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MARTHA ROSE C. SERRANO


I: TAXATION
1. Definition of Taxation
a. Taxation is the act of laying a tax. The process or means
by which the sovereign through its law making body
raises income to defray the necessary expenses of
government. It is merely a way of apportioning the cost
of government among those who is some measure are
privileged to enjoy its benefits and therefor must bear
its burden.
b. Inherent power of the state to demand enforced
contributions for public purpose or purposes.

2. Nature of Internal Revenue Laws
EMILIO Y. HILADO, PETITIONER, VS. THE COLLECTOR OF
INTERNAL REVENUE AND THE COURT OF
TAX APPEALS, RESPONDENTS; G.R. No. L-9408,
October 31, 1956; Bautista Angelo J
Facts:
On March 31, 1952, petitioner filed his income tax return for 1951 with
the treasurer of Bacolod City wherein he claimed, among other things,
the amount of P12, 837.65 as a deductible item from his gross income
pursuant to General Circular No. V-123 issued by the Collector of
Internal Revenue. On the basis of said return, an assessment notice
demanding the payment of P9, 419 was sent to petitioner, who paid the
tax in monthly installments, the last payment having been made on
January 2, 1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the
Collector of Internal Revenue, issued General Circular No. V-139 which
not only revoked and declared voids his general Circular No. V-123 but
laid down the rule that losses of property which occurred during the
period of World War II from fires, storms, shipwreck or other casualty,
or from robbery, theft, or embezzlement are deductible in the year of
actual loss or destruction of said property. The deduction was
disallowed and the CIR demanded from him P3, 546 as deficiency
income tax for said year. The petition for reconsideration filed by
petitioner was denied so he filed a petition for review with the CTA.
The SC affirmed the assessment made by the CIR. Hence, this appeal.
Issue: 1. whether Hilado can claim compensation during the war; and
2. Whether the internal revenue laws can been enforced during
the war
Ruling:
1. No. Assuming that said amount represents a portion of the 75% of his
war damage claim which was not paid, the same would not be
deductible as a loss in 1951 because, according to petitioner, the last
installment he received from the War Damage Commission, together
with the notice that no further payment would be made on his claim,
was in 1950. In the circumstance, said amount would at most be a proper
deduction from his 1950 gross income. In the second place, said amount
cannot be considered as a "business asset" which can be deducted as a
loss in contemplation of law because its collection is not enforceable as a
matter of right, but is dependent merely upon the generosity and
magnanimity of the U. S. government. As of the end of 1945, there was
absolutely no law under which petitioner could claim compensation for
the destruction of his properties during the battle for the liberation of the
Philippines. And under the Philippine Rehabilitation Act of 1946, the
payments of claims by the War Damage Commission merely depended
upon its discretion to be exercised in the manner it may see lit, but the
non-payment of which cannot give rise to any enforceable right.
2. Yes. It is well known that our internal revenue laws are not political
in nature and as such were continued in force during the period of
enemy occupation and in effect were actually enforced by the occupation
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government. As a matter of fact, income tax returns were filed during
that period and income tax payment were effected and considered valid
and legal. Such tax laws are deemed to be the laws of the occupied
territory and not of the occupying enemy
ISSUE
Whether the Secretary of Finance acted with valid authority in
revoking General Circular No. V-123 and approving in lieu thereof,
General Circular No. V-139.
HELD
Yes. The Secretary of Finance is vested with authority to revoke, repeal
or abrogate the acts or previous rulings of his predecessors in office
because the construction of a statute by those administering it is not
binding on their successors if the latter becomes satisfied that a different
construction should be given. General Circular No. V-123, having been
issued on a wrong construction by the law, cannot give rise to a vested
right that can be invoked by a taxpayer. A vested right cannot spring
from a wrong interpretation.
An administrative officer cannot change a law enacted by Congress.
Once a regulation which merely interprets a statute is determined
erroneous, it becomes a nullity. The CIRs erroneous construction of the
law does not preclude or stop the Government from collecting a tax
legally due.
Under Art. 2254 of the Civil Code, no vested/acquired right can arise
from acts/omissions which are against the law or which infringe upon
the rights of others.
3. SCOPE OF TAXATION
a. Sec 28 Art 6 1987 Constitution
i. The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive
system of taxation.
ii. 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.
iii. Charitable institutions, churches and personages
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.
a. No law granting any tax exemption
shall be passed without the
concurrence of a majority of all the
Members of the Congress.
- The power of taxation is regarded as unlimited plenary and
supreme.
- The power may be exercised even to the point od destroying eh
commercial or use value of the thing taxed.
- The power to tax is an imperious necessity of all governments
and it not to be restricted by mere legal fictions.
- It is to inhere the obligation of a sovereign state to protect its
citizens.
- Personal property belonging to a foreign sovereign and
temporarily located in a particular country is not subject to state
taxation in hat country.
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION,
INC. VS. EXECUTIVE SECRETARY- MINIMUM CORPORATE
INCOME TAX
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Constitutionality; justifiable controversy. A dispute ripens into a judicial
controversy by the mere enactment of a questioned law or the approval of a
challenged act, even without any other overt act. Thus, there is no need to wait
until the concerned taxpayers have shut down their operations as a result of the
questioned minimum corporate income tax (MCIT) or creditable withholding
tax (CWT). Chamber of Real Estate and Builders Associations, Inc. vs. The
Hon. Executive Secretary Alberto Romulo, et al., G.R. No. 160756, March 9,
2010.
FACTS:
Petitioner Chamber of Real Estate and Builders Associations, Inc.
(CREBA), an association of real estate developers and builders in the
Philippines, questioned the validity of Section 27(E) of the Tax Code
which imposes the minimum corporate income tax (MCIT) on
corporations. Under the Tax Code, a corporation can become subject to
theMCIT at the rate of 2% of gross income, beginning on the 4thtaxable
year immediately following the year in which it commenced its business
operations, when such MCIT is greater than the normal corporate
income tax. If the regular income tax is higher than the MCIT, the
corporation does not pay the MCIT.CREBA argued, among others, that
the use of gross income asMCIT base amounts to a confiscation of capital
because gross income, unlike net income, is not realized gain.CREBA
also sought to invalidate the provisions of RR No. 2-98, as amended,
otherwise known as the Consolidated Withholding Tax Regulations,
which prescribe the rules and procedures for the collection of CWT on
sales of real properties classified as ordinary assets, on the grounds that
these regulations:
Use gross selling price (GSP) or fair market value(FMV) as basis for
determining the income tax on the sale of real estate classified as
ordinary assets, instead of the entitys net taxable income as provided for
under the Tax Code;
Mandate the collection of income tax on a per transaction basis,
contrary to the Tax Code provision which imposes income tax on net
income at the end of the taxable period;
Go against the due process clause because the government collects
income tax even when the net income has not yet been determined; gain
is never assured by mere receipt of the selling price; and
Contravene the equal protection clause because the CWT is being
charged upon real estate enterprises, but not on other business
enterprises, more particularly, those in the manufacturing sector, which
do business similar to that of a real estate enterprise
CREBA assails the imposition of the minimum corporate income tax
(MCIT) as being violative of the due process clause as it levies income
tax even if there is no realized gain. They also question the creditable
withholding tax (CWT) on sales of real properties classified as ordinary
assets stating that (1) they ignore the different treatment of ordinary
assets and capital assets; (2) the use of gross selling price or fair market
value as basis for the CWT and the collection of tax on a per transaction
basis (and not on the net income at the end of the year) are inconsistent
with the tax on ordinary real properties; (3) the government collects
income tax even when the net income has not yet been determined; and
(4) the CWT is being levied upon real estate enterprises but not on other
enterprises, more particularly those in the manufacturing sector.
ISSUE:
Are the impositions of the MCIT on domestic corporations and
CWT on income from sales of real properties classified as ordinary
assets unconstitutional?
HELD:
NO. MCIT does not tax capital but only taxes income as shown by the
fact that the MCIT 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
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expenses from gross sales. Besides, there are sufficient safeguards that
exist for the MCIT: (1) it is only imposed on the 4th year of operations;
(2) the law allows the carry forward of any excess MCIT paid over the
normal income tax; and (3) the Secretary of Finance can suspend the
imposition of MCIT in justifiable instances.
The regulations on CWT did not shift the tax base of a real estate
business income tax from net income to GSP or FMV of the property
sold since the taxes withheld are in the nature of advance tax payments
and they are thus just installments on the annual tax which may be due
at the end of the taxable year. As such the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable
income and the use of the GSP or FMV is because these are the only
factors reasonably known to the buyer in connection with the
performance of the duties as a withholding agent.
Neither is there violation of equal protection even if the CWT is levied
only on the real industry as the real estate industry is, by itself, a class on
its own and can be validly treated different from other businesses.
Sison vs Ancheta
GR No. L-59431, 25 July 1984
Facts:
Section 1 of BP Blg 135 amended the Tax Code and petitioner Antero M.
Sison, as taxpayer, alleges that "he would be unduly discriminated
against by the imposition of higher rates of tax upon his income arising
from the exercise of his profession vis-a-vis those which are imposed
upon fixed income or salaried individual taxpayers. He characterizes
said provision as arbitrary amounting to class legislation, oppressive and
capricious in character. It therefore violates both the equal protection
and due process clauses of the Constitution as well as of the rule
requiring uniformity in taxation.
Issue: Whether or not the assailed provision violates the equal
protection and due process clauses of the Constitution while also
violating the rule that taxes must be uniform and equitable.
Held: The petition is without merit.
On due process - it is undoubted that it may be invoked where a taxing
statute is so arbitrary that it finds no support in the Constitution. An
obvious example is where it can be shown to amount to the confiscation
of property from abuse of power. Petitioner alleges arbitrariness but his
mere allegation does not suffice and there must be a factual foundation
of such unconstitutional taint.
On equal protection - it suffices that the laws operate equally and
uniformly on all persons under similar circumstances, both in the
privileges conferred and the liabilities imposed.
On the matter that the rule of taxation shall be uniform and equitable -
this requirement is met when the tax operates with the same force and
effect in every place where the subject may be found." Also, the rule of
uniformity does not call for perfect uniformity or perfect equality,
because this is hardly unattainable." When the problem of classification
became of issue, the Court said: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of the same class shall
be taxed the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation..." As
provided by this Court, where "the differentiation" complained of
"conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore
uniform.
SARASOLA v. TRINIDAD

Facts:

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1. A complaint for injunction was filed by the petitioner before CFI
Manila to restrain the Collector of Internal Revenue from the alleged
illegal collection of taxes in the amount of 11,739 pesos
2. CIR interposed a demurrer to the complaint on the following
grounds:

a. Court had no jurisdiction of the subject matter because of the
provisions of the Sec. 1578 of the Administrative Code
b. Facts stated in the complain did not entitle the plaintiff to the
relief demanded

3. Judge of CFI sustained the demurrer (basing his decision from
Churchill case)
4. The appellants assignments of error can be summarized as to the
following: Is the legal provision prohibiting the courts from
granting an injunction to retrain the collection of internal revenue
taxes constitutional?
5. The laws in question in this case are Secs. 1578-1579 of the
Administrative Code of 1917.

Sec. 1578: Injunction not available to restrain collection of tax No
court shall have authority to grant an injunction to restrain the
collection of any internal revenue tax.

Sec. 1579: Recovery of tax paid under protest When the validity of
any tax is questioned, or its amount disputed, or other question
raised as to liability therefore, the person against whom or against
whose property the same is sought to be enforced shall pay the tax
under instant protest, or upon protest within 10 days, and shall
request the decision of the Collector of Internal Revenue. If the
decision of the Collector of Internal Revenue is adverse, or if no
decision is made by him within 6 months from the date when his
decision was requested, the taxpayer may proceed, at any time
within 2 years after the payment of the tax, to bring an action against
the Collector of Internal Revenue for the recovery without interest of
the sum alleged to have been illegally collected, the process to be
served upon him, upon the provincial treasurer, or upon the officer
collecting the tax.

Note: The antecedents of the aforecited laws found its particular
inspiration in a similar provision in the Act of Congress (of the
United States).

Issue: W/N the words without interest is constitutional.

Held: YES

Principles from US cases:

1. Broad principle: every taxpayer has a right to a remedy for any
actual wrong he may have suffered in the collection of taxes. Usually,
a party will find a plain and sufficient remedy for the injuries
complained of, or threatened, in the courts of law; in such instances,
equity will not take jurisdiction.
2. Where, as in the Philippines, the taxpayer is permitted to pay the
amount demanded of him under protest and then maintain an action
at law to recover back the whole amount paid or so much of it was
illegal exacted, this is regarded as an adequate remedy.
3. The phrase without interest were not included when the
Legislature of the State of Tennessee enacted a statute similar to that
of the Philippine statute: This remedy is simple and effective 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 every embarrassed man, to whom delay
was more important than the payment of costs.
4. There can be no case of equitable cognizance where there is a plain
and adequate remedy at law. And except where the special
circumstances, the party of whom an illegal tax is collected has
ordinarily ample remedy, either by action against the officer making
the collection or the body to whom the tax was paid.

Decision of the Court:

5. It is well settled both on principle and authority that interest is not to
be awarded against a sovereign government unless its consent has
been manifested by an Act of its Legislature or by a lawful contract
of its executive officers. If there be doubt upon the subject, that doubt
must be resolved in favor of the State.
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6. The state never pays interest unless she expressly engages to do so.
7. Taxes only draw interest as do sums of money when expressly
authorized. Interest cannot be recovered on an abatement unless the
statute provides for it.
8. The only contrary dictum is that where an illegal tax has been
collected, the citizen who has paid and is obliged to bring suit
against the collector is entitled to interest from the time of the illegal
exaction. The distinction undoubtedly arises through the fiction that
the suit is against the collector and not against the State, although the
judgment is not to be paid by the collector but directly from the
treasury.
9. The state is not amenable to judgments for damages or costs without
its consent.
10. Our own statute not only does not authorize interest but negatives
the payment of interest.
11. The law is valid, or that the plaintiff has not proven such a case of
irreparable injury as would warrant the issuance of the extraordinary writ
of execution.

On the Scope of Taxation

12. Taxation is an attribute of sovereignty. It is the strongest of all the
powers of government. It involves the power to destroy.
13. Dows case: It is upon taxation that the several states chiefly rely to
obtain the means to carry on their respective governments, and it is
of the utmost important to all of them that the modes adopted to
enforce the taxes levied should be interfered with as little as
possible
14. The Government may fix the conditions upon which it will consent
to litigate the validity of its original taxes.
15. The power of taxation being legislative, all the incidents are within
the control of the Legislature.

4. UNDERLYING THEORY AND BASIS

The state demands and receives taxes so that it may be enabled to carry
its mandate into effect and perform the functions of government and the
citizens pays from his property the portion demanded in order tjat he
may by means thereof be secured in the enjoyment of the benefits of
organized society.
- General taxation is the factor that for the contributions received the
government renders no return or special benefit to any particular
property, but only secures to the citizen the general benefit which
results from protection to his person and property.
Commissioner of Internal Revenue vs. Algue Inc.
GR No. L-28896 | Feb. 17, 1988
Facts:
Algue Inc. is a domestic corp engaged in engineering, construction
and other allied activities
On Jan. 14, 1965, the corp. received a letter from the CIR regarding
its delinquency income taxes from 1958-1959, amtg to P83, 183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan
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On March 12, a warrant of distraint and levy was presented to
Algue Inc. thru its counsel, Atty. Guevara, who refused to receive it on
the ground of the pending protest
Since the protest was not found on the records, a file copy from the
corp. was produced and given to BIR Agent Reyes, who deferred service
of the warrant
On April 7, Atty. Guevara was informed that the BIR was not
taking any action on the protest and it was only then that he accepted
the warrant of distraint and levy earlier sought to be served
On April 23, Algue filed a petition for review of the decision of the
CIR with the Court of Tax Appeals
CIR contentions:
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- The claimed deduction of P75, 000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense
- Payments are fictitious because most of the payees are members of
the same family in control of Algue and that there is not enough
substantiation of such payments
CTA: 75K had been legitimately paid by Algue Inc. for actual
services rendered in the form of promotional fees. These were collected
by the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent purchase
of the properties of the Philippine Sugar Estate Development Company.
Issue: W/N the Collector of Internal Revenue correctly disallowed the
P75, 000.00 deductions claimed by Algue as legitimate business
expenses in its income tax returns
Ruling:
Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance, made in accordance with law.
RA 1125: the appeal may be made within thirty days after receipt
of the decision or ruling challenged
During the intervening period, the warrant was premature and
could therefore not be served.
Originally, CIR claimed that the 75K promotional fees to be
personal holding company income, but later on conformed to the
decision of CTA
There is no dispute that the payees duly reported their respective
shares of the fees in their income tax returns and paid the corresponding
taxes thereon. CTA also found, after examining the evidence, that no
distribution of dividends was involved
CIR suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction
Algue Inc. was a family corporation where strict business
procedures were not applied and immediate issuance of receipts was not
required. At the end of the year, when the books were to be closed, each
payee made an accounting of all of the fees received by him or her, to
make up the total of P75, 000.00. This arrangement was understandable
in view of the close relationship among the persons in the family
corporation
The amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to
Algue Inc. was P125K. After deducting the said fees, Algue still had a
balance of P50, 000.00 as clear profit from the transaction. The amount of
P75, 000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically
everything, from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the Sugar Estate properties.
Sec. 30 of the Tax Code: allowed deductions in the net income
Expenses - All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered xxx
The burden is on the taxpayer to prove the validity of the claimed
deduction
In this case, Algue Inc. has proved that the payment of the fees was
necessary and reasonable in the light of the 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.
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Taxes are what we pay for civilization 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
Taxation must be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right to
complain and the courts will then come to his succor
Algue Inc.s appeal from the decision of the CIR was filed on time with
the CTA in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by Algue Inc. was permitted under the Internal
Revenue Code and should therefore not have been disallowed by the
CIR.
5. PRINCIPLES OF A SOUND TAX SYSTEM
ABAKADA Guro Party List vs. Ermita
G.R. No. 168056 September 1, 2005
FACTS:
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party
List, et al., filed a petition for prohibition on May 27, 2005 questioning
the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the National Internal Revenue
Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and
properties, Section 5 imposes a 10% VAT on importation of goods, and
Section 6 imposes a 10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a uniform p ro v is o
authorizing the President, upon recommendation of the Secretary of
Finance, to raise the VAT rate to 12%, effective January 1, 2006, after
specified conditions have been satisfied. Petitioners argue that the law is
unconstitutional.
ISSUES:
1. Whether or not there is a violation of Article VI, Section 24 of the
Constitution.
2. Whether or not there is undue delegation of legislative power in
violation of Article VI Sec 28(2) of the Constitution.
3. Whether or not there is a violation of the due process and equal
protection under Article III Sec. 1 of the Constitution.
RULING:
1. Since there is no question that the revenue bill exclusively originated
in the House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it
included provisions in Senate Bill No. 1950 amending corporate income
taxes, percentage, and excise and franchise taxes.
2. There is no undue delegation of legislative power but only of the
discretion as to the execution of a law. This is constitutionally
permissible. Congress does not abdicate its functions or unduly delegate
power when it describes what job must be done, who must do it, and
what is the scope of his authority; in our complex economy that is
frequently the only way in which the legislative process can go forward.
3. The power of the State to make reasonable and natural classifications
for the purposes of taxation has long been established. Whether it relates
to the subject of taxation, the kind of property, the rates to be levied, or
the amounts to be raised, the methods of assessment, valuation and
collection, the States power is entitled to presumption of validity. As a
rule, the judiciary will not interfere with such power absent a clear
showing of unreasonableness, discrimination, or arbitrariness.
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6. COMPARISON WITH POLICE POWER AND EMINENT
DOMAIN
A) POLICE POWER
- taxing power is exercised for the purpose of raising revenue and is
subject to certain designated constitutional limitation, while police power is
exercised for the promotion of the public welfare by means of the regulation of
dangerous or potentially dangerous businesses, occupations or activities and is
not subject to constitutional restrictions.
- An exaction which is invalid as an exercise of the taxing power may not be
upheld as an exercise of the police power where it is clear that the legislative
body imposing it did not intend it as such,.
B) EMINENT DOMAIN
- The power of taxation nor the power of eminent domain can be exercised except
for public purpose, some constitutional provisions, particularly those requiring
compensation for private property taken for public use are applicable to the
power of eminent domain but not to the power of taxation.
Gerochi, et al. v. DOE
Facts:
RA 9136, otherwise known as the Electric Power Industry Reform Act of
2001 (EPIRA), which sought to impose a universal charge on all end-
users of electricity for the purpose of funding NAPOCORs projects, was
enacted and took effect in 2001.

Petitioners contest the constitutionality of the EPIRA, stating that the
imposition of the universal charge on all end-users is oppressive and
confiscatory and amounts to taxation without representation for not
giving the consumers a chance to be heard and be represented.
Issue: Whether or not the universal charge is a tax.
Held:
NO. The assailed universal charge is not a tax, but an exaction in the
exercise of the States police power. That public welfare is promoted may
be gleaned from Sec. 2 of the EPIRA, which enumerates the policies of
the State regarding electrification. Moreover, the Special Trust Fund
feature of the universal charge reasonably serves and assures the
attainment and perpetuity of the purposes for which the universal
charge is imposed (e.g. to ensure the viability of the countrys electric
power industry), further boosting the position that the same is an
exaction primarily in pursuit of the States police objectives
If generation of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that revenue is incidentally raised does not make the
imposition a tax.
The taxing power may be used as an implement of police power. 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 well-being of the people.

MATALIN COCONUT CO., INC. vs. MUNICIPAL COUNCIL OF
MALABANG, LANAO DEL SUR
Facts:
1. The Municipal Council of Malabang, Lanao del Sur enacted the
Municipal Ordinance No. 45-46 imposing a police inspection fee
of P0.30 per sack of Cassava Starch produced and shipped out of
the said Municipality where penalties are imposed for violations
thereof.

It made unlawful for any company, person, or group of persons
to ship out goods specifically Cassava Starch or Flour without
paying to the Municipal Treasurer (or his duly authorized
representatives) a fee fixed by the Ordinance and a police
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inspection fee of P0.30 (shouldered by the shipper if moving the
goods outside the Municipality).

In case of violations, the Ordinance prescribed the payment of a
fine of P100 < P1,000; an additional payment of P1.00 per sack
that was illegally shipped; or imprisonment of 20 days, or both,
depends in the discretion of the Court.

2. Validity of the Ordinance was challenged by Matalin Coconut
Inc., alleging being violative of R.A. 2264, unreasonable,
oppressive and confiscatory.

Purakan Plantation Companty is also affected, crippling its
operations to transport its goods to the port through the said
Municipality.

3. Trial Court decided the Municipal Ordinance is null and void;
ordered the Municipal Treasurer refund the payments it made
from the period of: Sept. 27, 66 to May 2, 67 with a total amount
of: P25,000.00 and subsequent payments; and, prohibiting the
collection of P0.30 police inspection fees.

Issue: Whether the said Ordinance is valid.

Held: Invalid.

The Court ruled that tax should be based on sales, not in the
quantity of goods that have yet to be sold. Moreover, for taxes to
be valid, it should be levied for public purposes, just, and
uniform.

The imposition of a police inspection fee of P0.30 per bag was
found to be unjust and unreasonable.

LUTZ v. ARANETA GR No. L-7859, December 22, 1955 98 PHIL 148
FACTS:
Plaintiff Walter Lutz, in his capacity as judicial administrator of the
intestate estate of Antionio Ledesma, sought to recover from the CIR the
sum of P14,666.40 paid by the estate as taxes, under section 3 of the CA
567 or the Sugar Adjustment Act thereby assailing its constitutionality,
for it provided for an increase of the existing tax on the manufacture of
sugar, alleging that such enactment is not being levied for a public
purpose but solely and exclusively for the aid and support of the sugar
industry thus making it void and unconstitutional. The sugar industry
situation at the time of the enactment was in an imminent threat of loss
and needed to be stabilized by imposition of emergency measures.
ISSUE: Is CA 567 constitutional, despite its being allegedly violative
of the equal protection clause, the purpose of which is not for the
benefit of the general public but for the rehabilitation only of the
sugar industry?
HELD:
Yes. The protection and promotion of the sugar industry is a matter of
public concern, it follows that 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 to fully
play, subject only to the test of reasonableness; and it is not contended
that the means provided in the law 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.
Held: Yes. The act is primarily an exercise of the police power. It is
shown in the Act that the tax is levied with a regulatory purpose, to
11

provide means for the rehabilitation and stabilization of the threatened
sugar industry.
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.
The funds raised under the Act should be exclusively spent in aid of the
sugar industry, since it is that very enterprise that is being protected. It
may be that other industries are also in need of similar protection; but
the legislature is not required by the Constitution to adhere to a policy of
all or none.
ISSUE:
Whether the tax is valid in supporting an industry.
HELD:
The tax is levied with a regulatory purpose, i.e. to provide means for the
rehabilitation and stabilization of the threatened sugar industry. The act
is primarily an exercise of police power, and is not a pure exercise of
taxing power. As sugar production is one of the great industries of the
Philippines; and that its promotion, protection and advancement
redounds greatly to the general welfare, the legislature found that the
general welfare demanded that the industry should be stabilized, and
provided that the distribution of benefits there from be readjusted
among its component to enable it to resist the added strain of the
increase in tax that it had to sustain. Further, it cannot be said that the
devotion of tax money to experimental stations to seek increase of
efficiency in sugar production, utilization of by-products, etc., as well as
to the improvement of living and working conditions in sugar mills and
plantations, without any part of such money being channeled directly to
private persons, constitute expenditure of tax money for private
purposes.
The tax is valid.
NATIONAL TELECOMMUNICATIONS COMMISSION, petitioner,
vs. HONORABLE COURT OF APPEALS and PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY, respondents.
FACTS:
Sometime in 1988, the National Telecommunications Commission (NTC)
served on the Philippine Long Distance Telephone Company (PLDT)
assessment notices and demands for payment in connection to Section 40
(e) (f) and (g) of the Revised NTC Schedule of Fees and Charges. The
PLDT challenged the assessments of the NTC. Then NTC rendered a
Decision denying the protest of PLDT. On May 12, 1994, PLDT appealed
to the Court of Appeals. The CA ordered the NTC to recompute its
assessments and demands for payment. On November 20, 1996, NTC
moved for partial reconsideration for the Decision of the CA with
respect to the basis of the assessment under Section 40 (e) but the CA
denied its motion. Thus, petitioner found its way to this court.
ISSUE:
Whether the Court of Appeals erred in holding that the computation of
supervision and regulation fees under Section 40 (F) of the Public Service
Act should be based on the par value of the subscribed capital stock.
HELD:
Yes. Concise and clear is the ruling of this Court in the case of Philippine
Long Distance Telephone Company vs. Public Service Commission, 66
SCRA 341, that the basis for computation of the fee to be charged by
NTC on PLDT, is " the capital stock subscribed or paid and not,
alternatively, the property and equipment."The law in point is clear and
categorical. There is no room for construction. It simply calls for
application. It bears stressing that it is not the NTC that imposed such a
fee. It is the legislature itself. Since Congress has the power to exercise
the State inherent powers of Police Power, Eminent Domain and
12

Taxation, the distinction between police power and the power to tax,
which could be significant if the exercising authority were mere political
subdivisions (since delegation by it to such political subdivisions of one
power does not necessarily include the other), would not be of any
moment when, as in the case under consideration, Congress itself
exercises the power. All that is to be done would be to apply and enforce
the law when sufficiently definitive and not constitutional infirm.
WHEREFORE, the decision of the Court of Appeals is SET ASIDE.
SO ORDERED.
II: TAXES
1. DEFINITION
A tax is a burden, charge, exaction, imposition or contribution
assessed in accordance with some reasonable rule of
apportionment within its jurisdiction to provide public revenue
for the support of the government, the administration of the law
or the payment of public expenses.
- Any payment exacted by the state or its municipal subdivisions as a
contribution toward the cost of maintaining governmental functions.
- It operates in invitum and is no way dependent upon the will or contractual
assent, express or implied of the person taxed.
Republic of the Philippines v. Philippine Rabbit Bus Lines

Facts:

1. A complaint was filed by the Republic seeking the invalidation of the
payment by PRBL for the registration fees of its motor vehicles in the
sum of 78k pesos in the form of such negotiable backpay certificates
of indebtedness
2. This complaint also sought the payment of such amount with
surcharges plus the legal rate of interest from the filing thereof and
a declaration of the nullity of the use of such negotiable certificate of
indebtedness to satisfy its obligation
3. Answer of defendant: both the Treasurer of the Philippines and the
General Auditing Office having signified their conformity to such a
mode of payment
4. Lower courts decision: it appears that the Treasurer had approved
the acceptance of negotiable certificates of indebtedness in payment
of registration fees of motor vehicles with the view that such
certificates should be accorded with the same confidence by other
governmental instrumentalities
5. Republic wants the bus firm to be an assignee of the negotiable
certificates of indebtedness in question, it could not use the same in
payment of taxes. (However, the Court believes that it runs counter
to the recitals appearing on the certificates)

Issue: What is the nature of the fee made by the Philippine Rabbit
through the use of negotiable backpay certificates?

Held:

1. SC held that a tax is neither a penalty that must be satisfied or a
liability arising from a contract. Much less can it be confused or
identified with a license or a fee as a manifestation of an exercise of
the police power.
2. This broad and all-encompassing governmental competence to
restrict rights of liberty and property carries with it the undeniable
power to collect a regulatory fee. Unlike a tax, it has not for its object
the raising of revenue but looks rather to the enactment of specific
measures that govern the relations not only as between individuals
but also between private parties and political society.
3. It can be concluded that the Motor Vehicle Act requires the payment
not of a tax but of a registration fee under the police power. Hence
the inapplicability of the section relied upon by defendant under the
Back Pay Law. It is not held liable for a tax but for a registration fee.

2. ESSENTIAL CHARACTERISTICS OF TAXES
3. TAXES DISTINGUISHED FROM :
a. DEBT: The obligation of a tax is a statutory liability imposed
upon all inhabitants of the state who are defined as taxable, to
the end that they may contribute their just share to the expenses
of the government.

G.R. No. 92585 May 8, 1992
13

CALTEX PHILIPPINES, INC., petitioner, vs.THE HONORABLE
COMMISSION ON AUDIT, HONORABLECOMMISSIONER
BARTOLOME C. FERNANDEZ and HONORABLECOMMISSIONER
ALBERTO P. CRUZ, respondents.
Topic: (1) tax vs. ordinary debt, (2) purpose/objective of taxation: non-
revenue / special / regulatoryPonente: Davide, Jr. J.
DOCTRINE:
A taxpayer may not offset taxes due from the claims that he may have
against the government.
QUICK FACTS
: Caltex Philippines questions the decisions of COA for disallowing the
offsetting of its claims for reimbursement with its due OPSFremittance
FACTS:
The Oil Price Stabilization Fund (OPSF) was created under Sec. 8, PD
1956, as amended by EO 137 for the purpose of minimizing frequent
price changes brought about by exchange rate adjustments. It will be
used to reimburse the oil companies for cost increase and possible cost
under recovery incurred due to reduction of domestic prices.COA sent a
letter to Caltex directing the latter to remit to the OPSF its collection.
Caltex requested COA for an early release of its reimbursement
certificates which the latter denied.COA disallowed recover of financing
charges, inventory losses and sales tomarcopper and atlas but allowed
the recovery of product sale or those arising from export sales.
Petitioners Contention: Department of Finance issued Circular No. 4-88
allowing reimbursement. Denial of claim for reimbursement would be
inequitable. NCC (compensation) and Sec. 21, Book V, Title I-B of the
Revised Administrative Code (Retention of Money for Satisfaction of
Indebtedness to Government) allows offsetting. Amounts due do not
arise as a result of taxation since PD 1956 did not create source of
taxation, it instead established a special fund. This lack of public purpose
behind OPSF exactions distinguishes it from tax. Respondents
Contention: Based on Francia v. IAC, theres no offsetting of taxes
against the claims that a taxpayer may have against the government, as
taxes do not arise from contracts or depend upon the will of the
taxpayer, but are imposed by law.
ISSUE: WON Caltex is entitled to offsetting
DECISION: NO. COA AFFIRMED
HELD:
It is settled that a taxpayer may not offset taxes due from the claims that
he may have against the government. Taxes cannot be 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 a
debt, demand, contract or judgment as is allowed to be set-off.
Technically, the oil companies merely act as agents for the Government
in the latters collection since the taxes are, in reality, passed unto the
end-users the consuming public. Their primary obligation is to account
for and remit the taxes collection to the administrator of the OPSF.
there is not merit in Caltexs contention that the OPSF contributions are
not for a public purpose because they go to a special fund of the
government. Taxation is no longer envisioned as a measure merely to
raise revenue to support the existence of the government; taxes may
believed with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected
with public interest as to be within the police power of the State.
The oil industry is greatly imbued with public interest as it vitally
affects the general welfare.
PD 1956, as amended by EO No. 137 explicitly provides that the source
of OPSF is taxation
14

Caltex Philippines vs. Commission on Audit (COA)
GR 92585, 8 May 1992
En Banc, Davide (J): 12 concur, 2 took no part
Facts:
In 1989, COA sent a letter to Caltex, directing it to remit its collection to
the Oil Price Stabilization Fund (OPSF), excluding that unremitted for
1986 and 188 of the additional tax on petroleum products authorized
under Section 8 of PD 1956; and that pending such remittance, all its
claims for reimbursement from the OPSF shall be held in abeyance.
Caltex requested COA, notwithstanding an early release of its
reimbursement certificates from the OPSF, which COA denied. On 31
May 1989, Caltex submitted a proposal to COA for the payment and the
recovery of claims. COA approved the proposal but prohibited Caltex
from further off seting remittances and reimbursements for the current
and ensuing years. Caltex moved for reconsideration.
Issue: Whether the amounts due from Caltex to the OPSF may be off
setted against Caltex outstanding claims from said funds.
Held: Taxation is no longer envisioned as a measure merely to raise
revenue to support the existence of government; taxes may be levied
with a regulatory purpose to provide means for the rehabilitation and
stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state. PD 1956, as
amended by EO 137, explicitly provides that the source of OPSF is
taxation. A taxpayer may not offset taxes due from the 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 a
debt, demand, contract or judgment as is allowed to be set-off.
Francia vs. IAC 162 SCRA 753
FACTS:
Francia was the registered owner of a house and lot in Pasay
City. A portion of said property was expropriated by the republic. It
appeared that Francia did not pay his real estate taxes from 1963 to 1977.
He contended that his tax delinquency had been extinguished by legal
compensation since the government owed him 4,116 when a portion of
his land was expropriated.
ISSUE: can there be off-setting of debts and taxes?
RULING:
No. there can be no off-setting of taxes original the claims
against the claims that the taxpayer may have against the government.
Taxes cannot be the subject of compensation. The government and the
taxpayer are not mutually creditor and debtors of each other and a claim
for each other and a claim for taxes is not such a debt demand, contract
or judgment as is allowed to be set-off. Furthermore, the tax was due to
the city government. While the expropriation effected by the national
government. In fact, the expropriation payment was already deposited
with the PNB long before the sale at public auction of his property was
conducted.
ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT,
ET AL.G.R. No. L-67649, June 28, 1988
Facts:
On October 15, 1977, a 125 square meter portion of Franciss property
was expropriated by the Republic of the Philippines for the sum of P4,
116.00 representing the estimated amount equivalent to the assessed
value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia
failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City
pursuant to Section 73 of Presidential Decree No.464 known as the Real
Property Tax Code in order to satisfy a tax delinquency of P2, 400.00.
15

Issue: May compensation take place?
Ruling:
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 was being collected. The collection of a tax cannot
await the results of a lawsuit against the government. 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. Government and taxpayer are not mutually
creditors and debtors of each other under Article 1278 of the Civil Code
and acclaim for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off.


PHILEX V. CIR (tax v. ordinary debt)
FACTS:
BIR asked Philex to pay tax for 1991-1992 in the total
Amount of P123, 821,982.52. Philex refused stating that it has pending
claims for VAT input credit/refund for the taxes it paid for the years
1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore
asking for an off-set. Philex filed a case with the CTA.
Philex was able to obtain its VAT input credit/refund not only for the
taxable year 1989 to 1991 but also for 1992and 1994

In view of the grant of its VAT input credit/refund, Philex now contends
that the same should, ipso jure, off-set its excise tax liabilities, since both
had already become due and demandable, as well as fully liquidated;
hence, legal compensation can properly take place.
ISSUE:
WON there should be an offset?
HELD: NO.
Taxes cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each
other. There is a material distinction between a tax and debt.DE BTS are
due to the Government in its corporate capacity, while TAXES are due to
the Government in its sovereign capacity.
Philexs claim 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.
A distinguishing feature of a tax is that it is compulsory rather than a
matter of bargain. Hence, a tax does not depend upon the consent of the
taxpayer. A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government or that the
collection of the tax is
Contingent on the result of the lawsuit it filed against the government.
Moreover, Philexs theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give rise to confusion
and abuse, depriving the government of authority over the manner by
which taxpayers credit and offset their tax liabilities.
2. LICENSE FEES
Implies an imposition or exaction on the right to use or dispose of
property, to pursue a business occupation or calling or to exercise a privilege.
16

-Such charges may imposed either under the police power for purposes of
regulation or under the taxing power for purposes of revenue.
Progressive Development Corporation vs. Quezon City
Facts:
The City Council of QC passed an ordinance known as the Market Code
of QC, which imposed a 5% supervision fee on gross receipts on rentals
or lease of privately-owned market spaces in QC.
In case of failure of the owners of the market spaces to pay the tax for
three consecutive months, the City shall revoke the permit of the
privately-owned market to operate.
Progressive Development Corp, owner and operator of Farmers Market,
filed a petition for prohibition against QC on the ground that the tax
imposed by the Market Code was in reality a tax on income, which the
municipal corporation was prohibited by law to impose.

Issue: Whether or not the supervision fee is an income tax or a license
fee.
Held:
It is a license fee. A LICENSE FEE is imposed in the exercise of the police
power primarily for purposes of regulation, while TAX is imposed
under the taxing power primarily for purposes of raising revenues.
If the generating of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally, revenue is also obtained does not
make the imposition a tax.
To be considered a license fee, the imposition must relate to an
occupation or activity that so engages the public interest in health,
morals, safety, and development as to require regulation for the
protection and promotion of such public interest; the imposition must
also bear a reasonable relation to the probable expenses of regulation,
taking into account not only the costs of direct regulation but also its
incidental consequences.
In this case, the Farmers Market is a privately-owned market
established for the rendition of service to the general public. It warrants
close supervision and control by the City for the protection of the health
of the public by insuring the maintenance of sanitary conditions,
prevention of fraud upon the buying public, etc.
Since the purpose of the ordinance is primarily regulation and not
revenue generation, the tax is a license fee. The use of the gross amount
of stall rentals as basis for determining the collectible amount of license
tax does not, by itself, convert the license tax into a prohibited tax on
income.
Such basis actually has a reasonable relationship to the probable costs of
regulation and supervision of Progressives kind of business, since
ordinarily, the higher the amount of rentals, the higher the volume of
items sold.
The higher the volume of goods sold, the greater the extent and
frequency of supervision and inspection may be required in the interest
of the buying public.
4. SPECIAL ASSESSMENTS
An enforced proportional contribution from owners of lands
especially or peculiarly benefited by public improvements.

Characteristics:
1. A special assessment is levied only on land
2. It is not a personal liability of the person assessed
3. It is based wholly on benefits
4. It is exceptional both as to the time and place.
17

Apostolic Prefect of Mt. Province vs. Treasurer of Baguio 71 Phil. 547
Exemptions from Taxation Assessment
FACTS:
In 1937, an ordinance (Ord. 137) was passed in the City of Baguio. The
said ordinance sought to assess properties of property owners within the
defined city limits. Apostolic Prefect of Mt. Province (APMP), on the
other hand, is a religious corporation duly established under Philippine
laws. Pursuant to the ordinance, it contributed a total amount of P1,
019.37. It filed the said contribution in protest. APMP later averred that it
should be exempt from the said special contribution since as a religious
institution, it has a constitutionally guaranteed right not to be taxed
including its properties.
ISSUE: Whether or not APMP is exempt from taxes.
HELD:
The test of exemption from taxation is the use of the property for
purposes mentioned in the Constitution. Based on Justice Cooleys
words: While the word tax in its broad meaning, includes both general
taxes and special assessments, and in a general sense a tax is an
assessment, and an assessment is a tax, yet there is a recognized
distinction between them in that assessment is confined to local
impositions upon property for the payment of the cost of public
improvements in its immediate vicinity and levied with reference to
special benefits to the property assessed. The differences between a
special assessment and a tax are that (1) a special assessment can be
levied only on land; (2) a special assessment cannot (at least in most
states) be made a personal liability of the person assessed; (3) a special
assessment is based wholly on benefits; and (4) 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 and 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 notwithstanding the statute calls
it a tax. In the case at bar, the Prefect cannot claim exemption because
the assessment is not taxation per se but rather a system for the benefits
of the inhabitants of the city.
ISSUE:
Whether or not APMP is exempt from taxes
HELD:
The test of exemption from taxation is the use of the property for
purposes mentioned in the Constitution. Based on Justice Cooleys
words: "While the word 'tax' in its broad meaning, includes both general
taxes and special assessments, and in a general sense a tax is an
assessment, and an assessment is a tax, yet there is a recognized
distinction between them in that assessment is confined to local
impositions upon property for the payment of the cost of public
improvements in its immediate vicinity and levied with reference to
special benefits to the property assessed.
The differences between a special assessment and a tax are that (1) a
special assessment can be levied only on land; (2) a special assessment
cannot (at least in most states) be made a personal liability of the person
assessed; (3) a special assessment is based wholly on benefits; and (4) 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 and 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 notwithstanding the statute calls it a tax." In
the case at bar, the Prefect cannot claim exemption because the
assessment is not taxation per se but rather a system for the benefits of
the inhabitants of the city.
18

5. TOLLS:
Toll has been defined as a sum of money for the use of something,
generally applied to the consideration which is paid for the use
of a road, bridge, or the like of a public nature.
1. A toll is a demand of proprietorship while a tax is demand of
sovereignty.
2. A toll is paid for the use of anothers property
3. The amount of toll depends upon the cost of construction or
maintenance of the public improvement used, while there is
generally no limit on the amount of tax that may be imposed
4. A toll may be imposed by the government or private
individuals or entities, while tax may be imposed only by the
government.
Diaz vs. Secretary of Finance (2011)
Facts:
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed
this petition for declaratory relief assailing the validity of the impending
imposition of value-added tax (VAT) by the Bureau of Internal Revenue
(BIR) on the collections of toll way operators. Court treated the case as
one of prohibition. Petitioners hold the view that Congress did not,
when it enacted the NIRC, intend to include toll fees within the meaning
of "sale of services" that are subject to VAT; that a toll fee is a "user's tax,"
not as ale of services; that to impose VAT on toll fees would amount to a
tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate then on-
impairment clause of the constitution. The government avers that the
NIRC imposes VAT on all kinds of services of franchise grantees,
including toll way operations; that the Court should seek the meaning
and intent of the law from the words used in the statute; and that the
imposition of VAT on toll way operations has been the subjects early as
2003 of several BIR rulings and circulars. The government also argues
that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll
operating agreements (TOAs) between the government and toll way
operators. At any rate, the non-impairment clause cannot limit the State's
sovereign taxing power which is generally read into contracts.
Issue:
May toll fees collected by toll way operators be subjected to VAT (Are
toll way operations a franchise and/or a service that is subject to
VAT)?
Ruling:
When a toll way operator takes a toll fee from a motorist, the fee is in
effect for the latter's use of thetollway facilities over which the operator
enjoys private proprietary rights that its contract and the law recognize.
In this sense, the toll way operator is no different from the service
providers under Section108 who allow others to use their properties or
facilities for fee.Tollway operators are franchise grantees and they do not
belong to exceptions that Section 119 spares from the payment of VAT.
The word "franchise" broadly covers government grants of a special
right to do an act or series of acts of public concern. Toll way operators
are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities
on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. A tax is
imposed under the taxing power of the government principally for the
purpose of raising revenues to fund public expenditures. Toll fees, on
the other hand, are collected by private toll way operators as
reimbursement for the costs and expenses incurred in the construction,
maintenance and operation of the toll ways, as well as to assure them a
reasonable margin of income. Although toll fees are charged for the use
of public facilities, therefore, they are not government exactions that can
be properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be demanded by
19

either the government or private individuals or entities, as an attribute of
ownership.
PENALTIES
Penalty is any sanction imposed as a punishment for the violation of
law or acts deemed injurious.
1. a penalty is designed to regulate conduct while a tax is
generally intended to raise revenue
2. Penalty may be imposed by the government or private
individuals or entities, while a tax may be imposed only by
the government.
National Development Co. vs. Commissioner L-53961, 30 June 1987
En Banc, Cruz (J): 14 concur
Facts:
The National Development Co. (NDC) entered into contracts in Tokyo
with several Japanese shipbuilding companies for the construction of 12
ocean-going vessels. Initial payments were made in cash and through
irrevocable letters of credit. When the vessels were completed and
delivered to the NDC in Tokyo, the latter remitted to the shipbuilders
the amount of US$ 4,066,580.70 as interest on the balance of the purchase
price. No tax was withheld. The Commissioner then held NDC liable on
such tax in the total amount of P5, 115,234.74. The Bureau of Internal
Revenue served upon the NDC a warrant of distrait and levy after
negotiations failed
Issue:
Whether the NDC is liable for deficiency tax.
Held:
The Japanese shipbuilders were liable on the interest remitted to them
under Section 37 of the Tax Code. The NDC is not the one taxed. The
imposition of the deficiency taxes on the NDS is a penalty for its failure
to withhold the same from the Japanese shipbuilders. Such liability is
imposed by Section 53(c) of the Tax Code. NDC was remiss in the
discharge of its obligation of its obligation as the withholding agent of
the government and so should be liable for its omission.
F) CUSTOM DUTIES
The taxes imposed on the goods exported form or imported into a
country.

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