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Bar Reviewer on Taxation

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  PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) PIERRE MARTIN DE LEON REYES Page 1 of 158 Ateneo Law Batch 2013 Last Updated: 30 July 2013(v3) This is the first installment of my two-part reviewer on taxation. This covers two topics: (1) General Principles of Taxation; and (2) Income Tax. It is a consolidated and updated version of my reviewers in Tax 1 and Taxation Law Review. This reviewer is based on notes from Atty. Montero and Assoc. Dean Gruba and the books and reviewers of Atty. Mamalateo and Atty. Domondon. I also added some stuff from Atty. Mickey Ingles’ reviewer a nd Justice Dimaampao. References have also been made to the 2013 Bedan Red Book and the 2012 UP Tax Reviewer. Further, I added the recent and relevant revenue regulations and other BIR issuances (especially those issued in 2012) and the latest SC and CTA  jurisprudence (as of January 31, 2013). Most of the digests were sourced from Du Baladad and Associates (BDB Law) and from Baniqued & Baniqued. The reviewer will make reference to codal provisions. Thus, I recommend that you read this with a copy of the NIRC and other Laws Codal (2012 edition) by Atty. Sacadalan-Casasola Possessors may reproduce and distribute my reviewer provided my name remains clearly associated with my work and no alterations in the form and content of my reviewer are made. If you find this reviewer useful, please share it to others. May this reviewer prove useful to you. If it does, please share it to others. Happy studying! --------------------------------------------------------------------------- TABLE OF CONTENTS --------------------------------------------------------------------------- I. General Principles of Taxation .................... 1 II. NIRC A. Income Tax .............................................. 45 ---------------------------------------------------------- I. GENERAL PRINCIPLES OF TAXATION ---------------------------------------------------------- --------------------------------------------------------------- A. Definition and Concept of Taxation --------------------------------------------------------------- Q: Define taxation Taxation  is the inherent power of the sovereign exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. It is the mode of raising revenue for public purposes.   It is the power by which the sovereign raises revenue to defray the expenses of government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burden. --------------------------------------------------------------- B. Nature of Taxation --------------------------------------------------------------- Q: What is the nature of the power of taxation? The nature of the power of taxation is two-fold . It is both an inherent power   and a legislative power  . 1. An inherent power The power of taxation is inherent in the State, being an attribute of sovereignty . The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it M ACTAN C EBU I NTERNATIONAL A IRPORT A UTHORITY VS .   M ARCOS [261   SCRA   667] . This is so because the very existence of the State is dependent on taxes. 2. Legislative in character The power of taxation is essentially a legislative function . Taxation is an attribute of sovereignty. It is the strongest of all powers of the government. There is a presumption in favor of legislative determination. Public policy decrees that since upon the prompt collection of revenue depends the very existence of government itself, whatever determination shall be arrived at by the legislature should not be interfered with, unless there be a clear violation of some constitutional inhibition.   [S ARASOLA VS .   T RINIDAD [40   P HIL .   252] It is a legislative power because it involves the promulgation of rules.  The Constitution has allocated to the legislative department the enactment of law  PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) PIERRE MARTIN DE LEON REYES Page 2 of 158 Ateneo Law Batch 2013 Last Updated: 30 July 2013(v3) Q: May the legislature enact a law to raise revenues even in the absence of a constitutional provision granting the said body the power to tax? Yes. The power to tax can be exercised by the government even if the Constitution is entirely silent on the subject. There is no need for a constitutional grant for the State to exercise this power. The power to tax is inherent in the State, being an attribute of sovereignty. This is so because the State can neither exist nor endure without taxes. It must be noted that Constitutional provisions relating to the power of taxation do not operate as grants of power to the Government, but instead merely constitute as limitations upon a power which would otherwise be practically without limit Q: Why is the power to tax considered inherent in sovereignty? It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity. No sovereign State can continue to exist without the means to pay its expenses, and, for those means, it has the right to compel all citizens and properly within its limits to contribute; hence, the emergence of the power to tax. --------------------------------------------------------------- C. Characteristics of Taxation --------------------------------------------------------------- Note: This should properly refer to Characteristics or Elements of a Tax, not Characteristics of Taxation. In the event the question is asked, answer as if the question refers to characteristics of a tax. See Chapter 1, K. Characteristic of Tax. With reservations, however, as to the source, the 2013 Beda tax reviewer enumerates as characteristic of taxation the following: (1) Comprehensive (2) Unlimited (3) Plenary and (4) Supreme. It is submitted that the proper answer would make reference to the inherent limitations to the power of taxation. Atty. Domondon states that the inherent limitations on the  power of taxation is also known as the elements, tenets or characteristics of taxation.   --------------------------------------------------------------- D. Power of Taxation compared with other powers --------------------------------------------------------------- Q: Differentiate the power of taxation from police power and the power of eminent domain. See table below.   TAXATION EMINENT DOMAIN POLICE POWER Authority who exercises the power Only by the government or its political subdivisions May be exercised by (1) government or political subdivisions OR (2) granted to public utilities Only by government or its political subdivisions Purpose The property is taken for the support of the government The property is taken for public use and must be compensated The use of the property is regulated for promoting the general welfare and is not compensable Persons affected Operates on a community or class of individuals Operates on an individual as owner of a particular property Operates on a community or class of individuals Effect The money contributed becomes part of the public funds There is a transfer of the right to property There is no transfer of title. At most, there is restraint on the injurious use of property Benefits received It is assumed that the He receives the market value of the The person affected receives  PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) PIERRE MARTIN DE LEON REYES Page 3 of 158 Ateneo Law Batch 2013 Last Updated: 30 July 2013(v3) individual receives the equivalent of the tax in the form of protection and benefits he receives from the government property taken from him indirect benefits as may arise from the maintenance of a healthy economic standard of society Amount of imposition Generally, there is no limit on the amount of tax that may be imposed No amount imposed but rather the owner is paid the market value of property taken  Amount imposed should not be more than sufficient to cover license and necessary expenses Relationship to Constitution Subject to certain constitutional limitations; including the impairment of obligation of contracts Inferior to the impairment of obligations of contracts prohibition; government cannot expropriate property which under a contract it had previously bound itself to purchase Relatively free from constitutional limitations; it is superior to the impairment of contract provision --------------------------------------------------------------- D. Purposes of taxation 1. Revenue-raising 2. Non-revenue/special or regulatory --------------------------------------------------------------- Q: What are the purposes of taxation?  1     _________________________________________ 1  Atty. Mamalateo enumerated six purposes or objectives of taxation, namely: (1) Revenue; (2) Regulatory; (3) Promotion of General Welfare; (4) Reduction of social inequity; (5) Encourage economic growth by granting incentives and exemptions; and (6) 1. Revenue purposes:   The basic purpose of taxation is to raise revenues. 2. Sumptuary or regulatory purpose:  The secondary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of inhabitants Q: What are non-revenue (or sumptuary) objectives of taxation? 1. Taxation can strengthen anemic enterprises; 2. Taxes may be increased in period of prosperity to curb spending power and halt inflation and lowered in periods of slump to expand business and ward off depression 3. Taxes on imports may be increased to protect local industries 4. Taxes on imported goods may be used as a bargaining tool by a country by setting trarrif rates first at a relatively high level before trade negotiations 5. Taxes can discourage certain business (e.g. tobacco and alcohol) 6. Taxes can also minimize inequity Some cases illustrating the non-revenue or sumptuary objectives of taxation: In P HILIPPINE C OCONUT P RODUCERS F EDERATION VS .   PCGG   [178   SCRA   236] , the Supreme Court held that the coconut industry is one of the major industries supporting the national economy. It is therefore, the State’s concern  to make it a strong and secure source not only of the livelihood of a significant segment of the population but also of export earnings the sustained growth of which is one of the imperatives of economic stability. In  P HILIPPINE H EALTH C ARE P ROVIDERS VS .   CIR   [   554 SCRA 411] , the Supreme Court, on the issue of whether Health maintenance organizations (HMOs) were exempt from Documentary Stamp Tax (DST), held that it is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise. HMOs, just like any concern organized protectionism. Note : It is submitted that items (3) to (6) can be considered subsumed under the regulatory purpose.  PM REYES BAR REVIEWER ON TAXATION I (Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) PIERRE MARTIN DE LEON REYES Page 4 of 158 Ateneo Law Batch 2013 Last Updated: 30 July 2013(v3) for a lawful economic activity have a right to maintain a legitimate business. Hence, HMOs should not be arbitrarily and unjustly included in the DST coverage. In T IO VS .   V IDEOGRAM R EGULATORY B OARD [151   SCRA   208] , the Supreme Court held that the levy of 30% tax on videogram operators was imposed primarily to answer the need for regulating the video industry, particularly rampant film piracy and flagrant violation of intellectual property rights. Q: May a tax be validly imposed in the exercise of police power and not of the power to tax? Yes. The power of taxation may be used as an implement of police power of the State with the end in view of regulating a particular activity. Note: Some authors and jurisprudence still refer to the imposition levied for the purpose of regulation as a tax. This is inaccurate and adds to confusion. The proper term, as used by the Supreme Court in numerous decisions should be “regulatory fee” or “fee”. I  n earlier cases, they were referred to as “license fees.” It is submitted that the use of the term “tax” should only be used to refer to an imposition for the purposes of revenue while the term “fee” is used for an imposition for purposes of regulation. As you will see later, the distinction between a “tax” and a “fee” is relevant as certain inherent and constitutional limitations apply only to one and no to the other. It is also important for purposes of tax exemptions. Q: How do you determine if an imposition is a tax or a (regulatory) fee? In determining whether an imposition is a tax or a regulatory fee, one must inquire into the following: 1. The purpose of the imposition 2. The amount of the exaction 3. The designation Note: The criteria is based on Atty. Montero’s lecture. This is particularly useful in analyzing whether an imposition is a tax or a fee. The purpose of the imposition Q: How do you distinguish a tax from a regulatory fee in terms of its purpose? The distinction made by the Supreme Court in P ROGRESSIVE D EVELOPMENT C ORPORATION V .   Q UEZON C ITY [172   SCRA   629]  is particularly instructive. The Court stated that: If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if the regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax Thus, a (regulatory) fee  is imposed for purposes of regulation (in exercise of police power) while a tax  is imposed for revenue generation purpose (the power of taxation). Q: When an exaction is imposed to discourage certain businesses, is the exaction a tax? No, it is a regulatory fee. In C OMPANIA G ENERAL DE T ABACOS DE F ILIPINAS V .   C ITY OF M ANILA [8   SCRA   367] ,   the Supreme Court held that the municipal license fees for the privilege to engage in the business of selling liquor or alcoholic beverages were imposed for regulatory purposes as such products are potentially harmful to public health and morals. Q: When an exaction is imposed to provide means for the rehabilitation and stabilization of a threatened industry, is the exaction a tax? No. Jurisprudence provides that such exactions are considered regulatory fees in light of their purpose. Some cases: In O SMENA V .   O RBOS [220   SCRA   703] , in determining whether the taxes collected for the Oil Price Stabilization Fund are taxes or regulatory fees, the Supreme Court stated that while the funds were referred to as taxes, they were exacted not under the power of taxation, but in the exercise of the police power of the State. The main objective was not revenue but to stabilize the price of oil and petroleum products. . In R EPUBLIC V .   B ACOLOD -M URCIA M ILLING [17   SCRA   632],   in determining whether the levy for the Philippine Sugar Institute Fund is a fee or a tax, the Supreme Court held that such levy was not so much
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