FAR EASTERN UNIVERSITY INSTITUTE OF LAW

NOTES IN TAXATION 1
(Atty. Edwin R. Abella, CPA, LLB, LLM) I. GENERAL PRINCIPLES OF TAXATION 1.1. 1.2. 1.3. DEFINITION AND CONCEPT OF TAXATION POWER OF TAXATION COMPARED WITH OTHER INHERENT POWERS POLICE POWER POWER OF EMINENT DOMAIN SOURCE OF POWER TO TAX NATIONAL GOVERNMENT AN INHERENT POWER OF SOVEREIGN GOVERNMENT LOCAL GOVERNMENT UNITS CONSTITUTIONALLY DELEGATED POWER NPC versus CITY OF CABANATUAN, G.R. NO. 149110, APRIL 9, 2003

FACTS: NAPOCOR, the petitioner, is a government-owned and controlled corporation created under Commonwealth Act 120. It is tasked to undertake the development of hydroelectric generations of power and the production of electricity from nuclear, geothermal, and other sources, as well as, the transmission of electric power on a nationwide basis. For many years now, NAPOCOR sells electric power to the resident Cabanatuan City, posting a gross income of P107,814,187.96 in 1992. Pursuant to Sec. 37 of Ordinance No. 165-92, the respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the formers gross receipts for the preceding year. Petitioner, whose capital stock was subscribed and wholly paid by the Philippine Government, refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contend that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees in accordance with Sec. 13 of RA 6395, as amended. The respondent filed a collection suit in the RTC of Cabanatuan City, demanding that petitioner pay the assessed tax, plus surcharge equivalent to 25% of the amount of tax and 2% monthly interest. Respondent alleged that petitioners exemption from local taxes has been repealed by Sec. 193 of RA 7160 (Local Government Code). The trial court issued an order dismissing the case. On

appeal, the Court of Appeals reversed the decision of the RTC and ordered the petitioner to pay the city government the tax assessment. ISSUES: (1) Is the NAPOCOR excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government and its charter characterized is as a non-profit organization? (2) Is the NAPOCORs exemption from all forms of taxes repealed by the provisions of the Local Government Code (LGC)? HELD: (1) NO. To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name, and can exercise all the powers of a corporation under the Corporation Code. To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is no engaged in business. (2) YES. One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the National Government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e. when specific provisions of the LGC authorize the LGUs to impose taxes, fees, or charges on the aforementioned entities. The legislative purpose to withdraw tax privileges enjoyed under existing laws or charter is clearly manifested by the language used on Sec. 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used. 1.4. BASIS OF POWER TO TAX NECESSITY THEORY PHILIPPINE GUARANTY, CO., versus CIR, L-22074, SEPTEMBER 6, 1965 BENEFITS-PROTECTION THEORY (SYMBIOTIC RELATIONSHIP) COMMISSIONER versus ALGUE, L-28896, FEBRUARY 17, 1988 PURPOSE OR OBJECTIVE OF TAXATION

1.5.

 REVENUE REGULATION CALTEX versus COA, G.R. NO. 92585, MAY 8, 1992

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 offsetting 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 offset 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. PROMOTION OF GENERAL WELFARE LUTZ versus ARANETA, 98 PHIL. 148

FACTS: Walter Lutz, as the Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from J. Antonio Araneta, the Collector of Internal Revenue, the sum of money paid by the estate as taxes, pursuant to the Sugar Adjustment Act.

Under Section 3 of said Act, taxes are levied on the owners or persons in control of the lands devoted to the cultivation of sugar cane. Furthermore, Section 6 states all the collections made under said Act shall be for aid and support of the sugar industry exclusively. Lutz contends that such purpose is not a matter of public concern hence making the tax levied for that cause unconstitutional and void. The Court of First Instance dismissed his petition, thus this appeal before the Supreme Court. ISSUE: Whether or Not the tax levied under the Sugar Adjustment Act ( Commonwealth Act 567) is unconstitutional? HELD: The tax levied under the Sugar Adjustment Act is constitutional. The tax under said Act is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. Since sugar production is one of the great industries of our nation, its promotion, protection, and advancement, therefore redounds greatly to the general welfare. Hence, said objectives of the Act are a public concern and is therefore constitutional. It follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. If objectives 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 with the implement of the states police power. In addition, it is only rational that the taxes be obtained from those that will directly benefit from it. Therefore, the tax levied under the Sugar Adjustment Act is held to be constitutional. OSMEA versus ORBOS, G.R. NO. 99886, MARCH 31, 1993

DOCTRINE: To avoid the taint of unlawful delegation of the power to tax, there must be a standard which implies that the legislature determines matter of principle and lays down fundamental policy. FACTS: Senator John Osmea assails the constitutionality of paragraph 1c of PD 1956, as amended by EO 137, empowering the Energy Regulatory Board (ERB) to approve the increase of fuel prices or impose additional amounts on petroleum products which proceeds shall accrue to the Oil Price Stabilization Fund (OPSF)

established for the reimbursement to ailing oil companies in the event of sudden price increases. The petitioner avers that the collection on oil products establishments is an undue and invalid delegation of legislative power to tax. Further, the petitioner points out that since a 'special fund' consists of monies collected through the taxing power of a State, such amounts belong to the State, although the use thereof is limited to the special purpose/objective for which it was created. It thus appears that the challenge posed by the petitioner is premised primarily on the view that the powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation power of the State. ISSUE: Is there an undue delegation of the legislative power of taxation? HELD: None. It seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF as a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a special fund. With regard to the alleged undue delegation of legislative power, the Court finds that the provision conferring the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by which the authority must be exercised. In addition to the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic pump rates, P.D. 1956 expressly authorizes the ERB to impose additional amounts to augment the resources of the Fund.

REDUCTION OF SOCIAL INEQUALITY - GRADUATED TAX RATES ENCOURAGE ECONOMIC GROWTH - TAX RELIEFS PROTECTIONISM - PROTECTIVE TARIFFS 1.6.