecum in order to compel the taxpayer to present his tax records for tax audit purposes, impose the corresponding suggested compromise penalty for his violation of the Bookkeeping Regulations as may be warranted and/ or institute criminal action for the taxpayer's violation of the Subpoena. 2.2 Criminal Action for Violation of Summons. — In case the taxpayer violates the Subpoena Duces Tecum, the Legal Division or the Prosecution Division, as the case may be, shall institute criminal action against the taxpayer himself, or the responsible officer, in the case of a corporation. 2.3 Assessment Based on Best Evidence Obtainable. — An assessment based on best evidence obtainable is justified when any of the grounds provided by law is clearly established, viz.: 1. The report or records requested from the taxpayer are not forthcoming, i.e., the records are lost; refusal of the taxpayer to submit such records; 2. The reports submitted are false, incomplete or erroneous. In every case where a taxpayer is ordered to be examined and he refuses or fails to submit his records giving rise to the issuance of a subpoena duces tecum pursuant to RMO No. 35-90, the assessment shall only be issued after a criminal case has been instituted for failure to obey summons. APPENDIX " C " REVENUE MEMORANDUM CIRCULAR NO. 23-2000 305 After filing of the complaint against the taxpayer for violation of the Subpoena Duces Tecum, the Legal Division/ Prosecution shall immediately return the docket o' the case to the concerned Revenue Officer. The Revenue Officer shall, upon receipt of the docket, immediately proceed to determine the taxpayer's deficiency internal revenue tax liability in accordance with the "Best Evidence Obtainable." 2.4 Existing Revenue Procedures and Jurisprudence Governing Assessment Based on the Best Evidence Obtainable. — Provided hereunder are the existing revenue procedures and jurisprudence governing issuance of a deficiency tax assessment based on the best evidence obtainable: (a) Assessment Based on Estimate, When Valid. —"xxx In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. In this instance, petitioner has not pointed out one single provision in the Memorandum of the Special Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the charge of impropriety of the assessment made, x x x" (b) Assessment Based on Estimate. — Facts: The taxpayer-petitioner, a land transportation contractor, did not pay documentary stamp taxes on freight tickets issued. Freight tickets are taxable as "bill of lading." Actual amount per ticket could not be determined because most of them were torn or destroyed, hence, the revenue officer who conducted the audit decided to assess the stamp tax based on estimate."Held: The Court sustained the validity of the assessment based on estimate, as follows: 306 TAX PRINCIPLES A N D REMEDIES "In support of its first assignment of error, the petitioner-appellant claims that the computation made by the respondent is not based upon the best available evidence, but on mere presumptions. This claim is devoid of merit. The agent of the Bureau of Internal Revenue who investigated the petitioner's books of accounts found it impossible to count one by one the freight tickets contained in used booklets dumped inside the petitioner's bodega, because the booklets were so numerous most of them were either torn or destroyed. The procedure followed by said agent, which is the average method, in ascertaining the total number of freight tickets used during the period under review cannot be impugned because an actual count of the freight tickets is practically impossible. The average method is the only way by which the agent could determine the number of booklets used during the period in question." "The agent also correctly assumed that the value of the goods covered by each freight ticket is not less than P5.00. It is a common practice of passengers in the rural areas not to secure receipts for cargoes of small value and to demand receipts only for valuable cargo. (Inter-provincial Autobus Co., Inc. v. Collector of Internal Revenue, G.R. No. L-6741, January 31, 1956) If the freight tickets were issued, the baggage carried must have been valuable enough." "On the other hand, it was the duty of petitioner to present evidence to show inaccuracy in the above method of assessment (Inter-provincial Autobus Co., Inc. v. Collector, supra; Perez v. C.T.A., G.R. No. 1-9193, May 29, 1957; Perez v. C.T.A., et al., G.R. No. L-10507, May 30, 1958; Government of P.l. v. Monte de Piedad, 35 Phil. 42) but it failed to do so. The claim of petitioner that the freight tickets issued by it are not bills of lading subject to documentary stamp tax must also be dismissed in view of our ruling in the case of Interprovincial Autobus Co., Inc. v. Collector, supra, x x x." (c) Assessment Based on Estimate: 50% Rule, In the Absence of Receipts to Prove Actual Amount of Expense Deduction. — The Court held in the Mariano Zamora case that, APPENDIX " C " REVENUE MEMORANDUM CIRCULAR NO. 23-2000 307 if there is a showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that may be allowable in computing the taxpayer's taxable income bearing heavily against the taxpayer whose inexactitude is of his own making. That disallowance of 50% of the taxpayer of the taxpayer's claimed deduction is valid. "It is alleged by Mariano Zamora that the CTA erred in disallowing P10,478.50 as promotion expenses incurred by his wife for the promotion of the Bay View Hotel and Farmacia Zamora. He contends that the whole amount of P20,957.00, as promotion expenses in his 1951 income tax returns, should be allowed and not merely one-half of it or PI0,478.50, on the ground that, while not all the itemized expenses are supported by receipts, the absence of some supporting receipts has been sufficiently and satisfactorily established. For, as alleged, the said amount of P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of Mariano), during her travel to Japan and the United States to purchase machinery for the new Tiki Tiki plan, and to observe hotel management in modern hotels. The CTA, however, found that for said trip, Mrs. Zamora obtained only the sum of P5,000.00 from the Central Bank and that in her application for dollar allocation, she stated that she was going abroad on a combined medical and business trip, which facts were not denied by Mariano Zamora. No evidence had been submitted as to where Mariano had obtained the amount in excess of P5,000.00 given to his wife which she spent abroad. No explanation had been made either that the statement contained in Mrs. Zamora's application for dollar allocation that she was going abroad on a combined medical and business trip, was not correct. The alleged expenses were not supported by receipts. Mrs. Zamora could not even remember how much money she had when she left abroad in 1951 and how the alleged amount of P20,957.00 was spent. "Section 30 of the Tax Code provides that in computing net income, there shall be allowed as deductions all the 308 TAX PRINCIPLES A N D REMEDIES ordinary and necessary expenses paid or incurred during the taxable year, in carrying on any trade or business. (Vol. 4, Mertens, Law of Federal Income Taxation, Sec. 25.03, p. 307) Since promotion expenses constitute one of the deductions in conducting a business, same must satisfy these requirements. Claims for the deduction of promotion expenses or entertainment expenses must also be substantiated or supported by record showing in detail the amount and nature of the expense incurred. (N.H. Van Sicklen, Jr. v. Comm. of Int. Rev., 33 BTA 544) Considering, as heretofore stated, that the application of Mrs. Zamora for dollar allocation shows that she went abroad on a combined medical and business trip, not all of her expenses came under the category of ordinary and necessary expenses: part thereof constituted her personal expenses. There having been no means by which to ascertain which expense was incurred by her in connection with the business of Mariano Zamora and which was incurred for her personal benefit, the Collector and the CTA in their decisions, considered 50% of the said amount of P20,957.00 as business expense and the other 50%, as her personal expense. We hold that said allocation is very fair to Mariano Zamora, there having been no receipt whatsoever, submitted to explain the alleged business expenses, or proof of the connection which said expenses had to the business or the reasonableness of the said amount of P20,957.00. While in situations like the present, absolute certainty is usually not possible, the CTA should make as close an approximate as it can, bearing heavily, if it chooses, upon the taxpayer whose inexactness is of his own making." (d) BIR RULING. — Assessment Based on Estimate. — In the absence of accounting records, the taxpayer's tax liability may be determined by estimate under the best evidence rule based on records of other taxpayers engaged in the same line of business, as follows: "In reply, please be informed that under Section 16 of the Tax Code, the Commissioner is authorized to assess the proper tax based on the best evidence obtainable. If the tax- APPENDIX " C " REVENUE MEMORANDUM CIRCULAR NO. 23-2000 309 payer fails to submit the required returns, statements, reports and other documents, the Commissioner shall assess the proper tax, using the correct method of computation in determining the taxpayer's liability; hence, complete and outright disallowance of the taxpayer's claim for deduction of legitimate, business expenses appears not warranted. If no documents of any kind are available or presented by the taxpayer, a comparative determination of reasonable business expenses incurred by other taxpayers undertaking similar kind of business should be ascertained to arrive at a reasonable determination of the deductible business expenses. "In the instant case, involving taxpayers in Ormoc City who have lost all of their books of accounts and other records during the great flood in 1991, greater leniency in allowing their claims for deduction for reasonable business expenses is justified. One way of manifesting this leniency is to refer to the taxpayers' previous two (2) years deficiency tax assessments, if any. The average of their deficiency tax during the last two years may then be used as the best evidence to impute their deficiency tax liability for 1991. Otherwise, if there is none, then it can be concluded that no deficiency tax is due for 1991." Note. Under this procedure, the gross profit and net profit ratios of other taxpayers engaged in the same line of business may be used in estimating the taxpayer's gross profit from sales and net taxable income. (e) Networth Method Of Investigation. — Determination of the taxpayer's taxable net income through the networth method of investigation is valid. "We next come to the question of the use of the inventory method in assessing the income taxes due from petitioner. The use of the inventory method is authorized under Section 15 of the National Internal Revenue Code (Com. Act No. 466), as amended, which authorizes the Collector of Internal Revenue to assess taxes due a taxpayer from any other available fact or evidence. If a taxpayer commits 310 TAX PRINCIPLES A N D R E M E D I E S a violation of the law, hiding his income to evade payment of taxes, the Government must be permitted to resort to all evidence or sources available to determine his said income, so that the tax may be collected for public purposes. There is and there should be a presumption of regularity accorded this action of the Collector of Internal Revenue in assessing the tax on the best evidence obtainable otherwise it would be impossible to assess taxes due from a dishonest taxpayer. "This form of assessment has also been adopted by the Collector of Internal Revenue with the approval of this Court in three cases, Perez v. Collector, G.R. No. L-10507, May 30, 1958; Collector v. A.P. Reyes, G.R. Nos. L-11534 and L-11558, Nov. 25, 1958; and Avelino v. Collector, G.R. No. L-17715, July 31, 1963. In the case at bar, the existence of assets or properties appearing in the name of the taxpayer in the name of his dummies or friends, without the taxpayer being able to give a definite reasonable explanation for their existence justifies the Court of Tax Appeals and this Court to resort to the inventory method of assessment, such being necessary and at the same time just and equitable." (f) Assessment Based on Best Evidence in Case of NonPresentation of Taxpayer's Books of Accounts. — The disputed 1954 deficiency income tax assessment of P73,636.50, even if it was based merely on adjusting entries recorded in petitioner's general ledger, is justified and sanctioned by Section 15 of the National Internal Revenue Code, the pertinent portion of which reads as follows: "SECTION 15. Power of Commissioner of Internal Revenue to make assessments. — When a report required by laws as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation, or when there is reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on the best evidence obtainable." Petitioner's willful and consistent neglect to file its corporate income tax returns for a period of four (4) calendar years (1950 to APPENDIX " C " REVENUE MEMORANDUM CIRCULAR NO. 23-2000 311 1953) justifies the issuance of respondent's deficiency income tax assessment and letter of demand. A taxpayer like the petitioner cannot be permitted to hide its taxable income and evade the payment of taxes with impunity by the simple expediency of conveniently losing its books of accounts and paying the minimal compromise penalty therefor; otherwise, it would be impossible to collect income taxes due from a dishonest taxpayer. This doctrine was enunciated by our Supreme Court in the disputed income tax case of William Li Yao v. Collector of Internal Revenue, G.R. No. L-11875, December 28, 1963, wherein the said Court categorically stated as follows: "Ifa taxpayer commits a violation ofthelaw, hidinghis income to evade payment of taxes, the Government must be permitted to resort to all evidence or sources available to determine his said income so that the tax may be collected for public purposes. There is and there should be a presumption of regularity accorded this action of the Collector of Internal Revenue in assessing the tax on the best evidence obtainable otherwise, it would be impossible to assess taxes due from a dishonest taxpayer." After sustaining the power of respondent to assess the deficiency income tax, the question posed before us is whether or not the disputed income tax assessment was based on the best obtainable evidence. We uphold the affirmative view. In the first place, petitioner conveniently lose its books of accounts to avoid and prevent any investigation of its internal revenue tax liability. Second, the reported loss of petitioner's books of accounts covering the years 1950 to 1954 was only made on June 6, 1956, thereby showing a deliberate intent to delay or cover up its tax liabilities for prior years. Third, the recovery of the general ledger undoubtedly belonging to petitioner and containing a summary of its business transactions constitutes the best evidence obtainable under the circumstances. Fourth, an analysis of the accounting entries in petitioner's ledger indicates that the amount of P220,389.72 debited to cash and credited to surplus on December 31,1954 is income to petitioner. And finally, petitioner's failure to present any evidence to show the incorrectness of respondent's assessment during the administrative hearing of the case on 312 TAX PRINCIPLES A N D REMEDIES the merits conducted by Legal Officer Teodolfo Yerro, Jr. of the Appellate Division, Bureau of Internal Revenue, establishes a presumption that the disputed assessment is prima facie correct. Thus, in the case of Bohol Land Transportation Co. v. Collector of Internal Revenue, G.R. Nos. L-13099 and L-13462, April 29, 1960, 107 Phil. 968, our Supreme Court held: "At the hearing of the case on the merits, the company in spite of the suggestion of the court did not present any evidence to show the incorrectness of the deficiency income tax assessments with respect to the years 1945 to 1950, inclusive, and so the court considered such failure fatal in view of the theory that the assessment made by the Collector is presumed to be prima facie correct unless controverted. Hence, the Court of Tax Appeals held the petitioner liable for deficiency income taxes for the years 1948, 1949 and 1950. (Emphasis supplied.)" On the other hand, petitioner vigorously contends that the deficiency income tax assessment issued by respondent is inherently weak and not based on the best obtainable evidence because the real facts of the case and not the bookkeeping entries shall control the determination of the taxable income of petitioner. In support thereof, petitioner cited as authority the case of Collector v. Benipayo, G.R. No. L-13656, January 31, 1962, wherein it was held quoting the Court of Tax Appeals, as follows: "To our mind, the appealed decision has no factual basis and must be reversed. An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumption may be. . ." "In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption. . . In the case under consideration there are no substantial facts to support the assessment in question. (Emphasis ours.) APPENDIX " C " REVENUE MEMORANDUM CIRCULAR NO. 23-2000 313 Petitioner's legal defense is untenable. The real and actual facts of the case cannot be ascertained or established by either the respondent or the petitioner because the latter, through culpable negligence, conveniently lost its books of accounts except the general ledger which was subsequently recovered by the revenue examiners from the Manila Police Department. The weakness of petitioner's stand lies in the fact that it disregards the entries in the ledger whenever it bolsters the assessment of respondent and would want us to take them on their face value when it suits the defense of petitioner. (g) BIR may Resort to Assessment Based on Best Evidence if the Taxpayer's Accounting Records is not Understandable.— "(1) Any bookkeeping system authorized under existing laws or regulations on the matter may be adopted by taxpayers. If any authorized bookkeeping system is not understandable to the fieldmen of this Bureau, the taxpayer must necessarily have to explain such system. If notwithstanding such explanation, the fieldmen cannot understand its operations, they may disregard such bookkeeping records so kept and resort to the best evidence available reflecting the operations of the taxpayer. At any rate, this Office will not countenance any system of bookkeeping which is not generally understandable, x x x." (h) BIR RULING: In the Absence of the Taxpayer's Books of Accounts, Records of the Pertinent Government Agency on the Industry's Revenue may be Used as Best Evidence in Assessing the Tax. "The investigation conducted in connection with this case disclosed that many if not all of the fishpond owners and operators concerned are not keeping and using books of accounts. They did not pay the fixed and percentage (sales) taxes due on their operations during the period in question. Neither did they file the sales tax returns. "Under the above circumstance, the sales tax in question should, as you have correctly stated, be assessed on the best evidence obtainable. The income tax return is the best evidence 314 TAX PRINCIPLES A N D R E M E D I E S for purposes of the sales tax although it may be admitted that the same may be of some help in determining the true and correct amount of sales tax due. This Office believes that the official determination of the value of production of each class of fishpond made by the provincial treasurer and assessor of your province should be given more evidence in the absence of the books of accounts and sales tax returns of said owners and operators. "In view of the foregoing, we regret to inform you that we find your contention untenable. As soon as the fishpond owners and operator herein involved receive the demand for payment of the taxes in question, this Office will appreciate it very much if you will advise them to pay promptly." (i) When Secondary Evidence Offered by the Taxpayer is Admissible. — Where a taxpayer questions the correctness of an assessment against him and is apparently not acting in bad faith or merely attempting to delay payment, but is deprived of the best means of proving his contention because "his books of account were lost by the B.I.R. agent who examined them said taxpayer must be given an opportunity to prove, by secondary evidence, that the assessment is incorrect." SECTION 3. Enforcement. — A uniform and strict enforcement of the foregoing prescribed revenue procedures is enjoined. All revenue officials and employees are enjoined to give this Circular as wide a publicity as possible. (Sgd.) DAKILA B. FONACIER Commissioner of Internal Revenue APPENDIX "D" REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE B U R E A U OF INTERNAL R E V E N U E Quezon City February 19, 2001 REVENUE MEMORANDUM CIRCULAR NO. 5-2001 SUBJECT : Grounds and Procedures for the Implementation of Section 206 of the Tax Code of 1997 on Constructive Distraint. TO All Internal Revenue Officers and Others Concerned. Pursuant to the provisions of Section 4, in relation to Section 246 of the Tax Code of 1997 (Code), this Circular is hereby issued to clarify the grounds and procedures for the implementation of Section 206 of the Code on constructive distraint. SECTION 1. When to Issue Notice or Warrant of Constructive Distraint on the Property of a Taxpayer. — In order to safeguard the interest of the government, the Commissioner may place under constructive distraint the personal or movable property/ies of: a) a delinquent taxpayer, or b) any taxpayer who, in his opinion, is retiring from any business subject to tax, or intending to leave the Philippines, or intending to remove his property/ies from the Philippines, or intending to hide or conceal his property/ies, or intending to 315 316 TAX PRINCIPLES AND REMEDIES perform any act tending to obstruct the proceedings for collecting tax due or which may be due from him. SEC. 2. Specific Cases When a Notice or Warrant of Constructive Distraint over the Property/ies of a Taxpayer may be Issued. — a) When a taxpayer who applies for retirement from business has a huge amount of assessment pending with the Bureau of Internal Revenue (BIR). An assessment is huge if the amount thereof is equal to or bigger than the networth or equity of the taxpayer; b) When a taxpayer who is under tax investigation has a record of leaving the Philippines at least twice a year, unless such trips are justified and / or connected with his business, profession or employment; c) When a taxpayer, other than a banking institution, who is under tax investigation has a record of transferring his bank deposits and other valuable personal property/ies from the Philippines to any foreign country; d) When the taxpayer uses aliases in bank accounts, other than the name for which he is legally and/or popularly known; e) When the taxpayer keeps bank deposits and owns other property/ies under the name of other persons, whether or not related to him, and the same are not under any lawful fiduciary or trust capacity; f) When a taxpayer's big amount of undeclared income is known to the public or to the BIR by credible means and there is a strong reason to believe that the taxpayer, in the natural course of events, will have a great tendency to hide or conceal his property/ies. For this purpose, the term "big amount of undeclared income" means an amount exceeding thirty percent (30%) of the gross sales, gross receipts or gross revenue declared per return; g) When the BIR receives information or complaint pertaining to undeclared income in an amount exceeding 30% of gross sales, gross receipts or gross revenue declared per return of a particular taxpayer and there is enough reason to believe A P P E N D I X "D" 317 R E V E N U E M E M O R A N D U M C I R C U L A R N O . 5-2001 that the said information is correct as when the complaint or information is supported by substantial and credible evidence. SEC. 3. Persons Who May Conduct the Constructive Distraint. — In general, it is only the Commissioner who may decide whether a notice of constructive distraint on the personal property of any taxpayer may be issued. However, the Commissioner may delegate this power by specific orders since this power is not one of those which cannot be delegated as enunciated in Section 7 of the Tax Code of 1997. Thus, pursuant to aforesaid section, this power can be delegated to any subordinate official with the rank equivalent to a Division Chief or higher. SEC. 4. Procedures in Conducting Constructive Distraint. — The constructive distraint of personal or movable property/ ies of a taxpayer shall be effected by requiring him or any person having possession or control of such property / ies to sign a receipt covering the property/ies distrained. He shall obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever without the express authority of the Commissioner. Provided, however, That if the subject of the constructive distraint is a bank deposit, the mere service of the notice is sufficient for this purpose. In case the subject taxpayer or the person having the possession and control of the property/ies sought to be placed under constructive distraint refuses or fails to sign the receipt herein referred to, the Revenue Officer effecting the constructive distraint shall proceed to prepare a list of such property/ies. He shall thereafter leave a copy of the Notice of Constructive Distraint and the list of such property/ies distrained in the premises where the said property/ies are located in the presence of at least two (2) witnesses, who may or may not be revenue officers, after which the subject personal or movable property / ies shall be deemed to have been placed under constructive distraint. SEC. 5. Repealing Clause. — Any ruling inconsistent herewith is deemed revoked, amended or modified accordingly. (Sgd.) RENE G. BANEZ Commissioner of Internal Revenue APPENDIX "E" REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Quezon City July 31, 2001 REVENUE REGULATIONS NO. 7-2001 SUBJECT : Further Implementing Sections 7(c), 204(A) and 290 of the Tax Code of 1997 on Compromise Settlement of Internal Revenue Tax Liabilities and Thereby Amending Revenue Regulations No. 6-2000. TO All Internal Concerned. Revenue Officers and Others SECTION 1. Scope and Objectives. — Pursuant to Section 244 of the Tax Code of 1997, these Regulations are hereby promulgated for the purpose of further implementing Sections 7(c), 204(A) and 290 of the same Code, thereby amending Revenue Regulations (RR) No. 6-2000 and giving an authority to the Commissioner of Internal Revenue to compromise the payment of internal revenue tax liabilities of certain taxpayers with outstanding receivable and disputed assessments with the Bureau. SEC. 2. Cases which may be Compromised. —The following cases may upon taxpayer's compliance with the basis set forth under Section 3 of these Regulations, be the subject matter of compromise settlement, viz.: 1. Delinquent accounts; 318 APPENDIX " E " REVENUE REGULATIONS NO. 7-2001 31V 2. Cases under administrative protest pending in the Regional Offices, Revenue District Offices, Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other offices in the National Office; 3. Civil tax cases being disputed before the courts, e.g., MTC, RTC, CTA, CA, SC; 4. Collection cases filed in courts; 5. Criminal violations other than those already filed in court or those involving criminal tax fraud; and 6. Cases covered by pre-assessment notices but taxpayer is not agreeable to the findings of the audit office as confirmed by the review office. EXCEPTIONS: 1. Withholding tax cases; 2. Criminal tax fraud cases; 3. Criminal violation already filed in court; 4. Delinquent accounts with duly approved schedule of installment payments; 5. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision. On the other hand, other protested cases shall be handled by the Regional Evaluation Board (REB) or the National Evaluation Board (BEB) on a case to case basis; and 6. Cases which become final and executory after final judgment of a court. SEC. 3. Basis for Acceptance of Compromise Settlement. — The Commissioner may compromise the payment of any internal revenue tax on the following grounds: 1. Doubtful validity of the assessment. — The offer to compromise a delinquent account of disputed assessment under these Regulations on the ground of reasonable doubt as to the 320 TAX PRINCIPLES A N D REMEDIES validity of the assessment may be accepted when it is shown that: (a) The delinquent account or disputed assessment is one resulting from a jeopardy assessment. (For this purpose, "jeopardy assessment" shall refer to a tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer's failure to comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or to substantiate all or any of the deductions, exemptions, or credits claimed in his return); or (b) The assessment seems to be arbitrary in nature, appearing to be based on presumptions and there is reason to believe that it is lacking in legal and/or factual basis; or (c) The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment or preliminary assessment and there is reason to believe that the assessment is lacking in legal and/or factual basis; or (d) The taxpayer failed to file a request for reinvestigation /reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that the assessment is lacking in legal and/or factual basis; or (e) The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that the assessment is lacking in legal and /or factual basis; or (f) The assessments were issued on or after January 1,1998, where the demand notice allegedly failed to comply with the formalities prescribed under Sec. 228 of the Tax Code of 1997; or (g) Assessments made based on the "Best Evidence Obtainable Rule" and there is reason to believe that the same can be disputed by sufficient and competent evidence. APPENDIX " E " REVENUE REGULATIONS NO. 7-2001 321 2. Financial incapacity. — The offer to compromise based on financial incapacity may be accepted upon showing that: (a) The corporation ceased operation or is already dissolved; or (b) The taxpayer is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%; or (c) The taxpayer is suffering from a networth deficit computed by deducting total liabilities (net of deferred credits) from total assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well as appraisal increases in fixed assets), taken from the latest audited financial statements; or (d) The taxpayer is a compensation income earner with no other source of income and the family's gross monthly compensation income does not exceed the levels of compensation income provided for under Sec. 4.1.1 of these Regulations, and it appears that the taxpayer possesses no other leviable/distiainable assets, other than his family home; or (e) The taxpayer has been granted by the Securities and Exchange Commission (SEC) or by any competent tribunal a moratorium or suspension of payments to creditors, or otherwise declared bankrupt or insolvent. The Commissioner shall not consider any offer for compromise settlement by reason of financial incapacity unless and until the taxpayer waives in writing his privilege of the secrecy of bank deposits under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute as the authority of the Commissioner to inquire into the bank deposits of the taxpayer. For purposes of these Regulations, the term "assessment" includes the preliminary assessment notice (PAN) issued as of June 30, 2001 by the appropriate "Review Office." In fine, it does not include the post reporting notice issued by the head of the investigating unit. TAX PRINCIPLES A N D R E M E D I E S 322 SEC. 4. Prescribed Minimum Percentages of Compromise Settlement.—The compromise settlement of the internal revenue tax liabilities of taxpayers, reckoned on a per tax type assessment basis, shall be subject to the following minimum rates based on the basic assessed tax: 1. For cases of "financial incapacity" — 1.1 If taxpayer is an individual whose only source of income is from employment and whose monthly salary, if single is PI0,500 or less, or if married, whose salary together with his spouse is P21,000 per month, or less — 10 % 1.2 If taxpayer is an individual without any source of income —10 % 1.3 Where the taxpayer is under any of the following conditions: 1.3.1 Zero networth computed in accordance with Sec. 3.2(c) hereof —10 % 1.3.2 Negative networth computed in accordance with Sec. 3.2(c) hereof —10 % 1.3.3 Dissolved corporations —20% 1.3.4 Already non-operating companies for a period of: (a) three (3) years or more as of the date of application for compromise settlement —10 % (b) Less than 3 years — 20 % 1.3.5 Surplus or earnings deficit resulting to impairment in the original capital by at least 50% — 10 % 1.3.6 With moratorium/suspension of payments; declared insolvent or bankrupt —10% APPENDIX " E " REVENUE REGULATIONS NO. 7-2001 2. 323 For cases of "doubtful validity" — A i T u r u m u m compromise rate equivalent to forty percent (40%) of the basic assessed tax. The taxpayer may nevertheless request for a compromise rate lower than forty percent (40%); Provided, however, That he shall be required to submit his request in writing stating therein the reasons, legal and /or factual why he should be entitled to such lower rate; Provided, further, That for applications of compromise settlement based on doubtful validity of the assessment involving an offer lower than the minimum forty percent (40%) compromise rate, the same shall be subject to the prior approval by the NEB. The herein prescribed minimum percentages shall likewise apply in compromise settlement of assessments consisting solely of increments, i.e., surcharge, interest, etc., based on the total amount assessed. SEC. 5. Documentary Requirements. — 1. If the application for compromise is premised under Sec. 4.1.1 hereof, the taxpayer-applicant shall submit with his application: (a) a certification from his employer on his prevailing monthly salary, including allowances; and (b) a sworn statement that he has no other source of income other than from employment. 2. If the application is premised under Sec. 4.1.2 hereof, the taxpayer-applicant shall submit with his application a sworn statement that he derives no income from any source whatever. 3. If the application is premised under Sec. 4.1.3 hereof, a copy of the applicant's latest audited financial statements or audited Account Information Form filed with the BIR shall be submitted with the application. Nonetheless, for situation under Sec. 4.1.3.3 hereof, the "Notice of Dissolution" submitted to SEC or other similar or equivalent document should likewise be submitted. For situation under Sec. 4.1.3.6, a copy of the order granting the moratorium or suspension of payments or of bankruptcy or insolvency shall be submitted. 324 TAX PRINCIPLES A N D R E M E D I E S SEC. 6. Approval of Offer of Compromise. — Except for offers of compromise where the approval is delegated to the REB pursuant to the succeeding paragraph all compromise settlements within the jurisdiction of the National Office (NO) shall be approved by the NEB composed of the Commissioner and four (4) Deputy Commissioners. All decisions of the NEB, whether favorable or otherwise, shall have the concurrence of the Commissioner. Offers of compromise of assessments issued by the Regional Offices involving basic deficiency taxes of Five Hundred Thousand Pesos (P500,000) or less and for minor criminal violations discovered by the Regional and District Offices, shall be subject to the approval by the Regional Evaluation Board (REB) comprised of the following Officers of the Region: Regional Director — Chairman Members: • Assistant Regional Director • Chief, Legal Division • Chief, Assessment Division • Chief, Collection Division • Revenue District Officer having jurisdiction over the taxpayer-applicant Provided, however, That if the offer of compromise is less than the prescribed rates set forth in Sec. 4 hereof, the same shall always be subject to the approval of the NEB. If the compromise offer meets the conditions for availment set forth in Sections 3, 4 and 5 of these Regulations, the case is considered provisionally closed on the day compromise amount is fully paid and the approval of the compromise offer becomes a matter of course on the part of the approving authority referred to in this Section. SEC. 7. Report of the Commissioner on the Exercise of his Authority to Compromise to the Congressional Oversight Committee. — The Commissioner shall submit to the Congressional APPENDIX "E" 325 R E V E N U E R E G U L A T I O N S N O . 7-2001 Oversight Committee through the Chairmen of Committee on Ways and Means of both the Senate and House of Representatives, every six (6) months of each calendar year, a report on the exercise of his powers to compromise the tax liabilities of taxpayers. In this regard, the REB should submit to the Commissioner all the necessary reports and data in due time for the latter to be able to submit the required reports to the Congressional Oversight Committee. SEC 8. Repealing Clause. — RR No. 6-2000 and all other issuances implementing Section 204 of the Tax Code of 1997 or parts thereof which are contrary to or inconsistent with the provisions of these Regulations are hereby amended, modified or repealed accordingly. SEC. 9. Effectivity. — The provisions of these Regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation. (Sgd.) JOSE ISIDRO N. CAMACHO Secretary of Finance Recommending Approval: (Sgd.) RENE G. BANEZ Commissioner of Internal Revenue APPENDIX "F" REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Quezon City May 19, 2004 REVENUE REGULATIONS NO. 8-2004 SUBJECT: Revenue Regulations Implementing Sections 7(c), 204(A) and 290 of the National Internal Revenue Code of 1997 on Compromise Settlement of Internal Revenue Tax Liabilities Superseding Revenue Regulations Nos. 7-2001 and 30-2002. TO : All Internal Revenue Officers and Others Concerned. SECTION 1. SCOPE AND OBJECTIVES. — Pursuant to Section 244 of the National Internal Revenue Code of 1997 (Code), these Regulations are hereby promulgated for the purpose of implementing Sections 7(c), 204(A) and 290 of the same Code, superseding Revenue Regulations (RR) Nos. 7-2001 and 30-2002 and giving an authority to the Commissioner of Internal Revenue to compromise the payment of internal revenue tax liabilities of certain taxpayers with outstanding receivable accounts and disputed assessments with the Bureau of Internal Revenue and the Courts. SECTION 2. BASIS FOR ACCEPTANCE OF COMPROMISE SETTLEMENT. — Sec. 3 of Revenue Regulations No. 302002 is hereby amended to read as follows: 326 APPENDIX "F" REVENUE REGULATIONS NO. 8-2004 327 "SEC. 3. BASIS FOR ACCEPTANCE OF COMPROMISE SETTLEMENT. — The Commissioner may compromise the payment of any internal revenue tax on the following grounds: 1. Doubtful validity of the assessment. — x x x (a) xxx (b) xxx (c) xxx (d) xxx (e) xxx (0 xxx (g) xxx (h) The assessment was issued within the prescriptive period for assessment as extended by the taxpayer's execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic; or (i) The assessment is based on an issue where a court of competent jurisdiction made an adverse decision against the Bureau, but for which the Supreme Court has not decided upon with finality. 2. xxx SECTION 3. REPEALING CLAUSE. — These Regulations supersede Revenue Regulations Nos. 7-2001 and 30-2002. All other issuances inconsistent with the provisions of these Regulations are hereby amended, modified or repealed accordingly. SECTION 4. EFFECTIViTY. — The provisions of these Regulations shall take effect after fifteen (15) days following publication in any newspaper of general circulation except for cases the compromise of which have been confirmed by the 328 TAX PRINCIPLES A N D R E M E D I E S Secretary of Finance in which case these Regulations shall take effect immediately upon publication. (Original Signed) JUANITA D. AMATONG Secretary of Finance Recommending Approval: (Original Signed) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue APPENDIX "G" AN ACT CREATING THE COURT OF TAX APPEALS (R.A. No. 1125, as amended by R.A. No. 3457) SECTION 1. Court; Judges; qualifications; salary; tenure. — There is hereby created a Court of Tax Appeals which shall consist of a Presiding Judge and two Associate Judges, each of whom shall be appointed by the President, with the consent of the Commission on Appointments.' The Presiding Judge shall be so designated in the commission issued to him by the President, and the Associate Judges shall have precedence according to the date of their commissions. The Presiding Judge shall receive a compensation of twenty thousand pesos per annum, and shall have the same qualifications, rank, category and privileges as the Presiding Judge of the Court of Industrial Relations. The Associate Judges shall each receive a compensation of nineteen thousand pesos per annum and shall have the same qualifications, rank, category and privileges as a member of the Court of Industrial Relations. The Presiding Judge and the Associate Judges shall be appointed to hold office during good behavior, until they reach the age of seventy, or become incapacitated to discharge the duties of their office, unless sooner removed for the same causes and in the same manner provided by law for members of the judiciary of appellate rank. 2 , SEC. 2. Quorum; temporary vacancy. — Any two Judges of the Court of Tax Appeals shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate 'Now appointed by the President from a list of nominees submitted by the Judicial and Bar Council (JBC). T h e compensation has been increased in accordance with B.P. No. 129, The Judicial Reorganization Act of 1980. 'Replaced by the National Labor Relations Commission (NLRC). 329 330 TAX PRINCIPLES A N D R E M E D I E S any decision thereof. In case of temporary vacancy disability or disqualification, for any reason, of any of the judges of the said Court, the President may, upon the request of the Presiding Judge, designate any Judge of First Instance to act in his place; and such Judge of First Instance shall be duly qualified to act as such. 4 SEC. 3. Clerk of court; appointment; qualifications; compensation. — The Court ofTax Appeals shall have a Clerk of Court who shall be appointed by the President with the consent of the Commission on Appointments. No person shall be appointed Clerk of Court unless he is duly authorized to practice law in the Philippines. The Clerk of Court shall exercise the same powers and perform the same duties in regard to all matters within the court's jurisdiction, as are exercised and performed by clerks of Court of First Instance, in so far as the same may be applicable; and in the exercise of those powers and the performance of those duties, the clerk shall be under the direction of the said court. The Clerk of Court shall receive a compensation of six thousand pesos per annum. 5 SEC. 4. Other subordinate employees. — The Court of Tax Appeals shall appoint, in accordance with the Civil Service Law, rules and regulations, the necessary personnel to assist it in the performance of its duties. The said Court shall fix their salaries and prescribe their duties. SEC. 5. Disqualifications. — No judge or other officer or employee of the Court of Tax Appeals shall intervene, directly or indirectly, in the management or control of any private enterprise which in any way may be affected by the functions of the Court. Judges of the said Court shall be disqualified from sitting in any case on the same ground provided under Rule One hundred twenty-six of the Rules of Court for the disqualification of judicial officers. No person who has once served in the Court in a permanent capacity, either as Presiding Judge or as Associate Judge thereof, shall be qualified to practice as counsel before the 6 ' N o w Regional Trial Court (RTC). »See Art. VIII, Sec. 8(5), 1987 Philippine Constitution. ' N o w Rule 137. APPENDIX " G " AN ACT CREATING THE COURT OF TAX APPEALS 331 Court for a period of one year from his separation therefrom for any cause. SEC. 6. Place of office. — The Court of Tax Appeals shall have its office in the City of Manila, and shall hold hearings at such time and place as it may, by order in writing, designate with a view to assuring a reasonable opportunity for taxpayers to appear with as little inconvenience and expense as practicable. SEC. 7. Jurisdiction. — The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided — (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue; (2) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges; seizure, detention or release of property affected; fines, forfeitures or other penalties imposed in relation thereto; or other matters arising under the Customs Law or other law or part of law administered by the Bureau of Customs; and (3) Decisions of provincial or city Board of Assessment Appeals in cases involving the assessment and taxation of real property or other matters arising under the Assessment Law, including rules and regulations relative thereto. SEC. 8. Court of record; seal; proceedings. — The Court of Tax Appeals shall be a court of record and shall have a seal which shall be judicially noticed. It shall prescribe the form of its writs and other processes. It shall have the power to promulgate rules and regulations for the conduct of the business of the Court, and as may be needful for the uniformity of decisions within its jurisdiction as conferred by law, but such proceedings shall not be governed strictly by technical rules of evidence. SEC. 9. Fees. - The Court shall fix reasonable fees for the filing of an appeal, for certified copies of any transcript of record, 332 TAX PRINCIPLES A N D R E M E D I E S entry or other document, and for other authorized services rendered by the Court or its personnel. SEC. 10. Power to administer oaths, issue subpoena, punish for contempt. — The Court shall have the power to administer oaths, receive evidence, summon witnesses by subpoena and require the production of papers or documents by subpoena duces tecum, subject in all respects to the same restriction and qualifications as applied in judicial proceedings of a similar nature. The Court shall, in accordance with Rule Sixty-four of the Rules of Court, have the power to punish for contempt for the same causes, under the same procedure and with the same penalties provided therein. 7 SEC. 11. Who may appeal; effect of appeal. — Any person, association or corporation adversely affected by a decision or ruling of the Commissioner of Internal Revenue, or the Commissioner of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling. No appeal taken by the Court of Appeals from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the Bureau of Internal Revenue or the Commissioner of Customs 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. SEC. 12. Taking of evidence. — The Court may, upon proper motion or on its initiative, direct that a case, or any issue thereof, be assigned to one of its members for the taking of evidence, when the determination of a question of fact arises upon motion ' N o w Rule 7 1 . APPENDIX "G" AN ACT CREATING T H E COURT OF TAX APPEALS 333 or otherwise in any stage of the proceedings, or when the taking of an account is necessary, or when the determination of an issue of fact requires the examination of a long account. The hearing before such member shall proceed in all respects as though the same had been made before the Court. Upon completion of such hearing before such member, he shall promptly submit to the Court his report in writing, stating his findings and conclusions; and thereafter, the Court shall render its decision on the case adopting, modifying, or rejecting the report in whole or in part, as the case may be, or the Court may in its discretion recommit it with instructions, or receive further evidence. SEC. 13. Decision. — Cases brought before the Court shall be decided within thirty days after the submission thereof for decision. Decisions of the Court shall be in writing, stating clearly and distinctly the facts and the law on which they are based, and signed by the judges concurring therein. The Court shall provide for the publication of its decisions in the Official Gazette in such form and manner as may be best adapted for public information and use. As in the case of judicial officers under Section one hundred twenty-nine of the Administrative Code, the judges of the Court shall each certify on their applications for leave, and upon salary vouchers presented by them for payment, or upon the payrolls under which their salaries are paid, that all proceedings, petitions and motions which have been submitted to the Court for determination or decision by the Court on or before the date of making the certificate, and no leave shall be granted and no salary shall be paid without such certificate. SEC. 14. Effect of decision that tax is barred by statute of limitations. — If the assessment or collection of any tax is barred by any statute of limitations, the decision of the Court to that effect shall be considered as its decision that there is no deficiency in respect of such tax. SEC. 15. Publicity of proceedings and publication of decisions. — All decisions of, and all evidence received by the 334 TAX PRINCIPLES A N D R E M E D I E S Court and its divisions, including transcript of stenographic reports of the hearings, shall be public records open to the inspection of the public, except that after the decision of the Court in any proceeding has become final the Court may, upon motion of the taxpayer or the Government, permit the withdrawal, by the party entitled thereto of originals of books, documents and records, and of models, diagrams, and other exhibits, introduced in evidence before the Court or any division; or the Court may, on its own motion, make such other disposition thereof as it deems advisable. The Court shall provide for the publication of its decisions in the Official Gazette in such form and manner as may be best adapted for public information and use. SEC. 16. Damages. — Where an appeal is found to be frivolous, or that proceedings have been instituted merely for delay, the Court may assess damage against the appellant in an amount not exceeding five hundred pesos, which shall be collected in the same manner as fines or other penalties authorized by law. SEC. 17. Violation of Penal Law. — When in the performance of its functions, it should appear to the Court that a crime or other violation of law has been committed, or that there are reasonable grounds to believe that any official, employee or private person is guilty of any crime, offense or other violation, the Court shall refer the matter to the proper department, bureau or office for investigation or the institution of such criminal or administrative action as the facts and circumstances of the case may warrant. SEC. 18. Appeal to the Supreme Court." - No judicial proceedings against the Government involving matters arising under the National Internal Revenue Code, the Customs Law or the Assessment Law shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the Court of Tax Appeals and disposed of in accordance with the provisions of this Act. Any party adversely affected by any ruling, order or decision of the Court of Tax Appeals may appeal therefrom T h e appeal shall now be taken by way of Petition for Review with the Court of Appeals under Rule 43, Rules of Court. APPENDIX " G " AN ACT CREATING THE COURT OF TAX APPEALS 335 to the Supreme Court by filing with the said Court a notice of appeal and with the Supreme Court a petition for review, within thirty days from the date he receives notice of said ruling, order or decision. If, within the aforesaid period, he fails to perfect his appeal, the said ruling, order or decision shall become final and conclusive upon him. If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision, may file with said Court a notice of his intention to appeal to the Supreme Court, and if, within thirty days from the filing of said notice of intention to appeal, no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this section. If any ruling, order or decision of the Court of Tax Appeals be adverse to the Government, the Commissioner of Internal Revenue, the Commissioner of Customs, or the provincial or city Board of Assessment Appeals concerned may likewise file an appeal therefrom to the Supreme Court in the manner and within the same period as above prescribed for private parties. Any proceedings directly affecting any ruling, order or decision of the Court of Tax Appeals shall have preference over all other civil proceedings except habeas corpus, workmen's compensation and election cases. SEC. 19. Review by certiorari. — Any ruling, order or decision of the Court of Tax Appeals may likewise be reviewed by the Supreme Court upon a writ of certiorari in proper cases. Proceedings in the Supreme Court upon a writ of certiorari or a petition for review, as the case may be, shall be in accordance with the provisions of the Rules of Court or such rules as the Supreme Court may prescribe. SEC. 20. Appropriation. — The sum of seventy thousand pesos is hereby appropriated out of any funds in the National Treasury not otherwise appropriated for the salaries and the purchase of supplies and equipment necessary for the operation 336 TAX PRINCIPLES A N D R E M E D I E S of the Court of Tax Appeals herein established during the current fiscal year. Thereafter the funds necessary for the operation of the Court shall be included in the regular Appropriations Act. SEC. 21. General provisions. — Whenever the words "Board of Tax Appeals" are used in Commonwealth Act Numbered Four hundred and seventy, otherwise known as the Assessment Law, or in other laws, rules and regulations relative thereto, the same shall read "Board of Assessment Appeals." The Central Board of Tax Appeals created under Section two of Commonwealth Act Numbered Five hundred and thirty is hereby abolished. Executive Order Numbered Four hundred and One-A, dated the fifth of January, nineteen hundred and fifty-one, is repealed and the Board of Tax Appeals created therein abolished: Provided, however, That all cases heretofore decided by the said Board of Tax Appeals and thence appealed to the Supreme Court pursuant to Executive Order Numbered Four hundred One-A shall be decided by the Supreme Court on the merits to all intents and purposes as if said Executive Order had been duly enacted by the Congress: And, Provided, further, That all cases now pending in the said Board of Tax Appeals shall be transferred to the Court of Tax Appeals and shall be heard and decided by the latter to all intents and purposes as if they had been originally filed therein. Any law or part of law, or any executive order, rule or regulation or part thereof, inconsistent with the provisions of this Act is hereby repealed. SEC. 22. Pending cases to be remanded to Court. - All cases involving disputed assessments of internal revenue taxes or customs duties pending determination before the Court of First Instance shall be certified and remanded by the respective clerk of court to the Court of Tax Appeals for final disposition thereof. SEC. 23. Separability Clause. — If any clause, sentence, paragraph or part of this Act shall be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair or invalidate the remainder of this Act, but shall be APPENDIX " G " AN ACT CREATING THE COURT OF TAX APPEALS confined in its operations to the clause, sentence, paragraph part thereof directly involved in the controversy SEC. 24. This Act shall take effect upon its approval. APPROVED: June 16,1954. — oOo — APPENDIX "H REPUBLIC OF THE PHILIPPINES CONGRESS OF THE PHILIPPINES Metro Manila Twelfth Congress Third Regular Session Begun and held in Metro Manila, on Monday, the twenty-eighth day of July, two thousand and three. — 0 O 0 — REPUBLIC ACT NO. 9282 AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA), ELEVATING ITS RANK TO THE LEVEL OF A COLLEGIATE COURT WITH SPECIAL JURISDICTION AND ENLARGING ITS MEMBERSHIP, AMENDING FOR THE PURPOSE CERTAIN SECTIONS OF REPUBLIC ACT NO. 1125, AS AMENDED, OTHERWISE KNOWN AS THE LAW CREATING THE COURT OF TAX APPEALS, AND FOR OTHER PURPOSES Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled: SECTION 1. Section 1 of Republic Act No. 1125, as amended is hereby further amended to read as follows: "SECTION 1. Court; Justices; Qualifications; Salary; Tenure. — There is hereby created a Court of Tax Appeals (CTA) which shall be of the same level as the Court of Appeals, 338 APPENDIX "H" REPUBLIC ACT NO. 9282 339 possessing all the inherent powers of a Court of Justice, and shall consist of a Presiding Justice and five (5) Associate Justices. The incumbent Presiding Judge and Associate Judges shall continue in office and bear the new titles of Presiding Justice and Associate Justices. The Presiding Justice and the most Senior Associate Justice shall serve as chairmen of the two (2) Divisions. The additional three (3) Justices and succeeding members of the Court shall be appointed by the President upon nomination by the Judicial and Bar Council. The Presiding Justice shall be so designated in his appointment, and the Associate Justices shall have precedence according to the date of their respective appointments, or when the appointments of two (2) or more of them shall bear the same date, according to the order in which their appointments were issued by the President. They shall have the same qualifications, rank, category, salary, emoluments and other privileges, be subject to the same inhibitions and disqualifications, and enjoy the same retirements and other benefits as those provided for under existing laws for the Presiding Justice and Associate Justices of the Court of Appeals. "Whenever the salaries of the Presiding Justice and the Associate Justices of the Court of Appeals are increased, such increases in salaries shall be deemed correspondingly extended to and enjoyed by the Presiding Justice and Associate Justices of the CTA. "The Presiding Justice and Associate Justices shall hold office during good behavior, until they reach the age of seventy (70), or become incapacitated to discharge the duties of their office, unless sooner removed for the same causes and in the same manner provided by law for members of the judiciary of equivalent rank." SEC. 2. Section 2 of the same Act is hereby amended to read as follows: "SEC. 2. Sitting En Banc or Division; Quorum; Proceedings. — The CTA may sit en banc or in two (2) Divisions, each Division consisting of three (3) Justices. TAX PRINCIPLES A N D REMEDIES "Four (4) Justices shall constitute a quorum for sessions en banc and two (2) Justices for sessions of a Division: Provided, That when the required quorum cannot be constituted due to any vacancy, disqualification, inhibition, disability, or any other lawful cause, the Presiding Justice shall designate any Justice of other Divisions of the Court to sit temporarily therein. "The affirmative votes of four (4) members of the Court en banc or two (2) members of a Division, as the case may be, shall be necessary for the rendition of a decision or resolution." SEC. 3. Section 3 of the same Act is hereby amended to read follows: "SEC. 3. Clerk of Court; Division Clerks of Court; Appointment; Qualification; Compensation. — The CTA shall have a Clerk of Court and three (3) Division Clerks of Court who shall be appointed by the Supreme Court. No person shall be appointed Clerk of Court or Division Clerk of Court unless he is duly authorized to practice law in the Philippines. The Clerk of Court and Division Clerks of Court shall exercise the same powers and perform the same duties in regard to all matters within the Court's jurisdiction, as are exercised and performed by the Clerk of Court and Division Clerks of Court of the Court of Appeals, in so far as the same may be applicable or analogous; and in the exercise of those powers and the performance of those duties they shall be under the direction of the Court. The Clerk of Court and the Division Clerks of Court shall have the same rank, privileges, salary, emoluments, retirement and other benefits as those provided for the Clerk of Court and Division Clerks of Court of the Court of Appeals, respectively." SEC. 4. Section 4 of the same Act is hereby amended to read follows: "SEC. 4. Other Subordinate Employees. — The Supreme Court shall appoint all officials and employees of the CTA, APPENDIX "H" REPUBLIC ACT NO. 9282 341 in accordance with the Civil Service Law. The Supreme Court shall fix their salaries and prescribe their duties." SEC. 5. Section 5 of the same Act is hereby amended to read follows: "SEC. 5. Disqualifications. — No Justice or other officer or employee of the CTA shall intervene, directly or indirectly, in the management or control of any private enterprise which in any way may be affected by the functions of the Court. Justices of the Court shall be disqualified from sitting in any case on the same grounds provided under Rule one hundred thirty-seven of the Rules of Court for the disqualification of judicial officers. No person who has once served in the Court in a permanent capacity, either as Presiding Justice or as Associate Justice thereof, shall be qualified to practice as counsel before the Court for a period of one (1) year from his retirement or resignation." SEC. 6. Section 6 of the same Act is hereby amended to read follows: "SEC. 6. Place of Office. - The CTA shall have its principal office in Metro Manila and shall hold hearings at such time and place as it may, by order in writing, designate." SEC. 7. Section 7 of the same Act is hereby amended to read follows: "Sec. 7. Jurisdiction. — The CTA shall exercise: "a. Exclusive appellate jurisdiction to review by appeal, as herein provided: "1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue; "2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, 342 TAX PRINCIPLES A N D R E M E D I E S refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; "3. Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction; "4. Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; "5. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals; "6. Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code; "7. Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Sections 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the de cision to impose or not to impose said duties. APPENDIX " H " REPUBLIC ACT NO. 9282 343 "b. Jurisdiction over cases involving criminal offenses as herein provided: "1. Exclusive original jurisdiction over all criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filling of such civil action separately from the criminal action will be recognized. "2. Exclusive appellate jurisdiction in criminal offenses: "a. Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respected territorial jurisdiction. "b. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction. "c. Jurisdiction over tax collection cases as herein provided: TAX PRINCIPLES A N D R E M E D I E S "1. Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court. "2. Exclusive appellate jurisdiction in tax collection cases: "a. Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction. "b. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the Exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction." SEC. 8. Section 10 of the same Act is hereby amended to ad as follows: "SEC. 10. Power to Administer Oaths; Issue Subpoena; Punish for Contempt. — The Court shall have the power to administer oaths, receive evidence, summon witnesses by subpoena duces tecum, subject in all respects to the same restrictions and qualifications as applied in judicial proceedings of a similar nature. The Court shall, in accordance with Rule seventy-one of the Rules of Court, have the power to punish for contempt for the same causes, under the same procedure and with the same penalties provided therein." SEC. 9. Section 11 of the same Act is hereby amended to read follows: "SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. — Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, APPENDIX "H" REPUBLIC ACT NO. 9282 345 the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)[2] herein. "Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law to act thereon. A Division of the CTA shall hear the appeal: Provided, however, That with respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 43 of the 1997 Rules of Civil Procedure with the CTA, which shall hear the case en banc. "All other cases involving rulings, orders or decisions filed with the CTA as provided for in Section 7 shall be raffled to its Divisions. A party adversely affected by a ruling, order or decision of a Division of the CTA may file a motion for reconsideration of new trial before the same Division of the CTA within fifteen (15) days from notice thereof: Provided, however, That in criminal cases, the general rule applicable in regular Courts on matters of prosecution and appeal shall likewise apply. "No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be shall suspend the payment, levy, distraint, and/ or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the 346 TAX PRINCIPLES A N D R E M E D I E S aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the Court 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. "In criminal and collection cases covered respectively by Section 7(b) and (c) of this Act, the Government may directly file the said cases with the CTA covering amounts within its exclusive and original jurisdiction." SEC. 10. Section 13 of the same Act is hereby amended to read as follows: "SEC. 13. Decision, Maximum Period for Termination of Cases. — Cases brought before the Court shall be decided in accordance with Section 15, paragraph (1), Article VIII (Judicial Department) of the 1987 Constitution. Decisions of the Court shall be in writing, stating clearly and distinctly the facts and the law on which they are based, and signed by the Justices concurring therein. The Court shall provide for the publication of its decision in the Official Gazette in such form and manner as may best be adopted for public information and use. "The Justices of the Court shall each certify on their applications for leave, and upon salary vouchers presented by them for payment, or upon the payrolls under which their salaries are paid, that all proceedings, petitions and motions which have been submitted to the Court for determination or decision for a period required by the law or the Constitution, as the case may be, have been determined or decided by the Court on or before the date of making the certificate, and no leave shall be granted and no salary shall be paid without such certificate." SEC. 11. Section 18 of the same Act is hereby amended as follows: "SEC. 18. Appeal to the Court of Tax Appeals En Banc. — No civil proceeding involving matter arising under the APPENDIX "H" REPUBLIC ACT NO. 9282 347 National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the provisions of this Act. "A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc." "SEC. 19. Review by Certiorari. — A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure." SEC. 13. Distraint of Personal Property and/or Levy on Real Property. — Upon the issuance of any ruling, order or decision by the CTA favorable to the national government, the CTA shall issue an order authorizing the Bureau of Internal Revenue, through the Commissioner to seize and distraint any goods, chattels, or effects, and the personal property including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property and /or levy the real property of such persons in sufficient quantity to satisfy the tax or charge together with any increment thereto incident to delinquency. This remedy shall not be exclusive and shall not preclude the Court from availing of other means under the Rujes of Court. SEC. 14. Retention of Personnel; Security of Tenure; Upgrading of Positions and Salaries. — All existing permanent personnel of the CTA shall not be adversely affected by this Act. They shall continue in office and shall not be removed or separated from the service except for cause as provided for by existing laws. Further, the present positions and salaries of personnel shall be upgraded to the level of their counterparts in the Court of Appeals. SEC. 15. Transitory Provisions. — In consonance with the above provision, the incumbent Presiding Judge and Associate Judges shall comprise a Division pending the constitution of the entire Court. 348 TAX PRINCIPLES A N D R E M E D I E S SEC. 16. Appropriations. — The amount necessary to cany out the provisions of this Act shall be included in the General Appropriations Act of the year following its enactment into law and thereafter. SEC. 17. Repealing Clause. — All laws, executive orders, executive issuances or letter of instructions, or any part thereof, inconsistent with or contrary to the provisions of this Act are hereby deemed repealed, amended or modified accordingly. SEC. 18. Separability Clause. — If for any reason, any section or provision of this Act shall be declared unconstitutional or invalid, the other parts thereof not affected thereby shall remain valid. SEC. 19. Effectivity Clause. - This Act shall take effect after fifteen (15) days following its publication in at least (2) newspapers of general circulation. Approved, (Sgd.) JOSE DE VENECIA, JR. (Sgd.) FRANKLIN M. DRILON Speaker of the House President of the Senate of the Representatives This Act which is a consolidation of S. No. 2712 and H. No. 6673 was finally passed by the Senate and the House of Representatives on December 8, 2003 and February 2, 2004, respectively. (Sgd.) ROBERTO P. NAZARENO Secretary General House of Representatives (Sgd.) OSCAR G. YABES Secretary of the Senate Approved: MARCH 30, 2004 (Sgd.) GLORIA MACAPAGAL-ARROYO President of the Philippines APPENDIX "I" 2011 BAR COVERAGE FOR TAXATION I. General Principles of Taxation A. Definition and Concept of Taxation B. Nature of Taxation C. Characteristics of Taxation D. Power of Taxation Compared With Other Powers E. F. 1. Police Power 2. Power of Eminent Domain Purpose of Taxation 1. Re venue-raising 2. Non-revenue/special or regulatory Principles of Sound Tax System 1. G. Fiscal Adequacy 2. Administrative Feasibility 3. Theoretical Justice Theory and Basis of Taxation 1. Lifeblood Theory 2. Necessity Theory 3. Benefits-Protection Theory (Symbiotic Relationship) 4. Jurisdiction over subject and objects 349 TAX PRINCIPLES A N D R E M E D I E S Doctrines in Taxation 1. Prospectivity of tax laws 2. Imprescriptibility 3. Double taxation a. 4. Broad sense c. Constitutionality of double taxation d. Modes of eliminating double taxation Escape from taxation a. 5. Strict sense b. Shifting of tax burden 1) Ways of shifting the tax burden 2) Taxes that can be shifted 3) Meaning of impact and incidence of taxation b. Tax avoidance c. Tax evasion Exemption from taxation a. Meaning of exemption from taxation b. Nature of tax exemption c. Kinds of tax exemption 1) 2) 3) Express Implied Contractual d. Rationale/grounds for exemption e. Revocation of tax exemption 6. Compensation and Set-off 7. Compromise 8. Tax amnesty a. Definition b. Distinguished from tax exemption APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 9. Construction and Interpretation of: a. b. Tax laws 1) General Rule 2) Exception Tax exemption and exclusion 1) General Rule 2) Exception c. Tax rules and regulations d. Penal provisions of tax laws e. Non-retroactive application to taxpayers 1) 1) I. 351 General rule only Exceptions Scope and Limitation of Taxation 1. Inherent Limitations a. Public Purpose b. Inherently Legislative 1) 2) General Rule Exceptions a) c. Delegation to local governments b) Delegation to the President c) Delegation to administrative agencies Territorial 1) Situs of Taxation a) Meaning b) Situs of Income Tax 1) From sources within the Philippines 2) From sources without the Philippines TAX PRINCIPLES A N D R E M E D I E S 3) c) Income partly within and partly without the Philippines Situs of Property Taxes (1) Taxes on Real Property (2) Taxes on Personal Property d) Situs of Excise Tax (1) Estate Tax (2) e) Donor's Tax Situs of Business Tax (1) Sale of Real Property (2) Sale of Personal Property (3) VAT d. International Comity e. Exemption of Government Entities, Agencies, and Instrumentalities Constitutional Limitations a. Provisions Directly Affecting Taxation 1) Prohibition against imprisonment for non-payment of poll tax 2) Uniformity and equality of taxation 3) Grant by Congress of authority to the President to impose tariff rates 4) Prohibition against taxation of religious, charitable entities, and educational entities 5) Prohibition against taxation of nonstock, non-profit institutions 6) Majority vote of Congress for grant of tax exemption 7) Prohibition on use of tax levied for special purpose APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 8) President's veto power on appropriation, revenue, tariff bills 9) Non-impairment of jurisdiction of the Supreme Court 10) Grant of power to the local government units to create its own sources of revenue 11) Flexible tariff clause 12) Exemption from real property taxes 13) No appropriation or use of public money for religious purposes b. J. K. Provisions Indirectly Affecting Taxation 1) Due process 2) Equal protection 3) Religious freedom 4) Non-impairment of obligations of contracts Stages of Taxation 1. Levy 2. Assessment and Collection 3. Payment 4. Refund Definition, Nature, and Characteristics of Taxes L. Requisites of a valid tax M. Tax as distinguished from other forms of exactions N. 353 1. Tariff 2. Toll 3. License fee 4. Special assessment 5. Debt Kinds of Taxes 354 TAX PRINCIPLES A N D R E M E D I E S 1. 2. 3. 4. 5. 6. As to object a. Personal, capitation, or poll tax b. Property tax c. Privilege tax As to burden or incidence a. Direct b. Indirect As to tax rates a. Specific b. Ad valorem c. Mixed As to purposes a. General or fiscal b. Special, regulatory, or sumptuary As to scope or authority to impose a. National - internal revenue taxes b. Local - real property tax, municipal tax As to graduation a. II. Progressive b. Regressive c. Proportionate National Internal Revenue Code of 1997 as amended (NIRC) A. Income Taxation 1. 2. Income Tax Systems a. Global Tax System b. Schedular Tax System c. Semi-schedular or semi-global tax system Features of the Philippine Income Tax Law a. Direct tax b. Progressive •APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 3. c. Comprehensive d. Semi-schedular or semi-global tax system Criteria in Imposing Philippine Income Tax a. Citizenship Principle b. Residence Principle c. Source Principle 4. Types of Philippine Income Tax 5. Taxable Period 6. 355 a. Calendar Period b. Fiscal Period c. Short Period Kinds of Taxpayers a. Individual Taxpayers 1) 2) Citizens a) Resident citizens b) Non-resident citizens Aliens a) Resident aliens b) Non-resident aliens (1) Engaged in trade or business (2) Not engaged in trade or business 3) Special Class of Individual Employees a) b. Minimum wage earner Corporations 1) Domestic corporations 2) Foreign corporations (1) Resident foreign corporations c. (2) Non-resident foreign corporations Partnerships TAX PRINCIPLES A N D R E M E D I E S d. 7. 8. General Professional Partnerships e. Estates and Trusts f. Co-ownerships Income Taxation a. Definition b. Nature c. General principles Income a. Definition b. Nature c. When income is taxable d. 1) Existence of income 2) Realization of income a) Tests of Realization b) Actual vis-a-vis Constructive receipt 3) Recognition of income 4) Methods of accounting a) Cash method vis-a-vis Accrual method b) Installment payment vis-a-vis Deferred payment vis-a-vis Percentage completion (in long term contracts) Tests in detenruning whether income is earned for tax purposes 1) Realization test 2) Claim of right doctrine or Doctrine of ownership, command, or control 3) Economic benefit test. Doctrine of proprietary interest 4) Severance test 357 APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 9. Gross Income a. Definition b. Concept of income from whatever source derived c. Gross Income vis-a-vis Net Income vis-a-vis Taxable Income d. Classification of Income as to Source d. 1) Gross income and taxable income from sources within the Philippines 2) Gross income and taxable income from sources without the Philippines 3) Income partly within or partly without the Philippines Sources of income subject to tax 1) 2) Compensation Income Fringe Benefits a) Special treatment of fringe benefits b) Definition c) Taxable and non-taxable fringe benefits 3) Professional Income 4) Income from Business 5) Income from Dealings in Property a) Types of Properties (1) Ordinary assets (2) Capital assets b) Types of Gains from dealings in property (1) Ordinary income Capital gain (2) Actual gain sumed gain vis-a-vis vis-a-vis Pre- TAX PRINCIPLES A N D R E M E D I E S (3) Long term capital gain vis-avis Short term capital gain (4) Net capital gain, Net capital loss (5) Computation of the amount of gain or loss (a) Cost or basis of the property sold (b) Cost or basis of the property exchanged in corporate readjustment [1] (c) Merger [2] Consolidation [3] Transfer to a controlled corporation (tax-free exchanges) Recognition of gain or loss in exchange of property [1] General rule [a] Where no gain or loss shall be recognized [2] Exceptions [a] Meaning of merger, consolidation, control securities [b] Transfer of a controlled corporation (6) Income tax treatment of capital loss APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 359 (a) Capital loss limitation rule (applicable to both corporations and individuals) (b) Net loss carry-over rule (applicable only to individuals) (7) Dealings in real property situated in the Philippines (8) Dealings in shares of stock of Philippine corporations (a) Shares listed and traded in the stock exchange (b) Shares not listed and traded in the stock exchange (9) Sale of principal residence 6) Passive Investment Income a) Interest Income b) Dividend Income (1) Cash dividend (2) Stock dividend (3) Property dividend (4) Liquidating dividend c) Royalty Income d) Rental Income (1) Lease of personal property (2) Lease of real property (3) Tax treatment of (a) Leasehold improvements by lessee (b) VAT added to rental/ paid by the lessee 360 TAX PRINCIPLES A N D R E M E D I E S (c) 7) Annuities, Proceeds from life insurance or other types of insurance 8) Prizes and awards 9) Pensions, retirement benefit, or separation pay 10) e. Advance rental/long term lease Income from any source whatever a) Forgiveness of indebtedness b) Recovery of accounts previously written off c) Receipt of tax refunds or credit d) Income from any source whatever Source rules in detennining income from within and without 1) Interests 2) Dividends 3) Services 4) Rentals 5) Royalties 6) Sale of real property 7) Sale of personal property 8) Shares of stock of domestic corporation f. Situs of Income Taxation (See page 2 under Inherent Limitations, Territorial) g. Exclusions from Gross Income 1) Rationale for the exclusions 2) Taxpayers who may avail of the exclusions 3) Exclusions distinguished from deductions and tax credit 4) Under the Constitution APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION a) 5) Income derived by the government or its political subdivisions from the exercise of any essential governmental function Under the Tax Code a) h. 361 Proceeds of life insurance policies b) Return of premium paid c) Amounts received under life insurance, endowment or annuity contracts d) Value of property acquired by gift, bequest, devise or descent e) Amount received through accident or health insurance f) Income exempt under tax treaty g) Retirement benefits, pensions, gratuities, etc. h) Winnings, prizes, and awards, including those in sports competition 6) Under a Tax Treaty 7) Under Special Laws Deductions from Gross Income 1) 2) General rules a) Deductions must be paid or incurred in connection with the taxpayer's trade, business or profession b) Deductions must be supported by adequate receipts or invoices (except standard deduction) Return of capital (cost of sales or services) 362 TAX PRINCIPLES A N D R E M E D I E S 3) a) Sale of inventory of goods by manufacturers and dealers of properties b) Sale of stock in trade by a real estate dealer and dealer in securities c) Sale of services Itemized deductions a) Expenses (1) Requisites for deductibility (a) Nature: Ordinary and necessary (b) Paid and incurred during taxable year (2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid (3) Traveling/Transportation expenses (4) Cost of materials (5) Rentals and/or other payments for use or possession of property (6) Repairs and maintenance (7) Expenses under lease agreements (8) Expenses for professionals (9) Entertainment expenses (10) Political campaign expenses (11) Training expenses APPENDIX "I" 2011 BAR COVERAGE FOR TAXATION b) 363 Interest (1) Requisites for deductibility (2) Non-deductible interest expense (3) Interest subject to special rules (a) Interest paid in advance (b) Interest periodically amortized (c) Interest expense incurred to acquire property for use in trade/business/ profession c) Taxes (1) Requisites for deductibility (2) Non-deductible taxes (3) Treatments of surcharges /interests /fines for delinquency (4) Treatment of special assessment (5) Tax credit vis-a-vis deduction d) Losses (1) Requisites for deductibility (2) Other types of losses (a) Capital losses (b) Securities becoming worthless (c) Losses on wash sales of stocks or securities (d) Wagering losses e) (e) NOLCO Bad debts (1) Requisites for deductibility 364 TAX PRINCIPLES A N D R E M E D I E S f) g) h) Depreciation (1) Requisites for deductibility (2) Methods of computing depreciation allowance (a) Straight-line method (b) Declining-balance method (c) Sum-of-the-years-digit method Charitable and other contributions (1) Requisites for deductibility (2) Amount that may be deducted Contributions to pension trusts (1) Requisites for deductibility Optional standard deduction a) Individuals, except non-resident aliens b) Corporations, except non-resident foreign corporations Personal and additional exemption (Republic Act 9504 Minimum Wage Earner Law) a) Basic personal exemptions b) Additional exemptions for taxpayer with dependents c) Status-at-the-end-of-the-year rule Items not deductible a) General rules b) Personal, living or family expenses c) Amount paid for new buildings or for permanent improvements (capital expenditures) APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 365 d) Amount expended in restoring property (major repairs) e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested f) Interest expense, bad debts, and losses from sales of property between related parties g) Losses from sales or exchange or property h) Non-deductible interest i) Non-deductible taxes j) Non-deductible losses k) Losses from wash sales of stock or securities i. Exempt Corporations Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens a. General rule: Resident citizens - Taxable on income from all sources within and without the Philippines b. Taxation on Compensation Income 1) Inclusions a) Monetary compensation (1) Regular salary / wage (2) Separation pay / retirement benefit not otherwise exempt (3) Bonuses, 13th month pay, and other benefits not exempt (4) Director's fees b) Non-monetary compensation (1) Fringe benefit not subject tax TAX PRINCIPLES A N D R E M E D I E S 2) 3) Exclusions a) Fringe benefit subject to tax b) De minimis benefits c) 13th month pay and other benefits and payments specifically excluded from taxable compensation income Deductions a) Personal exemptions and additional exemptions b) Health and hospitalization insurance c) Taxation of compensation income of a minimum wage earner (1) Definition of Statutory Minimum Wage (2) Definition of Minimum Wage Earner (3) Income also subject to tax exemption: holiday pay, overtime pay, night shift differential, and hazard pay Taxation of Business Income/Income from Practice of Profession Taxation of Passive Income 1) Passive income subject to final tax a) 2) Interest income b) Royalties c) Dividends from domestic corporation d) Prizes and other winnings Passive income not subject to final tax Taxation of capital gains APPENDIX "V 2011 BAR COVERAGE FOR TAXATION 1) 11. 367 Income from sale of shares of stock of a Philippine corporation a) Shares traded and listed in the stock exchange b) Shares not listed and traded in the stock exchange 2) Income from the sale of real property situated in the Philippines 3) Income from the sale, exchange, or other disposition of other capital assets Taxation of Non-resident Aliens Engaged in Trade or Business a. General rules b. Cash and/or property dividends c. Capital gains 12. Exclude Non-resident Aliens Not Engaged in Trade or Business 13. Individual Taxpayers Exempt from Income Tax a. Senior citizens b. Exemptions granted under international agreements 14. Taxation of Domestic Corporations a. Tax payable 1) Regular tax 2) Minimum corporate income tax (MCIT) a) Imposition of MCIT b) Carry forward of excess minimum tax c) Relief from the MCIT under certain conditions d) Corporations exempt from the MCIT TAX PRINCIPLES A N D R E M E D I E S e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system Allowable deductions 1) Itemized deductions 2) Optional standard deduction Taxation of Passive Income 1) 2) Passive income subject to tax a) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties b) Capital gains from the sale of shares of stock not traded in the stock exchange c) Income derived under the expanded foreign currency deposit system d) Intercorporate dividends e) Capital gains realized from the sale, exchange, or disposition of lands and /or buildings Passive income not subject to tax Taxation of Capital Gains 1) Income from sale of shares of stock 2) Income from the sale of real property situated in the Philippine 3) Income from the sale, exchange, or other disposition of other capital assets Tax on proprietary educational institutions and hospitals APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION f. 369 Tax on government-owned or controlled corporations, agencies or instrumentalities 15. Taxation of Resident Foreign Corporations a. General rule b. With respect to their income from sources within the Philippines c. Minimum corporate income tax d. Tax on certain income (1) Interest from deposits and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royalties (2) Income derived under the expanded foreign currency deposit system (3) Capital gain from sale of shares of stock not traded in the stock exchange (4) Intercorporate dividends e. Exclude: (1) International carrier (2) Offshore banking units (3) Branch profits remittances (4) Regional or area headquarters and Regional operating headquarters of multinational companies 16. Taxation of Non-resident Foreign Corporations a. General rule b. Tax on certain income c. (1) Interest on foreign loans (2) Intercorporate dividends (3) Capital gains from sale of shares of stock not traded in the stock exchange Exclude: TAX PRINCIPLES A N D R E M E D I E S 370 (1) Non-resident cinematographic film owner, lessor or distributor (2) Non-resident owner or lessor of vessels chartered by Philippine nationals (3) Non-resident owner or lessor of aircraft machineries and other equipment 17. Improperly Accumulated Earnings of Corporations 18. Exemption from tax on corporations 19. Taxation of Partnerships 20. Taxation of General Professional Partnerships 21. Taxation on Estates and Trusts a) Application b) Exception c) Determination of tax 1) Consolidation of income of two or more trusts 2) Taxable income 3) Revocable trusts 4) Income for benefit of grantor 5) Meaning of "in the discretion of the grantor" 22. Withholding tax a. Concept b. Kinds c. 1) Withholding of final tax on certain incomes 2) Withholding of creditable tax at source Withholding on wages 1) Requirement for withholding 2) Tax paid by recipient 3) Refunds or credits APPENDIX "I" 2011 BAR COVERAGE FOR TAXATION d. e. 4) Year-end adjustment 5) Liability for tax Withholding of VAT Filing of return and payment of taxes withheld 1) Return and payment in case of government employees 2) Statements and returns f. Final withholding tax at source g. Creditable withholding tax h. B. 371 1) Expanded withholding tax 2) Withholding tax on compensation Fringe benefit tax Estate Tax 1. Basic principles 2. Definition 3. Nature 4. Purpose or object 5. Time and transfer of properties 6. Classification of decedent 7. Gross estate vis-a-vis Net estate 8. Determination of gross estate and net estate 9. Composition of gross estate 10. Items to be included in gross estate 11. Deductions from estate 12. Exclusions from estate 13. Tax credit for estate taxes paid in a foreign country 14. 15. Exemption of certain acquisitions and transmissions Filing of notice of death 16. Estate tax return 372 TAX PRINCIPLES A N D R E M E D I E S C. Donor's Tax 1. Definition 3. Nature 4. Purpose or object 5. Requisites of valid donation 6. Transfers which may be constituted as donation a. Sale/exchange/transfer of insufficient consideration property b. Condonation/ remission of debt for 7. Transfer for less than adequate and full consideration 8. Classification of donor 9. D. Basic principles 2. Determination of gross gift 10. Composition of gross gift 11. Valuation of gifts made in property 12. Tax credit for donor's taxes paid in a foreign country 13. Exemptions of gifts from donor's tax 14. Person liable 15. Tax basis Value-Added Tax (VAT) 1. Concept 2. Characteristics Impact of tax 3. 4. 5. 6. 7. 8. Incidence of tax Tax credit method Destination principle Persons liable VAT on sale of goods or properties a. Requisites of taxability of sale of goods or properties APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 9. 10. 373 Zero-rated sales of goods or properties, and effectively zero rated sales of goods or properties Transactions deemed sale a. Transfer, use or consumption not in the course of business of goods/properties originally intended for sale or use in the course of business b. Distribution or transfer to shareholders, investors or creditors c. Consignment of goods if actual sale not made within 60 days from date of consignment d. Retirement from or cessation of business with respect to inventories on hand 11. Change or cessation of status as VAT-registered person a. b. Subject to VAT 1) Change of business activity from VAT taxable status to VAT-exempt status 2) Approval of request for cancellation of a registration due to reversion to exempt status 3) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years Not subject to VAT 1) Change of control of a corporation 2) Change in the trade or corporate name 3) Merger or consolidation of corporations 12. VAT on importation of goods a. Transfer of goods by tax exempt persons 13. VAT on sale of service and use or lease of properties a. Requisites for taxability 374 TAX P R I N C I P L E S A N D R E M E D I E S 14. Zero-rated sale of services 15. VAT exempt transactions a. VAT exempt transactions, in general b. Exempt transaction, enumerated 16. Input tax and output tax, defined 17. Sources of input tax a. Purchase or importation of goods b. Purchase of real properties for which a VAT has actually been paid c. Purchase of services in which VAT has actually been paid d. Transactions deemed sale e. Transitional input tax f. Presumptive input tax g. Transitional input tax credits allowed under the transitory and other provisions of the regulations 18. Persons who can avail of input tax credit 19. Determination of output/input tax; VAT payable; Excess input tax credits a. Determination of output tax b. Determination of input tax creditable c. Allocation of input tax on mixed transactions d. Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits 20. Substantiation of input tax credits 21. Refund or tax credit of excess input tax a. Who may claim for refund/apply for issuance of tax credit certificate (TCC) b. Period to file claim/apply for issuance of TCC APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 375 c. Manner of giving refund d. Destination principle or Cross-border doctrine 22. Invoicing requirements a. Invoicing requirements in general b. Invoicing and recording deemed sale transactions c. Consequences of issuing erroneous VAT invoice or VAT official receipt 23. Filing of return and payment 24. Withholding of final VAT on sales to government E. Compliance Requirements (Internal Revenue Taxes) 1. Administrative requirements a. Registration requirements 1) 2) b. 3) Transfer of registration 4) Other updates 5) Cancellation of registration 6) Power of the Commissioner to suspend the business operations of any person who fails to register Persons required to register for VAT 1) c. Annual registration fee Registration of each type of internal revenue tax Optional registration for VAT of exempt person 2) Cancellation of VAT registration 3) Changes in or cessation of status of a VAT-registered person Supplying taxpayer identification number (TIN) TAX PRINCIPLES A N D R E M E D I E S d. Issuance of receipts or sales or commercial invoices 1) 2) Printing of receipts or sales or commercial invoices Invoicing requirements for VAT a) Information contained in the VAT invoice or VAT official receipt b) Consequences of issuing erroneous VAT invoice or official receipts e. Exhibition of certificate of payment at place of business f. Continuation of business of deceased person g. Removal of business to other location Tax returns a. Income Tax Returns 1) Individual Tax Returns a) Filing of individual tax returns (1) (2) 2) Who are required to file (a) Return of husband and wife (b) Return of parent to include income of children (c) Return of persons under disability Who are not required to file b) Where to file c) When to file Corporate Returns a) Requirement for filing returns (1) Declaration of quarterly corporate income tax (a) Place of filing APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 377 (b) Time of filing (2) Final adjustment return (a) Place of filing (b) Time of filing 3) b. (4) Extension of time to file return b) Return of corporation contemplating dissolution or reorganization c) Return on capital gains realized from sale of shares of stock not traded in the local stock exchange Returns of receivers, trustees in bankruptcy or assignees Returns of general partnerships 5) Fiduciary returns Estate Tax Returns 1) Notice of death to be filed 2) Estate tax returns a) Requirements b) Time of filing and extension of time c) Place of filing Discharge of executor or administrator from personal liability a) d. Taxable year of corporations 4) 3) c. (3) Definition of deficiency Donor's Tax Returns 1) Requirements 2) Time and place of filing VAT Returns 1) In general 2) Where to file the return TAX PRINCIPLES A N D R E M E D I E S e. 3. Withholding Tax Returns 1) Quarterly returns and payments of taxes withheld 2) Annual information return Tax payments a. b. Income Taxes 1) Payment, in general; time of payment 2) Installment payment 3) Payment of capital gains tax Estate Taxes 1) Time of payment 2) Liability for payment a) 3) Extension of time a) Discharge of executor or administrator from personal liability b) Definition of deficiency Payment before delivery by executor or administrator a) Payment of tax antecedent to the transfer of shares, bonds or rights 4) Duties of certain officers and debtors 5) Restitution of tax upon satisfaction of outstanding obligations c. Donor's Taxes d. VAT 1) Time and place of payment 1) Payment of VAT 2) Where to pay the VAT Tax Remedies under the NIRC 1. Taxpayer's Remedies a. Assessment APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION 1) 2) Concept of assessment a) Requisites for valid assessment b) Constructive methods of income determination c) Inventory method for income determination d) Jeopardy assessment e) Tax delinquency and tax deficiency Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement a) 3) Power of the Commissioner to obtain information, and to summon/ examine, and take testimony of persons When assessment is made a) Prescriptive period for assessment (1) b) 4) 5) 379 False, fraudulent, and non-filing of returns Suspension of running statute of limitations of General provisions on additions to the tax a) Civil penalties b) Interest Assessment process a) Tax audit b) Notice of informal conference c) Issuance of preliminary assessment notice (PAN) TAX P R I N C I P L E S A N D R E M E D I E S 6) d) Notice of informal conference e) Issuance of preliminary assessment notice (PAN) 0 Exceptions to Issuance of PAN g) Reply to PAN h) Issuance of formal letter of demand and assessment notice /final assessment notice i) Disputed assessment j) Administrative decision on a disputed assessment Protesting assessment a) 7) Protest of assessment by taxpayer (1) Protested assessment (2) When to file a protest (3) Forms of protest b) Submission of documents within 60 days from filing of protest c) Effect of failure to protest Rendition of decision by Commissioner a) Denial of protest (1) (2) 8) CIR's actions equivalent to denial of protest (a) Filing of criminal action against taxpayer (b) Issuing a warrant of distraint and levy Inaction by Commissioner Remedies of taxpayer to action by Commissioner a) In case of denial of protest APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION b. 381 b) In case of inaction by Commissioner within 180 days from submission of documents c) Effect of failure to appeal Collection 1) Requisites 2) Prescriptive periods 3) Distraint of personal property including garnishment a) Summary remedy of distraint of personal property (1) Procedure for distraint and garnishment (2) Sale of property distrained and disposition of proceeds (a) Release of distrained property upon payment prior to sale (3) Purchase by the government at sale upon distraint (4) Report of sale to BIR (5) 4) Summary remedy of levy on real property a) 5) Constructive distraint to protect the interest of the government Advertisement and sale b) Redemption of property sold c) Final deed of purchaser Forfeiture to government for want of bidder a) Remedy of enforcement of forfeitures TAX PRINCIPLES A N D R E M E D I E S (1) Action to contest forfeiture of chattel b) Resale of real estate taken for taxes c) When property to be sold or destroyed d) Disposition of funds recovered in legal proceedings or obtained from forfeiture 6) Further distraint or levy 7) Tax lien 8) Compromise a) 9) Authority of the Commissioner to compromise and abate taxes Civil and criminal actions a) Suit to recover tax based on false or fraudulent returns Refund 1) Grounds and requisites for refund 2) Requirements for refund as laid down by cases a) Necessity of written claim for refund b) Claim containing a categorical demand for reimbursement c) Filing of administrative claim for refund and the suit/proceeding before the CTA within 2 years from date of payment regardless of any supervening cause 3) Legal basis of tax refunds 4) Statutory basis for tax refund under the Tax Code a) Scope of claims for refund APPENDIX "I" 2011 BAR COVERAGE FOR TAXATION b) c) 5) Nature of erroneously paid tax / illegally assessed collected e) Tax refund vis-a-vis tax credit f) Essential requisites for claim of refund Who may claim/apply for tax refund/ tax credit Taxpayer/withholding agents of non-resident foreign corporation 6) Prescriptive period for recovery of tax erroneously or illegally collected 7) Other consideration affecting tax refunds Government Remedies a. b. 3. Necessity of proof for claim or refund Burden of proof for claim of refund d) a) 2. 383 Administrative remedies 1) Tax lien 2) Levy and sale of real property 3) Forfeiture of real property to the government for want of bidder 4) Further distraint and levy 5) Suspension of business operation 6) Non-availability of injunction to restrain collection of tax Judicial remedies Statutory Offenses and Penalties a. Civil penalties 1) Surcharge 2) Interest a) In General TAX PRINCIPLES A N D R E M E D I E S 4. G. Deficiency interest c) Delinquency interest d) Interest on extended payment Compromise and Abatement of taxes a. Compromise b. Abatement Organization and Function of the Bureau of Internal Revenue 1. 2. III. b) Rule-making authority of the Secretary of Finance a. Authority of secretary of finance promulgate rules and regulations to b. Specific provisions to be contained in rules and regulations c. Non-retroactivity of rulings Power of the Commissioner to suspend the business operation of a taxpayer Local Government Code of 1991, as amended A. Local Government Taxation 1. Fundamental principles 2. Nature and source of taxing power 3. a. Grant of local taxing power under the Local Government Code b. Authority to prescribe penalties for tax violations c. Authority to grant local tax exemptions d. Withdrawal of exemptions e. Authority to adjust local tax rates f. Residual taxing power of local governments g. Authority to issue local tax ordinances Local taxing authority a. Power to create revenues exercised thru LGUs APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION b. 385 Procedure for approval and errecnvity of tax ordinances Scope of taxing power Specific taxing power of local government unit (LGUs) a. Taxing powers of provinces 1) Tax on transfer of real property ownership 2) Tax on business of printing and publication 3) Franchise tax 4) Tax on sand, gravel and other quarry services 5) Professional tax 6) Amusement tax 7) Tax on delivery truck/van b. Taxing powers of cities c. Taxing powers of municipalities 1) Tax on various types of businesses 2) Ceiling on business tax impossible on municipalities within Metro Manila 3) Tax on retirement on business 4) Rules on payment of business tax 5) Fees and charges for regulation & licensing 6) Situs of tax collected d. Taxing powers of barangays e. Common revenue raising powers 1) f. Service fees and charges 2) Public utility charges 3) Toll fess or charges Community tax 386 TAX PRINCIPLES A N D R E M E D I E S 6. Common limitations on the taxing powers of 7. Collection of business tax LGUs a. 8. Accrual of tax c. Time of payment d. e. Penalties on unpaid taxes, fees or charges Authority of treasurer in collection and inspection of books Taxpayer's remedies a. 9. Tax period and manner of payment b. Periods of assessment and collection of local taxes, fees or charges b. Protest of assessment c. Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge Civil remedies by the LGU for collection of revenues a. Local government's lien for delinquent taxes, fees or charges b. Civil remedies, in general c. d. 1) Administrative action 2) Judicial action Procedure for administrative action 1) Distraint of personal property 2) Levy of real property, procedure 3) Further distraint or levy 4) Exemption of personal property from distraint or levy 5) Penalty on local treasurer for failure to issue and execute warrant of distraint or levy Procedure for judicial action APPENDIX " I " 2011 BAR COVERAGE FOR TAXATION B. 387 Real Property Taxation 1. Fundamental principles 2. Nature of real property tax 3. 4. Imposition of real property tax a. Power to levy real property tax b. Exemption from real property tax Appraisal and assessment of real property tax a. Rule on appraisal of real property at fair market value b. Declaration of real property c. Listing of real property in assessment rolls d. Preparation of schedules of fair market value e. Authority of assessor to take evidence Amendment of schedule of fair market value Classes of real property f. Actual use of property as basis of assessment g. Assessment of real property h. 5. 1) 2) 1) Assessment levels 2) General revisions of assessments and property classification 3) Date of effectivity of assessment or reassessment 4) Assessment of property subject to back taxes 5) Notification of new or revised assessment Appraisal and assessment of machinery Collection of real property tax a. Date of accrual of real property tax b. Collection of tax TAX PRINCIPLES A N D R E M E D I E S 386 1) Collecting authority 2) Duty of assessor to furnish local treasurer with assessment rolls 3) Notice of time for collection of tax c. Periods within which to collect real property tax d. Special rules on payment 1) e. 6. 7. Payment of real property tax in installments 2) Interests on unpaid real property tax 3) Condonation of real property tax Remedies of LGUs for collection of real property tax 1) Issuance of notice of delinquency for real property tax payment 2) Local government's lien 3) Remedies in general 4) Resale of real estate taken for taxes, fees or charges 5) Further levy until full payment of amount due Refund or credit of real property tax a. Payment under protest b. Repayment of excessive collections Taxpayer's remedies a. Contesting an assessment of value of real property 1) Appeal to the Local Board of Assessment Appeals (LBAA) 2) Appeal to the Central Board of Assessment Appeals (CBAA) 3) Effect of payment of tax APPENDIX T 2011 BAR COVERAGE FOR TAXATION b. 389 Payment of real property under protest 1) File protest with local treasurer 2) Appeal to the LBSS 3) Appeal to the CBAA 4) Appeal to the CTA 5) Appeal to the SC Tariff and Customs Code of 1978, as amended (TCC) A. Tariff and duties, defined B. General rule: All imported articles are subject to duty. Importation by the government taxable. C. Purpose for imposition D. Flexible tariff clause E. Requirements of importation F. G. H. 1. Beginning and ending of importation 2. Obligations of importer a. Cargo manifest b. Import entry c. Declaration of correct weight or value d. Liability for payment of duties e. Liquidation of duties f. Keeping of records Importation in violation of TCC 1. Smuggling 2. Other fraudulent practices Classification of goods 1. Taxable importation 2. Prohibited importation 3. Conditionally-free importation Classification of duties 1. Ordinary / Regular duties 390 TAX P R I N C I P L E S A N D R E M E D I E S a. Ad valorem; Methods of valuation 1) b. 2. I. J. Transaction value 2) Transaction value of identical goods 3) Transaction value of similar goods 4) Deductive value 5) Computed value 6) Fallback value Specific Special duties a. Dumping duties b. Countervailing duties c. Marking duties d. Retaliatory/Discriminatory duties e. Safeguard Drawbacks Remedies 1. Government a. Administrative / Extrajudicial b. Judicial 1) 1) 2. Search, seizure, forfeiture, arrest Rules on appeal including jurisdiction Taxpayer a. V. Protest b. Abandonment c. Abatement and refund Judicial Remedies; Republic Act 1125-The Act that Created the Court of Tax Appeals (CTA), as amended, and the Revised Rules of the Court of Tax Appeals A. Jurisdiction of the Court of Tax Appeals 1. Exclusive appellate jurisdiction over civil tax cases APPENDIX "I" 2011 BAR COVERAGE FOR TAXATION 391 a. 2. Cases within the jurisdiction of the Court en banc b. Cases within the jurisdiction of the Court in divisions Criminal cases a. Exclusive original jurisdiction b. B. Exclusive appellate jurisdiction in criminal cases Judicial Procedures 1. Judicial action for collection of taxes a. Internal revenue taxes b. Local taxes 1) 2. Prescriptive period Civil cases a. Who may appeal, mode of appeal, effect of appeal 1) Suspension of collection of tax a) 3. Injunction not available to restrain collection 2) Taking of evidence 3) Motion for reconsideration or New trial b. Appeal to the CTA, en banc, a. Petition for review on certiorari to the Supreme Court Criminal cases a. Institution and prosecution of criminal actions 1) b. Institution on civil action in criminal action Appeal and period to appeal 1) Solicitor General as counsel for the People and government officials sued in their official capacity TAX PRINCIPLES A N D R E M E D I E S c. Petition for review on certiorari to the Supreme Court Taxpayer's suit impugning the validity of tax measures or acts of taxing authorities a. Taxpayer's suit, defined b. Distinguished from citizen's suit c. Requisites for challenging the constitutionality of a tax measure or act of taxing authority 1) Concept of locus standi as applied in taxation 2) Doctrine of transcendental importance 3) Ripeness for judicial determination APPENDIX "J" B A R EXAMINATIONS Q U E S T I O N IN TAXATION 2010 B A R E X A M I N A T I O N Q U E S T I O N PARTI I True or False. A. In civil cases involving the collection of internal revenue taxes, prescription is construed strictly against the government and liberally in favor of the taxpayer. (1%) B. In criminal cases involving tax offenses punishable under the National Internal Revenue Code (NIRC), prescription is construed strictly against the government. (1%) C. In criminal cases where the Court of Tax Appeals (CTA) has exclusive original jurisdiction, the right to file a separate civil action for the recovery of taxes may be reserved. (1%) D. Proceedings before the CTA in the exercise of its exclusive original jurisdiction are in the nature of trial de novo. (1%) E. Judgments, resolutions or orders of the Regional Trial Court in the exercise of its original jurisdiction involving criminal offenses arising from violations of the NIRC are appealable to the CTA, which shall hear the cases en banc. (1%) A. What is the "all events test?" Explain briefly. (2%) II B. What is the "immediacy test?" Explain briefly. (2%) C. What is the "rational basis" test? Explain briefly. (2%) 393 394 TAX PRINCIPLES A N D R E M E D I E S D. What is the effect of the execution by a taxpayer of a "waiver of the statute of limitations" on his defense of prescription? (2%) E. What is the basis for the computation of business tax on contractors under the Local Government Code? (2%) F. How are retiring businesses taxed under the Local Government Code? (2%) III Mirador, Inc., a domestic corporation, filed its Annual Income Tax Return for its taxable year 2008 on April 15,2009. In the Return, it reflected an income tax overpayment of P1,000,000.00 and indicated its choice to carry-over the overpayment as an automatic tax credit against its income tax liabilities in subsequent years. On April 15, 2010, it filed its Annual Income Tax Return for its taxable year 2009 reflecting a taxable loss and an income tax overpayment for the current year 2009 in the amount of P500,000.00 and its income tax overpayment for the prior year 2008 of P1,000,000.00. In its 2009 Return, the corporation indicated its option to claim for refund the total income tax overpayment of Pl,500,000.00 Choose which of the following statements is correct. A. Mirador, Inc. may claim as refund the total income tax overpayment of Pl,500,000.00 reflected in its income tax return for its taxable year 2009; B. It may claim as refund the amount of P500,000.00 representing its income tax overpayment for its taxable year 2009; or C. No amount may be claimed as refund. Explain the basis of your answer. (5%) IV On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March 1, 2010 issued by the APPENDIX "]" BAR EXAMINATIONS QUESTIONS IN TAXATION 395 Commissioner of Internal Revenue (CIR) for deficiency income tax for its taxable year 2008. It failed to protest the PAN. The CIR thereupon issued a final assessment notice (FAN) with letter of demand on April 30, 2010. The FAN was received by the corporation on May 10, 2010, following which or on May 25, 2010, it filed its protest against it. The CIR denied the protest on the ground that the assessment had already become final and executory, the corporation having failed to protest the PAN. Is the CIR correct? Explain. (5%) V Does the Court of Appeals have the power to review compromise agreements forged by the Commissioner of Internal Revenue and a taxpayer? Explain. (5%) VI Based on the Affidavit of the Commissioner of Internal Revenue (CIR), an Information for failure to file income tax return under Section 255 of the National Internal Revenue Code (NIRC) was filed by the Department of Justice (DOJ) with the Manila Regional Trial Court (RTC) against XX, a Manila resident. XX moved to quash the Information on the ground that the RTC has no jurisdiction in view of the absence of a formal deficiency tax assessment issued by the CIR. Is a prior assessment necessary before an Information for violation of Section 255 of the NIRC could be filed in court? Explain. (4%) VII What are the conditions that must be complied with before the Court of Tax Appeals may suspend the collection of national internal revenue taxes? (3%) VIII What is the rule on appeal from decisions of the Collector of Customs in protest and seizure cases? When is the decision of the Collector of Customs appealable to the Court of Tax Appeals? Explain. (5%) TAX PRINCIPLES AND REMEDIES IX On May 15, 2009, La Manga Trading Corporation received a deficiency business tax assessment of PI,500,000.00 from the Pasay City Treasurer. On June 30,2009, the corporation contested the assessment by filing a written protest with the City Treasurer. On October 10, 2009, the corporation received a collection letter from the City Treasurer, drawing it to file on October 25, 2009 an appeal against the assessment before the Pasay Regional Trial Court (RTC). A. Was the protest of the corporation filed on time? Explain. (3%) B. Was the appeal with the Pasay RTC filed on time? Explain. (3%) PART II X True or False. (1% each) A. Gains realized by the investor upon redemption of shares of stock in a mutual fund company are exempt from income tax. B. A corporation can claim the optional standard deduction equivalent to 40% of its gross sales or receipts, as the case may be. C. Premium payment for health insurance of an individual who is an employee in an amount of P2,500 per year may be deducted from gross income if his gross salary per year is not more than P250,000. D. The Tax Code allows an individual taxpayer to pay in two equal installments, the first installment to be paid at the time the return is filed, and the second on or before July 15 of the same year, if his tax due exceeds P2,000. E. An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income tax return. APPENDIX " J " BAR EXAMINATIONS QUESTIONS IN TAXATION 397 F. The capitalization rules may be resorted to by the BIR in order to compel corporate taxpayers to declare dividends to their stockholders regularly. G. Informer's reward is subject to a final withholding tax of 10%. H. A non-resident alien who stays in the Philippines for less than 180 days during the calendar year shall be entitled to personal exemption not to exceed the amount allowed to citizens of the Philippines by the country of which he is subject or citizen. XI Are the following transactions subject to VAT? If yes, what is the applicable rate for each transaction. State the relevant authority/ies for your answer. A. Construction by XYZ Construction Co. of concrete barriers for the Asian Development Bank in Ortigas Center to prevent car bombs from ramming the ADB gates along ADB Avenue in Mandaluyong City. (3%) B. Call Center operated by a domestic enterprise in Makati that handles exclusively the reservations of a hotel chain which are all located in North America. The services are paid for in US$ and duly accounted for with the Bangko Sentral ng Pilipinas. (3%) C. Sale of orchids by a flower shop which raises its flowers in Tagaytay. (3%) XII Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains its principal office in Cubao, Quezon City. It has branches/sales offices in Cebu and Davao. Its factory is located in Marikina City where most of its workers live. Its principal office in Quezon City is also a sales office. Sales of finished products for calendar year 2009 in the amount of P10 million were made at the following locations: 398 TAX PRINCIPLES A N D R E M E D I E S i) Cebu branch ii) Davao branch 15% iii) Quezon City branch 60% 25% Total 100% Where should the applicable local taxes on the shoes be paid? Explain. (3%) XIII XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and the West Coast of the U.S. The company's vessels load and unload cargoes at the Port of Manila, albeit it does not have a branch or sales office in Manila. All the bills of lading and invoices are issued by the branch office in Makati which is also the company's principal office. The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the Port of Manila. Can the City Government of Manila legally impose said levy on the corporation? Explain. (3%) XIV A inherited a two-storey building in Makati from his father, a real estate broker in the '60s. A group of Tibetan monks approached A and offered to lease the building in order to use it as a venue for their Buddhist rituals and ceremonies. A accepted the rental of PI million for the whole year. The following year, the City Assessor issued an assessment against A for non-payment of real property taxes. Is the assessor justified in assessing A's deficiency real property taxes? Explain. (3%) XV Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on November 15, 2009. He left the following properties and interests: 3 APPENDIX " J " BAR EXAMINATIONS QUESTIONS IN TAXATION House and lot (family home) in Pasig P 800,000 Vacation house and lot in Florida, USA 1,500,000 Agricultural land in Naic, Cavite which he inherited from his father 2,000,000 Car which is being used by his brother in Cavite 9 9 500,000 Proceeds of life insurance where he named his estate as irrevocable beneficiary Household furnitures and appliances Claims against a cousin who has assets of P10,000 and liabilities of P100,000 Shares of stock in ABC Corp, a domestic enterprise 1,000,000 1,000,000 100,000 100,000 The expenses and charges on the estate are as follows: Funeral Expenses P 250,000 Legal fees for the settlement of the estate 500,000 Medical expenses of last illness 600,000 Claims against the estate 300,000 The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of his estate for which they have agreed to the above-stated professional fees. Specifically, they request you to explain and discuss with them the following questions. You oblige: A. What are the properties and interests that should be included in the computation of the gross estate of the decedent? Explain. (2.5%) B. What is the net taxable estate of the decedent? Explain. (2.5%) C. When is the due date for filing and payment of the applicable tax return and tax? Are these dates extendible? If so, under what conditions or requirements? (2.5%) 400 D. TAX PRINCIPLES A N D R E M E D I E S If X, one of the compulsory heirs, renounces his share in the inheritance in favor of the other co-heirs, is there any tax implication of X's renunciation? What about the other coheirs? (2.5%) XVI A is a iravelling salesman working full time for Nu Skin Products. He receives a monthly salary plus 3% commission on his sales in a Southern province where he is based. He regularly uses his own car to maximize his visits even to far flung areas. One fine day a group of militants seized his car. He was notified the following day by the police that the marines and the militants had a bloody encounter and his car was completely destroyed after a grenade hit it. A wants to file a claim for casualty loss. Explain the legal basis of your tax advice. (3%) XVII In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso. A. What will be your advice to Caruso in order to lessen the impact of possible double taxation on the same income? (3%) B. Would your answer in A. be the same if Caruso became a U.S. immigrant in 2008 and had become a non-resident Filipino citizen? Explain the difference in treatment for Philippine income tax purposes. (3%) XVIII ABC, a domestic corporation, entered into a software license agreement with XYZ, a non-resident foreign corporation based in the U.S. Under the agreement which the parties forged in the U.S., XYZ granted ABC the right to use a computer system program and to avail of technical know-how relative to such APPENDIX " J " BAR EXAMINATIONS QUESTIONS IN TAXATION 401 program. In consideration for such rights, ABC agreed to pay 5% of the revenues it receives from customers who will use and apply the program in the Philippines. Discuss the tax implication of the transaction. (5%) 2009 BAR EXAMINATION QUESTION PARTI I TRUE or FALSE. Answer TRUE if the statement is true, or FALSE if the statement is false. Explain your answer in not more than two (2) sentences. (5%) [a] A law that allows taxes to be paid either in cash or in kind is valid. [b] When the financial position of the taxpayer demonstrates a clear inability to pay the tax, the Commissioner of Internal Revenue may validly compromise the tax liability. [c] The doctrine of equitable recoupment allows a taxpayer whose claim for refund has prescribed to offset tax liabilities with his claim of overpayment. [d] A law imposing a tax on income of religious institutions derived from the sale of religious articles is valid. [e] A false return and a fraudulent return are one and the same. II Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (4%) III Melissa inherited from her father a 300-square-meter lot. At the time of her father's death on March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600,000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3,000.00 per square meter. 402 TAX PRINCIPLES A N D R E M E D I E S [a] Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why not? (4%) [b] Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and why? If not, why not? (4%) IV International Technologies, Inc. (ITI) filed a claim for refund for unutilized input VAT with the Court of Tax Appeals (CTA). In the course of the trial, ITI engaged the services of an independent Certified Public Accountant (CPA) who examined the voluminous invoices and receipts of ITI. ITI offered in evidence only the summary prepared by the CPA, without the invoices and the receipts, and then submitted the case for decision. Can the CTA grant ITI's claim for refund based only on the CPA's summary? Explain. (4%) V Jessie brought into the Philippines a foreign-made luxury car, and paid less than the actual taxes and duties due. Due to the discrepancy, the Bureau of Customs instituted seizure proceedings and issued a warrant of seizure and detention. The car, then parked inside a pay parking garage, was seized and brought by government agents to a government impounding facility. The Collector of Customs denied Jessie's request for the withdrawal of the warrant. Aggrieved, Jessie filed against the Collector a criminal complaint for usurpation of judicial functions on the ground that only a judge may issue a warrant of search and seizure. [a] Resolve with reasons Jessie's criminal complaint. (4%) [b] Would your answer be the same if the luxury car was seized while parked inside the garage of Jessie's residence? Why or why not? (4%) VI The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a storage fee of ten APPENDIX " J " BAR EXAMINATIONS QUESTIONS IN TAXATION 403 centavos (P0.10) for every 100 kilos of copra deposited in any bodega within the Municipality's jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal office in Makati, is engaged in the manufacture of soap, edible oil, margarine, and other coconut oil-based products. It has a warehouse in Sampaloc, Quezon, used as storage space for the copra purchased in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to court to challenge the validity of the ordinance, demanding the refund of the storage fees it paid under protest. Is the ordinance valid? Explain your answer. (4%) VII Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. Its commercial airplanes do not operate within Philippine territory, or service passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent, Philippine Airlines (PAL), a Philippine corporation. KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA's airline ticket sales constituted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory. Is the position of KIA tenable? Reasons. (4%) VIII The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons practicing various professions in the city. Among those subjected to the occupation tax were lawyers. Arty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation 404 TAX PRINCIPLES A N D R E M E D I E S tax under protest. He goes to court to assail the validity of the ordinance for being discriminatory. Decide with reasons. (3%) IX Republic Power Corporation (RPC) is a government-owned and controlled corporation engaged in the supply, generation and transmission of electric power. In 2005, in order to provide electricity to Southern Tagalog provinces, RPC entered into an agreement with Jethro Energy Corporation (JEC), for the lease of JEC's power barges which shall be berthed at the port of Batangas City. The contract provides that JEC shall own the power barges and the fixtures, fittings, machinery, and equipment therein, all of which JEC shall supply at its own cost, and that JEC shall operate, manage and maintain the power barges for the purpose of converting the fuel of RPC into electricity. The contract also stipulates that all real estate taxes and assessments, rates and other charges, in respect of the power barges, shall be for the account of RPC. In 2007, JEC received an assessment of real property taxes on the power barges from the Assessor of Batangas City. JEC sought reconsideration of the assessment on the ground that the power barges are exempt from real estate taxes under Section 234 [c] of R.A. 7160 as they are actually, directly and exclusively used by RPC, a government-owned and controlled corporation. Furthermore, even assuming that the power barges are subject to real property tax, RPC should be held liable therefor, in accordance with the terms of the lease agreement. Is the contention of JEC correct? Explain your answer. (4%) X ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.-based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income — 30% for individual and 35% for corporate non-resident stockholders — was deducted at source and remitted to the BIR. APPENDIX "J" BAR EXAMINATIONS QUESTIONS IN TAXATION 405 On May 15, 1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. The Commissioner denied the claim. On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund. [a] Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? Why or why not? (3%) [b] Is the contention of ABCD Corporation correct? Why or why not? (3%) PART II XI Raffy and Wena, husband and wife, are both employed by XXX Corporation. After office hours, they jointly manage a coffee shop at the ground floor of their house. The coffee shop is registered in the name of both spouses. Which of the following is the correct way to prepare their income tax return? Write the letter only. DO NOT EXPLAIN YOUR ANSWER. (2%) [a] Raffy will declare as his income the salaries of both spouses, while Wena will declare the income from the coffee shop. [b] Wena will declare the combined compensation income of the spouses, and Raffy will declare the income from the coffee shop. [c] All the income will be declared by Raffy alone, because only one consolidated return is required to be filed by the spouses. [d] Raffy will declare his own compensation income and Wena will declare hers. The income from the coffee shop shall be equally divided between them. 406 TAX PRINCIPLES AND REMEDIES Each spouse shall be taxed separately on their corresponding taxable income to be covered by one consolidated return for the spouses. [e] Raffy will declare his own compensation income and Wena will declare hers. The income from the coffee shop shall be equally divided between them. Raffy will file one income tax return to cover all the income of both spouses, and the tax is computed on the aggregate taxable income of the spouses. XII YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to defend the corporation's title over a property used in Lne business. For the legal services rendered in 2007, the law firm billed the corporation only in 2008. The corporation duly paid. YYY Corporation claimed this expense as a deduction from gross income in its 2008 return, because the exact amount of the expense was determined only in 2008. Is YYY's claim of deduction proper? Reasons. (4%) XIII In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was PI-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth P1.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro's death. Zandro died in 2007, and Wilma succeeded to the property. [a] Should the painting be included in the gross estate of Xavier in 2001 and thus, be subject to estate tax? Explain. (3%) [bj Should the painting be included in the gross estate of Zandro in 2007 and thus, be subject to estate tax? Explain. (3%) APPENDIX " J " BAR EXAMINATIONS QUESTIONS IN TAXATION 407 [c] May a vanishing deduction be allowed in either or both of the estates? Explain. (3%) XIV Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from P8,000.00 to P10,000.00. His gross rental income for one year is Pl,650,000.00. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why? (4%) XV Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property. [a] Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%) [b] Is Miguel entitled to the rule of reciprocity in order to be exempt from the Philippine donor's tax? Why or why not? (3%) XVI Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for 2007 claiming optional standard deductions. Realizing that he has enough documents to substantiate his profession-connected expenses, he now plans to file an amended income tax return for 2007, in order to claim itemized deductions, since no audit has been commenced by the BIR on the return he previously filed. Will Ernesto be allowed to amend his return? Why or why not? (4%) XVII A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The TAX P R I N C I P L E S A N D R E M E D I E S taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the CTA dismissed the same. [a] Is the CTA correct in dismissing the petition for review? Explain your answer. (4%) [b] Assume that the CTA's decision dismissing the petition for review has become final. May the Commissioner legally enforce collection of the delinquent tax? Explain. (4%) XVIII A taxpayer received an assessment notice from the BIR on February 3, 2009. The following day, he filed a protest, in the form of a request for reinvestigation, against the assessment and submitted all relevant documents in support of the protest. On September 11, 2009, the taxpayer, apprehensive because he had not yet received notice of a decision by the Commissioner on his protest, sought your advice. What remedy or remedies are available to the taxpayer? Explain. (4%) XIX Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnny's 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. [a] What advice will you give the trustee? Explain. (3%) [b] Will your advice be the same if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority? Why or why not? (3%) APPENDIX " J " BAR EXAMINATIONS QUESTIONS IN TAXATION 409 XX Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise for one of its line products. In its income tax return, MFC included the advertising expense as deduction from gross income, claiming it as an ordinary business expense. Is MFC correct? Explain. (3%) 2008 BAR EXAMINATION QUESTION I In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. This property has a current fair market value of P10 million in view of the construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. a) What is the nature of the real properties exchanged for tax purposes — capital asset or ordinary asset? Explain. (3%) b) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (3%) c) Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (3%) II Jose Cernan, Filipino citizen, married to Maria Cernan, died in a vehicular accident in NLEX on July 10, 2007. The spouses owned, among others, a 100-hectare agricultural land in Sta. Rosa, Laguna with current fair market value of P20 million, which was the subject matter of a Joint Venture Agreement about to be implemented with Star Land Corporation (SLC), a wellknown real estate development company. He bought the said real property for P2 million fifty years ago. On January 5, 2008, 410 TAX PRINCIPLES A N D R E M E D I E S the administrator of the estate and SLC jointly announced their big plans to start conversion and development of the agricultural lands in Sta. Rosa, Laguna, into first-class residential and commercial centers. As a result, the prices of real properties in the locality have doubled. The Administrator of the Estate of Jose Ceman filed the estate tax return on January 9,2008, by including in the gross estate the real property at P2 million. After 9 months, the BIR issued deficiency estate tax assessment, by valuing the real property at P40 million. a) Is the BIR correct in valuing the real property at P40 million? Explain. (3%) b) If you disagree, what is the correct value to use for estate tax purposes? Explain. (3%) III DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Starting December 15, 2004, DEF Corporation paid annual royalties to DEF, Inc., for the use of the latter's software, for which the former, as withholding agent of the government, withheld and remitted to the BIR the 15% final tax based on the gross royalty payments. The withholding tax return was filed and the tax remitted to the BIR on January 10 of the following year. On April 10,2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review with the Court of Tax Appeals involving the tax credit claim for 2004 and 2005. a) As a BIR lawyer handling the case, would you raise the defense of prescription in your answer to the claim for tax credit? Explain. (4%) b) Can the BIR lawyer raise the defense that DEF Corporation is not the proper party to file such claim for tax credit? Explain. (3%) rv JKL Corporation is a domestic corporation engaged in the importation and sale of motor vehicles in the Philippines and - APPENDIX " ] " BAR EXAMINATIONS QUESTIONS IN TAXATION 411 is duly registered with the Subic Bay Metropolitan Authority (SBMA). In December 2007, it imported several second-hand motor vehicles from Japan and Korea, which it stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing in the customs territory. a) Are the importations of motor vehicles from abroad subject to customs duties and value added taxes? Explain. (4%) b) paid? If they are taxable, when must the duties and taxes be What are the bases for and purposes of computing customs duties and VAT? To whom must the duties and VAT be paid? Explain. (3%) V Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of PI million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair market value of P300 million, payable as follows: (a) P60 million downpayment; and (b) balance, payable equally in twenty four (24) monthly consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares of stock of MAS Corporation. A BIR ruling, confirming the tax-free exchange of property for shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold her entire stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of the tax advice, Maria Suerte paid only the capital gains tax of P29,895,000 (P100,000 x 5% plus P298,900,000 x 10%), instead of the corporate income tax of P104,650,000 (35% on P299 million gain from sale of real property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion. Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to? Explain. (6%) 412 TAX P R I N C I P L E S A N D R E M E D I E S VI While driving his car to Baguio last month, Pedro Asuncion, together with his wife Assunta, and only son, Jaime, met an accident that caused the instantaneous death of Jaime. The following day, Assunta also died in the hospital. The spouses and their son had the following assets and liabilities at the time of death: Assunta Exclusive Cash Conjugal Jaime Exclusive P10,000,000. Pl,200,000. Cars P2,000,000. 500,000. Land 5,000,000. 2,000,000. Residential house 4,000,000. Mortgage payable 2,500,000. Funeral expenses 300,000. a) Is the Estate of Jaime Asuncion liable for estate tax? Explain. (4%) b) Is vanishing deduction applicable to the Estate of Assunta Asuncion? Explain. (4%) VII After examining the books and records of EDS Corporation, the 2004 final assessment notice, showing basic tax of P1,000,000, deficiency interest of P400,000, and due date for payment of April 30,2007, but without the demand letter, was mailed and released by the BIR on April 15, 2007. The registered letter, containing the tax assessment, was received by the EDS Corporation on April 25, 2007. a) What is an assessment notice? What are the requisites of a valid assessment? Explain. ( 3 % ) b) As tax lawyer of EDS Corporation, what legal defensefs) would you raise against the assessment? Explain. ( 3 % ) APPENDIX "J" 413 BAR EXAMINATIONS QUESTIONS IN TAXATION VIII The City of Manila enacted an ordinance, imposing a 5% tax on gross receipts on rentals of space in privately-owned public markets. BAT Corporation questioned the validity of the ordinance, stating that the tax is an income tax, which cannot be imposed by the city government. Do you agree with the position of BAT Corporation? Explain. (5%) IX William Antonio imported into the Philippines a luxury car worth US$100,000. This car was, however, declared only for US$20,000 and corresponding customs duties and taxes were paid thereon. Subsequently, the Collector of Customs discovered the underdeclaration and he initiated forfeiture proceedings of the imported car. a) May the Collector of Customs declare the imported car forfeited in favor of the government? Explain. (3%) b) Are forfeiture proceedings of goods illegally imported criminal in nature? Explain. (3%) X John McDonald, a U.S. citizen residing in Makati City, bought shares of stock of a domestic corporation whose shares are listed and traded in the Philippine Stock Exchange at the price of P2 million. Yesterday, he sold the shares of stock through his favorite Makati stockbroker at a gain of P200,000. a) Is John McDonald subject to Philippine income tax on the sale of his shares through his stockbroker? Is he liable for any other tax? Explain. (3%) b) If John McDonald directly sold the shares to his best friend, who is another U.S. citizen residing in Makati, at a gain of P200,000, is he liable for Philippine income tax? If so, what is the tax base and rate? (3%) TAX PRINCIPLES A N D R E M E D I E S 414 XI Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and lot in San Francisco, California, U.S.A, which he acquired in 2000 for PI5 million. On January 10, 2006, he sold said real property to Juan Mayaman, another Filipino citizen residing in Quezon City, for P20 million. On February 9, 2006, Manalo filed the capital gains tax return and paid PI .2 million representing 6% capital gains tax. Since Manalo did not derive any ordinary income, no income tax return was filed by him for 2006. After the tax audit conducted in 2007, the BIR officer assessed Manalo for deficiency income tax computed as follows: P5 million (P20 million less P15 million) x 35% = PI .75 million, without the capital gains tax paid being allowed as tax credit. Manalo consulted a real estate broker who said that the PI .2 million capital gains tax should be credited from the PI .75 million deficiency income tax. a) Is the BIR officer's tax assessment correct? Explain. (3%) b) If you were hired by Manalo as his tax consultant, what advice would you give him to protect his interest? Explain. (3%) XII Greenhills Condominium Corporation Incorporated in 2001 is a non-stock, non-profit association of unit owners in Greenhills Tower, San Juan City. To be able to reduce the association dues being collected from the unit owners, the Board of Directors of the corporation agreed to lease part of the ground floor of the condominium building to DEF Savings Bank for P120,000 a month or PI .44 million for the year, starting January 2007. a) Is the non-stock, non-profit association liable for value added tax in 2007? If your answer is in the negative, is it liable for another kind of business tax? (4%) b) Will the association be liable for value added tax in 2008 if it increases the rental to P150,000 a month beginning January 2008? Explain. (3%) •APPENDIX "J" BAR EXAMINATIONS QUESTIONS IN TAXATION 415 XIII MNO Corporation was organized on July 1,2006, to engage in trading of school supplies, with principal place of business in Cubao, Quezon City. Its books of accounts and income statement showing gross sales as follows: July 1, 2006 to December 31, 2006 P 5,000,000. January 1, 2007 to June 30, 2007 P 10,000,000. July 1, 2007 to December 31, 2007 P 15,000,000. Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax purposes, it paid its 2% business tax for fiscal year ending June 30, 2007 based on gross sales of P15 million. However, the Quezon City Treasurer assessed the corporation for deficiency business tax for 2007 based on gross sales of P25 million alleging that local business taxes shall be computed based on calendar year. a) Is the position of the city treasurer tenable? Explain. (3%) b) May the deficiency business tax be paid in installments without surcharge and interest? Explain. (3%) XIV Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses donated said real property to them. At the time of donation, the real property has a fair market value of P2 million. a) Are Mario and Maria subject to income tax for the value of the real property donated to them? Explain. (4%) b) Are Jose and Clara subject to donor's tax? If so, how much is the taxable gift of each spouse and what rate shall be applied to the gift? Explain. (4%) 416 TAX P R I N C I P L E S A N D R E M E D I E S XV In 2007, spouses Renato and Judy Garcia opened peso and dollar deposits at the Philippine branch of the Hong Kong Bank in Manila. Renato is an overseas worker in Hong Kong while Judy lives and works in Manila. During the year, the bank paid interest income of P10,000 on the peso deposit and US$1,000 on the dollar deposit. The bank withheld final income tax equivalent to 20% of the entire interest income and remitted the same to the BIR. a) Are the interest incomes on the bank deposits of spouses Renato and Judy Garcia subject to income tax? Explain. (4%) b) Is the bank correct in withholding the 20% final tax on the entire interest income? Explain. (3%) APPENDIX "K" A.M. NO. 05-11-07-CTA REVISED RULES OF THE COURT OF TAX APPEALS Pursuant to Section 8 of Republic Act No. 1125, as further amended by Republic Act No. 9282, the Court of Tax Appeals (hereinafter referred to as the Court) hereby adopts and promulgates the following Rules for the conduct of its business: RULE 1 TITLE AND CONSTRUCTION SECTION 1. Title of the Rules. — These Rules shall be known and cited as the Revised Rules of the Court of Tax Appeals (RRCTA). (RCTA, Rule 1, sec. la) SEC. 2. Liberal construction. — The Rules shall be liberally construed in order to promote their objective of securing a just, speedy, and inexpensive determination of every action and proceeding before the Court. (RCTA, Rule 1, sec. 2a) SEC. 3. Applicability of the Rules of Court. - The Rules of Court in the Philippines shall apply suppletorily to these Rules. (n) RULE 2 THE COURT, ITS ORGANIZATION AND FUNCTIONS SECTION 1. Composition of the Court. — The Court is composed of a presiding justice and five associate justices appointed by the President of the Philippines. In appropriate cases, the Court shall sit en banc, or in two Division© of three justices each, including the presiding justice, who shall be the Chairman of its First Division, (n) 417 418 TAX PRINCIPLES A N D R E M E D I E S SEC. 2. Exercise of powers and functions. — The Court shall exercise its adjudicative powers, functions and duties en banc or in Divisions. The Court shall sit en banc in the exercise of its administrative, ceremonial and non-adjudicative functions. Cn) SEC. 3. Court en banc; quorum and voting. — The presiding justice or, in his absence, the most senior justice in attendance shall preside over the sessions of the Court en banc. The attendance of four justices of the Court shall constitute a quorum for its sessions en banc. The presence at the deliberation and the affirmative vote of four justices of the Court en banc shall be necessary for the rendition of a decision or resolution on any case or matter submitted for its consideration. Where the necessary majority vote cannot be had, the petition shall be dismissed; in appealed cases, the judgment or order appealed from shall stand affirmed; and on all incidental matters, the petition or motion shall be denied. No decision of a Division of the Court may be reversed or modified except by the affirmative vote of four justices of the Court en banc acting on the case. Interlocutory orders or resolutions shall be acted upon by majority vote of the justices present constituting a quorum. (Rules of Court, Rule 56, sec. 7a) SEC. 4. The Court in Divisions; quorum and voting. — The chairman of the Division or, in his absence, its senior member shall preside over the sessions of the Court in Divisions. The attendance of at least two justices of the Court shall be necessary to constitute a quorum for its sessions in Divisions. The presence at the deliberation and the affirmative vote of at least two justices shall be required for the pronouncement of a judgment or final resolution of the Court in Divisions, (n) SEC. 5. Hearings. — The Court en banc or in Divisions shall conduct hearings on such days and at such times and at such places as it may fix, with notice to the parties concerned. However, the Friday of each week shall be devoted to hearing motions, unless, for special reasons, the Court en banc or in Divisions shall, APPENDIX " K " A.M. NO. 05-11-07-CTA 419 motu proprio or upon motion of a party, fix another day for the hearing of any motion. (RCTA, Rule 3, sec. 2a) SEC. 6. Disqualification of justices.— (a) Mandatory. — No justice or other officer or employee of the Court shall intervene, directly or indirectly, in the management or control of any private enterprise which in any way may be affected by the functions of the Court. Justices of the Court shall be disqualified from sitting in any case on the same grounds provided under the first paragraph. Section 1, Rule 137 of the Rules of Court. No person who has once served in the Court either as presiding justice or as associate justice shall be qualified to practice as counsel before the Court for a period of one year from his retirement or resignation as such. (Rules of Court, Rule 137, sec. 1, par. la) (b) Disclosure and consent of parties and lawyers. — A justice disqualified under the first paragraph. Section 1 of Rule 137 of the Rules of Court, may, instead of withdrawing from a case or proceeding, disclose on the records the basis of his disqualification. If, based on such disclosure, the parties and lawyers, independently of the justice's participation, all agree in writing that the reason for the inhibition is immaterial or unsubstantial, the justice may participate in the action or proceeding. The agreement, signed by all parties and lawyers, shall be incorporated in the record of the action or proceeding. (Rules of Court, Rule 137, sec. 1, par. la) (c) Voluntary. — A justice of the Court may, in the exercise of his sound discretion, disqualify himself from sitting in a case or proceeding, for just or valid reasons other than those mentioned above. (Rules of Court, Rule 137, sec. 1, par. 2a) A justice of the Court who inhibits himself from sitting in a case or proceeding shall immediately notify in writing the presiding justice and the members of his Division, (n) SEC. 7. Motion to inhibit a justice. — When a motion for inhibition of a justice is filed, the Court, en banc or in Division, shall act upon the motion. However, if the motion for inhibition 420 TAX PRINCIPLES A N D R E M E D I E S is based on a discretionary ground, the Court shall refer the motion to the justice involved for his appropriate action, (n) RULE 3 PLACE OF OFFICE, SEAL AND OFFICE HOURS SECTION 1. Place of office. — The Court shall have its principal office in Metro Manila. (RCTA, Rule 3, sec. la) SEC. 2. Court seal. — The seal of the Court shall be circular in form and shall be of the usual size. It shall bear, in its center, a design of the coat of arms of the Republic of the Philippines with the words "BATAS AT BAYAN" immediately underneath the design. On the upper margin running from left to right are the words "COURT OF TAX APPEALS," and on its lower margin the words "REPUBLIKA NG PILIPINAS." (RCTA, Rule 2, sec. la) SEC. 3. Seal, where affixed. — The seal of the Court shall be affixed to all summons, subpoena, notices, decisions, orders or resolutions, certified copies of official records and such other papers that the Court may require to be sealed, (n) SEC. 4. Office hours. — The Office of the Clerk of Court shall be open for the transaction of business and receiving petitions, complaints, pleadings, motions, and other papers, during the hours from eight o'clock in the morning to four-thirty o'clock in the afternoon on Mondays to Fridays, except on such days as may be designated by law or executive proclamation as nonworking official holidays. (RCTA, Rule 3, sec. 3a) RULE 4 JURISDICTION OF THE COURT SECTION 1. Jurisdiction of the Court. — The Court shall exercise exclusive original jurisdiction over or appellate jurisdiction to review by appeal the cases specified in Republic Act No. 1125, Section 7, as amended by Republic Act No. 9282, Section 7. (n) SEC. 2. Cases within the jurisdiction of the Court en banc. — The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the following: •APPENDIX " K " A.M. NO. 05-11-07-CTA 421 (a) Decisions or resolutions on motions for reconsideration or new trial of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over: (1) Cases arising from administrative agencies — Bureau of Internal Revenue, Bureau of Customs, Department of Finance, Department of Trade and Industry, Department of Agriculture; (2) Local tax cases decided by the Regional Trial Courts in the exercise of their original jurisdiction; and (3) Tax collection cases decided by the Regional Trial Courts in the exercise of their original jurisdiction involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and penalties claimed is less than one million pesos; (b) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them in the exercise of their appellate jurisdiction; (c) Decisions, resolutions or orders of the Regional Trial Courts in tax collection cases decided or resolved by them in the exercise of their appellate jurisdiction; (d) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over tax collection cases; (e) Decisions of the Central Board of Assessment Appeals (CBAA) in the exercise of its appellate jurisdiction over cases involving the assessment and taxation of real property originally decided by the provincial or city board of assessment appeals; (f) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over cases involving criminal offenses arising from violations of the National Internal Revenue Code or the Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs; TAX P R I N C I P L E S A N D R E M E D I E S (g) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive appellate jurisdiction over criminal offenses mentioned in the preceding subparagraph; and (h) Decisions, resolutions or orders of the Regional trial Courts in the exercise of their appellate jurisdiction over criminal offenses mentioned in subparagraph (f). (n) SEC. 3. Cases within the jurisdiction of the Court in Divisions. — The Court in Divisions shall exercise: (a) Exclusive original or appellate jurisdiction to review by appeal the following: (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228 of the National Internal Revenue Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax case, Provided, further, that should the taxpayer opt to await the final decision of the Commissioner of Internal Revenue on the disputed assessments beyond the one hundred eighty day-period abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these APPENDIX " K " A.M. NO. 05-11-O7-CTA 423 Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of the National Internal Revenue Code; (3) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them in the exercise of'their original jurisdiction; (4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or release of property affected, fines, forfeitures of other penalties in relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of Customs; (5) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of Customs adverse to the Government under Section 2315 of the Tariff and Customs Code; and (6) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture, in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not to impose said duties; (b) Exclusive jurisdiction over cases involving criminal offenses, to wit: (1) Original jurisdiction over all criminaL-offenses arising from violations of the National Internal-Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue of the Bureau of Customs, where the principal amount of taxes and fees, ex- 424 TAX PRINCIPLES A N D R E M E D I E S elusive of charges and penalties, claimed is one million pesos or more; and (2) Appellate jurisdiction over appeals from the judgments, resolutions or orders of trje Regional Trial Courts in their original jurisdiction in criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than one million pesos or where there is no specified amount claimed; (c) Exclusive jurisdiction over tax collections cases, to wit: (1) Original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is one million pesos or more; and (2) Appellate jurisdiction over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them within their respective territorial jurisdiction, (n) RULE 5 FORM AND STYLE OF PAPERS SECTION 1. Style. — All papers filed with the Court shall be either printed or typewritten, and fastened on the upper left hand corner. All such papers shall have a caption, date and signature, and copies, as specified below. (RCTA, Rule 4, sec. la) SEC. 2. Size and specifications. — Printed or typewritten papers shall be typed doubled-spaced on good quality, unglazed and plain white paper eight and a half inches wide by thirteen inches long (legal-size), or eight and a quarter inches wide by eleven and three-fourths inches long (A4-size), at least substance twenty and printed on one side only without covers. There shall be a margin at the left-hand side of each page of not less than one APPENDIX " K " A.M. NO. 05-11-07-CTA 425 and one-half inches in width and at the top, bottom and righthand side of each page of not less than one inch in width. (RCTA, Rule 4, sec. 3a) SEC. 3. Citations. — Citations shall be indented at least one inch from the inside margin and typed single-spaced. (RCTA, Rule 4, sec. 4a) SEC. 4. Number of copies. — The parties shall file eleven signed copies of every paper, for cases before the Court en banc and six signed copies for cases before a Division of the Court in addition to the signed original copy, except as otherwise directed by the Court. Papers to be filed in more than one case shall include one additional copy for each additional case. (RCTA, Rule 4, sec. 5a) SEC. 5. Clear and legible copies. — All copies shall be clear and legible. (RCTA, Rule 4, sec. 6a) RULE 6 PLEADINGS FILED WITH THE COURT SECTION 1. Complaint; contents. — The complaint shall contain allegations showing jurisdiction of the Court and a concise statement of the complete facts of the plaintiff's cause or causes of action. The complaint shall be verified and must contain a certification against forum shopping as provided in Sections 4 and 5, Rule 7 of the Rules of Court, (n) SEC. 2. Petition for review; contents. — The petition for review shall contain allegations showing the jurisdiction of the Court, a concise statement of the complete facts and a summary statement of the issues involved in the case, as well as the reasons relied upon for the review of the challenged decision. The petition shall be verified and must contain a certification against forum shopping as provided in Section 3, Rule 46 of the Rules of Court. A clearly legible duplicate original or certified true copy of the decision appealed from shall be attached to the petition, (RCTA, Rule 5, sec. 2a) SEC. 3. Payment of docket fees. — The Clerk of Court shall not receive a petition for review for filing unless the petitioner 426 TAX PRINCIPLES A N D R E M E D I E S submits proof of payment of the docket fees. Upon receipt of the petition or the complaint, it will be docketed and assigned a number, which shall be placed by the parties on all papers thereafter filed in the proceeding. The Clerk of Court will then issue the necessary summons to the respondent or defendant. (RCTA, Rule 5, sec. 3a) SEC. 4. Bill of particulars. — (a) Requirement for bill of particulars. — The Court, on its own initiative or upon motion of either party filed before responding to a pleading or, if no responsive pleading is permitted by these Rules, within ten days after service of the pleading upon him, may order a party to submit a detailed statement of the nature of the claim or defense or of any matter stated in any pleading, which is not averred with sufficient definiteness or particularity. Such order or motion shall point out the defects complained of and the details desired. After service of the bill of particulars or of a more definite pleading, the moving or adverse party may file his responsive pleading within ten days. (RCTA, Rule 8, sec. la) (b) Failure to comply. — If the order issued by the Court pursuant to paragraph (a) above is not complied with within ten days after notice of the order, or within such other time as the Court may fix, the Court may strike out the pleading to which the motion was directed or may make such other order as it deems just. The Court may upon motion set aside the order, or modify it in the interest of justice. (RCTA, Rule 8, sec. 2a) Ir.' (c) Motion for bill of particulars when not allowed. — No motion for bill of particulars shall be allowed in cases falling under Sections 3(a)(3) and 3(c)(2) of Rule 4 of these Rules, (n) SEC. 5. Answer. — (a) Time for filing and contents. — Within fifteen days after service of summons, the respondent or the defendant shall file an ansWer to the petition or complaint which shall include all defenses in law and the specific provisions of law and applicable jurisprudence and grounds for dismissal of the petition or complaint, or which shall prevent and bar recovery. (Rule of APPENDIX " K " A.M. NO. 05-11-07-CTA 427 Procedure for Civil Forfeiture, Asset Preservation and Freeze Order, Sec. 9, par. 2a; and RCTA, Rule 7, sec. la) (b) Transmittal of records. — The respondent Commissioner of Internal Revenue, Commissioner of Customs, the Secretary of Finance, the Secretary of Agriculture, or the Secretary of Trade and Industry, within ten days after his answer, the chairman of the Central Board of Assessment Appeals and the presiding judges of the Regional Trial Courts, within ten days from receipt of notice, shall certify and forward to the Court all the records of the case in their possession, with the pages duly numbered, and, if the records are in separate folders, then the folders will also be numbered. If there are no records, such fact shall be manifested to the Court within the same period of ten days. The Court may, on motion, and for good cause shown, grant an extension of time within which to submit the aforesaid records of the case. Failure to transmit the records within the time prescribed herein or within the time allowed by the Court may constitute indirect contempt of court. (RCTA, Rule 7, sec. 2a) SEC. 6. Entry of appearance. — An attorney may enter his appearance by signing the initial pleading. An attorney may later enter his appearance only by filing an entry of appearance with the written conformity of his client. The initial pleading or entry of appearance shall show: (1) The attorney's specific address which must not be a Post Office Box number; (2) His Roll of Attorney's Number; (3) The date and number of his current membership due in the Integrated Bar of the Philippines (IBP) per Official Receipt, or Lifetime Member Number; (4) Current Professional Tax Receipt (PTR) number together with date and place of issuance; and (5) MCLE certificate number and date of issue, unless exempt. The attorney or party entering his appearance shall serve a copy of the entry of appearance upon the opposing party. An 428 TAX PRINCIPLES A N D R E M E D I E S attorney who appears in open court without previously having filed his written appearance must give his business address to the Clerk of Court and file his written appearance within fortyeight hours from such open court appearance. An attorney or party who has filed his appearance and who changes his address of record shall notify the Clerk of Court and the adverse party of such change of address, and a separate notice of such change of address shall be filed for each additional case. (RCTA, Rule 10, sec. la) RULE 7 PROCEDURE IN THE COURT OF TAX APPEALS SECTION 1. Applicability of the Rules of the Court of Appeals, exception. — The procedure in the Court en banc or in Divisions in original and in appealed cases shall be the same as those in petitions for review and appeals before the Court of Appeals pursuant to the applicable provisions of Rules 42, 43, 44 and 46 of the Rules of Court, except as otherwise provided for in these Rules, (n) RULE 8 PROCEDURE IN CIVIL CASES SECTION 1. Review of cases in the Court en banc. — In cases falling under the exclusive appellate jurisdiction of the Court en banc, the petition for review of a decision or resolution of the Court in Division must be preceded by the filing of a timely motion for reconsideration or new trial with the Division, (n) SEC. 2. Review of cases in the Court in Division. — In appealed cases falling under the jurisdiction of the Court in Division in Sections 3(a)(1) to 3(a)(6) and 3(c)(2) of Rule 4, the party filing the case shall be called the Petitioner and the party against whom the case is filed shall be called the Respondent. The pleading shall be entitled Petition for Review. In tax collection cases originally filed with the Court under Section 3(c)(1) of Rule 4, the party filing the case shall be called the Plaintiff and the party against whom the case is filed shall be APPENDIX " K " 429 A.M. NO. 05-11-07-CTA called the Defendant. The pleading shall be entitled Complaint. In appealed tax collection cases, the original captions shall be retained. The party filing the appeal shall be called the Appellant and the party against whom the appeal is filed shall be called the Appellee. (RCTA, Rule 5, Sec. la) SEC. 3. Who may appeal; period to file petition. — (a) A party adversely affected by a decision, ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claims for refund of internal revenue taxes, or by a decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional Trial Court in the exercise of its original jurisdiction may appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision or ruling, or expiration of the period fixed by law for the Commissioner of Internal Revenue to act on the disputed assessments. In case of inaction of the Commissioner of Internal Revenue on claims for refund of internal revenue taxes erroneously or illegally collected, the taxpayer must file a petition for review within the two-year period prescribed by law from payment or collection of the taxes, (n) (b) A party adversely affected by a decision or resolution of a Division of the Court on a motion for reconsideration or new trial may appeal to the Court by filing before it a petition for review within fifteen days from receipt of a copy of the questioned decision or resolution. Upon proper motion and the payment of the full amount of the docket and other lawful fees and deposit for costs before the expiration of the reglementary period herein fixed, the Court may grant an additional period not exceeding fifteen days from the expiration of the original period within which to file the petition for review. (Rules of Court, Rule 42, sec. la) (c) A party adversely affected by a decision or ruling of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of their appellate jurisdiction may appeal to the Court by filing before it a petition for review within thirty days from receipt of a copy of the questioned decision or ruling, (n) 430 TAX P R I N C I P L E S A N D R E M E D I E S SEC. 4. Where to appeal; mode of appeal. — (a) An appeal from a decision or ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claim for refund of internal revenue taxes erroneously or illegally collected, the decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade & Industry, the Secretary of Agriculture, and the Regional Trial Court in the exercise of their original jurisdiction, shall be taken to the Court by filing before it a petition for review as provided in Rule 42 of the Rules of Court. The Court in Division shall act on the appeal, (n) (b) An appeal from a decision or resolution of the Court in Division on a motion for reconsideration or new trial shall be taken to the Court by petition for review as provided in Rule 43 of the Rules of Court. The Court en banc shall act on the appeal. (n) (c) An appeal from a decision or ruling of the Central Board of Assessment Appeals or the Regional Trial Court in the exercise of their appellate jurisdiction shall be taken to the Court by filing before it a petition for review as provided in Rule 43 of the Rules of Court. The Court en banc shall act on the appeal, (n) RULE 9 PROCEDURE IN CRIMINAL CASES SECTION 1. Review of cases in the Court — The review of criminal cases in the Court en banc or in Division shall be governed by the applicable provisions of Rule 124 of the Rules of Court, (n) SEC. 2. Institution of criminal actions. — All criminal actions before the Court in Division in the exercise of its original jurisdiction shall be instituted by the filing of an information in the name of the People of the Philippines. In criminal actions involving violations of the National Internal Revenue Code and other laws enforced by the Bureau of Internal Revenue, the Commissioner of Internal Revenue must approve their filing. In criminal actions involving violations of the Tariff and Customs Code and other laws enforced by the Bureau of Customs, the Commissioner of Customs must approve their filing. (Rules of Court, Rule 110, sec. 2a; n) APPENDIX " K " 431 A.M. NO. 05-11-07-CTA The institution of the criminal action shall interrupt the running of the period of prescription. (Rules of Court, Rule 110, sec. 1, par. 2a) SEC. 3. Prosecution of criminal actions. — All criminal actions shall be conducted and prosecuted under the direction and control of the public prosecutor. In criminal actions involving violation of the National Internal Revenue Code or other laws enforced by the Bureau of Internal Revenue, and violations of the Tariff and Customs Code or other laws enforced by the Bureau of Customs, the prosecution may be conducted by their respective duly deputized legal officers. (Rules of Court, Rule 110, sec. 5, par. 6a) SEC. 4. Warrant of arrest. — Within ten days from the filing of the information, the Division of the Court to which the case was raffled shall evaluate the resolution of the public prosecutor and its supporting evidence. The Division may immediately dismiss the case if it finds that the evidence on record clearly fails to establish probable cause. If the Division finds probable cause, it shall issue a warrant of arrest signed by the Chairman of the Division. In case of doubt on the existence of probable cause, the Division may order the prosecutor to present additional evidence, ex parte, within five days from notice. (Rules of Court, Rule 112, sec. 6a) SEC. 5. When search warrant may issue. — The Division may issue a search warrant signed by its Chairman following the requirements of Rule* 126 of the Rules of Court, (n) SEC. 6. Bail, how amount fixed; approval. — The amount of bail to be posted in a case filed with the Court shall be fixed and approved by the Division to which the case is raffled: Provided, however, that where the accused is arrested, detained or otherwise placed in custody outside the Metropolitan Manila area, any judge of the Regional Trial Court of the place where the arrest is made may accept and approve the bail for fps release and appearance before the Division to which his case is assigned. The judge who accepted the bail and released the accused shall inform the Division that issued the order of arrest of his action 432 TAX PRINCIPLES A N D R E M E D I E S and forward to it the papers relative to the case. (Rules of Court, Rule 114, sec. 17a) SEC. 7. Conditions of the bail. — The conditions of the bail are that the accused shall appear and answer the complaint or information in the Division of the Court to which it is raffled or transferred for trial and submit himself to its orders and processes. If convicted, and the case is appealed to the Court en banc or to the Supreme Court, he will surrender himself for the execution of such judgment as the Court en banc or the Supreme Court may render; or that, in the event the case is to be tried anew or remained for a new trial, he shall appear before the Division to which it may be remanded and submit himself to its orders and processes. (Rules of Court, Rule 114, sec. 2a) SEC. 8. Release order. — The Clerk of Court shall issue the corresponding release order. (Rules of Court, Rule 114, sec. 3a) SEC. 9. Appeal; period to appeal. — (a) An appeal to the Court in criminal cases decided by a Regional Trial Court in the exercise of its original jurisdiction shall be taken by filing a notice of appeal pursuant to Sections 3(a) and 6, Rule 122 of the Rules of Court within fifteen days from receipt of a copy of the decision or final order with the court which rendered the final judgment or order appealed from and by serving a copy upon the adverse party. The Court in Division shall act on the appeal. (b) An appeal to the Court en banc in criminal cases decided by the Court in Division shall be taken by filing a petition for review as provided in Rule 43 of the Rules of Court within fifteen days from receipt of a copy of the decision or resolution appealed from. The Court may, for good cause, extend the time for filing of the petition for review for an additional period not exceeding fifteen days. (c) An appeal to the Court in criminal cases decided by the Regional Trial Courts in the exercise of their appellate jurisdiction shall be taken by filing a petition for review as provided in Rule 43 of the Rules of Court within fifteen days from receipt of a copy of the decision or final order appealed from. The Court en banc shall act on the appeal, (n) APPENDIX " K " A.M. NO. 05-11-07-CTA 433 SEC. 10. Solicitor General as counsel for the Peopleand government officials sued in their official capacity. — The Solicitor General shall represent the People of the Philippines and government officials sued in their official capacity in all cases brought to the Court in the exercise of its appellate jurisdiction. He may deputized the legal officers of the Bureau of Internal Revenue in cases brought under the National Internal Revenue Code or other laws enforced by the Bureau of Internal Revenue, or the legal officers of the Bureau of Customs in cases brought under the Tariff and Customs Code of the Philippines or other laws enforced by the Bureau of Customs, to appear in behalf of the officials of said agencies sued in their official capacity: Provided, however, such duly deputized legal officers shall remain at all times under the direct control and supervision of the Solicitor General, (n) SEC. 11. Inclusion of civil action in criminal action. — In cases within the jurisdiction of the Court, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall be deemed jointly instituted in the same proceeding. The filing of the criminal action shall necessarily carry with it the filing of the civil action. No right to reserve the filing of such civil action separately from the criminal action shall be allowed or recognized. (Rules of Court, Rule 111, sec. l[a], par. la) RULE 10 SUSPENSION OF COLLECTION OF TAX )}. SECTION 1. No suspension of collection of tax, except as herein prescribed. — No appeal taken to the Court shall suspend the payment, levy, distraint, or sale of any property of the taxpayer for the satisfaction of his tax liability as provided under existing laws, except as hereinafter prescribed, (n) SEC. 2. Who may file. — Where the collection of the amount of the taxpayer's liability, sought by means of a dfemand for payment, by levy, distraint or sale of any property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardized the interest of the Government or the taxpayer, 434 TAX PRINCIPLES A N D R E M E D I E S an interested party may file a motion for the suspension of the collection of the tax liability. (RCTA, Rule 12, sec. la) SEC. 3. When to file. — The motion for the suspension of the collection of the tax may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings. (RCTA, Rule 12, sec. 2) SEC. 4. Contents and attachments of the motion. — The motion for the suspension of the collection of the tax shall be verified and shall state clearly and distinctly the facts and the grounds relied upon in support of the motion. Affidavits and other documentary evidence in support thereof shall be attached thereto, which, if unconrroverted, would be admissible in evidence as proof of the facts alleged in the motion. (RCTA, Rule 12, sec. 3a) SEC. 5. Opposition. — Unless a shorter period is fixed by the Court because of the urgency of the motion, the adverse party shall, within five days after receipt of a copy of the motion, file an opposition thereto, if any, which shall state clearly and distinctly the facts and the grounds relied upon in support of the opposition. (RCTA, Rule 12, sec. 4) SEC. 6. Hearing of the motion. — The movant shall, upon receipt of the opposition, set the motion for hearing at the next available motion day, and the Court shall give preference to the motion over all other cases, except criminal cases. At the hearing, both parties shall submit their respective evidence. If warranted, the Court may grant the motion if the movant shall deposit with the Court an amount in cash equal to the value of the property or goods under dispute or filing with the Court of an acceptable surety bond in an amount not more than double the disputed amount or value. However, for the sake of expediency, the Court, motu proprio or upon motion of the parties, may consolidate the hearing of the motion for the suspension of the collection of the tax with the hearing on the merits of the case. (RCTA, Rule 12, sec. 5a) SEC. 7. Corporate surety bonds. — In the selection and qualification of surety companies, the parties and the Court 435 APPENDIX " K " A.M. NO. 05-11-07-CTA shall be guided by Supreme Court Circular A.M. No. 04-7-02-SC, dated July 20, 2004. (n) RULE 11 PRE-TRIAL SECTION 1. Applicability. — The rule on pre-trial under Rules 18 and 118 of the Rules of Court, as amplified in A.M. No. 03-109-SC dated July 13,2004 (Re: Rule on Guidelines to be Observed by Trial Court Judges and Clerk of Court in the Conduct of PreTrial and Use of Deposition-Discovery Measures), shall apply to all cases falling within the original jurisdiction of the Court, except that the parties may not be allowed to compromise the criminal liability or submit the case to mediation, arbitration or other mode of alternative dispute resolution, (n) SEC. 2. Mandatory pre-trial. — In civil cases, the Clerk of Court shall set the case for pre-trial on the first available date immediately following the tenth day after the filing of the answer. In criminal cases, the Clerk of Court shall set the case for pre-trial not later than ten days after arraignment, if the accused is detained, nor later than thirty days if the accused is on bail. (RCTA, Rule 11, sec. la) SEC. 3. Setting for an earlier date. — Where, due to the urgency of the case, either party desires that the pre-trial be set on an earlier date, such party shall so state in his pleading, in which event the Clerk of Court shall set the pre-trial on the first available date imrrtediately after the filing of the answer. (RCTA, Rule 11, sec. 2a) SEC. 4. Duty of the Court. — The Court shall confer with the parties in pre-trial conferences with a view to narrowing the issues, making admissions of or stipulating on facts, simplifying the presentation of evidence, or otherwise assisting in the preparation for trial or possible disposition of the case in whole or in part without trial, (n) ,fl! SEC. 5. Procedure in civil cases. — In civil cases, the parties shall submit, at least three days before the pre-trial, their respective pre-trial briefs containing the following: 436 TAX PRINCIPLES A N D R E M E D I E S (a) A statement of their willingness to compromise the civil liability indicating its desired terms, except that the case shall not be subject to referral to mediation, arbitration or other mode of alternative dispute resolution; (b) A summary of admitted facts and proposed stipulation of facts; (c) The issues to be tried or resolved; (d) The documents or exhibits to be presented, stating their purpose. No evidence shall be allowed to be presented and offered during the trial in support of a party's evidence-in-chief other than those that had been pre-marked and identified, unless allowed by the Court to prevent manifest injustice; (e) A manifestation of their having availed themselves of discovery procedures or referral to commissioners; and (f) The numbers and names of the witnesses, the substance of their testimonies and the approximate number of hours that will be required by the parties for the presentation of their respective witnesses. The consequence on the party at fault shall be the same as the effect of failure to appear. Failure to file the pre-trial brief or to comply with its required contents shall have the same effect as failure to appear at the pretrial. (Rules of Court, Rule 18, sec. 6a) SEC. 6. Procedure in criminal cases. — H- (a) Before the preliminary conference. — Before the pre-trial conference, the Court may issue an order referring the case to the Division Clerk of Court for a preliminary conference of the parties at least three days prior to the pre-trial: (1) To mark the documents or exhibits to be presented by the parties and copies to be attached to the records after comparison; (2) To consider other matters as may aid in its disposition; and APPENDIX " K " A.M. NO. 05-11-07-CTA 437 (3) To inform the parties that no evidence shall be allowed to be presented and offered during the trial other than those identified and marked during the pre-trial unless allowed by the Court to prevent manifest injustice. (Rule on Guidelines to be Observed by Trial Court Judges and Clerks of Court in the Conduct of Pre-trial and Use of Deposition-Discovery Measures, Sec. W[2]a) (b) During the preliminary conference. — The Division Clerk of Court shall: (1) Mark the documents to be presented as exhibits and copies attached to the records after comparison; (2) Ascertain from the parties the undisputed facts and admission on the genuineness and due execution of documents marked as exhibits; and (3) Consider such other matters as may aid in the prompt disposition of the case. The proceedings during the preliminary conference shall be recorded in the minutes of preliminary conference to be signed by both parties and counsel. The Division Clerk of Court shall attach the minutes of preliminary conference and the exhibits to the case record before the pre-trial. (Rule on Guidelines to be Observed by Trial Court Judges and Clerks of Court in the Conduct of Pre-trial and Use of Deposition-Discovery Measures, Sec. IB[3Ja) (c) During the pre-trial conference. — The Court at the pretrial conference shall consider the following: (1) Stipulation of facts and issues raised; (2) Marking for identification of evidence of the parties; (3) Waiver of objections to admissibility of evidence; (4) Modification of order of trial; and (5) Such matters as will promote a fair and expeditious trial of the criminal and civil aspects of the case. (Rules of Court, Rule 118, sec. la). 438 TAX PRINCIPLES A N D R E M E D I E S All agreements or admissions made or entered during the pre-trial conference shall be in writing and signed by the accused and counsel; otherwise, they cannot be used in evidence against the accused. The agreements shall be subject to the approval of the Court. (Rule on Guidelines to be Observed by Trial Court Judges and Clerks of Court in the Conduct of Pre-trial and Use of DepositionDiscovery Measures, Sec. IB[8]a; and Rules of Court, Rule 118, sec. 2a) The Court may impose appropriate sanctions or penalties on the accused or counsel or the prosecutor who does not appear at the pre-trial conference and does not offer an acceptable excuse for his absence and lack of cooperation. (Rules of Court, Rule 118, sec. 3a) (d) Pre-trial order. — After the pre-trial conference, the Court shall issue a pre-trial order reciting the actions taken, the facts stipulated, the admissions made, evidence marked, and such other matters covered during the pre-trial conference. The order shall bind the parties, limit the trial to matters not disposed of and control the course of the action during the trial, unless modified by the Court to prevent manifest injustice. (Rules of Court, Rule 118, sec. 4a) RULE 12 TRIAL SECTION 1. Procedure. — The Court shall conduct the trial in accordance with Rule 30 of the Rules of Court in civil cases and Rule 119 thereof in criminal cases, (n) SEC. 2. Power of the Court to receive evidence. — The Court may receive evidence in the following cases: (a) In all cases falling within the original jurisdiction of the Court in Division pursuant to Section 3, Rule 4 of these Rules; and (b) In appeals in both civil and criminal cases where the Court grants a new trial pursuant to Section 2, Rule 53 and Section 12, Rule 124 of the Rules of Court, (n) SEC. 3. Taking of evidence by a justice. — The Court may, motu proprio or upon proper motion, direct that a case, or any APPENDIX " K " A.M. NO. 05-11-07-CTA 439 issue therein, be assigned to one of its members for the taking of evidence, when the determination of a question of fact arises at any stage of the proceedings, or when the taking of an account is necessary, or when the determination of an issue of fact requires the examination of a long account. The hearing before such justice shall proceed in all respects as though the same had been made before the Court. Upon the completion of such hearing, the justice concerned shall promptly submit to the Court a written report thereon, stating therein his findings and conclusions. Thereafter, the Court shall render its decision on the case, adopting, modifying, or rejecting the report in whole or in part, or, the Court may, in its discretion, recommit it to the justice with instructions, or receive further evidence, (n) SEC. 4. Taking of evidence by Court official. — In default or ex parte hearings, or in any case where the parties agree in writing, the Court may delegate the reception of evidence to the Clerk of Court, the Division Clerks of Court, their assistants who are members of the Philippine bar, or any Court attorney. The reception of documentary evidence by a Court official shall be for the sole purpose of marking, comparison with the original, and identification by witnesses of such documentary evidence. The Court official shall have no power to rule on objections to any question or to the admission of exhibits, which objections shall be resolved by the Court upon submission of his report and the transcripts within ten days from termination of the hearing. (Rules of Court, Rule 30, sec. 9a) SEC. 5. Presentation of voluminous documents or long accounts. — In the interest of speedy administration of justice, the following rules shall govern the presentation of voluminous documents or long accounts, such as receipts, invoices and vouchers, as evidence to establish certain facts: (a) Summary and CPA certification. — The party who desires to introduce in evidence such voluminous documents or long accounts must, upon motion and approval by the Court, refer the voluminous documents to an independent Certified Public Accountant (CPA) for the purpose of presenting: 440 TAX PRINCIPLES A N D R E M E D I E S (1) a summary containing, among other matters, a chronological listing of the numbers, dates and amounts covered by the invoices or receipts and the amounts) of taxes paid; and (2) a certification of an independent CPA attesting to the correctness of the contents of the summary after making an examination, evaluation and audit of voluminous receipts, invoices or long accounts. The name of the Certified Public Accountant or partner of a professional partnership of certified public accountants in charge must be stated in the motion. The Court shall issue a commission authorizing him to conduct an audit and, thereafter, testify relative to such summary and certification. (b) Pre-marking and availability of originals. — The receipts, invoices, vouchers or other documents covering the said accounts or payment to be introduced in evidence must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party who desires to check and verify the correctness of the summary and CPA certification. The original copies of the voluminous receipts, invoices or accounts must be ready for verification and comparison in case doubt on its authenticity is raised during the hearing or resolution of the formal offer of evidence, (n) RULE 13 TRIAL BY COMMISSIONER SECTION 1. Appointment of independent Certified Public Accountant (CPA). — A party desiring to present voluminous documents in evidence before the Court may secure the services of an independent Certified Public Accountant (CPA) at its own expense. The Court shall commission the latter as an officer of the Court solely for the purpose of performing such audit functions as the Court may direct, (n) SEC. 2. Duties of independent CPA. — The independent CPA shall perform audit functions in accordance with the generally APPENDIX " K " A.M. NO. 05-11-07-CTA 441 accepted accounting principles, rules and regulations, which shall include: (a) Examination and verification of receipts, invoices, vouchers and other long accounts; (b) Reproduction of, and comparison of such reproduction with, and certification that the same are faithful copies of original documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c) Preparation of schedules or summaries containing a chronological listing of the numbers, dates and amounts covered by receipts or invoices or other relevant documents and the amount(s) of taxes paid; (d) Making findings as to compliance with substantiation requirements under pertinent tax laws, regulations and jurisprudence; (e) Submission of a formal report with certification of authenticity and veracity of findings and conclusions in the performance of the audit; (f) Testifying on such formal report; and (g) Performing such other functions as the Court may direct. SEC. 3. Findings of independent CPA. — The submission by the independent CPA of pre-marked documentary exhibits shall be subject "to verification and comparison with the original documents, the availability of which shall be the primary responsibility of the party possessing such documents and, secondarily, by the independent CPA. The findings and conclusions of the independent CPA may be challenged by the parties and shall not be conclusive upon the Court, which may, in whole or in part, adopt such findings and conclusions subject to verification, in) SEC. 4. Other referral to commissioner. — Whenever practicable and convenient, the Court may apply the procedure prescribed in Rule 32 of the Rules of Court. When the parties stipulate that 442 TAX P R I N C I P L E S A N D R E M E D I E S a commissioner's findings of fact shall be final, only questions of law shall thereafter be considered, (n) SEC. 5. Compensation of Commissioner. — The Court shall allow the commissioners such reasonable compensation as the circumstances of the case may warrant. (Rules of Court, Rule 32, sec. 13a) RULE 14 JUDGMENT, ITS ENTRY AND EXECUTION SECTION 1. Rendition of judgment. — The Court shall decide the cases brought before it in accordance with Section 15, paragraph (1), Article VIII of the 1987 Constitution. The conclusions of the Court shall be reached in consultation by the Members on the merits of the case before its assignment to a Member for the writing of the decision. The presiding justice or chairman of the Division shall include the case in an agenda for a meeting of the Court en banc or in Division, as the case may be, for its deliberation. If a majority of the justices of the Court en banc or in Division agree on the draft decision, the ponente shall finalize the decision for the signature of the concurring justices and its immediate promulgation. Any justice of the Court en banc or in Division may submit a separate written concurring or dissenting opinion within twenty days from the date of the voting on the case. The concurring and dissenting opinions, together with the majority opinion, shall be jointly promulgated and attached to therollo. bri In deciding the case, the Court may not limit itself to the issues stipulated by the parties but may also rule upon related issues necessary to achieve an orderly disposition of the case. (2002 Internal Rules of the Court of Appeals, Rule VI, sees. 9 and 10a; and Rules of Court, Rule 51, sec. 2a) SEC. 2. Form of decision. — Every decision or final resolution of the Court shall be in writing, stating clearly and distinctly the findings of fact and the conclusions of law on which it is based, and signed by the justices concurring therein. Such findings and conclusions shall be contained in the decision or final resolution APPENDIX " K " 443 A.M. NO. 05-11-07-CTA itself. However, in appealed cases, the Court may adopt by reference the findings and conclusions set forth in the decision, order or resolution appealed from. Every decision of the Court shall be accompanied by a certification signed by the presiding justice or acting presiding justice, chairman or most senior member as acting chairman of the Court en banc or in Division in the following form: "Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court." (Rules of Court, Rule 51, sec. 5a; and 2002 Internal Rules of the Court of Appeals, Rule VI, sec. 11a) SEC. 3. Amended decision. — Any action modifying or reversing a decision of the Court en banc or in Division shall be denominated as Amended Decision. (2002 Internal Rules of the Court of Appeals, Rule VI, sec. 12a) SEC. 4. Resolution. — Any disposition of the Court en banc or in Divisions other than on the merits shall be embodied in a Resolution. (2002 Internal Rules of the Court of Appeals, Rule VI, sec. 12a) SEC. 5. Promulgation and notice of decision and resolution. — The Clerk of Court or Deputy Clerk of Court shall have the direct responsibility for the promulgation of the decision and resolution of the Court. He shall see to it that the decision and resolution are properly signed by the concurring and dissenting justices and the required certification is duly accomplished. Promulgation consists of the filing of the decision or resolution with the Clerk of Court or Division Clerk of Court, who shall forthwith annotate the date and time of receipt and attest to it by his signature thereon. He shall serve notice of such decision or resolution upon the parties or their counsel, furnishing them with certified true copies thereof. (2002 Internal Rules of the Court of Appeals, Rule VI, sec. 13a; and Rules of Court, Rule 51, sec. 9a) TAX PRINCIPLES A N D R E M E D I E S In criminal cases originally filed with and decided by the Court in Division, the chairman shall cause the decision or resolution to be filed with the Division Clerk of Court in a sealed envelope, who shall schedule its promulgation, giving notice to the prosecution, the accused personally or through his bondsman or warden, and counsel requiring their presence at the promulgation. The promulgation shall consist of the reading by the Division Clerk of Court of the dispositive portion of the decision or resolution in the presence of the accused and a justice of the Division that rendered the same. If the accused is detained, the warden shall produce him before the Court. However, if he is detained outside Metro Manila, the Court may authorize the executive judge of the Regional Trial Court having territorial jurisdiction over the place of detention to promulgate the decision or resolution at such place. (Rules of Court, Rule 120, sec. 6a) SEC. 6. Entry of judgment and final resolution. — If no appeal or motion for reconsideration or new trial is filed within the time provided in these Rules, the Clerk of Court shall forthwith enter the judgment or final resolution in the book of judgment. The date when the judgment or final resolution becomes executory shall be deemed the date of its entry. The entry shall contain the dispositive part of the judgment or final resolution and shall be signed by the Clerk of Court, with a certification that such judgment or resolution has become final and executory. (Rules of Court, Rule 51, sec. 10a) SEC. 7. Execution of judgment. — Upon the expiration of the period to appeal from a judgment or order that disposes of the action or proceeding and no appeal has been duly perfected, execution shall issue as a matter of right, on motion. If an appeal has been duly perfected and finally resolved, execution may be forthwith applied for in the court of origin, on motion of the judgment oblige, submitting therewith a certified true copy of the judgment or final order sought to be enforced and of its entry, with notice to the adverse party. (Rules of Court, Rule 39, sec. la) APPENDIX " K " A.M. NO.05-11-07-CTA 445 RULE 15 MOTION FOR RECONSIDERATION OR NEW TRIAL SECTION 1. Who may and when to file motion. — Any aggrieved party may seek a reconsideration or new trial of any decision, resolution or order of the Court. He shall file a motion for reconsideration or new trial within fifteen days from the date he received notice of the decision, resolution or order of the Court in question. (RCTA, Rule 13, sec. la) SEC. 2. Opposition. — The adverse party may file an opposition to the motion for reconsideration or new trial within ten days after his receipt of a copy of the motion for reconsideration or new trial of a decision, resolution or order of the Court. (RCTA, Rule 13, sec. 2a) SEC. 3. Hearing of the Motion. — The motion for reconsideration or new trial, as well as the opposition thereto, shall embody all supporting arguments and the movant shall set the same for hearing on the next available motion day. Upon the expiration of the period set forth in the next preceding section, without any opposition having been filed by the other party, the motion for reconsideration or new trial shall be considered submitted for resolution, unless the Court deems it necessary to hear the parties on oral argument, in which the case the Court shall issue the proper order. (RCTA, Rule 13, sec. 3a) SEC. 4. Effect of filing the motion. — The filing of a motion for reconsideration or new trial shall suspend the running of the period within which an appeal may be perfected. (RCTA, Rule 13, sec. 4a) SEC. 5. Grounds of motion for new trial. — A motion for new trial may be based on one or more of the following causes materially affecting the substantial rights of the movant: (a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have guarded against and by reason of which such aggrieved party has probably been impaired in his rights; or 446 TAX PRINCIPLES AND REMEDIES (b) Newly discovered evidence, which he could not, with reasonable diligence, have discovered and produced at the trial and, which, if presented, would probably alter the result. A motion for new trial shall include all grounds then available and those not included shall be deemed waived. (Rules of Court, Rule 37, sec. la) SEC. 6. Contents of motion for reconsideration or new trial and notice. — The motion shall be in writing stating its grounds, a written notice of which shall be served by the movant on the adverse party. A motion for new trial shall be proved in the manner provided for proof of motions. A motion for the cause mentioned in subparagraph (a) of the preceding section shall be supported by affidavits of merits which may be rebutted by counteraffidavits. A motion for the cause mentioned in subparagraph (b) of the preceding section shall be supported by affidavits of the witnesses by whom such evidence is expected to be given, or by duly authenticated documents which are proposed to be introduced in evidence. A motion for reconsideration or new trial that does not comply with the foregoing provisions shall be deemed pro forma, which shall not toll the reglementary period for appeal. (Rules of Court, Rule 37, sec. 2a) SEC. 7. No second motion for reconsideration or for new trial. — No party shall be allowed to file a second motion for reconsideration of a decision, final resolution or order; or for new trial. (Rules of Court, Rule 52, sec. 2a) SEC. 8. Ruling. — The Court shall resolve the motion for reconsideration or new trial within three months from the time it is deemed submitted for resolution. (Rules of Court, Rule 52, sec. 3a) RULE 16 APPEAL SECTION 1. Appeal to Supreme Court by petition for review on certiorari. — A party adversely affected by a decision or ruling APPENDIX " K " A.M. NO. 05-11-07-CTA 447 of the Court en banc may appeal therefrom by filing with the Supreme Court a verified petition for review on certiorari within fifteen days from receipt of a copy of the decision or resolution, as provided in Rule 45 of the Rules of Court. If such party has filed a motion for reconsideration or for new trial, the period herein fixed shall run from the party's receipt of a copy of the resolution denying the motion for reconsideration or for new trial, (n) SEC. 2. Effect of appeal. — The motion for reconsideration or for new trial filed before the Court shall be deemed abandoned if, during its pendency, the movant shall appeal to the Supreme Court pursuant to Section 1 of this Rule. (2002 Internal Rules of the Court of Appeals, Rule VI, sec. 15a) RULE 17 LEGAL FEES AND COSTS SECTION 1. Additional fees and costs. — In addition to the fees prescribed in Rule 141 of the Rules of Court and all amendments thereto, the following legal fees and costs shall be collected: (a) For reception of evidence by a Court official pursuant to Section 4, Rule 12 of these Rules five hundred pesos for each day of actual sessions; and (b) For any other services of the Clerk of Court and other Court officials not provided for in Rule 141 of the Rules of Court, two hundred pesos;. RULE 18 EFFECTIVITY SECTION 1. Effectivity of the Revised Rules. — These Rules shall take effect on the fifteenth day of December 2005 following their publication in a newspaper of general circulation in the Philippines not later than 25 November 2005. (n) TAX PRINCIPLES A N D REMEDIES by JAPAR B. DIMAAMPAO Associate Justice, Court of Appeals Professor of Law and Bar Reviewer FOURTH EDITION 2011 Published & Distributed by R E X B o o k Store 856 Nlcanor Reyes, Sr. St. Philippine Copyright, 2011 by No portion of this book may be copied or reproduced in books, pamphlets, outlines or notes, whether printed, mimeographed, typewritten, copied in different electronic devices or in any other form, for distribution or sale, without the written permission of the author except brief passages in books, articles, reviews, legal papers, and judicial or other official proceedings with proper citation. Any copy of this book without the corresponding number and the signature of the author on this page either proceeds from an illegitimate source or is in possession of one who has no authority to dispose of the same. ALL RIGHTS RESERVED BY THE AUTHOR N? 1904 Printed by r e x pmofflNq c o M p w y , foe 84 P Florentine. St.. Quezon City Tel No». 712-41-08-712-41-01 • FOREWORD Recently we have seen a tremendous multiplication of treatises on various legal fields. Despite this development, however, few annotators have dared to tread the intricate pathways of Taxation. As a result, we have a scarcity of legal resources on this important yet little discussed subject. Taxes are the lifeblood of State, and it is unfortunate that there are not enough dissertations that can explain to lawyers and non-lawyers alike the entire expanse of this subject. This work by Judge Japar B. Dimaampao is thus a welcome contribution to our country's growing legal atheneum. Having taught the subject as a law professor and a Bar reviewer, Judge Dimaampao truly knows Taxation like the back of his hand. His ease with the subject is evident, and his confidence in discussing tax issues is reassuring. Like any good law book, this volume discusses the general rules of Taxation, the exceptions to the rules, and then the exceptions to the exceptions. The book goes the extra mile, however, by integrating various sources of taxation principles, including laws, local jurisprudence and foreign authorities. And then there is the matter of the extensive breadth of the discussion, which exhausts all. The wealth of learning encased here can intimidate even the keenest of readers, but the author's lucid explications facilitate the comprehension of an exceedingly complex field of law. This is a guidebook that no student of law should be left without. Indeed, it would be helpful even to those who wish only to better understand the workings of government. I am much pleased that this expertly crafted commentary is now part of our country's legal wealth. It deals with a subject that must be understood by all, and it provides the means by which such understanding may be had. The realization of justice is expedited by knowledge of the law, and in this sense, I am thankful that we have this book to help our countrymen realize justice. City of Manila, 11 July 2002. HILARIO G. DAVIDE, JR. PREFACE TO THE 2011 REVISED EDITION The encomiastic reception of the book inspired this latest edition. The simplified yet comprehensive approach of the book's first three publications had been scrupulously adopted. The core revisions in this edition consist of jurisprudential pronouncements on tax principles, particularly the limitations on the power to tax, exemption of instrumentalities of the national government from taxation, progressive taxation vis-d-vis regressive taxation and direct double taxation. For tax remedies, this publication includes a discourse on recent cases delving on tax refund and its two-fold purpose, computation of the two-year prescriptive period for filing tax refund, and the proper party who may seek refund of indirect tax. The 2010 case of Allied Banking Corporation v. Commissioner of Internal Revenue, 611 SCRA 692, and its resounding impact on the rule on exhaustion of administrative remedies discernibly draw cognizance. This oeuvre also contains considerable discussions on assessment, collection, Best Evidence Rule as now envisaged under Section 6 of the present NIRC, and the rationale behind the No Injunction Rule. Notations on Republic Act No. 9503 reflecting the increase in the composition of the Court of Tax Appeals from a division of three Justices to three divisions of nine Justices, the CTA's rules on documentary evidence and the purpose of automatic review in customs cases are exigent additions to this publication. The author's earnest and unceasing desire is to unriddle the complexities of taxation for lawyers, students and bar reviewees. May this humble opus turn the vision into reality. Las Pifias, 3 January 2011. JBD PREFACE TO THE 2008 R E V I S E D EDITION This publication is yet another modest attempt to probe through the labyrinth of taxation. In the years that have passed since the last edition came out, the field of taxation has been enriched by significant pronouncements of the Supreme Court. This edition accentuates decisional rules on the Expanded Senior Citizen's Act under Republic Act No. 9257, as well as the Destination Principle under the Reformed Value Added Tax Law or Republic Act No. 9337. It also includes a vital discussion on the strict observance of the rule on valid assessment and tax refund. The Revised Rules of the Court of Tax Appeals has been added for better appreciation of the considerable role that this collegiate court has taken in the adjudication of tax cases. May this publication merit the same enthusiastic response that it has previously enjoyed. It is the author's hope that this book continue to be of help to lawyers, bar reviewees and law students in their quest for knowledge. Las Pinas, 28 February 2008. JBD PREFACE TO THE 2005 REVISED EDITION This revised edition includes updates on various jurisprudence involving tax principles and remedies recently pronounced bythe Supreme Court. The main addition, however, is the outlined discussion on the salient features of R.A. 8292 which significantly expanded the jurisdiction of the Court of Tax Appeals and redefined its role and rank as a Collegiate Court in the Judiciary. As with the first edition, the purpose this revised edition seeks to achieve anchors on the author's desire to present the issues in taxation in a comprehensive yet comprehensible manner. JBD ix PREFACE TO THE 2002 EDITION Taxation is one of the most difficult subjects in the Bar. In a large sense, law students and bar candidates have found the subject very technical, especially those who never had any experience in taxation in their undergraduate studies. As a Professor and a Bar Reviewer in Taxation, I have observed that law students and bar candidates have some difficulties understanding not only the intricacies of taxation law, but also the fundamentals and basic structures involved in the discipline. This encouraged me to publish a book for the use and benefit of bar reviewees and law students. To this end, "Tax Principles and Remedies'' is intended to help law students and bar reviewees, as well, to understand taxation law in a simplified manner. Beyond this, this humble work aims to provide clarification and understanding to frequently asked questions about taxation law, in such a way that the answers could easily be grasped and committed to memory by the law student, bar reviewee and tax practitioner. This book contains the author's synthesized lectures in Bar Review classes; jurisprudential opinions of Judge Cooley, a noted authority in Taxation; settled Tax Rules; and recent decisions of the Supreme Court on the subject. It is fervently hoped that this book would be of great assistance to law students, bar reviewees, professors, lawyers, and tax practitioners, in their pursuit of excellence in the noble profession of law. JBD To my parents, for encouraging me to achieve and pursue my dreams and my beloved wife, GIN A, for inspiring me to reach the heights of my destiny ACKNOWLEDGMENTS Time and again, I have been asked if it would be possible to write a book on Taxation — one that is easy to grasp and understand. Finally, words of encouragement and unwavering support from my family, friends and colleagues have inspired me to start and eventually finish this book. It was once said that it takes a whole village to raise a child. The writing of this book is a truism of this adage. Thus, my deepest gratitude to: Honorable Hilario G. Davide, Jr., Chief Justice of the Supreme Court of the Philippines, who willingly gave the FOREWORD of this first book, saying therein that my book, having been expertly crafted, "is now part of our country's legal wealth." Former Justice Secretary now Dean of the College of Law of MLQU, Dean Artemio Tuquero, for reposing in me such trust and confidence and for sharing in my belief that the task of conferring knowledge is sacred. Thank you too, Sir, for all the years of guidance and friendship; Atty. Juliet M. Manalo and Ms. Fatima H. Magtibay, both former students, for turning their nights into days to do an extensive research on the subject; Ms. Ynna F. Adalla, also a former student, for proofreading every page of this book; Dean Ed Vincent Albano, for continuously firing me up to put my knowledge into writing; Mrs. Cecille V. Dumdum, for tirelessly typing and encoding the text; Ms. Maia V. Dumdum, whose comments and suggestions, being a student herself, did not fall on deaf ears instead taken and used in the writing of the book; Ms. Cecille B. Bulaong, for her indefatigable desire to finish the typing and encoding the entirety of the book; My former students, Cathy Cunanan, Mads Albano, Emer Francia, who are all lawyers now, for their never ending support and backing up; My staff at Branch 208, RTC, Mandaluyong City, Norbie Torres and Mhel Ballesteros for their technical support; My friends, for airlifting me out of the many jams of writing a book; Rex Bookstore, Inc., its late Chairman Juanito F. Fontelera and Arty. Ernesto C. Salao for their assistance; All my students, for the confidence and faith they reposed in me as their professor in Taxation; and finally to ALMIGHTY GOD, the ultimate source of knowledge and wisdom. Forever, I will be thankful. JBD *76u mode&t tutu anitten uttde* tfie of Sufitemc ^cunt Senan (Justice IRenafo S. Vu*& Ai&uvuf, fiotleqe of *&<uv. lOiweteity of tfie Z**t. f 7 & ?u*uU fox ^e&avicA and SytlaScu of tAu 6006 wenc pnowded 6y (Ac TiS 'pouHcUtiott fox IReteancA and /tdumtced Studies. 1«c. ('US-7&4S')). CONTENTS CHAPTER I GENERAL PRINCIPLES I. II. Taxation Defined Basis of Taxation 1 2 A. 2 Taxation and the Lifeblood Doctrine Cases for Study CIR v. BPI, 521 SCRA 373, 387-388 CIR v. Pineda, 21 SCRA 105 Vera v. Fernandez, 89 SCRA 199 CIR v. CTA, 234 SCRA 348 Commissioner v. Algue, Inc., 158 SCRA 9 . YMCA v. CIR, 298 SCRA 83 Davao Gulf Lumber Corp. v. CIR, 293 SCRA 77 Marcos II v. CA, 273 SCRA 47 Reyes v. Almanzor, 196 SCRA 322 PB Com v. CIR, 302 SCRA 250 Phil. Guaranty, Co., Inc. v. CIR, 13 SCRA 775 Philex Mining Corp. v. CIR, 294 SCRA 687 North Camarines Lumber Co. v. CIR, 109 Phil. 511 ID. 2 3 4 5 6 7 8 8 9 9 10 10 10 B. Theories on Taxation 11 C. Liabilities Involved 12 Nature of the Taxing Power A. B. Taxation as an Inherent Attribute of Sovereignty Taxation as Legislative in Character xix 13 13 14 IV. Aspects, Processes, Phases of Taxation A. Levy/Imposition Scope of the Legislative Power to Tax 14 14 15 Cases for Study V. Lutz v. Araneta, 98 Phil. 148 Gomez v. Palomar, 25 SCRA 827 Punsalan v. Mun. Board of the City of Manila, 95 Phil. 46 Is the Power to Tax the Power to Destroy Judicial Review of Taxation 15 16 B. Assessment and Collection 21 C. Payment 21 17 18 20 Purposes of Taxation 22 A. B. 22 22 22 Primary Purpose: To Raise Revenues Secondary Purposes Reduction of Social Inequality Encourage the Growth of Local Industry Protection of the Local Industry As an Implement of the Police Power VI. Extent of the Taxing Power VII. Principles of a Sound Tax System Fiscal Adequacy Theoretical Justice Administrative Feasibility VIII. Taxation Distinguished from Other Inherent Powers and Impositions A. Police Power B. Eminent Domain C. Other Impositions Special Assessment License Toll Penalty Debt XX 23 23 23 26 27 27 27 27 28 28 29 29 29 30 31 31 32 Cases for Study Francia v. IAC, 162 SCRA 753 Domingo v. Garlitos, 8 SCRA 443 Philex Mining Corp. v. CIR, 294 SCRA 687 LX. Limitations on the Taxing Power A. Inherent Limitations 1. Public Purpose 33 34 35 35 36 36 Cases for Study 2. 3. Gomez v. Palomar, 25 SCRA 827 Lutz v. Araneta, 98 Phil. 148 Tio v. VRB, 151 SCRA 208 City of Baguio v. De Leon, 25 SCRA 938 Bagatsing v. Ramirez, 74 SCRA 306... Pascual v. Secretary of Public Works, 110 SCRA 331 International Comity Territoriality Mobilia Sequuntur Personam Commissioner v. BOAC, 149 SCRA 395 38 39 40 40 41 41 42 43 44 46 Case for Study Atlas Consolidated Mining and Development Corp. v. Commissioner of Internal Revenue, 524 SCRA 731,103 4. Non-Delegation of the Power to Tax 48 48 Cases for Study Board of Assessment Appeals of Laguna v. CTA, 8 SCRA 224 Pepsi-Cola Bottling Co. v. City of Butuan,24SCRA789 Pepsi-Cola Bottling Co. v. Municipality of Tanauan, 69 SCRA 460 xxi 50 50 50 5. Osmena v. Orbos, 220 SCRA 703 Villegas v. Hiu Chiong Tsai Pao Ho, 86 SCRA 270 Gomez v. Palomar, 25 SCRA 827 Bagatsing v. Ramirez, 74 SCRA 306... Exemption from Taxation of Government Agencies/Instrumentalities 51 52 53 54 54 Cases for Study Standard Oil Company of New York v. Posadas, 55 Phil. 715 Board of Assessment Appeals v. CTA, 8 Phil. 227 National Development Co. v. Cebu City, 215 SCRA 382 ESSO Standard Eastern, Inc. v. Acting Commissioner of Customs, 18 SCRA 488 B. 58 58 59 60 Constitutional Limitations 61 1. 62 Due Process of Law Cases for Study 2. Carlos Superdrug Corp. v. DSWD, 526 SCRA 130,140,143-145 Reyes v. Almanzor, 196 SCRA 322 Commissioner of Internal Revenue v. CA, 261 SCRA 236 Equal Protection of the Law 68 69 70 71 Cases for Study Gomez v. Palomar, 25 SCRA 827 Eastern Theatrical Co. v. Alfonso, 83 Phil. 852 Manila Race Horse Trainers Assn., Inc. v. De la Fuente, 88 Phil. 60 Punsalan v. Mun. Board of the City of Manila, 95 Phil. 46 City of Baguio v. De Leon, 25 SCRA 938 75 76 77 78 79 3. Sison v. Ancheta, 130 SCRA 654.._ Juan Luna Subdivision, Inc. v. Sarmiento, 91 Phil. 371 Association of Custom Brokers, Inc. v. Mun. Board, City of Manila, 93 Phil. 107 Ormoc Sugar Co., Inc. v. Treasurer of Ormoc City, 22 SCRA 603 Reyes v. Almanzor, 196 SCRA 322 Villegas v. Hsiu Chiong Chai Pao, 86 SCRA 270 Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, 238 SCRA 63. Tolentino v. Secretary of Finance, 235 SCRA 630 Uniformity of Taxation 79 80 81 82 83 84 84 85 88 Case for Study 4. 5. Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas v. Tan, 163 SCRA 371 Progressive Taxation Non-Impairment Clause 89 90 91 Cases for Study Casanovas v. Hord, 8 Phil. 125 6. 7. 95 Tolentino v. Secretary of Finance, 235 SCRA 630 95 Cagayan Electric Power and Light Co., Inc. v. Commissioner, G.R. No. 60126, September 25,1985 96 Philippine Power and Development Co. v. Commissioner, CTA Case No. 1152, October 31,1965 96 Non-Imprisonment for Non-Payment of Poll Tax 97 Bills to Originate from the House of Representatives 97 Case for Study 8. 9. 10. Tolentino v. Secretary of Finance, 235 SCRA 630 Veto Power of the President President's Power to Tax Taxation and the Freedom of the Press 97 101 102 103 Case for Study Tolentino v. Secretary of Finance, 235 SCRA 630 11. Taxation and Freedom of Religion 12. Tax Exemption of Properties Used for Religious, Charitable, and Educational Purposes Controlling Doctrine on Exemption from Taxation of Real Property of Religious, Charitable, and Educational Institutions 103 104 105 106 Cases for Study Abra Valley College, Inc. v. Aquino, 162 SCRA 106 Rev. Lladoc v. CIR, 14 Phil. 292 YMCA of Manila v. Collector of Internal Revenue, 33 Phil. 217... Bishop of Nueva Segovia v. Prov. Board of Ilocos Norte, 51 Phil. 352 Herrera v. Quezon City Board of Assessment Appeals, 3 SCRA 186 and Commissioner of Internal Revenue v. Bishop of the Missionary District, 14 SCRA 991 Province of Abra v. Hernando, 107 SCRA 104 13. Tax Exemptions Granted to Non-Stock, Non-Profit Educational Institutions.. 14. Appropriation of Public Money 15. Grant of Tax Exemptions x»v 108 110 Ill 111 Ill 112 112 117 118 Cases for Study ESSO Standard Eastern, Inc. v. Acting Comm. of Customs, 18 SCRA 488 Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, 238 SCRA 63 16. Local Taxation 122 123 124 Cases for Study X. Villanueva v. City of Iloilo, 26 SCRA 578 Pepsi-Cola Bottling Co. v. Mun. of Tanauan, Leyte, 69 SCRA 460 Pepsi-Cola Bottling Co. v. City of Butuan, 24 SCRA 789 17. Special Fund Case for Study Osmena v. Orbos, 220 SCRA 703 18. Supreme Court's Jurisdiction Over Tax Cases Kinds of Taxes Differentiated Direct and Indirect Specific and Ad Valorem General and Special National and Local Personal and Property Progressive and Regressive XI. Concept of Double Taxation XII. Tax Evasion and Tax Avoidance 128 129 130 130 130 133 134 134 135 136 136 136 137 137 140 Case for Study Ungab Doctrine Sustained in CIR v. Pascor, 309 SCRA 402 XIII. Doctrine of Imprescriptibility XTV. Nature and Prospectivity of Tax Laws XV. Taxpayer's Suit, Requisites XXV 144 145 146 147 CHAPTER II TAX REMEDIES I. Remedies of the Government A. Assessment and Collection Commissioner's Recommendation Letter cannot be considered as Formal Assessment of Tax Liability Presumption of Regularity of Assessment 148 148 149 150 Cases for Study Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 104151.... Republic of the Philippines v. Court of Appeals, 149 SCRA 351 Assessment Deemed Made Meaning of Best Evidence Existing Revenue Procedures and Jurisprudence Governing Assessment Assessment Based on Estimate Networth Method of Investigation B. Remedies for Collection of Delinquent Taxes.... 1. Distraint and Levy Procedure for Actual Distraint 150 152 153 154 155 156 157 157 158 161 Case for Study Collector of Internal Revenue v. Flores vda. de Codinera, 102 Phil. 1165 Procedure on Levy of Real Property 164 165 Cases for Study Cabrera v. Provincial Treasurer of Tayabas, C.A. No. 502, January 29,1946 Valencia v. Jimenez, No. 4406, October 23,1908 168 169 2. 3. Some Principles Governing Distraint and Levy Civil Action A proceeding in Court after the Collection of Tax may be begun without assessment Criminal Action Criminal Complaint for Tax Evasion Distinguished from Assessment 171 173 174 177 178 Case for Study Ungab v. Cusi, Jr., 97 SCRA 877 4. Compromise Cases Which May Be Compromised Basis for Acceptance of Compromise Settlement Prescribed Minimum Percentages of Compromise Settlement Cases Which Cannot Be Compromised 5. Tax Liens Government's Claim Predicated on a Tax Lien is Superior to Claim Based on Judgment 6. Forfeiture 7. Civil Penalties C. No Injunction to Restrain Tax Collection Rationale of the No Injunction Rule II. 179 180 181 182 185 188 189 190 190 191 192 192 Statute of Limitations 193 A. Assessment of the Tax Liability 195 B. Case for Study Mambulao Lumber Company v. Republic, 132 SCRA 1 Collection of the Tax 196 197 xxvii C. Cases for Study Fernandez Hermanos, Inc. v. Commissioner of Internal Revenue, 29 SCRA 552 Republic v. Araneta, 2 SCRA 144 Marcos II v. Court of Appeals, 273 SCRA 47 Fraudulent or False Return What Constitutes Fraud Criminal Liability Suspension of Prescriptive Periods Case for Study Republic v. Hizon, 320 SCRA 574 i n . Taxpayer's Remedies A. Protest Against Assessment Request for Reconsideration Distinguished From Request for Reinvestigation 197 198 199 202 202 203 204 205 207 207 208 Case for Study Commissioner of Internal Revenue v. Villa, 22 SCRA 3 B. Claim for Refund Two-fold Purpose of Tax Refund Tax Refunds are not founded principally On Legislative Grace Tax Refund and Tax Credit Distinguished .... Requirements for Refund Claims Computation of the Two-Year Period The Two-Year Prescriptive Period for Filing of Tax Refund 210 213 214 214 215 215 219 222 CHAPTER III THE NEW COURT OF TAX APPEALS Salient Features of R.A. No. 9282 Expanded Jurisdiction of the CTA Composition Appeals Assumption to Office xxviii 229 229 230 230 230 CTA Proceedings ••• Jurisdiction Over Both Civil and Criminal Aspects CTA shall not be Governed by the Technical Rules of Evidence As a Court of Record, CTA is bound by the Rules on Documentary Evidence Outline of Jurisdiction Exclusive Appellate Jurisdiction to Review by Appeal Criminal and Civil Cases Exclusive Original Jurisdiction Exclusive Appellate Jurisdiction Who may Appeal? What is the Mode of Appeal? When distraint of Personal Property/Levy on Real Property shall issue? Appeal to the CTA shall not Suspend the Payment, Levy, Distraint and Sale of Taxpayer's Property Final Notice before Seizure 2 3 0 231 231 232 233 233 235 235 236 236 237 237 238 238 APPENDICES APPENDIX "A" Significant Jurisprudence and Doctrines in Taxation 247 APPENDIX "B" Revenue Regulations No. 12-99 294 APPENDIX "C" Revenue Memorandum Circular No. 23-2000 303 APPENDIX "D" Revenue Memorandum Circular No. 5-2001 315 APPENDIX "E" Revenue Regulations No. 7-2001 318 APPENDIX "F" Revenue Regulations No. 8-2004 326 APPENDIX "G" Republic Act No. 1125, as amended by Republic Act No. 3457 xxix An Act Creating the Court of Tax Appeals APPENDIX "H" Republic Act No. 9282 APPENDIX "I" 2011 Bar Coverage for Taxation APPENDIX ")" Bar Examination Questions in Taxation APPENDIX "K" A.M. No. 05-11-07-CTA Revised Rules of the Court of Tax Appeals TAXATION Birth determines personality. Upon birth, a child is bestowed his rights as a member of society. He receives not merely the love and affection of his natural parents but also the aid and protection of his parent State. In return, every citizen is beholden with a correlative duty to preserve the integrity of his parent State. The power of the State over its citizens manifests itself in the form of taxation.