DIGESTS
General Principles / Considerations
Definition of tax; Distinguished from license or fee.
A tax refers to a financial obligation imposed by a state on persons, whether natural or juridical, within its jurisdiction, for property owned, income earned, business or profession engaged in, or any such activity analogous in character for raising the necessary revenues to take care of the responsibilities of government. An often-quoted definition is that of Cooley: “Taxes are the enforced proportional contributions from persons and property levied by the state by virtue of its sovereignty for the support of government and for all public needs.”
As distinguished from other pecuniary burdens, the differentiating factor is that the purpose to be subserved is the raising of revenue. A tax then is neither a penalty that must be satisfied or a liability arising from 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. It has been settled law in this jurisdiction as far back as Cu Unjieng v. Potstone, decided in 1962 (42 Phil. 818), that 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 as between private parties and the political society. To quote from Cooley anew: “Legislation for these purposes it would seem proper to look upon as being made in the exercise of that authority …spoken of as the police power.”
~~~Republic of the Philippines vs. Philippine Rabbit Bus Lines, Inc. (G.R. No. L-26862, 30 March 1970, En Banc, J. Fernando)
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Lifeblood of the government
Taxes, the lifeblood of the government, are meant to be paid without delay and often oblivious to contingencies or conditions.
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That taxation is an essential attribute of sovereignty and the lifeblood of every nation are doctrines well-entrenched in our jurisdiction. Taxes are the government’s primary means to generate funds needed to fulfill its mandate of promoting the general welfare and well-being of the people and so should be collected without unnecessary hindrance.
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Taxation must be exercised reasonably and in accordance with the prescribed procedure.
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. Thus, even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure.
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Taxes are the lifeblood of government and should be collected without hindrance. However, the collection of taxes should be exercised reasonably and in accordance with the prescribed procedure.
The essential nature of taxes for the existence of the State grants government with vast remedies to ensure its collection. However, taxpayers are guaranteed their fundamental right to due process of law, as articulated in various ways in the process of tax assessment. After all, the State’s purpose is to ensure the well-being of its citizens, not simply to deprive them of their fundamental rights.
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Tax collection should be premised on a valid assessment.
Compliance with Section 228 of the NIRC is a substantive requirement. It is not a mere formality. Providing the taxpayer with the factual and legal bases for the assessment is crucial before proceeding with tax collection. Tax collection should be premised on a valid assessment, which would allow the taxpayer to present his or her case and produce evidence for substantiation.
Taxes are the lifeblood of government and should be collected without hindrance. However, the collection of taxes should be exercised reasonably and in accordance with the prescribed procedure.
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The power to tax and to collect the same.
The power to tax necessarily carries with it the power to collect the taxes.
~~~Wee Poco & Co., Inc. vs. Posadas, Jr. (G.R. No. L-43142, 26 August 1937, En Banc, J. Concepcion)
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While taxation per se is generally legislative in nature, collection of tax is administrative in character. Thus, Congress delegated the assessment and collection of all national internal revenue taxes, fees, and charges to the BIR. And as the BIR’s chief, the CIR has the power to make assessments and prescribe additional requirements for tax administration and enforcement.
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The power to tax has its limits.
It is true that taxes are the lifeblood of the government. However, in spite of all its plenitude, the power to tax has its limits. Thus, in Commissioner of Internal Revenue v. Algue, Inc. (G.R. No. L-28896, 17 February 1988), this Court held:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
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It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the 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 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. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it 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. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate x x x that the law has not been observed.
It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law. In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the Constitution.
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On the strength of the foregoing observations, we ought to reiterate our earlier teachings that “in balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the Constitution.” Thus, while “taxes are the lifeblood of the government,” the power to tax has its limits, in spite of all its plenitude. Even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure.
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Tax provisions are not all about raising revenue.
Although we recognize that the power of taxation is deemed inherent in order to support the government, tax provisions are not all about raising revenue. Our legislature has provided safeguards and remedies beneficial to both the taxpayer, to protect against abuse; and the government, to promptly act for the availability and recovery of revenues. A statute of limitations on the assessment and collection of internal revenue taxes was adopted to serve a purpose that would benefit both the taxpayer and the government.
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Tax laws may not be extended by implication.
Tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided.
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Taxation is not only practical; it is vital.
As the Tax Court of the United States emphasized in Harbin v. CIR [40 TC 373 (1963)], taxation is not only practical; it is vital. The obligation of good faith and fair dealing in carrying out its provision is reciprocal and, as the government should never be over-reaching or tyrannical, neither should a taxpayer be permitted to escape payment by the concealment of material facts.
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Tax laws are civil in nature.
Tax laws are civil in nature. Under our Civil Code, acts executed against the mandatory provisions of law are void, except when the law itself authorizes the validity of those acts. Failure to comply with Section 228 does not only render the assessment void, but also finds no validation in any provision in the Tax Code.
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While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them.
The principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim: potestas delegata non delegari potest which means “what has been delegated, cannot be delegated.” This doctrine is based on the ethical principle that such as delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another.
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that “the Legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives.” The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a complete law – complete as to the time when it shall take effect and as to whom it shall be applicable – and to determine the expediency of its enactment. Thus, the rule is that in order that a court may be justified in holding a statute unconstitutional as a delegation of legislative power, it must appear that the power involved is purely legislative in nature – that is, one appertaining exclusively to the legislative department. It is the nature of the power, and not the liability of its use or the manner of its exercise, which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate; and (b) fixes a standard — the limits of which are sufficiently determinate and determinable — to which the delegate must conform in the performance of his functions. A sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected. Both tests are intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative.
In People vs. Vera (No. 45685, 16 November 1937, 65 Phi;. 56), the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of delegation of power.
Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority. While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence of facts on which its operation depends.
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information and making recommendations is the kind of subsidiary activity which the legislature may perform through its members, or which it may delegate to others to perform. Intelligent legislation on the complicated problems of modern society is impossible in the absence of accurate information on the part of the legislators, and any reasonable method of securing such information is proper. The Constitution as a continuously operative charter of government does not require that Congress find for itself every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has declared to be prerequisite to application of legislative policy to particular facts and circumstances impossible for Congress itself properly to investigate.
In the present case, the challenged section of RA No. 9337 is the common proviso in Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).
The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively nullified the President’s power of control over the Secretary of Finance by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also subscribe to the position of petitioners Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase “upon the recommendation of the Secretary of Finance.” Neither does the Court find persuasive the submission of petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside by the President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive and administrative functions of the Chief Executive are performed by and through the executive departments, and the acts of the secretaries of such departments, such as the Department of Finance, performed and promulgated in the regular course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position and holds office in an advisory capacity, and, in the language of Thomas Jefferson, “should be of the President’s bosom confidence” and, in the language of Attorney-General Cushing, is “subject to the direction of the President.
In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1½%). If either of these two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. 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.
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative power to tax is contrary to the principle of republicanism, the same deserves scant consideration. Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to inquire into, its task being to interpret the law.
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the conditions to bring about either or both the conditions precedent does not deserve any merit as this argument is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as these may not exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances instead of realities, justice and law will be short-lived.
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Taxation, tax exemptions, or tax refunds
Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government. And 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 taxpayer and liberally in favor of the taxing authority. A claim of refund or exemption from tax payments must be clearly shown and be based on language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception.
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Along with police power and eminent domain, taxation is one of the three basic and necessary attributes of sovereignty. Thus, the State cannot be deprived of this most essential power and attribute of sovereignty by vague implications of law. Rather, being derogatory of sovereignty, the governing principle is that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of statute.
Tax refunds are a derogation of the State’s taxing power. Hence, like tax exemptions, they are construed strictly against the taxpayer and liberally in favor of the State. Consequently, he who claims a refund or exemption from taxes has the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted.
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Tax exemptions
One who claims to be exempt from the payment of a particular tax must do so under clear and unmistakable terms found in the statute. Tax exemptions are strictly construed against the taxpayer, they being highly disfavored and may almost be said “to be odious to the law.” He who claims an exemption must be able to point to some positive provision of law creating the right; it cannot be allowed to exist upon a mere vague implication or inference. The right of taxation will not be held to have been surrendered unless the intention to surrender is manifested by words too plain to be mistaken (Ohio Life Insurance & Trust Co. vs. Debolt, 60 Howard, 416), for the state cannot strip itself of the most essential power of taxation by doubtful words; it cannot, by ambiguous language, be deprived of this highest attribute of sovereignty (Erie Railway Co. vs. Commonwealth of Pennsylvania, 21 Wallace, 492, 499). So, when exemption is claimed, it must be shown indubitably to exist, for every presumption is against it, and a well-founded doubt is fatal to the claim (Farrington vs. Tennessee & County of Shelby, 95 U.S. 697, 686).
~~~Manila Electric Company vs. Vera, et seq. (G.R. Nos. L-29987 and L-23847, 22 October 1975, 1st Div., J. Muñoz Palma)
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Assumption on the grant of tax exemption or the withdrawal thereof.
The grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most sound and logical interpretation because petitioner could not have been exempted from paying taxes which it was not liable to pay in the first place.
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As a rule, estoppel does not apply to government, especially on matters of taxation; Exceptions.
We recognize the well-entrenched principle that estoppel does not apply to the government, especially on matters of taxation. Taxes are the nation’s lifeblood through which government agencies continue to operate and with which the State discharges its functions for the welfare of its constituents. As an exception, however, this general rule cannot be applied if it would work injustice against an innocent party.
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While the Government cannot, concededly, be estopped from collecting taxes by the mistake, negligence, or omission of its agents, the Court’s ruling in the Pilipinas Shell case is to the effect that an assignee’s status as a transferee in good faith and for value provides ample protection from the adverse findings subsequently made by the Center.
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In this case, petitioner may have raised the question of prescription only on appeal to this Court. The BIR could have crushed the defense by the mere invocation of the rule against setting up the defense of prescription only at the appeal stage. The government, however, failed to do so.
On the contrary, the BIR was silent despite having the opportunity to invoke the bar against the issue of prescription. It is worthy of note that the Court ordered the BIR to file a Comment. The government, however, did not offer any argument in its Comment about the issue of prescription, even if petitioner raised it in the latter’s Petition. It merely fell silent on the issue. It was given another opportunity to meet the challenge when this Court ordered both parties to file their respective memoranda. The CIR, however, merely filed a Manifestation that it would no longer be filing a Memorandum and, in lieu thereof, it would be merely adopting the arguments raised in its Comment. Its silence spoke loudly of its intent to waive its right to object to the argument of prescription.
We are mindful of the rule in taxation that estoppel does not prevent the government from collecting taxes; it is not bound by the mistake or negligence of its agents. The rule is based on the political law concept “the king can do no wrong,” which likens a state to a king: it does not commit mistakes, and it does not sleep on its rights. The analogy fosters inequality between the taxpayer and the government, with the balance tilting in favor of the latter. This concept finds justification in the theory and reality that government is necessary, and it must therefore collect taxes if it is to survive. Thus, the mistake or negligence of government officials should not bind the state, lest it bring harm to the government and ultimately the people, in whom sovereignty resides.
Republic v. Ker & Co. Ltd. [124 Phil. 822 (1966)] involved a collection case for a final and executory assessment. The taxpayer nevertheless raised the prescription of the right to assess the tax as a defense before the Court of First Instance. The Republic, instead of objecting to the invocation of prescription as a defense by the taxpayer, litigated on the issue and thereafter submitted it for resolution. The Supreme Court ruled for the taxpayer, treating the actuations of the government as a waiver of the right to invoke the defense of prescription. Ker effectively applied to the government the rule of estoppel. Indeed, the no-estoppel rule is not absolute.
The same ingredients in Ker – procedural matter and injustice – obtain in this case. The procedural matter consists in the failure to raise the issue of prescription at the trial court/administrative level, and injustice in the fact that the BIR has unduly delayed the assessment and collection of the DST in this case. The fact is that it took more than 12 years for it to take steps to collect the assessed tax. The BIR definitely caused untold prejudice to petitioner, keeping the latter in the dark for so long, as to whether it is liable for DST and, if so, for how much.
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As held in the case of Vera vs. Fernandez (G.R. No. L-31364, 20 March 1979), this Court emphatically said that taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. Upon taxation depends the Government’s ability to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affair. This should not hold true to government officials with respect to matters not of their own personal concern. This is the philosophy behind the government’s exception, as a general rule, from the operation of the principle of estoppel.
~~~Atlas Consolidated Mining & Development Corporation vs. Commissioner of Internal Revenue, et seq. (G.R. Nos. L-26911 and L-26924, 27 January 1981, 1st Div., J. De Castro)
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Tax pyramiding
A tax should not be imposed upon another tax. This is tax pyramiding, which has no basis either in fact or in law.
Tax pyramiding has since 1922 been rejected by this Court, the legislature, and our tax authorities. The intent behind the law is clearly to obviate a tax imposed upon another tax. Ratio legis est anima legis. The reason for the law is its spirit.
For instance, Regulations No. 27 (or the “Revised Regulations and Instructions Governing the Business of Manufacturers of Cigars and Cigarettes and Chewing and Smoking Tobacco” issued by Alberto Barretto, Secretary of Finance, on 10 August 1922), promulgated March 1, 1923, already excludes the specific tax on cigars and cigarettes from the tax base upon which such tax is computed. This is reiterated in the more recent amendments to our tax law, among which are EOs 22 and 273, and their implementing rules. In fact, Commissioner of Internal Revenue v. American Rubber Co. (124 Phil. 1471, 29 November 1966) held that a taxpayer cannot be “compelled to pay a xxx tax on the tax itself.”
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The purpose of the “most favored nation” clause in tax treaties.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the “most favored” among other countries. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable.
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A void law or administrative act cannot be the source of legal rights or duties.
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A franchise emanates from the constitutional power of the Legislature to grant concessions and privileges to private entities.
A franchise started out as a “royal privilege or (a) branch of the King’s prerogative, subsisting in the hands of a subject.” This definition was given by Finch, adopted by Blackstone, and accepted by every authority since. Further, “a franchise is defined to be a special privilege to, do certain things conferred by government on an individual or corporation, and which does not belong to citizens generally of common right.” Insofar as the great powers of government are concerned, “[a] franchise is basically a legislative grant of a special privilege to a person.” Section 11, Article XII of the 1987 Constitution further states that “such franchise or right [shall] be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. x x x”
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Tax avoidance and tax evasion
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being “evil,” in “bad faith,” “willfull,” or “deliberate and not accidental”; and (3) a course of action or failure of action which is unlawful.
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A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. This is called tax avoidance. It is the use of legal means to reduce tax liability. However, this method should be used by the taxpayer in good faith and at arms-length.
Contrariwise, tax evasion is a scheme used outside of those lawful means. It connotes fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes. To constitute tax evasion, the following factors must be proven: (1) the end to be achieved, i.e., the payment of less than known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith, willful, or deliberate and not accidental; and (3) a course of action or failure of action which is unlawful. In other words, the payment of lesser taxes must be in the context of fraud, which must be proven by clear and convincing evidence and cannot be based on mere speculation.
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Tax exemption
Tax exemption must be clearly expressed and cannot be established by implication. Exemption from a common burden cannot be permitted to exist upon vague implication.
~~~Wonder Mechanical Engineering Corp. vs. Court of Tax Appeals, et al. (G.R. Nos. L-22805 and L-27858, 30 June 1975, 1st Div., J. Esguerra)
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It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right.
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The avowed purpose of tax exemption is some public benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption.
Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.
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Indirect taxes
Jurisprudence states that indirect taxes are those which are demanded in the first instance from one person with the expectation and intention that he can shift the economic burden to someone else. In this regard, the statutory taxpayer can transfer to its customer the value of the excise taxes it pad or would be liable to pay to the government by treating it as part of the cost of the goods and tacking it on the selling price. Notably, this shifting process, otherwise known as “passing on,” is largely a contractual affair between the parties. Meaning, even if the purchaser effectively pays the value of the tax, the manufacturer/producer (in case of goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition) or the owner or importer (in case of imported goods) are still regarded as the statutory taxpayer under the law. To this end, the purchaser does not really pay the tax; rather, he only pays the seller more for the goods because of the latter’s obligation to the government as the statutory taxpayer.
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Double taxation
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.
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Pacta sunt servanda.
Our Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith. More importantly, treaties have the force and effect of law in this jurisdiction.
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Observance of any treaty obligation binding upon the government of the Philippines is anchored on the constitutional provision that the Philippines “adopts the generally accepted principles of international law as part of the law of the land[.]“ Pacta sunt servanda is a fundamental international law principle that requires agreeing parties to comply with their treaty obligations in good faith.
Hence, the application of the provisions of the NIRC must be subject to the provisions of tax treaties entered into by the Philippines with foreign countries.
Tax treaties form part of the law of the land, and jurisprudence has applied the statutory construction principle that specific laws prevail over general ones.
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Separate juridical personality of a corporation
A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:
(1) He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;
(2) He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
(3) He agrees to hold himself personally and solidarily liable with the corporation; or
(4) He is made, by specific provision of law, to personally answer for his corporate action.
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Prospective or retroactive application of statutes.
The general rule is that statutes are prospective. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule against the retroactive operation of statutes.
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