1 TAXATION LAW 1 2014 | ATTY.

BONILLA TRICIA CRUZ JDCTR DLSU LAW

A. Module on Constitutional Provisions on Taxation and Fundamentals of Taxation Gaston v. Republic FACTS: Petitioners are sugar producers, sugarcane planters and millers, who have come to this Court in their individual capacities and in representation of other sugar producers, planters and millers; Respondent Republic Planters Bank (RPB) is a commercial banking corp. PHILSUCOM was formerly the govt office tasked with the function of regulating and supervising the sugar industry until it was suoerseded by its co respondent Sugar Regulatory Administration (SRA) under EO No. 18. EO abolished PHILSUCOM yet the latters existence as a juridical entity was still mandated to continue its winding-up of affairs. Angel Severino Jr., et al. (sugarcane planters in Negros Occidental) and National Federation Sugar Planters were allowed to intervene by the Court OTG of common cause with petitioners. Petitioners and Intervenors prayed for a Writ of mandamus commanding respondents to implement and accomplish the privatization of RPB by the transfer and distribution of the shares of stock in the said bank held by and still carried in the name of the PSC to the sugar producers, planters & millers who are the true beneficial owners of the shares; the same investment having been funded by the deduction of P1/picul from sugar proceeds of the sugar producers until the present stabilization fund pursuant to P.D. No. 388. Respondents PHILSUCOM and SRA, argued that no trust results from Section 7 of P.D. No. 388; that the stabilization fees collected are considered government funds under the Government Auditing Code; that the transfer of shares of stock from PHILSUCOM to the sugar producers would be irregular, if not illegal; and that this suit is barred by laches. ISSUE/S: W/N the stabilization fees collected from sugar planters and millers pursuant to Sec. 7 of PD 388 are funds in trust for them, or public funds? W/N shares of stock in respondent Bank paid for with said stabilization fees belong to the PHILSUCOM or to the different sugar planters and millers from whom the fees were collected and levied? RULING: 1. NO. Section 7 of P.D. No. 388 provides that the stabilization fees collected "shall be administered in trust by the Commission." However, while the element of an intent to create a trust is present, a resulting trust in favor of the sugar producers, millers and planters cannot be said to have ensued because the presumptive intention of the parties is not reasonably ascertainable from the language of the statute itself. No implied trust in favor of the sugar producers either can be deduced from the imposition of the levy. "The essential Idea of an implied trust involves a certain antagonism between the cestui que trust and the trustee even when the trust has not arisen out of fraud nor out of any transaction of a fraudulent or immoral character. It is not clearly shown from the statute itself that the PHILSUCOM imposed on itself the obligation of holding the stabilization fund for the benefit of the sugar producers. It must be categorically demonstrated that the very administrative agency which is the source of such regulation would place a burden on itself. 2. NO. The stabilization fees collected are in the nature of a tax, which is within the power of the State to impose for the promotion of the sugar industry (sugar liens). The stabilization fees in question are levied by the State upon sugar millers, planters and producers for a special purpose that of "financing the growth and development of the sugar industry and all its components, stabilization of the domestic market including the foreign market, the fact that the State has taken possession of moneys pursuant to law is sufficient to constitute them state funds, even though they are held for a special purpose. Having been levied for a special purpose, the revenues collected are to be treated as a special fund, to be, in the language of the statute, "administered in trust' for the purpose intended. Once the purpose has been fulfilled or abandoned, the balance, if any, is to be transferred to the general funds of the Government. That is the essence of the trust intended (1987 Constitution, Article VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI, Sec. 23(l]). That the fees were collected from sugar producers, planters and millers, and that the funds were channeled to the purchase of shares of stock in respondent Bank do not convert the funds into a trust fired for their benefit nor make them the beneficial owners of the shares so

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purchased. It is but rational that the fees be collected from them since it is also they who are to be benefited from the expenditure of the funds derived from it. To rule in petitioners' favor would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. The Stabilization Fund is to be utilized for the benefit of the entire sugar industry, "and all its components, stabilization of the domestic market," including the foreign market the industry being of vital importance to the country's economy and to national interest. Writ of mandamus DENIED and the Petition DISMISSED. FPA countered that the issuance of LOI No. 1465 was a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also averred that Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate consumer, not the seller. Contentions: o PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims that LOI was implemented for the purpose of assuring the fertilizer supply and distribution in the country and for benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI. o Fertiphil counters that LOI is unconstitutional because it was enacted to give benefit to a private company. The levy was imposed to pay the corporate debt of PPI. It also did not promote the general welfare of the people or public interest.

Planters Products vs. Fertiphil FACTS: Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws. They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals. On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in the Philippines. Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the depositary bank of the PPI. After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand. Fertiphil filed a complaint for collection and damages against FPA and PPI with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law. Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry.

ISSUE: W/N LOI 1465 constitutes a valid legislation pursuant to the exercise of taxation and police power for public purposes? (Other issues were re: procedural matters) RULING: NO. Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order to promote the general welfare, while the power of taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful subjects and lawful means test are used to determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations. Test of lawful subjects and lawful means: (1) the interest of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. While it is true that the power of taxation can be used as an implement of police power, the primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is called a property tax.

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The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five percent. A plain reading of the LOI also supports the conclusion that the levy was for revenue generation. The LOI expressly provided that the levy was imposed until adequate capital is raised to make PPI viable. Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a public purpose. The levy was imposed to give undue benefit to PPI. *Public purpose 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. Public purpose is the heart of a tax law. When a tax law is only a mask to exact tax funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of public purpose. create, through executive proclamation, subject to the concurrence of the local government units directly affected, other SEZs in areas such as Camp John Hay. BCDA entered into a Joint Venture Agreement with private respondents Tuntex and Asiaworld for the development of PoroPoin in La Union and Camp John Hay as premier tourist destinations and recreation centers. The Baguio City government passed several resolutions regarding the actions taken by BCDA. Among these involve the exclusion of barangays located within the camp from BCDAs development programs, a development program that affords protection to the environment, family-oriented tourist destinations, priority for Baguio residents in employment opportunities, and liability for local taxes of businesses to be established within the camp. The Sangguniang Panlungsod of Baguio finally passed a resolution supporting P.D. 420 issued by President Ramos, declaring a portion of the camp as a SEZ. P.D. 420 also declared among others that Camp John Hay SEZ is likewise entitled to all applicable incentives of SEZ under Section 12 of RA 7227 such as the tax exemptions aforementioned. Herein petitioners challenged among others this provision of PD 420 on tax exemption for being invalid as it is an unconstitutional exercise by the president of a power granted only to the legislature, and that it violates the rule that taxes should be uniform and equitable. Hence, this application to the Supreme Court for temporary restraining order and/or writ of preliminary injunction against respondents for implementation of PD 420.

John Hay Peoples Alternative Coalition FACTS: Herein petitioners assail the validity of Presidential Decree No. 420, Series of 1994, and CREATING AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP JOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC ACT NO. 7227. R.A. 7227 is AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING FUNDS THEREFOR AND FOR OTHER PURPOSES. R.A. 7227 provides for the conversion into alternative productive uses of former military bases in the Philippines, such as Clark and Subic military reservations and their extensions including John Hay Station (Camp John Hay). RA 7227 created BCDA to carry out the objectives of the law, and the Subic Special Economic (and Free Port) Zone (Subic SEZ), the metes and bounds of which were to be delineated in a Presidential Proclamation. Subic SEZ was granted by R.A. 7227 incentives ranging from tax and dutyfree importations, exemption of businesses therein from local and national taxes, to other hallmarks of a liberalized financial and business climate. R.A. No. 7227 expressly gave authority to the President to

ISSUES: W/N PD 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives to John Hay SEZ? RULING: NO. The Court observed that nowhere in RA 7227 is there a grant of tax exemption to SEZs yet to be established in base areas. The tax exemption provision of Section 12 of RA 7227 only applies exclusively to Subic SEZ, as confirmed by the deliberations of the Senate during the reading of the bill of RA 7227 with respect to investment policies that would govern Subic SEZ. It is clear that under said Section 12, it is only the Subic SEZ which was granted by Congress with tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other SEZs still to be created at the

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time via presidential proclamation. Tax exemption cannot be implied as it must be categorically and unmistakably expressed. While the grant of economic incentives may be essential to the creation and success of SEZs, free trade zones and the like, the grant thereof to John Hay SEZ cannot be sustained. The incentives under R.A. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support therein. Neither does the same grant of privileges to the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation No. 420. Petitioners are correct in concluding that the grant of tax exemption to John Hay SEZ contravenes Article VI, Section 28 (4) of the Constitution which provides that No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress. It is the legislature, unless limited by a provision of the State Constitution that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes. The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. The claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and unmistakably expressed. If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227. In view of the foregoing, the second sentence of Section 3 of PD 420 is declared NULL AND VOID and of no legal force and effect. The remaining provisions thereof remain valid and effective. OTHER MATTERS: 1. When questions of constitutional significance are raised, the court can exercise its power of judicial review only if the following requisites are present: (1) the existence of an actual and appropriate case; (2) a personal and substantial interest of the party raising the constitutional question; (3) the exercise of judicial review is pleaded at the earliest opportunity; and (4) the constitutional question is the lismota of the case. These are present in the case, thus, SC has jurisdiction to try and decide the case, despite the fact that that RA 7227 actually gives it the jurisdiction to enjoin or restrain implementation of projects for conversion of the base areas. Petitioners also have locus standi to institute this action as they have real interest over the subject matter. The SC can void an act or policy of the political departments of the government on either of two groundsinfringement of the Constitution or grave abuse of discretion. Where part of a statute is void as contrary to the Constitution, while another part is valid, the valid portion, if separable from the invalid, may stand and be enforced.

2.

3.

CIR v. SMC FACTS: Respondent San Miguel Corporation, a domestic corporation engaged in the manufacture and sale of fermented liquor, produces as one of its products "Red Horse" beer which is sold in 500-ml. and 1-liter bottle variants. On January 1, 1998, Republic Act (R.A.) No. 8424 or the Tax Reform Act of 1997 took effect. It reproduced, as Section 143 thereof, the provisions of Section 140 of the old National Internal Revenue Code as amended by R.A. No. 8240:
o SEC. 143. Fermented Liquor. - There shall be levied, assessed and collected an excise tax on beer, lager beer, ale, porter and other fermented liquors except tuba, basi, tapuy and similar domestic fermented liquors in accordance with the following schedule: (a) If the net retail price (excluding the excise tax and value-added tax) per liter of volume capacity is less P14.50, the tax shall be P6.15 per liter; (b) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume capacity is P14.50 up to P22.00, the tax shall be P9.15 per liter; (c) If the net retail price (excluding the excise tax and the value-added tax) per liter of volume capacity is more than P22.00, the tax shall be P12.15 per liter. Variants of existing brands which are introduced in the domestic market after the effectivity of Republic Act No. 8240 shall be taxed under the highest classification of any variant of that brand. Fermented liquor which are brewed and sold at micro-breweries or small establishments such as pubs and restaurants shall be subject to the rate in paragraph (c) hereof. The excise tax from any brand of fermented liquor within the next three (3) years from the effectivity of Republic Act No.

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8240 shall not be lower than the tax which was due from each brand on October 1, 1996.

On December 16, 1999, the Secretary of Finance issued Revenue Regulations No. 17-99 increasing the applicable tax rates on fermented liquor by 12% . This increase, however, was qualified by the last paragraph of sec. 1 of Revenue Regulations No. 17-99: new specific tax rate shall not be lower than the excise tax prior Jan. 2000. Now, for the period June 1, 2004 December 31, 2004, respondent was assessed and paid excise taxes amounting to P2,286,488,861.58 for the 323,407,194 liters of Red Horse beer products removed from its plants. Said amount was computed based on the tax rate of P7.07/liter or the tax rate which was being applied to its products prior to January 1, 2000, as the last paragraph of Section 1 of Revenue Regulations No. 17-99 provided that the new specific tax rate for fermented liquors "shall not be lower than the excise tax that is actually being paid prior to January 1, 2000. Respondent later contended that the said qualification in the last paragraph of Section 1 of Revenue Regulations No. 17-99 has no basis in the plain wording of Section 143. Respondent argued that the applicable tax rate was only the P 6.89/liter tax rate stated in Revenue Regulations No. 17-99, and that accordingly, its excise taxes should have been only P2,228,275,566.66. Respondent filed before the BIR a claim for refund or tax credit of the amount of P60,778,519.56 as erroneously paid excise taxes for the period of May 22, 2004 to December 31, 2004. Later, said amount was reduced to P58,213,294.92 because of prescription. As the petitioner Commissioner of Internal Revenue (CIR) failed to act on the claim, respondent filed a petition for review with the CTA. The CTA Second Division granted the petition and ordered petitioner to refund P58,213,294.92 to respondent or to issue in the latters favor a Tax Credit Certificate for the said amount for the erroneously paid excise taxes. The CTA held that Revenue Regulations No. 17-99 modified or altered the mandate of Section 143 of the Tax Reform Act of 1997. Petitioner sought reconsideration9 of the above decision, but the CTA Second Division denied petitioners motion in a Resolution10 dated January 17, 2008. Petitioner then filed a Petition for Review with the CTA En Banc. CTA En Banc affirmed the Decision and Resolution of the CTA Second Division. The CTA En Banc held that "considering that there is nothing in the law that allows the BIR to extend the three-year transitory

period, and considering further that there is no provision in the law mandating that the new specific tax rate should not be lower than the excise tax that is actually being paid prior to January 1, 2000, the last paragraph of BIR Revenue Regulations No. 17-99 has no basis in law and is inconsistent with the situation contemplated under the provisions of Section 143 of the Tax Reform Act of 1997. It is an unauthorized administrative legislation and, therefore, invalid. ISSUE: W/N the CTA committed reversible error in ruling that the provision in the last paragraph of Section 1 of Revenue Regulations No. 17-99 is invalid administrative interpretation of Sec. 143 of the Tax Reform Act of 1997? RULING: NO. Section 143 of the Tax Reform Act of 1997 is clear and unambiguous. It provides for two periods: (1) 3-year transition period beginning January 1, 1997, the date when R.A. No. 8240 took effect, until December 31, 1999; (2) the period thereafter. During the 3-year transition period, Section 143 provides that "the excise tax from any brand of fermented liquorshall not be lower than the tax which was due from each brand on October 1, 1996." After the transitory period, Section 143 provides that the excise tax rate shall be the figures provided under paragraphs (a), (b) and (c) of Section 143 but increased by 12%, without regard to whether such rate is lower or higher than the tax rate that is actually being paid prior to January 1, 2000 and therefore, without regard to whether the revenue collection starting January 1, 2000 may turn out to be lower than that collected prior to said date. Revenue Regulations No. 17-99, however, created a new tax rate when it added in the last paragraph of Section 1 thereof, the qualification that the tax due after the 12% increase becomes effective "shall not be lower than the tax actually paid prior to January 1, 2000." As there is nothing in Section 143 of the Tax Reform Act of 1997 which clothes the BIR with the power or authority to rule that the new specific tax rate should not be lower than the excise tax that is actually being paid prior to January 1, 2000, such interpretation is clearly an invalid exercise of the power of the Secretary of Finance to interpret tax laws and to promulgate rules and regulations necessary for the effective enforcement of the Tax Reform Act of 1997. Said qualification must, perforce, be struck down as invalid and of no effect.

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Tax burdens are not be imposed, nor presumed to be imposed beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. In case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails as said rule or regulation cannot go beyond the terms and provisions of the basic law. It must be stressed that the objective of issuing BIR Revenue Regulations is to establish parameters or guidelines within which our tax laws should be implemented, and not to amend or modify its substantive meaning and import. 23 and 27 legal and constitutional; ordering the plaintiff to pay taxes due under the Municipal Production tax (2 ordinances) and to pay the costs. Plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals.

ISSUE/S: Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive? Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes? RULING: 1. NO. 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. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department 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. This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax. Under the New Constitution, local governments are granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the power of local taxation. 2. NO. There is no double taxation. The argument of the Municipality is well taken. Further, Pepsi Colas assertion that the delegation of taxing power in itself constitutes double taxation cannot be merited. It must be observed that the delegating authority specifies the limitations and enumerates the taxes over which local taxation may not be exercised. The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law unlike in other jurisdictions. Double taxation becomes obnoxious only where the taxpayer is taxed twice for

Pepsi v. Tanauan FACTS: Pepsi-Cola Bottling Company of the Philippines Inc. commenced a complaint with preliminary injunction before the CFI of Leyte for that court to declare Section 2 of Republic Act No. 2264. (Local Autonomy Act) unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void. Stipulation of Facts: (1) Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein are practically the same; (2) On January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the provisions of said Ordinance No. 27, series of 1962. Municipal Ordinance No. 23, of Tanauan, Leyte levies and collects "from soft drinks producers and manufacturers a total of 1/16 of a centavo for every bottle of soft drink corked. For the purpose of computing the taxes due, the person, firm, company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of the total number of bottles produced and corked during the month. Municipal Ordinance No. 27 levies and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of P0.01 on each gallon (128 fluid ounces, U.S.) of volume capacity." For the purpose of computing the taxes due, the person, firm company, partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of the total number of gallons produced or manufactured during the month. CFI of Leyte rendered judgment dismissing the complaint and upholding the constitutionality of Sec. 2, RA No. 2264 declaring the Ordinance Nos.

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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. dealer, who, in the very nature of things, must be one engaged in business outside the City. Besides, the tax would not be applicable to such agent and/or consignee, if less than 1,000 cases of soft drinks are consigned or shipped to him every month. When we consider, also, that the tax shall be based and computed from the cargo manifest or bill of lading . . . showing the number of cases not sold but received by the taxpayer, the intention to limit the application of the ordinance to soft drinks and carbonated drinks brought into the City from outside thereof becomes apparent. Viewed from this angle, the tax partakes of the nature of an import duty, which is beyond defendants authority to impose by express provision of law. It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation. Even however, if the burden in question were regarded as a tax on the sale of said beverages, it would still be invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales, and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the City of Butuan, would be exempt from the disputed tax. The classification made in the exercise of this authority, to be valid, must, however, be reasonable and this requirement is not deemed satisfied unless: (1) It is based upon substantial distinctions which make real differences; (2) These are germane to the purpose of the legislation or ordinance; (3) The classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the present; and (4) The classification applies equally to all those who belong to the same class. These conditions are not fully met by the ordinance in question. Indeed, if its purpose was merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales thereof by dealers other than agents or consignees of producers or merchants established outside the City of Butuan should be exempt from the tax.

Pepsi v. Butuan FACTS: Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices and principal place of business in Quezon City. The defendants are the City of Butuan, its City Mayor, the members of its municipal board and its City Treasurer. Plaintiff seeks to recover the sums paid by it to the City of Butuan hereinafter referred to as the City and collected by the latter, pursuant to its Municipal Ordinance No. 110, as amended by Municipal Ordinance No. 122, both series of 1960, which plaintiff assails as null and void, and to prevent the enforcement thereof. This Ordinance imposes a tax on any person, association, etc., of P0.10 per case of 24 bottles of Pepsi- Cola. Pepsi operates within the Butuan and it paid under protest the amount of P4.926.63 from August 16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30, 1961. Pepsi filed a complaint for the recovery of the total amount of P14,177.03 paid under protest and those that it may later on pay until the termination of this case on the ground that Ordinance No. 110 as amended of the City of Butuan is illegal. Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the nature of an import tax. (2) it amounts to double taxation (3) it is excessive, oppressive and confiscatory. that the tax imposed is excessive and that it is unconstitutional. ISSUE: W/N the ordinance is valid? RULING: NO. The tax prescribed in sec 3 of Ordinance No. 110, as originally approved, was imposed upon dealers engaged in selling soft drinks or carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the sale of said merchandise. As amended by Ordinance No. 122, the tax is, however, imposed only upon any agent and/or consignee of any person, association, partnership, company or corporation engaged in selling . . . soft drinks or carbonated drinks.As a consequence, merchants engaged in the sale of soft drinks or carbonated drinks, are not subject to the tax, unless they are agents and/or consignees of another

Villanueva v. City of Iloilo FACTS:

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On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86. The Supreme Court, however, declared the ordinance ultra vires. On January 15, 1960 the municipal board of Iloilo City, believing that with the passage of Republic Act 2264, otherwise known as the Local Autonomy Act, it had acquired the authority or power to enact an ordinance similar to that previously declared by the Supreme Court as ultra vires, enacted Ordinance 11 (eleven), series of 1960, imposing municipal license tax on persons engaged in the business of operating tenement houses. In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five tenement houses, aggregately containing 43 apartments, while the other appellees and the same Remedios S. Villanueva are owners of ten apartments. By virtue of the ordinance in question, the appellant City collected from spouses Eusebio Villanueva and Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30, and from the appellees Pio Sian Melliza, Teresita S. Topacio, and Remedios S. Villanueva, for the years 1960-1964, the sum of P1,317.00. On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended complaint, respectively, against the City of Iloilo, praying that Ordinance 11, series of 1960, be declared "invalid for being beyond the powers of the Municipal Council of the City of Iloilo to enact, and unconstitutional for being violative of the rule as to uniformity of taxation and for depriving said plaintiffs of the equal protection clause of the Constitution," and that the City be ordered to refund the amounts collected from them under the said ordinance. The lower court rendered judgment declaring the ordinance illegal. in the business of operating tenement houses finds authority in Section 2 of the Local Autonomy Act which provides that chartered cities have the authority to impose municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges within their respective territories, and "otherwise to levy for public purposes, just and uniform taxes, licenses, or fees." NO. The ordinance is not violative of the rule of uniformity in taxation. The Supreme Court has already ruled that tenement houses constitute a distinct class of property. It has likewise ruled that "taxes are uniform and equal when imposed upon all property of the same class or character within the taxing authority." The fact, therefore, that the owners of other classes of buildings in the City of Iloilo do not pay the taxes imposed by the ordinance in question is no argument at all against uniformity and equality of the tax imposition. Neither is the rule of equality and uniformity violated by the fact that tenement taxes are not imposed in other cities, for the same rule does not require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. So long as the burden of the tax falls equally and impartially on all owners or operators of tenement houses similarly classified or situated, equality and uniformity of taxation is accomplished.

2.

ISSUE/S: W/N the City of Iloilo is empowered by the Local Autonomy Act to impose tenement taxes. W/N Ordinance 11, series of 1960, does violate the rule of uniformity of taxation. RULING: 1. YES. The lower court has interchangeably denominated the tax in question as a tenement tax or an apartment tax. Called by either name, it is not among the exceptions listed in Section 2 of the Local Autonomy Act. The imposition by the ordinance of a license tax on persons engaged

Swedish Match v. Treasurer FACTS: Petitioner paid business taxes in the total amount of P470, 932.21. The assessed amount was based on sections 14 and 21 of Ordinance No. 7794, otherwise known as the Manila Revenue Code, as amended by Ordinance Nos. 7798 and 8011. Out of that amount, only a portion was paid corresponding to the payment under Sec. 21. Petitioner wrote a letter to respondent assenting that it was not liable to pay taxes under Sec. 21. Petitioner filed a Petition for Refund of Taxes with the RTC of Manila in accordance with Section 196 of the LGCode of 1991. RTC dismissed petition. It held Secs. 14 and 21 pertained to taxes of a different nature and, thus, the elements of double taxation were wanting in this case. CTA affirmed.

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ISSUE: W/N the imposition of tax under Sec. 21 of the Manila Revenue Code constitutes double taxation in view of the tax collected and paid under Sec. 14 of the same code? RULING: YES. Petitioner maintains that the enforcement of Section 21 of the Manila Revenue Code constitutes double taxation in view of the taxes collected under Section 14 of the same code. Petitioner points out that Section 21 is not in itself invalid, but the enforcement of this provision would constitute double taxation if business taxes have already been paid under Section 14 of the same revenue code. Petitioner further argues that since Ordinance Nos. 7988 and 8011 have already been declared null and void in Coca-Cola Bottlers Philippines, Inc. v. City of Manila, all taxes collected and paid on the basis of these ordinances should be refunded. Petitioner should not have been subject to taxes under Sec. 21 of the Manila Revenue Code for the fourth quarter of 2001 considering that it had already been paying local business tax under Sec. 14 of the same ordinance. Double taxation means taxing the same property twice when it should be taxed only once; that is, taxing the same person twice by the same jurisdiction for the same thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character. Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter the privilege of doing business in the City of Manila; (2) for the same purpose to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority petitioner City of Manila; (4) within the same taxing jurisdiction within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods per calendar year; and (6) of the same kind or character a local business tax imposed on gross sales or receipts of the business. Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic Act 6958. Since the time of its creation, MCIAA enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14 of its Charter. However on 11 October 1994, the Office of the Treasurer of Cebu, demanded for the payment of realty taxes on several parcels of land belonging to the petitioner. Petitioner objected to such demand for payment as baseless and unjustified. It also asserted that it is an instrumentality of the government performing governmental functions, which puts limitations on the taxing powers of local government units. It nonetheless stands in the same footing as an agency or instrumentality of the national government by the very nature of its powers and functions. The City refused to cancel and set aside petitioners realty tax account, insisting that the MCIAA is a government controlled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local Government Code (LGC), and not an instrumentality of the government but merely a government owned corporation performing proprietary functions. MCIAA paid its tax account under protest when City is about to issue a warrant of levy against the MCIAAs properties. On 29 December 1994, MCIAA filed a Petition of Declaratory Relief with the Cebu Regional Trial Court contending that the taxing power of local government units do not extend to the levy of taxes or fees on an instrumentality of the national government. It contends that by the nature of its powers and functions, it has the footing of an agency or instrumentality of the national government; which claim, the City rejects. RTC dismissed the petition, citing a close reading of the LGC which provides the express cancellation and withdrawal of tax exemptions of Government Owned and Controlled Corporations. MCIAAs motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the petitioner filed the instant petition.

ISSUE: W/N MCIAA is liable to pay taxes as it has been assessed? RULING: YES. The exemption originally granted to MCIAA has been validly and effectively withdrawn. It must pay the assessed amount.

Mactan v. Marcos FACTS:

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its

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abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. Since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor of the taxing authority. A claim of exemption from tax payment must be clearly shown and based on language in the law too plain to be mistaken. There can be no question that under Section 14 RA 6958 the petitioner is exempt from the payment of realty taxes imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption is the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by LGUs of their power to tax, the scope thereof or its limitations, and the exemption from taxation. Section 133 of the LGC prescribes the common limitations on the taxing powers of LGUs: (a) Taxes, fees or charges of any kind on the national government, its agencies and instrumentalities and LGUs. Among the "taxes" enumerated in the LGC is real property tax. Section 234 of LGC provides for the exemptions from payment of GOCCs, except as provided therein. On the other hand, the LGC authorizes LGUs to grant tax exemption privileges. Reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as laid down in Secs 133 the taxing powers of LGUs cannot extend to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its agencies and instrumentalities, and LGUs"; however, pursuant to Sec 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, "real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial used thereof has been granted to a taxable person." As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including government-owned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except upon the effectivity of the LGC, except those granted to local water districts, cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer to Section 234, which enumerates the properties exempt from real property tax. But the last paragraph of Section 234 further qualifies the retention of the exemption in so far as the real property taxes are concerned by limiting the retention only to those enumerated there-in; all others not included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the real property is owned by the Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has been granted to taxable person for consideration or otherwise. Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from real property taxes granted to natural or juridical persons, including GOCCs, except as provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is qualified by Section 232 and 234. The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of 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. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need for this entities to share in the requirements of the development, fiscal or otherwise, by paying the taxes and other charges due from them. The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b) whether the petitioner is a "taxable person". It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then administered by the Lahug Air Port and includes the parcels of land the respondent City of Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands" among other things, to the petitioner and not just the transfer of the beneficial use thereof, with the ownership being retained by the Republic of the Philippines.

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This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's authorized capital stock consists of "the value of such real estate owned and/or administered by the airports." Hence, the petitioner is now the owner of the land in question and the exception in Sec 234(c) of the LGC is inapplicable. Petitioner cannot claim that it was never a "taxable person" under its Charter. It was only exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property tax. Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be an "agency" or "instrumentality" of the Government, a taxable person for such purpose in view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment of real property taxes, which, as earlier adverted to, applies to the petitioner. Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Pagcor is unavailing since it was decided before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom. ISSUE: W/N subject ordinance violated the cardinal rule of uniformity in taxation? RULING: YES. Ordinance No. 6537 does not lay down any criterion 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 mayors 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. The ordinance in question violates the due process of law and equal protection rule of the Constitution. 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 him the basic right of the people in the Philippines 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.

Villegas v. Hiu Chiong Tsia Pa Ho FACTS: Pao Ho is a Chinese national employed in the City of Manila. On 27 March 1968, then Manila mayor Antonio Villegas signed Ordinance No. 6537. The said ordinance prohibits foreign nationals to be employed within the City of Manila without first securing a permit from the Mayor of Manila. The permit will cost them P50.00. Pao Ho, on 04 May 1968 filed a petition for prohibition against the said Ordinance alleging that as a police power measure, it makes no distinction between useful and non-useful occupations, imposing a fixed P50.00 employment permit, which is out of proportion to the cost of registration and that it fails to prescribe any standard to guide and/or limit the action of the Mayor, thus, violating the fundamental principle on illegal delegation of legislative powers. Judge Arca of Manila CFI ruled in favor of Pao Ho and he declared the Ordinance as being null and void.

American Bible Society v. Manila FACTS: ABS is a foreign non-stock, non-profit, religious, missionary corporation duly registered and doing business in the Philippines through its Philippine agency established in Manila in November 1898. ABSs Philippine agency has been distributing and selling bibles and/or gospel portions thereof (except during the Japanese occupation) throughout the Philippines and translating the same into several Philippine dialects. City Treasurer of Manila informed ABS that it was conducting the business of general merchandise since November 1945 without providing itself with the necessary Mayors permit and municipal license in violation of Ordinance No. 3000 as amended, and Ordinance Nos. 2529, 3028 and 3364, and required plaintiff to secure corresponding permit and license fees.

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Plaintiff paid under protest. Plaintiff filed a complaint against the City Treasurer questioning the constitutionality of the ordinances. The provincial assessor made a tax assessment on the properties of the Roman Catholic Bishop of Bangued. The bishop claims tax exemption from real estate tax, through an action for declaratory relief. A summary judgment was made granting the exemption without hearing the side of the Province of Abra. ISSUE: Whether the properties of the Bishop of Bangued are tax-exempt. RULING: The 1935 and the 1973 Constitutions differ in language as to the exemption of religious property from taxes as tehy should not only be exclusively but also actually and directly used for religious purposes. Herein, the judge accepted at its face the allegation of the Bishop instead of demonstrating that there is compliance with the constitutional provision that allows an exemption. There was an allegation of lack of jurisdiction and of lack of cause of action, which should have compelled the judge to accord a hearing to the province rather than deciding the case immediately in favor of the Bishop. Exemption from taxation is not favored and is never presumed, so that if granted, it must be strictly construed against the taxpayer. There must be proof of the actual and direct use of the lands, buildings, and improvements for religious (or charitable) purposes to be exempted from taxation. The case was remanded to the lower court for a trial on merits.

ISSUE: Constitutionality of questioned ordinances. RULING: Section 1, (7) of Article III of the Constitution (this is a 1957 case) provides: (7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof, and the free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religion test shall be required for the exercise of civil or political rights. Predicated on this constitutional mandate, ABS contends that the Ordinances Nos. 2529 and 3000, as respectively amended, are unconstitutional and illegal and insofar as its society is concerned, because they provide for religious censorship and restrain the free exercise and enjoyment of its religious profession to wit; the distribution and sale of bibles and other religious literature to the people of the Philippines. The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent. The SC held that it could not be said that petitioners were engaged in commercial rather than a religious venture. Their activities could not be described as embraced in the occupation of selling books and pamphlets. The ordinance in question is a license tax a flat tax imposed on the exercise of a privilege granted by the Bill of Rights. The power to impose a license tax on the exercise of the freedom is indeed as potent as the power of censorship which this Court has repeatedly struck down. The provisions of Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs.

Province of Abra v. Hernando FACTS:

Abra Valley College v. Aquino FACTS: Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange Commission in 1948, filed a complaint to annul and declare void the Notice of Seizure and the Notice of Sale of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said Notice of Seizure by respondents Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned decision. The trial court ruled for the government, holding that the second floor of the building is being used by the director for residential purposes and that the ground floor used and rented by Northern Marketing Corporation, a commercial establishment, and thus the property is not being used exclusively for educational purposes. Instead of perfecting an

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appeal, petitioner availed of the instant petition for review on certiorari with prayer for preliminary injunction before the Supreme Court, by filing said petition on 17 August 1974. ISSUE: W/N the lot and building are used exclusively for educational purposes RULING: 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, buildings, and improvements used exclusively for religious, charitable or educational purposes. Reasonable emphasis has always been made 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. In the case at bar, the lease of the first floor of the building to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. The decision of the CFI Abra (Branch I) is affirmed subject to the modification that half of the assessed tax be returned to the petitioner. The modification is derived from the fact that the ground floor is being used for commercial purposes (leased) and the second floor being used as incidental to education (residence of the director). availment of a preferential tax rate under a tax treaty. It likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 12000 cannot be relaxed for petitioner. ISSUE: W/N the failure to strictly comply with RMO No. 1-2000 will deprive persons of corporations of the benefit of a tax treaty? RULING: NO. Under Section 28 (A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of 15% based on the total profits applied for or earmarked for remittance without any deduction of the tax component. However, petitioner invokes paragraph 6, Art. 10 of the RP-Germany Tax Treaty, which provides that where a resident of the Federal Republic of Germany has a branch in the Republic of the Philippines, this branch may be subjected to the BPRT withheld at source in accordance with Philippine law but shall not exceed 10% of the gross amount of the profits remitted by that branch to the head office. By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines, remitting to its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT. Tax treaties are entered into to minimize, if not eliminate the harshness of international judicial double taxation, which is why they are also known as double tax treaty or double tax agreements. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. Deutsche Bank v. CIR FACTS: Section 28 (A) of the NIRC of 1997, petitioner withheld and remitted to respondent the amount of P67, 688, 553.51, which represented the 15% BPRT on its regular banking unit (RBU) net income remitted to Deutsche Bank Germany for 2002 and prior taxable years. Petitioner filed with the BIR Large Taxpayers assessment and investigation division on October 4, 2005 an administrative claim for refund or issuance of its tax credit certificates in the total of P22K. Petitioner requested from the International Tax Affairs Division a confirmation of its entitlement to the preferential tax rate of 10% under the RP-Germany Tax Treaty. CTA denied petitioners claim for refund. CTA En Banc affirmed. It held that a ruling from the ITAD of the BIR must be secured prior to the There is nothing in RMO which would indicate a deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period. Such denial of availment of the tax relief would impair the value of the tax treaty.

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B. Module on Income Tax Basic Concepts and General Principles A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. A tax on income is not tax on property.

Madrigal v. Rafferty FACTS: In 1915, Vicente Madrigal filed a sworn declaration with the CIR showing a total net income for the year 1914 the sum of P296K. He claimed that the amount did not represent his own income for the year 1914, but the income of the conjugal partnership existing between him and his wife, Susana Paterno. He contended that since there exist such conjugal partnership, the income declared should be divided into 2 equal parts in computing and assessing the additional income tax provided by the Act of Congress of 1913. The Attorney-General of the Philippines opined in favor of Madrigal, but Rafferty, the US CIR, decided against Madrigal. After his payment under protest, Madrigal instituted an action to recover the sum of P3,800 alleged to have been wrongfully and illegally assessed and collected, under the provisions of the Income Tax Law. However, this was opposed by Rafferty, contending that taxes imposed by the Income Tax Law are taxes upon income, not upon capital or property, and that the conjugal partnership has no bearing on income considered as income. The CFI ruled in favor of the defendants, Rafferty. ISSUE: W/N Madrigals income should be divided into 2 equal parts in the assessment and computation of his tax? RULING: NO. Susana Paterno, wife of Vicente Madrigal, still has an inchoate right in the property of her husband during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Susana has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, she cannot make a separate return in order to receive the benefit of exemption, which could arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely separate from her husbands property, the income cannot be considered the separate income of the wife for purposes of additional tax. Income, as contrasted with capital and property, is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow.

CIR v. BOAC FACTS: British Overseas Airways Corp (BOAC) is a 100% British Governmentowned corporation engaged in international airline business and is a member of the Interline Air Transport Association, and thus, it operates air transportation services and sells transportation tickets over the routes of the other airline members. From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines Warner Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against BOAC. ISSUE: W/N the revenue derived by BOAC from ticket sales in the Philippines, constitute income of BOAC from Philippine sources, and accordingly taxable? RULING: YES. The source of an income is the property, activity, or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payment for fares was also made here in the Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If it had been intended as an excise tax or percentage tax, it would have been placed under Title V of the Tax Code covering taxes on business.

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BOAC, during the periods covered by the subject assessments, maintained a general sales agent in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. Commission as a corporation, branch office, or partnership and is not licensed to do business herein. For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line flights based on 2.5% Gross Philippine Billings (GPB) for a total of amount P1,727,766.38 (claimed as refund). But on Feb. 5, 2003, it filed with BIR a claim for refund for the erroneous payment of tax based on GPB, but the same was unheeded by the BIR. So, it filed a petition for review with the CTA for the refund which denied the same and held that it be liable to pay a tax of 32% on its income derived from the sales of passage documents in the Philippines. legal implication of the amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB, with the new definition of GPB, it is no longer liable under Sec. 28(A)(3)(a); that because the 2 1/2% tax on GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax. existence of such liability would preclude their claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a), thus, offsetting is unavailing.

South African Airways v. CIR FACTS: Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the Republic of South Africa with principal office is located at International Airport, South Africa. In the Philippines, it is an internal air carrier having no landing rights in the country but with general sales, Aerotel Limited Corporation (Aerotel). Aerotel sells passage documents for compensation or commission for petitioners off-line flights for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines. It is not registered with the Securities and Exchange

ISSUE/S: Income derived by petitioner from the sale of passage documents covering petitioners off-line flights is Philippine-source income subject to Philippine income tax. As an off-line international carrier selling passage documents through an independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC. Entitlement to a refund or a tax credit of erroneously paid tax on Gross Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38. RULING: Petition is granted and remanded to CTA for proper determination of the tax refund. Since an action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the most explicit and categorical language, it is strictly construed against the claimant who must discharge such burden convincingly. On the proper taxability of the subject corporation:

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Sec. 28(A)(3)(a), 1997 NIRC provides that an international carrier doing business in the Philippines shall pay a tax of 2 1/2% on its Gross Philippine Billings, as to refer to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. Sec. 28(A)(1), 1997 NIRC provides for the rates of income tax on Resident Foreign Corporations shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. The logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec. 28(A)(1). The general rule in this case at bar is that resident foreign corporations shall be liable for a 32% income tax on their income from within the Philippines, except for resident foreign corporations that are international carriers that derive income from carriage of persons, excess baggage, cargo and mail originating from the Philippines which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no flights originating from the Philippines, does not fall under the exception, thus, it must fall under the general rule. This principle is embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as coming within the purview of the general rule. The correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income. On the claim for refund: Art. 1279 NCC provides for requisites for compensation may be proper: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. 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. The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund. Here, petitioners similar tax refund claim assumes that the tax return that it filed was correct. It would not be proper to deny such claim without making a determination of petitioners liability under Sec. 28(A)(1). It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable income, that is, gross income less deductions and exemptions, if any. It cannot be assumed that petitioners liabilities under the two provisions would be the same. Thus, there is a need to make a determination of petitioners liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency exists. There is a necessity to receive evidence to establish such amount vis--vis the claim for refund. It is only after such amount is established that a tax refund or deficiency may be correctly pronounced.

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C. Module on Income Taxation of Individuals (A) Nonresident Alien Engaged in Trade or Business Within the Philippines. In General. A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a nonresident alien doing business in the Philippines, Section 22(G) of this Code notwithstanding. x xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on their income received from all sources within the Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the incomes "source. The important factor therefore which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered. The decisive factual consideration here is not the capacity in which respondent received the income, but the sufficiency of evidence to prove that the services she rendered were performed in Germany. The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation. In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the service which would entitle her to 10% commission income, are "sales actually concluded and collected through her efforts." What she presented as evidence to prove that she performed income producing activities abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be

CIR v. Baier-Nickel FACTS: Respondent Juliane Baier-Nickel, a non-resident German citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged in manufacturing embroidered textile products. Through JUBANITEXs Gen Manager Marina Guzman, the corporation appointed and engaged the services of respondent JBN as commission agent. JBN is to receive 10% sales omission on all sales actually concluded and collected through her efforts. Respondent received her sales commission income from which JUBANITEX withheld the corresponding 10& withholding tax amount and remitted the same to the BIR. Respondent JBN then filed her income tax return. Respondent later on filed a claim to refund the amount alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR. She contended that her sales commission income is not taxable in the Philippines because the same was a compensation for her services rendered in Germany and therefore considered as income from sources outside the Philippines. She filed a petition for review with CTA. CTA denied her claim. It held that the commissions received by respondent were actually her remuneration in the performance of her duties as President of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation. CA reversed CTAs decision. It held that respondent received the commissions as sales agent of JUBANITEX and not as President thereof. And since the "source" of income means the activity or service that produce the income, the sales commission received by respondent is not taxable in the Philippines because it arose from the marketing activities performed by respondent in Germany. ISSUE: W/N JBNs sales commission is taxable in the Philippines? RULING: YES. SEC. 25. Tax on Nonresident Alien Individual.

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used in the finished products as well as samples of sales orders purportedly relayed to her by clients. However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to consummated sales and whether these sales were truly concluded in Germany, respondent presented no such evidence. Neither did she establish reasonable connection between the orders/instructions faxed and the reported monthly sales purported to have transpired in Germany. Respondent presented no evidence to prove that JUBANITEX does not sell embroidered products in the Philippines and that her appointment as commission agent is exclusively for Germany and other European markets. Furthermore, the faxed documents presented by respondent did not constitute substantial evidence, or that relevant evidence that a reasonable mind might accept as adequate to support the conclusion31 that it was in Germany where she performed the income producing service which gave rise to the reported monthly sales in the months of March and May to September of 1995. She thus failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax refund should be denied. Carmen Soriano as her conjugal share, the other formed part of his estate. ANSCOR increased its capital stock to P20M and further increased it to P30M. Dona Carmen requested a ruling from the US Internal Revenue Service inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme under Section 367 of the 1954 US Revenue Act. ANSCOR reclassified its existing 300K common shares into 150K common and 150K preferred shares. IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Dona Carmen exchanged her whole 138, 864 common shares for 138, 860 of the newly reclassified preferred shares. The estate of Don Andres exchanged 11, 140 of its common shares, for the remaining 11, 140 preferred reducing the estates common shares. ANSCOR redeemed 28K common shares from Don Andres estate pursuant to a Board Resolution. The Board further increased ANSCORs capital stock to P75M divided into 150K preferred shares and 600K common shares. A year later, ANSCOR again redeemed 80K common shares from the Don Andres estate, further reducing the latters common shareholdings to 19, 727. As stated in the Board Resolutions, ANSCORs business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the companys foreign exchange remittances in case cash dividends are declared. BIR made the corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty under PD 23 which were amended by PD 67 AND 157. However, petitioner ruled that the invoked decrees do not cover Secs. 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed. ANSCORs subsequent protest on the assessments was denied in 1983 by petitioner. ANSCOR filed a petitioner for review with the CTA assailing tax assessments on the redemptions and exchange of stocks. CTA reversed petitioners ruling, after finding sufficient evidence to overcome the prima facie correctness of the questioned assessments. o Sec. 83 (b): a stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially

CIR v. CA & A. Soriano Corp. FACTS: Don Andres Soriano, a citizen and resident of the US, formed the corporation A Soriano y Cia predecessor of ANSCOR. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all nonresidents. ANSCORs authorized capital stock was increased to P2,500,000 divided into 25K common shares with the same par value of the additional 15K shares, only 10K was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their preemptive rights to subscribe to the new issues. Don Andres transferred 1, 250 shares each to his two sons, Jose and Andres Jr., as their initial investments in ANSCOR. Both sons are foreigners. ANSCOR declared dividends. Other stock dividend declarations were made between 1949 and December 20, 1963. Don Andres died. Soon after, one half of his shareholdings were transferred to his wife, Dona

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equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits accumulated after March 1, 1913. ISSUE: W/N ANSCORs redemption of stocks from its stockholder as well as the exchange of common with preferred shares can be considered as essentially equivalent to the distribution of taxable dividend making the proceeds thereof taxable under the provisions of the law? RULING: Section 83 (b) of the 1939 NIRC was taken from the Section 115(g)(1) of the US Revenue Code of 1928. It laid down the general rule known as the proportionate test wherein stock dividends once issued form part of the capital and, thus, subject to income tax. Gen Rule: A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. Exception: However, if a corporation cancels or redeems stock issued as a 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 a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March 1, 1913. The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable. Redemption is a repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon. It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is undisputed that at the time of the last redemption, the original common shares owned by the estate were only 25,247.5. This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock dividends. The test of taxability under the exempting clause, when it provides "such time and manner" as would make the redemption "essentially equivalent to the distribution of a taxable dividend", is whether the redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed "realize" until the fruit has fallen or been plucked from the tree. The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is assessed on income received from any property, activity or service that produces the income because the Tax Code stands as an indifferent neutral party on the matter of where income comes from. As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends 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.

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The decision of the Court of Appeals is MODIFIED in that ANSCOR's redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of taxable dividends for which it is LIABLE for the withholding tax-atsource.