PURPOSE AND SCOPE OF TAXATION

Hon. Ramon D. Bagatsing v. Hon Pedro Ramirez and Federation of Manila

Market Vendors, Inc.
G.R. No. L-41631
December 17, 1976

FACTS:

The Municipal Board of Manila enacted Ordinance No. 7522 titled “An Ordinance Regulating The
Operation of Public Markets and Prescribing Fees For The Rentals of Stalls and Providing Penalties
For Violation Thereof and For Other Purposes”. The same was approved by City Mayor Ramon D.
Bagatsing on June 15, 1974.

On February 17, 1975, Federation of Manila Market Vendors, Inc. filed an action before the Court of
First Instance of Manila presided by respondent judge, seeking the declaration of nullity of the said
ordinance on the ground that the publication requirement under the Revised Charter of the City of
Manila was not complied with.

Respondent Judge Ramirez ruled in favor of Federation of Manila Market Vendors, Inc, declaring
Ordinance No. 7522 null and void on the ground of non-compliance with the publication requirement.

Petitioners moved for reconsideration, stressing that a) the Local Tax Code only requires publication
after approval of the ordinance and b) private respondent failed to exhaust all administrative remedies
before instituting an action in court. Judge Ramirez denied the motion.

The case was elevated to the Supreme Court through a petition for review on certiorari.

ISSUES:

1. Whether the Revised City Charter or the Local Tax Code shall govern the publication of a tax
ordinance enacted by the Municipal Board of Manila.
2. Whether or not the subject ordinance is a tax ordinance.

RULING:

1. The Local Tax Code prevails. The Revised Charter of the City of Manila is a special law
pertaining only to the City of Manila, while the Local Tax Code is a general law that is
universally applied to all local governments. As a general rule, a prior special law is not
ordinarily repealed by a subsequent general law. However, this rule is subject to an exception,
such as when the special statute refers to a subject in general, while the general statute treats
in particular.

The Revised Charter speaks of “ordinance” in general, regardless of its nature and scope,
whereas the Local Tax Code relates to “ordinances levying or imposing taxes, fees or other
charges” in particular. Therefore, the Revised Charter is applied to ordinances in general, but
not to “ordinances levying or imposing taxes, fees or other charges” in particular, which is
governed by the Local Tax Code.
 The Local Tax Code only prescribes for publication after the approval of "ordinances levying
or imposing taxes, fees or other charges" either in a newspaper or publication widely
circulated within the jurisdiction of the local government or by posting the ordinance in the
local legislative hall or premises and in two other conspicuous places within the territorial
jurisdiction of the local government.

Having complied with the requisite publication, Ordinance No. 7522 is valid.

2. Ordinance No. 7522 is a tax ordinance. Private respondent contends that the imposition of
rentals, permit fees, tolls and other fees is not strictly a taxing power but a revenue-raising
function, and therefore not governed by the Local Tax Code. The Court held that raising
revenues is the principal object of taxation. Under the Constitution, "Each local government
unit shall have the power to create its own sources of revenue and to levy taxes, subject to
such provisions as may be provided by law." Moreover, the Local Tax Codes particularly
points out that one of the sources of revenue is the collection of “fees or rentals for the
occupancy or use of public markets and premises.”
LIMITATIONS ON THE POWER OF TAXATION: REQUIREMENT OF DUE PROCESS OF LAW

Chamber of Real Estate and Builders Associations, Inc. vs. Hon. Executive
Secretary Alberto Romulo
GR No. 160756
March 9, 2010
FACTS:

Petitioner Chamber of Real Estate and Builders Association, Inc. (CREBA) is an association of real
estate developers and builders in the Philippines. Petitioner questioned the validity of the imposition
of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on
sales of real properties classified as ordinary assets.

Under Sec. 27(E) of RA 8424, a corporation can become subject to the MCIT at the rate of 2% of
gross income, beginning on the 4th taxable year immediately following the year in which it
commenced its business operations, whenever such MCIT is greater than the normal corporate income
tax. If the regular income tax is higher than the MCIT, the corporation is not required to pay the
MCIT.

CREBA contends that the MCIT violates the due process clause because it levies income tax even if
there is no realized gain. Petitioner further asserts that the subject revenue regulations (RR 2-98) on
CWT violate the due process clause because, like the MCIT, the government collects income tax even
when the net income has not yet been determined.

ISSUES:

1. Whether or not the imposition of the MCIT on domestic corporations is constitutional

2. Whether or not the imposition of the CWT on income from sales of real properties classified
as ordinary assets is constitutional

RULING:

1. Yes, the imposition of the MCIT is constitutional. An income tax is arbitrary and confiscatory
if it taxes capital because capital is not income. In other words, it is income, not capital, which
is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from
gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal
net income tax, and only if the normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a corporation, pegging the rate at a very
much reduced 2% and uses as the base the corporation’s gross income.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its
very nature no limits, so that the principal check against its abuse is to be found only in the
responsibility of the legislature (which imposes the tax) to its constituency who are to pay it.
 Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any
other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat that no person shall be
deprived of life, liberty or property without due process of law. The Court previously held
that the due process clause may properly be invoked to invalidate, in appropriate cases, a
revenue measure when it amounts to a confiscation of property. However, the Court will not
strike down a revenue measure on the mere allegation of arbitrariness. There is need for proof
of such persuasive character.

Absent any other valid objection, the assignment of gross income, instead of net income, as
the tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not
constitutionally objectionable. Moreover, petitioner does not cite any actual, specific and
concrete negative experiences of its members nor does it present empirical data to show that
the implementation of the MCIT resulted in the confiscation of their property.

Various safeguards were incorporated into the law imposing MCIT. Firstly, it recognizes the
birth pangs of business and the reality of the need to recoup initial major capital expenditures;
hence the MCIT is imposed only on the 4th taxable year immediately following the year in
which the corporation commenced its operations.

Second, the law allows the carry-forward of any excess of the MCIT paid over the normal
income tax which shall be credited against the normal income tax for the three immediately
succeeding years.

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes
the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses
due to prolonged labor dispute, force majeure and legitimate business reverses.

2. Yes, it is constitutional. The Court has long recognized that the method of withholding tax at
source is a procedure of collecting income tax which is sanctioned by our tax laws. The
withholding tax system was devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probably income tax liability; second, to ensure the collection
of income tax which can otherwise be lost or substantially reduce through failure to file the
corresponding returns and third, to improve the government’s cash flow.

It is stressed that the CWT is creditable against the tax due from the seller of the property at
the end of the taxable year. The seller will be able to claim the tax refund if its net income is
less than the taxes withheld. Nothing is taken that is not due so there is no confiscation of
property repugnant to the constitutional guarantee of due process. More importantly, the due
process requirement applies to the power to tax. The CWT does not impose new taxes nor
does it increase taxes. It relates entirely to the method and time of payment.

On the alleged violation of the equal protection clause, the taxing power has the authority to
make reasonable classifications for purposes of taxation. Inequalities which result from
singling out a particular class for taxation or exemption, infringe no constitutional limitation.
The real estate industry is, by itself, a class and can be validly treated different from other
business enterprises.
SITUS OF TAXATION

Commissioner of Internal Revenue vs. Marubeni Corporation

G.R. No. 137377
December 18, 2001
FACTS:
Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of
Japan. It is engaged in general import and export trading, financing and the construction business.

Petitioner CIR issued a letter of authority to examine the books of accounts of the Manila branch
office respondent corporation for the fiscal year ending March 1985. After the examination, petitioner
found out that respondent had undeclared income from 2 contracts in the Philippines, completed in
1984. One contract was with the National Development Company (NDC) and one was with the
Philippine Phosphate Fertilizer Corporation.

On August 27, 1986, Marubeni received a letter from CIR assessing several deficiency taxes. CIR
claims that the income in question were derived from income sourced within the Philippines, and thus
subject to internal revenue taxes. On September, Marubeni filed 2 petitions for review with the CTA,
first questioning the deficiency income, branch profit remittance and contractor’s tax assessments and
second questioning the deficiency commercial broker’s assessment.

On August 2, 1986, EO No. 41 was issued, declaring a one-time amnesty covering unpaid income
taxes for the years 1981 to 1985. On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate
and donor’s taxes under Title 3 and business tax under Chap 2, Title 5 of NIRC, extended the period
of availment to Dec 15, 1986 and stated those who already availed amnesty under EO 41 should file
an amended return to avail of the new benefits. Marubeni filed a supplemental tax amnesty return on
Dec 15, 1986.

CTA rendered a decision finding Marubeni having properly availed of the tax amnesty under E.O. No.
41 and 64. On appeal, the CA affirmed the decision of the CTA.

ISSUES:

1. Whether or not Marubeni is qualified to avail of tax amnesty.

2. Whether or not Marubeni is liable to pay taxes under Philippine tax law.

RULING:

1. Marubeni can avail of tax amnesty. Petitioner claims that Marubeni is disqualified from
availing of tax amnesty under E.O. No. 41, which provides that “those with income tax cases
already filed in Court as of the effectivity hereof” may not avail of the amnesty granted
therein. The point of reference is the date of effectivity of EO No. 41. Thus, for a taxpayer to
qualify for amnesty, there must have been no income tax cases filed in court against when the
said ordinance took effect.

EO No. 41 took effect on August 22, 1986, while the case questioning the tax defiencies was
filed by Marubeni with the CTA on September 26, 1986. When EO No. 41 took effect, there
was still no pending case in court.
 The difficulty herein is with respect to the contractor’s tax assessment (business tax) and
respondent’s availment of the amnesty under EO 64, which expanded EO 41’s coverage.
When EO 64 took effect on Nov 17, 1986, it did not provide for exceptions to the coverage of
the amnesty for business, estate and donor’s taxes. Instead, Section 8 said EO provided that:

“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not
contrary to or inconsistent with this amendatory Executive Order shall remain in full
force and effect.”

There is nothing in EO No. 64 that provides that it should retroact to the effectivity of EO No.
41, the original issuance. Neither is it necessarily implied from EO No. 64 that it or any of its
provisions should apply retroactively. The general rule is that an amendatory act operates
prospectively. Where the statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to subject to tax past
transactions not subject to tax under the original act. It may not be given a retroactive effect
unless it is so provided expressly or by necessary implication and no vested right or
obligations of contract are thereby impaired.

2. Yes, Marubeni is subject to Philippine tax laws. Marubeni contends that assuming it did not
validly avail of the amnesty, it is still not liable for the deficiency tax because the income
from the projects came from the “Offshore Portion” as opposed to “Onshore Portion”. It
claims all materials and equipment in the contract under the “Offshore Portion” were
manufactured and completed in Japan, not in the Philippines, and are therefore not subject to
Philippine taxes.

CIR argues that since the two agreements are turn-key, they call for the supply of both
materials and services to the client, they are contracts for a piece of work and are indivisible.
The situs of the two projects is in the Philippines, and the materials provided and services
rendered were all done and completed within the territorial jurisdiction of the Philippines.
Accordingly, respondent’s entire receipts from the contracts, including its receipts from the
Offshore Portion, constitute income from Philippine sources. The total gross receipts covering
both labor and materials should be subjected to contractor’s tax.

A contractor’s tax is a tax imposed upon the privilege of engaging in business. It is generally
in the nature of an excise tax on the exercise of a privilege of selling services or labor rather
than a sale on products and is directly collectible from the person exercising the privilege.
Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or
business are done or performed within the jurisdiction of said authority. Like property taxes,
it cannot be imposed on an occupation or privilege outside the taxing district.

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed
in the Philippines because some of them were completed in Japan (and in fact subcontracted)
in accordance with the provisions of the contracts. While the construction and installation
work were completed within the Philippines, the evidence is clear that some pieces of
equipment and supplies were completely designed and engineered in Japan. All services for
the design, fabrication, engineering and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan. These services were rendered
outside the taxing jurisdiction of the Philippines and therefore not subject to contractor’s tax.