CASE DOCTRINES IN TAXATION LAW 1
(part II)
(part II)
Prepared by: Glenn Rey Anino
University of Cebu- College of Law
Sison, Jr. vs. Ancheta,
130 SCRA 654 , July 25, 1984
Taxation; Constitutional
Law; The Constitution sets forth the restrictions to the power to
tax.—The power to tax moreover, to borrow from Justice Malcolm, “is
an attribute of sovereignty. It is the strongest of all the powers of
government.” It is, of course, to be admitted that for all its
plenitude, the power to tax is not unconfined. There are
restrictions. The Constitution sets forth such limits. Adversely
affecting as it does property rights, both the due process and equal
protection clauses may properly be invoked, as petitioner does, to
invalidate in appropriate cases a revenue measure. If it were
otherwise, there would be truth to the 1803 dictum of Chief Justice
Marshall that “the power to tax involves the power to destroy.”
In a separate opinion in Graves v. New York, Justice Frankfurter,
after referring to it as an “unfortunate remark,” characterized
it as “a flourish of rhetoric [attributable to] the intellectual
fashion of the times [allowing] a free use of absolutes.” This is
merely to emphasize that it is not and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully
conclude: “The web of unreality spun from Marshall’s famous
dictum was brushed away by one stroke of Mr. Justice Holmes’s pen:
‘The power to tax is not the power to destroy while this Court
sits.’ ” So it is in the Philippines.
Same; Same; A bare
allegation that Batas 135, which sets different income tax schedules
for fixed income earners and business or professional income earners,
is arbitrary does not suffice to invalidate said tax statute.—The
difficulty confronting petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here, does not suffice. There
must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as
void on its face, he has not made out a case. This is merely to
adhere to the authoritative doctrine that where the due process and
equal protection clauses are invoked, considering that they are not
fixed rules but rather broad standards, there is a need for proof of
such persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail.
Same; Same; Due process
clause may be invoked where a tax statute is so arbitrary as to find
no support in Constitution.—It is undoubted that the due process
clause 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. That would be
a clear abuse of power. It then becomes the duty of this Court to say
that such an arbitrary act amounted to the exercise of an authority
not conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure is
beyond the jurisdiction of the state, or is not for a public purpose,
or, in case of a retroactive statute is so harsh and unreasonable, it
is subject to attack on due process grounds.
Same; Same; The State is
free to select the subjects of taxation and inequalities consequent
to its exercise infringe no constitutional limitation.—The equal
protection clause is, of course, inspired by the noble concept of
approximating the ideal of the laws’s benefits being available to
all and the affairs of men being governed by that serene and
impartial uniformity, which is of the very essence of the idea of
law. There is, however, wisdom, as well as realism, in these words of
Justice Frankfurter: “The equality at which the ‘equal
protection’ clause aims is not a disembodied equality. The
Fourteenth Amendment enjoins ‘the equal protection of the laws,’
and laws are not abstract propositions. They do not relate to
abstract units A, B and C, but are expressions of policy arising out
of specific difficulties, addressed to the attainment of specific
ends by the use of specific remedies. The Constitution does not
require things which are different in fact or opinion to be treated
in law as though they were the same.” Hence the constant
reiteration of the view that classification if rational in character
is allowable. As a matter of fact, in a leading case of Lutz V.
Araneta, this Court, through Justice J.B.L. Reyes, went so far as to
hold “at any rate, 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.’ ”
Same; Same; Uniformity in
taxation quite similar to the standard of equal
protection.—Petitioner likewise invoked the kindred concept of
uniformity. According to the Constitution: “The rule of taxation
shall be uniform and equitable.” This requirement is met according
to Justice Laurel in Philippine Trust Company v. Yatco, decided in
1940, when the tax “operates with the same force and effect in
every place where the subject may be found.” He likewise added:
“The rule of uniformity does not call for perfect uniformity or
perfect equality, because this is hardly attainable.” The problem
of classification did not present itself in that case. It did not
arise until nine years later, when the Supreme Court held: “Equality
and uniformity in taxation means that all taxable articles or kinds
of property of the same class shall be taxed at the same rate. The
taxing power has the authority to make reasonable and natural
classifications for purposes of taxation, * * *. As clarified by
Justice Tuason, 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.” There is quite a similarity then to the standard of equal
protection for all that is required is that the tax “applies
equally to all persons, firms and corporations placed in similar
situation.”
Same; Same; Taxpayers may
be classified into different categories where it rests on real
differences.—Apparently, what misled petitioner is his failure to
take into consideration the distinction between a tax rate and a tax
base. There is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time
reducing the applicable tax rate. Taxpayers may be classified into
different categories. To repeat, it is enough that the classification
must rest upon substantial distinctions that make real differences.
In the case of the gross income taxation embodied in Batas Pambansa
Blg. 135, the discernible basis of classification is the
susceptibility of the income to the application of generalized rules
removing all deductible items for all taxpayers within the class and
fixing a set of reduced tax rates to be applied to all of them.
Taxpayers who are recipients of compensation income are set apart as
a class. As there is practically no overhead expense, these taxpayers
are not entitled to make deductions for income tax purposes because
they are in the same situation more or less. On the other hand, in
the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses
necessary to produce their income. It would not be just then to
disregard the disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the basis
of gross income. There is ample justification then for the Batasang
Pambansa to adopt the gross system of income taxation to compensation
income, while continuing the system of net income taxation as regards
professional and business income.
Lung Center of the
Philippines vs. Quezon City, 433 SCRA 119 , June 29, 2004
Taxation; Lung Center of
the Philippines; Charitable Institutions; Test of Charitable
Character; Words and Phrases; To determine whether an enterprise is a
charitable institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its corporate
purpose, its constitution and by-laws, the methods of administration,
the nature of the actual work performed, the character of the
services rendered, the indefiniteness of the beneficiaries, and the
use and occupation of the properties; In the legal sense, a charity
may be fully defined as a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons,
either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in
life or otherwise lessening the burden of government. The test
whether an enterprise is charitable or not is whether it exists to
carry out a purpose recognized in law as charitable or whether it is
maintained for gain, profit, or private advantage.—On the first
issue, we hold that the petitioner is a charitable institution within
the context of the 1973 and 1987 Constitutions. To determine whether
an enterprise is a charitable institution/entity or not, the elements
which should be considered include the statute creating the
enterprise, its corporate purposes, its constitution and by-laws, the
methods of administration, the nature of the actual work performed,
the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties. In the
legal sense, a charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts under
the influence of education or religion, by assisting them to
establish themselves in life or otherwise lessening the burden of
government. It may be applied to almost anything that tend to promote
the well-doing and well-being of social man. It embraces the
improvement and promotion of the happiness of man. The word
“charitable” is not restricted to relief of the poor or sick. The
test of a charity and a charitable organization are in law the same.
The test whether an enterprise is charitable or not is whether it
exists to carry out a purpose reorganized in law as charitable or
whether it is maintained for gain, profit, or private advantage.
Same; Same; Same; The
Lung Center of the Philippines was organized for the welfare and
benefit of the Filipino people principally to help combat the high
incidence of lung and pulmonary diseases in the Philippines; Any
person, the rich as well as the poor, may fall sick or be injured or
wounded and become a subject of charity.—Under P.D. No. 1823, the
petitioner is a non-profit and non-stock corporation which, subject
to the provisions of the decree, is to be administered by the Office
of the President of the Philippines with the Ministry of Health and
the Ministry of Human Settlements. It was organized for the welfare
and benefit of the Filipino people principally to help combat the
high incidence of lung and pulmonary diseases in the Philippines. The
raison d’etre for the creation of the petitioner is stated in the
decree, viz: x x x Hence, the medical services of the petitioner are
to be rendered to the public in general in any and all walks of life
including those who are poor and the needy without discrimination.
After all, any person, the rich as well as the poor, may fall sick or
be injured or wounded and become a subject of charity.
Same; Same; Same; As a
general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or confined
in the hospital, or receives subsidies from the government, so long
as the money received is devoted or used altogether to the charitable
object which it is intended to achieve, and no money inures to the
private benefit of the persons managing or operating the
institution.—As a general principle, a charitable institution does
not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient,
or confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve;
and no money inures to the private benefit of the persons managing or
operating the institution. In Congregational Sunday School, etc. v.
Board of Review, the State Supreme Court of Illinois held, thus: …
[A]n institution does not lose its charitable character, and
consequent exemption from taxation, by reason of the fact that those
recipients of its benefits who are able to pay are required to do so,
where no profit is made by the institution and the amounts so
received are applied in furthering its charitable purposes, and those
benefits are refused to none on account of inability to pay therefor.
The fundamental ground upon which all exemptions in favor of
charitable institutions are based is the benefit conferred upon the
public by them, and a consequent relief, to some extent, of the
burden upon the state to care for and advance the interests of its
citizens.
Same; Same; Same; The
Lung Center of the Philippines does not lose its character as a
charitable institution simply because the gift or donation is in the
form of subsidies granted by the government.—Under P.D. No. 1823,
the petitioner is entitled to receive donations. The petitioner does
not lose its character as a charitable institution simply because the
gift or donation is in the form of subsidies granted by the
government. As held by the State Supreme Court of Utah in Yorgason v.
County Board of Equalization of Salt Lake County: Second, the …
government subsidy payments are provided to the project. Thus, those
payments are like a gift or donation of any other kind except they
come from the government. In both Intermountain Health Care and the
present case, the crux is the presence or absence of material
reciprocity. It is entirely irrelevant to this analysis that the
government, rather than a private benefactor, chose to make up the
deficit resulting from the exchange between St. Mark’s Tower and
the tenants by making a contribution to the landlord, just as it
would have been irrelevant in Intermountain Health Care if the
patients’ income supplements had come from private individuals
rather than the government. Therefore, the fact that subsidization of
part of the cost of furnishing such housing is by the government
rather than private charitable contributions does not dictate the
denial of a charitable exemption if the facts otherwise support such
an exemption, as they do here.
Same; Same; Same; Those
portions of Lung Center’s real property that are leased to private
entities are not exempt from real property taxes as these are not
actually, directly and exclusively used for charitable purposes.—Even
as we find that the petitioner is a charitable institution, we hold,
anent the second issue, that those portions of its real property that
are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for
charitable purposes.
Same; Same; Same;
Statutory Construction; Taxation is the rule and exemption is the
exception—the effect of an exemption is equivalent to an
appropriation.—The settled rule in this jurisdiction is that 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 effect of an exemption
is equivalent to an appropriation. Hence, a claim for exemption from
tax payments must be clearly shown and based on language in the law
too plain to be mistaken. As held in Salvation Army v. Hoehn: An
intention on the part of the legislature to grant an exemption from
the taxing power of the state will never be implied from language
which will admit of any other reasonable construction. Such an
intention must be expressed in clear and unmistakable terms, or must
appear by necessary implication from the language used, for it is a
well settled principle that, when a special privilege or exemption is
claimed under a statute, charter or act of incorporation, it is to be
construed strictly against the property owner and in favor of the
public. This principle applies with peculiar force to a claim of
exemption from taxation . …
Same; Same; Same; Same;
It is plain as day that under P.D. 1823, the Lung Center of the
Philippines does not enjoy any property tax exemption privileges for
its real properties as well as the building constructed thereon.—It
is plain as day that under the decree (P.D. 1823), the petitioner
does not enjoy any property tax exemption privileges for its real
properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the
enumeration of tax exempt privileges under Section 2: It is a settled
rule of statutory construction that the express mention of one
person, thing, or consequence implies the exclusion of all others.
The rule is expressed in the familiar maxim, expressio unius est
exclusio alterius. The rule of expressio unius est exclusio alterius
is formulated in a number of ways. One variation of the rule is the
principle that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum. Thus, where a statute, by
its terms, is expressly limited to certain matters, it may not, by
interpretation or construction, be extended to other matters. ... The
rule of expressio unius est exclusio alterius and its variations are
canons of restrictive interpretation. They are based on the rules of
logic and the natural workings of the human mind. They are predicated
upon one’s own voluntary act and not upon that of others. They
proceed from the premise that the legislature would not have made
specified enumeration in a statute had the intention been not to
restrict its meaning and confine its terms to those expressly
mentioned.
Same; Same; Same; Same;
The exemption must not be so enlarged by construction.—The
exemption must not be so enlarged by construction since the
reasonable presumption is that the State has granted in express terms
all it intended to grant at all, and that unless the privilege is
limited to the very terms of the statute the favor would be intended
beyond what was meant.
Same; Same; Same; Same;
The tax exemption under Section 28 (3), Article VI of the 1987
Constitution covers property taxes only.—Section 28(3), Article VI
of the 1987 Philippine Constitution provides, thus: (3) Charitable
institutions, churches and parsonages 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. The tax exemption under this constitutional provision
covers property taxes only. As Chief Justice Hilario G. Davide, Jr.,
then a member of the 1986 Constitutional Commission, explained: “.
. . what is exempted is not the institution itself . . .; those
exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or
educational purposes.”
Same; Same; Same; Same;
Under the 1973 and the present Constitutions, for “lands,
buildings, and improvements” of the charitable institution to be
considered exempt, the same should not only be “exclusively” used
for charitable purposes—it is required that such property be used
“actually” and “directly” for such purposes.—We note that
under the 1935 Constitution, “. . . all lands, buildings, and
improvements used ‘exclusively’ for . . . charitable . . .
purposes shall be exempt from taxation.” However, under the 1973
and the present Constitutions, for “lands, buildings, and
improvements” of the charitable institution to be considered
exempt, the same should not only be “exclusively” used for
charitable purposes; it is required that such property be used
“actually” and “directly” for such purposes. In light of the
foregoing substantial changes in the Constitution, the petitioner
cannot rely on our ruling in Herrera v. Quezon City Board of
Assessment Appeals which was promulgated on September 30, 1961 before
the 1973 and 1987 Constitutions took effect.
Same; Same; Same; Same;
Words and Phrases; If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation—the words “dominant use” or
“principal use” cannot be substituted for the words “used
exclusively” without doing violence to the Constitutions and the
law.—Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in
order to be entitled to the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes. “Exclusive” is defined
as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and “exclusively” is defined, “in a
manner to exclude; as enjoying a privilege exclusively.” If real
property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to
taxation. The words “dominant use” or “principal use” cannot
be substituted for the words “used exclusively” without doing
violence to the Constitutions and the law. Solely is synonymous with
exclusively. What is meant by actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate and
actual application of the property itself to the purposes for which
the charitable institution is organized. It is not the use of the
income from the real property that is determinative of whether the
property is used for tax-exempt purposes.
Same; Same; Same;
Portions of the land leased to private entities as well as those
parts of Lung Center leased to private individuals are not exempt
from taxes but portions of the land occupied by the hospital and
portions of the hospital used for its patients, whether paying or
non-paying, are exempt from real property taxes.—We hold that the
portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt
from such taxes. On the other hand, the portions of the land occupied
by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes.
Commissioner of
Internal Revenue vs. Court of Appeals, 298 SCRA 83 , October 14, 1998
Taxation; Court of Tax
Appeals; Factual findings of the CTA, when supported by substantial
evidence, will not be disturbed on appeal unless it is shown that the
court committed gross error in the appreciation of facts.—Indeed,
it is a basic rule in taxation that the factual findings of the CTA,
when supported by substantial evidence, will not be disturbed on
appeal unless it is shown that the said court committed gross error
in the appreciation of facts. In the present case, this Court finds
that the February 16, 1994 Decision of the CA did not deviate from
this rule. The latter merely applied the law to the facts as found by
the CTA and ruled on the issue raised by the CIR: “Whether or not
the collection or earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall under the
last paragraph of Section 27 of the National Internal Revenue Code of
1977, as amended.”
Same; Same; Distinction
between a question of law and a question of fact.—The distinction
between a question of law and a question of fact is clear-cut. It has
been held that “[t]here is a question of law in a given case when
the doubt or difference arises as to what the law is on a certain
state of facts; there is a question of fact when the doubt or
difference arises as to the truth or falsehood of alleged facts.”
Same; Tax Exemptions;
Court has always applied the doctrine of strict interpretation in
construing tax exemptions.—Because taxes are the lifeblood of the
nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions. Furthermore, a claim of
statutory exemption from taxation should be manifest and unmistakable
from the language of the law on which it is based. Thus, the claimed
exemption “must expressly be granted in a statute stated in a
language too clear to be mistaken.”
Same; Same; The exemption
claimed by the YMCA is expressly disallowed by the very wording of
the last paragraph of then Section 27 of the NIRC; Court is
duty-bound to abide strictly by its literal meaning and to refrain
from resorting to any convoluted attempt at construction.—In the
instant case, the exemption claimed by the YMCA is expressly
disallowed by the very wording of the last paragraph of then Section
27 of the NIRC which mandates that the income of exempt organizations
(such as the YMCA) from any of their properties, real or personal, be
subject to the tax imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent
income of the YMCA from its real property, the Court is duty-bound to
abide strictly by its literal meaning and to refrain from resorting
to any convoluted attempt at construction.
Same; Same; Private
respondent is exempt from the payment of property tax, but not income
tax on the rentals from its property.—Private respondent also
invokes Article XIV, Section 4, par. 3 of the Charter, claiming that
the YMCA “is a non-stock, non-profit educational institution whose
revenues and assets are used actually, directly and exclusively for
educational purposes so it is exempt from taxes on its properties and
income.” We reiterate that private respondent is exempt from the
payment of property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock,
non-profit educational institution is insufficient to justify its
exemption from the payment of income tax.
Same; Constitutional Law;
YMCA is not a school or an educational institution.—The term
“educational institution” or “institution of learning” has
acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant. Under the Education
Act of 1982, such term refers to schools. The school system is
synonymous with formal education, which “refers to the
hierarchically structured and chronologically graded learnings
organized and provided by the formal school system and for which
certification is required in order for the learner to progress
through the grades or move to the higher levels.” The Court has
examined the “Amended Articles of Incorporation” and “By-Laws”
of the YMCA, but found nothing in them that even hints that it is a
school or an educational institution.
Commissioner of
Internal Revenue vs. S.C. Johnson and Son, Inc., 309 SCRA 87 , June
25, 1999
Taxation; Tax Treaties;
Double Taxation; International Law; A cursory reading of the various
tax treaties will show that there is no similarity in the provisions
on relief from or avoidance of double taxation as this is a matter of
negotiation between the contracting parties.—The above construction
is based principally on syntax or sentence structure but fails to
take into account the purpose animating the treaty provisions in
point. To begin with, we are not aware of any law or rule pertinent
to the payment of royalties, and none has been brought to our
attention, which provides for the payment of royalties under
dissimilar circumstances. The tax rates on royalties and the
circumstances of payment thereof are the same for all the recipients
of such royalties and there is no disparity based on nationality in
the circumstances of such payment. On the other hand, a cursory
reading of the various tax treaties will show that there is no
similarity in the provisions on relief from or avoidance of double
taxation as this is a matter of negotiation between the contracting
parties. As will be shown later, this dissimilarity is true
particularly in the treaties between the Philippines and the United
States and between the Philippines and West Germany.
Same; Same; Same; Same;
Words and Phrases; International juridical double taxation is defined
as the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical
periods; The apparent rationale for doing away with double taxation
is to encourage the free flow of goods and services and the movement
of capital, technology and persons between countries, conditions
deemed vital in creating robust and dynamic economies.—The RP-US
Tax Treaty is just one of a number of bilateral treaties which the
Philippines has entered into for the avoidance of double taxation.
The purpose of these international agreements is to reconcile the
national fiscal legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with a
view towards the elimination of international juridical double
taxation, which is defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same
subject matter and for identical periods. The apparent rationale for
doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust
and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate
and the protection against double taxation is crucial in creating
such a climate.
Same; Same; Same; Same;
Same; Methods resorted to in eliminating double taxation; Exemption
and Credit Methods, Explained.—Double taxation usually takes place
when a person is resident of a contracting state and derives income
from, or owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate double
taxation, a tax treaty resorts to several methods. First, it sets out
the respective rights to tax of the state of source or situs and of
the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one
of the contracting states; however, for other items of income or
capital, both states are given the right to tax, although the amount
of tax that may be imposed by the state of source is limited. The
second method for the elimination of double taxation applies whenever
the state of source is given a full or limited right to tax together
with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to
avoid double taxation. There are two methods of relief—the
exemption method and the credit method. In the exemption method, the
income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may
be taken into account in determining the rate of tax applicable to
the taxpayer’s remaining income or capital. On the other hand, in
the credit method, although the income or capital which is taxed in
the state of source is still taxable in the state of residence, the
tax paid in the former is credited against the tax levied in the
latter. The basic difference between the two methods is that in the
exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax.
Same; Same; Same; Same;
In negotiating tax treaties, the underlying rationale for reducing
the tax rate is that the Philippines will give up a part of the tax
in the expectation that the tax given up for this particular
investment is not taxed by the other country.—In negotiating tax
treaties, the underlying rationale for reducing the tax rate is that
the Philippines will give up a part of the tax in the expectation
that the tax given up for this particular investment is not taxed by
the other country. Thus the petitioner correctly opined that the
phrase “royalties paid under similar circumstances” in the most
favored nation clause of the US-RP Tax Treaty necessarily
contemplated “circumstances that are tax related.”
Same; Same; Same; Same;
Most Favored Nation Clause; The concessional tax rate of 10 percent
provided for in the RP-Germany Tax Treaty could not apply to taxes
imposed upon royalties in the RP-US Tax Treaty since the two taxes
imposed under the two tax treaties are not paid under similar
circumstances, they are not containing similar provisions on tax
crediting.—Given the purpose underlying tax treaties and the
rationale for the most favored nation clause, the concessional tax
rate of 10 percent provided for in the RP-Germany Tax Treaty should
apply only if the taxes imposed upon royalties in the RP-US Tax
Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must prove
that the RP-US Tax Treaty grants similar tax reliefs to residents of
the United States in respect of the taxes imposable upon royalties
earned from sources within the Philippines as those allowed to their
German counterparts under the RP-Germany Tax Treaty. The RP-US and
the RP-West Germany Tax Treaties do not contain similar provisions on
tax crediting. Article 24 of the RP-Germany Tax Treaty, supra,
expressly allows crediting against German income and corporation tax
of 20% of the gross amount of royalties paid under the law of the
Philippines. On the other hand, Article 23 of the RP-US Tax Treaty,
which is the counterpart provision with respect to relief for double
taxation, does not provide for similar crediting of 20% of the gross
amount of royalties paid.
Same; Same; Same; Same;
Same; Statutory Construction; Laws are not just mere compositions,
but have ends to be achieved and that the general purpose is a more
important aid to the meaning of a law than any rule which grammar may
lay down; A treaty shall be interpreted in good faith in accordance
with the ordinary meaning to be given to the terms of the treaty in
their context and in the light of its object and purpose.—The
reason for construing the phrase “paid under similar circumstances”
as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as
referring to taxes is anchored upon a logical reading of the text in
the light of the fundamental purpose of such treaty which is to grant
an incentive to the foreign investor by lowering the tax and at the
same time crediting against the domestic tax abroad a figure higher
than what was collected in the Philippines. In one case, the Supreme
Court pointed out that laws are not just mere compositions, but have
ends to be achieved and that the general purpose is a more important
aid to the meaning of a law than any rule which grammar may lay down.
It is the duty of the courts to look to the object to be
accomplished, the evils to be remedied, or the purpose to be
subserved, and should give the law a reasonable or liberal
construction which will best effectuate its purpose. The Vienna
Convention on the Law of Treaties states that a treaty shall be
interpreted in good faith in accordance with the ordinary meaning to
be given to the terms of the treaty in their context and in the light
of its object and purpose.
Same; Same; Same; Same;
Same; 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 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. Both Article 13 of the RP-US Tax Treaty and
Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted,
speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms despite the
absence of a matching credit (20% for royalties) would derogate from
the design behind the most favored nation clause to grant equality of
international treatment since the tax burden laid upon the income of
the investor is not the same in the two countries. The similarity in
the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore
the need for equality of treatment.
Same; Tax Refunds;
Statutory Construction; Tax refunds are in the nature of tax
exemptions, and as such they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against
the person or entity claiming the exemption.—It bears stress that
tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming the
exemption. The burden of proof is upon him who claims the exemption
in his favor and he must be able to justify his claim by the clearest
grant of organic or statute law. Private respondent is claiming for a
refund of the alleged overpayment of tax on royalties; however, there
is nothing on record to support a claim that the tax on royalties
under the RP-US Tax Treaty is paid under similar circumstances as the
tax on royalties under the RP-West Germany Tax Treaty.
Duetsche Bank AG Manila
Branch vs. Commissioner of Internal Revenue, 704 SCRA 216 , August
28, 2013
Taxation; National
Internal Revenue Code; Foreign Corporations; Under Section 28(A)(5)
of the National Internal Revenue Code (NIRC), any profit remitted to
its head office shall be subject to a tax of 15% based on the total
profits applied for or earmarked for remittance without any deduction
of the tax component.―Under Section 28(A)(5) of the NIRC, any
profit remitted to its head office shall be subject to a tax of 15%
based on the total profits applied for or earmarked for remittance
without any deduction of the tax component. However, petitioner
invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which
provides that where a resident of the Federal Republic of Germany has
a branch in the Republic of the Philippines, this branch may be
subjected to the branch profits remittance tax withheld at source in
accordance with Philippine law but shall not exceed 10% of the gross
amount of the profits remitted by that branch to the head office.
International Law;
Treaties; Pacta Sunt Servanda; 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.―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.
Same; Same; Taxation; Tax
treaties are entered into to minimize, if not eliminate the harshness
of international juridical double taxation, which is why they are
also known as double tax treaty or double tax agreements.―Tax
treaties are entered into “to reconcile the national fiscal
legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different
jurisdictions.” CIR v. S.C. Johnson and Son, Inc., 309 SCRA 37
(1999), further clarifies that “tax conventions are drafted with a
view towards the elimination of international juridical double
taxation, which is defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same
subject matter and for identical periods. The apparent rationale for
doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust
and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate
and the protection against double taxation is crucial in creating
such a climate.” Simply put, tax treaties are entered into to
minimize, if not eliminate the harshness of international juridical
double taxation, which is why they are also known as double tax
treaty or double tax agreements.
Same; Same; Same; A state
that has contracted valid international obligations is bound to make
in its legislations those modifications that may be necessary to
ensure the fulfillment of the obligations undertaken.―“A state
that has contracted valid international obligations is bound to make
in its legislations those modifications that may be necessary to
ensure the fulfillment of the obligations undertaken.” Thus, laws
and issuances must ensure that the reliefs granted under tax treaties
are accorded to the parties entitled thereto. The BIR must not impose
additional requirements that would negate the availment of the
reliefs provided for under international agreements. More so, when
the RP-Germany Tax Treaty does not provide for any pre-requisite for
the availment of the benefits under said agreement.
Same; Same; Same; Bearing
in mind the rationale of tax treaties, the period of application for
the availment of tax treaty relief as required by RMO No. 1-2000
should not operate to divest entitlement to the relief as it would
constitute a violation of the duty required by good faith in
complying with a tax treaty.―Bearing in mind the rationale of tax
treaties, the period of application for the availment of tax treaty
relief as required by RMO No. 1-2000 should not operate to divest
entitlement to the relief as it would constitute a violation of the
duty required by good faith in complying with a tax treaty. The
denial of the availment of tax relief for the failure of a taxpayer
to apply within the prescribed period under the administrative
issuance would impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should merely
operate to confirm the entitlement of the taxpayer to the relief.
Same; Tax Refunds;
National Internal Revenue Code; Section 229 of the National Internal
Revenue Code (NIRC) provides the taxpayer a remedy for tax recovery
when there has been an erroneous payment of tax.―Section 229 of the
NIRC provides the taxpayer a remedy for tax recovery when there has
been an erroneous payment of tax. The outright denial of petitioner’s
claim for a refund, on the sole ground of failure to apply for a tax
treaty relief prior to the payment of the BPRT, would defeat the
purpose of Section 229.
City of Manila vs.
Coca-Cola Bottlers Philippines, Inc., 595 SCRA 299 , August 04, 2009
Same; Double Taxation;
Words and Phrases; 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”;
Otherwise described as “direct duplicate taxation,” the two taxes
must be imposed on the same subject matter, for the same purpose, by
the same taxing authority, within the same jurisdiction, during the
same taxing period, and the taxes must be of the same kind or
character.—Petitioners obstinately ignore the exempting proviso in
Section 21 of Tax Ordinance No. 7794, to their own detriment. Said
exempting proviso was precisely included in said section so as to
avoid 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.” It is
obnoxious when the taxpayer is taxed twice, when it should be but
once. Otherwise described as “direct duplicate taxation,” the two
taxes must be imposed on the same subject matter, for the same
purpose, by the same taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes must be of the same kind
or character. Using the aforementioned test, the Court finds that
there is indeed double taxation if respondent is subjected to the
taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since
these are being imposed: (1) on the same subject matter—the
privilege of doing business in the City of Manila; (2) for the same
purpose—to make persons conducting business within the City of
Manila contribute to city revenues; (3) by the same taxing
authority—petitioner City of Manila; (4) within the same taxing
jurisdiction—within the territorial jurisdiction of the City of
Manila; (5) for the same taxing periods—per calendar year; and (6)
of the same kind or character—a local business tax imposed on gross
sales or receipts of the business.
Same; Same; Municipal
Corporations; Local Government Units; It is apparent from a perusal
of Section 143 of the Local Government Code—the very source of the
power of municipalities and cities to impose a local business
tax—that when a municipality or city has already imposed a business
tax on manufacturers, etc. of liquors, distilled spirits, wines, and
any other article of commerce, pursuant to Section 143(a) of the
Local Government Code (LGC), said municipality or city may no longer
subject the same manufacturers, etc. to a business tax under Section
143(h) of the same Code.—The distinction petitioners attempt to
make between the taxes under Sections 14 and 21 of Tax Ordinance No.
7794 is specious. The Court revisits Section 143 of the LGC, the very
source of the power of municipalities and cities to impose a local
business tax, and to which any local business tax imposed by
petitioner City of Manila must conform. It is apparent from a perusal
thereof that when a municipality or city has already imposed a
business tax on manufacturers, etc. of liquors, distilled spirits,
wines, and any other article of commerce, pursuant to Section 143(a)
of the LGC, said municipality or city may no longer subject the same
manufacturers, etc. to a business tax under Section 143(h) of the
same Code. Section 143(h) may be imposed only on businesses that are
subject to excise tax, VAT, or percentage tax under the NIRC, and
that are “not otherwise specified in preceding paragraphs.” In
the same way, businesses such as respondent’s, already subject to a
local business tax under Section 14 of Tax Ordinance No. 7794 [which
is based on Section 143(a) of the LGC], can no longer be made liable
for local business tax under Section 21 of the same Tax Ordinance
[which is based on Section 143(h) of the LGC].
Commissioner of
Internal Revenue vs. Estate of Benigno P. Toda, Jr., 438 SCRA 290 ,
September 14, 2004
Taxation; Tax Avoidance
Distinguished from 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.
Same; Same; Factors to
Determine Tax Evasion.—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.
Taxation; Tax Avoidance
Distinguished from 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.
Same; Same; Factors to
Determine Tax Evasion.—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.
[Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr.,
438 SCRA 290(2004)]
Francia vs.
Intermediate Appellate Court, 162 SCRA 753 , June 28, 1988
Taxation; Obligations;
Requisites of Legal Compensation under Arts. 1278 and 1279 of Civil
Code; Case at bar.—Francia contends that his tax delinquency of
P2,400.00 has been extinguished by legal compensation. He claims that
the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been
set-off by operation of law as of October 15, 1977. There is no legal
basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278, Civil Code).
The circumstances of the case do not satisfy the requirements
provided by Article 1279, to wit: “(1) that each one of the
obligors be bound principally and that he be at the same time a
principal creditor of the other; xxx xxx xxx “(3) that the two
debts be due. xxx xxx xxx.
Taxation; Same; Internal
Revenue Taxes can not be subject of setoff or compensation.—This
principal contention of the petitioner has no merit. We have
consistently ruled that 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 being collected.
The collection of a tax cannot await the results of a lawsuit against
the government. In the case of Republic v. Mambulao Lumber Co. (4
SCRA 622), this Court ruled that Internal Revenue Taxes can not be
the subject of set-off or compensation. We stated that: “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. Neither
are they a proper subject of recoupment since they do not arise out
of the contract or transaction sued on. x x x (80 C.J.S., 73-74).
‘The general rule based on grounds of public policy is well-settled
that no set-off is admissible against demands for taxes levied for
general or local governmental purposes. The reason on which the
general rule is based, is that taxes are not in the nature of
contracts between the party and party but grow out of duty to, and
are the positive acts of the government to the making and enforcing
of which, the personal consent of individual taxpayer is not
required. x x x’ ”
Same; Same; Same; Auction
Sale; Purchaser has the burden of proof to show that all prescribed
requisites for tax sale were complied with.—We agree with the
petitioner’s claim that Ho Fernandez, the purchaser at the auction
sale, has the burden of proof to show that there was compliance with
all the prescribed requisites for a tax sale. The case of Valencia v.
Jimenez (11 Phil. 492) laid down the doctrine that: xxx xxx xxx “x
x x [D]ue process of law to be followed in tax proceedings must be
established by proof and the general rule is that the purchaser of a
tax title is bound to take upon himself the burden of showing the
regularity of all proceedings leading up to the sale.” (Italics
supplied). There is no presumption of the regularity of any
administrative action which results in depriving a taxpayer of his
property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437;
Denoga v. Insular Government, 19 Phil. 261). This is actually an
exception to the rule that administrative proceedings are presumed to
be regular. But even if the burden of proof lies with the purchaser
to show that all legal prerequisites have been complied with, the
petitioner can not, however, deny that he did receive the notice for
the auction sale. The records sustain the lower court’s finding
that: “[T]he plaintiff claimed that it was illegal and irregular.
He insisted that he was not properly notified of the auction sale.
Surprisingly, however, he admitted in his testimony that he received
the letter dated November 21, 1977 (Exhibit “I”) as shown by his
signature (Exhibit “I-A”) thereof. He claimed further that he was
not present on December 5, 1977 the date of the auction sale because
he went to Iligan City. As long as there was substantial compliance
with the requirements of the notice, the validity of the auction sale
can not be assailed. x x x.”
Same; Same; Same; Same;
General Rule that gross inadequacy of price is not
material.—Petitioner’s third assignment of grave error likewise
lacks merit. As a general rule, gross inadequacy of price is not
material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v.
Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v.
Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v.
Court of Appeals (109 SCRA 388) we held that “alleged gross
inadequacy of price is not material when the law gives the owner the
right to redeem as when a sale is made at public auction, upon the
theory that the lesser the price, the easier it is for the owner to
effect redemption.” In Velasquez v. Coronel, (5 SCRA 985), this
Court held: “x x x [R]espondent treasurer now claims that the
prices for which the lands were sold are unconscionable considering
the wide divergence between their assessed values and the amounts for
which they had been actually sold. However, while in ordinary sales
for reasons of equity a transaction may be invalidated on the ground
of inadequacy of price, or when such inadequacy shocks one’s
conscience as to justify the courts to interfere, such does not
follow when the law gives to the owner the right to redeem, as when a
sale is made at public auction, upon the theory that the lesser the
price the easier it is for the owner to effect the redemption. And so
it was aptly said: ‘When there is the right to redeem, inadequacy
of price should not be material, because the judgment debtor may
reacquire the property or also sell his right to redeem and thus
recover the loss he claims to have suffered by reason of the price
obtained at the auction sale.” [Francia vs. Intermediate Appellate
Court, 162 SCRA 753(1988)]
Domingo vs. Garlitos, 8
SCRA 443 , June 29, 1963
Taxation; Inheritance
tax; Procedure in enforcement against estate of deceased person;
Claim must be filed before probate court.—The ordinary procedure by
which to settle claims or indebtedness against the estate of a
deceased person, as an inheritance tax, is for the claimant to
present a claim before the probate court sa that said court may order
the administrator to pay the amount hereof (Aldamiz vs. Judge of the
Court of First Instance of Mindoro, L-2360, Dec. 29, 1949).
Same; Same; Same; Same;
Legal basis.—The legal basis for such a procedure is the fact that
in the testate or intestate proceedings to settle the estate of a
deceased person, the properties belonging to the estate are under the
jurisdiction of the court and such jurisdiction continues until said
properties havebeen distributed among the heirs entitled thereto.
During the pendency of the proceedings all the estate is in custodia
Iegis and the proper procedure is not to allow the sheriff. in case
of a court judgment, to seize the properties but to ask the court for
an order to require the administrator to pay the amount due from the
estate and required to be paid.
Same; Same; Compensation
between taxes and claims of intestate recognized and appropriated for
by law.—The fact that the court having jurisdiction of the estate
had found that the claim of the estate against the Government has
been appropriated for the purpose by a corresponding law (Rep. Act
No. 2700) shows that both the claim of the Government for inheritance
taxes and the claim of the intestate for services rendered have
already become overdue and demandable as well as fully liquidated.
Compensation, therefore, takes place by operation of law, in
accordance with the provisions of Articles 1279 and 1290 of the Civil
Code, and both debts are extinguished to the concurrent amount.
[Domingo vs. Garlitos, 8 SCRA 443(1963)]
Diaz vs. Secretary of
Finance, 654 SCRA 96 , July 19, 2011
Taxation; Value Added Tax
(VAT); Tollways; Declaratory Relief; Prohibition; A petition for
declaratory relief may be treated as one for prohibition if the case
has far-reaching implications and raises questions that need to be
resolved for the public good; A petition for prohibition is a proper
remedy to prohibit or nullify acts of executive officials that amount
to usurpation of legislative authority.—On August 24, 2010 the
Court issued a resolution, treating the petition as one for
prohibition rather than one for declaratory relief, the
characterization that petitioners Diaz and Timbol gave their action.
The government has sought reconsideration of the Court’s
resolution, however, arguing that petitioners’ allegations clearly
made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover,
that the petition does not meet the requirements of Rule 65 for
actions for prohibition since the BIR did not exercise judicial,
quasi-judicial, or ministerial functions when it sought to impose VAT
on toll fees. Besides, petitioners Diaz and Timbol has a plain,
speedy, and adequate remedy in the ordinary course of law against the
BIR action in the form of an appeal to the Secretary of Finance. But
there are precedents for treating a petition for declaratory relief
as one for prohibition if the case has far-reaching implications and
raises questions that need to be resolved for the public good. The
Court has also held that a petition for prohibition is a proper
remedy to prohibit or nullify acts of executive officials that amount
to usurpation of legislative authority.
Same; Same; Same;
Pleadings, Practice and Procedure; The imposition of value added tax
(VAT) on toll fees has far-reaching implications; The Supreme Court
has ample power to waive technical requirements when the legal
questions to be resolved are of great importance to the public.—The
imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million
motorists who use the tollways everyday, but more so on the
government’s effort to raise revenue for funding various projects
and for reducing budgetary deficits. To dismiss the petition and
resolve the issues later, after the challenged VAT has been imposed,
could cause more mischief both to the tax-paying public and the
government. A belated declaration of nullity of the BIR action would
make any attempt to refund to the motorists what they paid an
administrative nightmare with no solution. Consequently, it is not
only the right, but the duty of the Court to take cognizance of and
resolve the issues that the petition raises. Although the petition
does not strictly comply with the requirements of Rule 65, the Court
has ample power to waive such technical requirements when the legal
questions to be resolved are of great importance to the public. The
same may be said of the requirement of locus standi which is a mere
procedural requisite.
Same; Same; Same; Words
and Phrases; The law imposes value added tax (VAT) on “all kinds of
services” rendered in the Philippines for a fee, including those
specified in the list—every activity that can be imagined as a form
of “service” rendered for a fee should be deemed included unless
some provision of law especially excludes it.—It is plain from the
above that the law imposes VAT on “all kinds of services”
rendered in the Philippines for a fee, including those specified in
the list. The enumeration of affected services is not exclusive. By
qualifying “services” with the words “all kinds,” Congress
has given the term “services” an all-encompassing meaning. The
listing of specific services are intended to illustrate how pervasive
and broad is the VAT’s reach rather than establish concrete limits
to its application. Thus, every activity that can be imagined as a
form of “service” rendered for a fee should be deemed included
unless some provision of law especially excludes it.
Same; Same; Same; When a
tollway operator takes a toll fee from a motorist, the fee is in
effect for the latter’s use of the tollway facilities over which
the operator enjoys private proprietary rights that its contract and
the law recognize.—Now, do tollway operators render services for a
fee? Presidential Decree (P.D.) 1112 or the Toll Operation Decree
establishes the legal basis for the services that tollway operators
render. Essentially, tollway operators construct, maintain, and
operate expressways, also called tollways, at the operators’
expense. Tollways serve as alternatives to regular public highways
that meander through populated areas and branch out to local roads.
Traffic in the regular public highways is for this reason
slow-moving. In consideration for constructing tollways at their
expense, the operators are allowed to collect government-approved
fees from motorists using the tollways until such operators could
fully recover their expenses and earn reasonable returns from their
investments. When a tollway operator takes a toll fee from a
motorist, the fee is in effect for the latter’s use of the tollway
facilities over which the operator enjoys private proprietary rights
that its contract and the law recognize. In this sense, the tollway
operator is no different from the following service providers under
Section 108 who allow others to use their properties or facilities
for a fee: 1. Lessors of property, whether personal or real; 2.
Warehousing service operators; 3. Lessors or distributors of
cinematographic films; 4. Proprietors, operators or keepers of
hotels, motels, resthouses, pension houses, inns, resorts; 5. Lending
investors (for use of money); Transportation contractors on their
transport of goods or cargoes, including persons who transport goods
or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; and 7. Common
carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place
in the Philippines.
Same; Same; Same;
Franchises; Words and Phrases; Tollway operators are franchise
grantees and they do not belong to exceptions that Section 119 spares
from the payment of value added tax (VAT); The word “franchise”
broadly covers government grants of a special right to do an act or
series of acts of public concern.—And not only do tollway operators
come under the broad term “all kinds of services,” they also come
under the specific class described in Section 108 as “all other
franchise grantees” who are subject to VAT, “except those under
Section 119 of this Code.” Tollway operators are franchise grantees
and they do not belong to exceptions (the low-income radio and/or
television broadcasting companies with gross annual incomes of less
than P10 million and gas and water utilities) 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.
Same; Same; Same; Same;
Nothing in Section 108 of the National Internal Revenue Code
indicates that the “franchise grantees” it speaks of are those
who hold legislative franchises; The term “franchise” has been
broadly construed as referring, not only to authorizations that
Congress directly issues in the form of a special law, but also to
those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.—Petitioners of course
contend that tollway operators cannot be considered “franchise
grantees” under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the “franchise
grantees” it speaks of are those who hold legislative franchises.
Petitioners give no reason, and the Court cannot surmise any, for
making a distinction between franchises granted by Congress and
franchises granted by some other government agency. The latter,
properly constituted, may grant franchises. Indeed, franchises
conferred or granted by local authorities, as agents of the state,
constitute as much a legislative franchise as though the grant had
been made by Congress itself. The term “franchise” has been
broadly construed as referring, not only to authorizations that
Congress directly issues in the form of a special law, but also to
those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.
Same; Same; Same;
Statutory Construction; Statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect
the sense of that body and are, consequently, not controlling in the
interpretation of law—the congressional will is ultimately
determined by the language of the law that the lawmakers voted
on.—Nor can petitioners cite as binding on the Court statements
made by certain lawmakers in the course of congressional
deliberations of the would-be law. As the Court said in South African
Airways v. Commissioner of Internal Revenue, 612 SCRA 665 (2010),
“statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that
body and are, consequently, not controlling in the interpretation of
law.” The congressional will is ultimately determined by the
language of the law that the lawmakers voted on. Consequently, the
meaning and intention of the law must first be sought “in the words
of the statute itself, read and considered in their natural,
ordinary, commonly accepted and most obvious significations,
according to good and approved usage and without resorting to forced
or subtle construction.”
Same; Same; Same; Tollway
fees are not taxes.—As can be seen, the discussion in the MIAA case
on toll roads and toll fees was made, not to establish a rule that
tollway fees are user’s tax, but to make the point that airport
lands and buildings are properties of public dominion and that the
collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes. Indeed, they are not assessed
and collected by the BIR and do not go to the general coffers of the
government. It would of course be another matter if Congress enacts a
law imposing a user’s tax, collectible from motorists, for the
construction and maintenance of certain roadways. The tax in such a
case goes directly to the government for the replenishment of
resources it spends for the roadways. This is not the case here. What
the government seeks to tax here are fees collected from tollways
that are constructed, maintained, and operated by private tollway
operators at their own expense under the build, operate, and transfer
scheme that the government has adopted for expressways. Except for a
fraction given to the government, the toll fees essentially end up as
earnings of the tollway operators.
Same; Same; Same; A tax
is imposed under the taxing power of the government principally for
the purpose of raising revenues to fund public expenditures while
toll fees are collected by private tollway operators as reimbursement
for the costs and expenses incurred in the construction, maintenance
and operation of the tollways, as well as to assure them a reasonable
margin of income.—In sum, fees paid by the public to tollway
operators for use of the tollways, are not taxes in any sense. 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 tollway operators
as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, 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 either the government or private individuals
or entities, as an attribute of ownership.
Same; Same; Same; Value
added tax (VAT) on tollway operations cannot be deemed a tax on tax
due to the nature of VAT as an indirect tax; Once shifted, the value
added tax (VAT) ceases to be a tax and simply becomes part of the
cost that the buyer must pay in order to purchase the good, property
or service.—Parenthetically, VAT on tollway operations cannot be
deemed a tax on tax due to the nature of VAT as an indirect tax. In
indirect taxation, a distinction is made between the liability for
the tax and burden of the tax. The seller who is liable for the VAT
may shift or pass on the amount of VAT it paid on goods, properties
or services to the buyer. In such a case, what is transferred is not
the selle’s liability but merely the burden of the VAT. Thus, the
seller remains directly and legally liable for payment of the VAT,
but the buyer bears its burden since the amount of VAT paid by the
former is added to the selling price. Once shifted, the VAT ceases to
be a tax and simply becomes part of the cost that the buyer must pay
in order to purchase the good, property or service. Consequently, VAT
on tollway operations is not really a tax on the tollway user, but on
the tollway operator. Under Section 105 of the Code, VAT is imposed
on any person who, in the course of trade or business, sells or
renders services for a fee. In other words, the seller of services,
who in this case is the tollway operator, is the person liable for
VAT. The latter merely shifts the burden of VAT to the tollway user
as part of the toll fees.
Same; Same; Same;
Parties; Non-Impairment Clause; A person who will neither be
prejudiced by nor be affected by the alleged diminution in return of
investments that may result from the value added tax (VAT) imposition
has no personality to invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects.—Petitioner
Timbol has no personality to invoke the non-impairment of contract
clause on behalf of private investors in the tollway projects. She
will neither be prejudiced by nor be affected by the alleged
diminution in return of investments that may result from the VAT
imposition. She has no interest at all in the profits to be earned
under the TOAs. The interest in and right to recover investments
solely belongs to the private tollway investors.
Same; Same; Same; The
Court cannot rule on matters that are manifestly conjectural, and
neither can it prohibit the State from exercising its sovereign
taxing power based on uncertain, prophetic grounds.—Besides, her
allegation that the private investors’ rate of recovery will be
adversely affected by imposing VAT on tollway operations is purely
speculative. Equally presumptuous is her assertion that a stipulation
in the TOAs known as the Material Adverse Grantor Action will be
activated if VAT is thus imposed. The Court cannot rule on matters
that are manifestly conjectural. Neither can it prohibit the State
from exercising its sovereign taxing power based on uncertain,
prophetic grounds.
Same; Same; Same;
Administrative feasibility, one of the canons of a sound tax system,
simply means that the tax system should be capable of being
effectively administered and enforced with the least inconvenience to
the taxpayer; Even if the imposition of value added tax (VAT) on
tollway operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate any
law or the Constitution.—Administrative feasibility is one of the
canons of a sound tax system. It simply means that the tax system
should be capable of being effectively administered and enforced with
the least inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid “except to the
extent that specific constitutional or statutory limitations are
impaired.” Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not necessarily
invalid unless some aspect of it is shown to violate any law or the
Constitution. Here, it remains to be seen how the taxing authority
will actually implement the VAT on tollway operations. Any
declaration by the Court that the manner of its implementation is
illegal or unconstitutional would be premature. Although the
transcript of the August 12, 2010 Senate hearing provides some clue
as to how the BIR intends to go about it, the facts pertaining to the
matter are not sufficiently established for the Court to pass
judgment on. Besides, any concern about how the VAT on tollway
operations will be enforced must first be addressed to the BIR on
whom the task of implementing tax laws primarily and exclusively
rests. The Court cannot preempt the BIR’s discretion on the matter,
absent any clear violation of law or the Constitution. [Diaz vs.
Secretary of Finance, 654 SCRA 96(2011)]
Abaya vs. Ebdane, Jr.,
515 SCRA 720 , February 14, 2007
Same; Same; Same; Same;
Same; Taxpayer’s Suits; Locus standi is merely a matter of
procedure and it has been recognized that in some cases, suits are
not brought by parties who have been personally injured by the
operation of a law or any other government act—the Supreme Court
has invariably adopted a liberal stance on locus standi; The
prevailing doctrine in taxpayer’s suits is to allow taxpayers to
question contracts entered into by the national government or
government-owned or controlled corporations allegedly in
contravention of law.—Locus standi, however, is merely a matter of
procedure and it has been recognized that in some cases, suits are
not brought by parties who have been personally injured by the
operation of a law or any other government act but by concerned
citizens, taxpayers or voters who actually sue in the public
interest. Consequently, the Court, in a catena of cases, has
invariably adopted a liberal stance on locus standi, including those
cases involving taxpayers. The prevailing doctrine in taxpayer’s
suits is to allow taxpayers to question contracts entered into by the
national government or government-owned or controlled corporations
allegedly in contravention of law. A taxpayer is allowed to sue where
there is a claim that public funds are illegally disbursed, or that
public money is being deflected to any improper purpose, or that
there is a wastage of public funds through the enforcement of an
invalid or unconstitutional law. Significantly, a taxpayer need not
be a party to the contract to challenge its validity.
Gonzales
vs. Marcos, 65 SCRA 624 , July 31, 1975
Constitutional law;
Action; Taxpayer has no legal standing to question executive acts
that do not involve the use of public funds.—It may not be amiss
though to consider briefly both the procedural and substantive
grounds that led to the lower court’s order of dismissal. It was
therein pointed out as “one more valid reason” why such an
outcome was unavoidable that “the funds administered by the
President of the Philippines came from donations [and] contributions
[not] by taxation.” Accordingly, there was that absence of the
“requisite pecuniary or monetary interest.” The stand of the
lower court finds support in judicial precedents. This is not to
retreat from the liberal approach followed in Pascual vs. Secretary
of Public Works, foreshadowed by People v. Vera, where the doctrine
of standing was first fully ‘discussed. It is only to make clear
that petitioner, judged by orthodox legal learning, has not satisfied
the elemental requisite for a taxpayer’s suit.
Same; Executive
Department; The President had the power under the former
Constitution, to administer a trust created by an agreement with a
foreign country.—Justice Malcolm in Government of the Philippine
Islands vs. Springer took pains to emphasize: “Just as surely as
the duty of caring for governmental property is neither judicial nor
legislative in character is it as surely executive.” It would be an
unduly narrow or restrictive view of such a principle if the public
funds that accrued by way of donation from the United States and
financial contributions for the Cultural Center project could not be
legally considered as “governmental property.” They may be
acquired under the concept of dominium, the state as a persona in law
not being deprived of such an attribute, thereafter to be
administered by virtue of its prerogative of imperium. What is a more
appropriate agency for assuring that they be not wasted or frittered
away than the Executive, the department precisely entrusted with
management functions? It would thus appear that for the President to
refrain from taking positive steps and await the action of the then
Congress could be tantamount to dereliction of duty.
Same; Same; Legislative
Department; Creation of rules governing the administration of a trust
may be concurrently exercised by the President and Congress.—While
to the Presidency under the 1935 Constitution was entrusted the
responsibility for administering public property, the then Congress
could provide guidelines for such a task. Relevant in this connection
is the excerpt from an opinion of Justice Jackson in Youngstown Sheet
& Tube Co. vs. Sawyer: “When the President acts in absence of
either a congressional grant or denial of authority, he can only rely
upon his own independent powers, but there is a zone of twilight in
which he and Congress may have concurrent authority, or in which its
distribution is uncertain. Therefore, congressional inertia,
indifference or quiescence may sometimes, at least as a practical
matter, enable, if not invite, measures on independent presidential
responsibility. In this area, any actual test of power is likely to
depend on the imperatives of events and contemporary imponderables
rather than on abstract theories of law.” To vary the phraseology,
to recall Thomas Reed Powell, if Congress would continue to keep its
peace notwithstanding the action taken by the executive department,
it may be considered as silently vocal. In plainer language, it could
be an instance of silence meaning consent.
Action; Moot and
academic; Action disputing the creation of the Cultural Center of the
Philippines rendered moot and academic by the passage of Presidential
Decree No. 15.—The futility of this appeal by certiorari becomes
even more apparent with the issuance of Presidential Decree No. 15 on
October 5, 1972. As contended by the Solicitor General, the matter,
as of that date, became moot and academic. Executive Order No. 30 was
thus superseded. The institution known as the Cultural Center is
other than that assailed in this suit. In that sense a coup de grace
was administered to this proceeding. The labored attempt of
petitioner could thus be set at rest. This particular litigation is
at an end. There is, too, relevance in the observation that the
aforesaid decree is part of the law of the land. So the Constitution
provides.
Constitutional law; Arts
and letters; Creation of Cultural Center of the Philippines promotes
constitutional policy encouraging arts and letters.—It only remains
to be added that respondents as trustees lived up fully to the
weighty responsibility entrusted to them. The task imposed on them
was performed with competence, fidelity, and dedication. That was to
be expected. It is not surprising then that the Cultural Center
became a reality, the massive and imposing structure constructed at a
shorter period and at a lower cost than at first thought possible.
What is of even greater significance, with a portion thereof being
accessible at modest admission prices, musical and artistic
performances of all kinds are within reach of the lower-income
groups. Only thus may meaning be imparted to the Constitutional
provision that arts and letters shall be under State patronage.
Vinzona-Chato vs.
Fortune Tobacco Corporation, 575 SCRA 23 , December 23, 2008
Administrative Law;
Public Officers; Damages; The general rule is that a public officer
is not liable for damages which a person may suffer arising from the
just performance of his official duties and within the scope of his
assigned tasks; However, a public officer is by law not immune from
damages in his/her personal capacity for acts done in bad faith which
being outside the scope of his authority, are no longer protected by
the mantle of immunity for official actions.— The general rule is
that a public officer is not liable for damages which a person may
suffer arising from the just performance of his official duties and
within the scope of his assigned tasks. An officer who acts within
his authority to administer the affairs of the office which he/she
heads is not liable for damages that may have been caused to another,
as it would virtually be a charge against the Republic, which is not
amenable to judgment for monetary claims without its consent.
However, a public officer is by law not immune from damages in
his/her personal capacity for acts done in bad faith which, being
outside the scope of his authority, are no longer protected by the
mantle of immunity for official actions.
Same; Same; Same; A
public officer who directly or indirectly violates the constitutional
rights of another, may be validly sued for damages under Article 32
of the Civil Code even if his acts were not so tainted with malice or
bad faith; Instances Where a Public Officer May Be Validly Sued in
His/Her Private Capacity for Acts Done in the Course of the
Performance of the Functions of the Office.—In addition, the Court
held in Cojuangco, Jr. v. Court of Appeals, 309 SCRA 602 (1999), that
a public officer who directly or indirectly violates the
constitutional rights of another, may be validly sued for damages
under Article 32 of the Civil Code even if his acts were not so
tainted with malice or bad faith. Thus, the rule in this jurisdiction
is that a public officer may be validly sued in his/her private
capacity for acts done in the course of the performance of the
functions of the office, where said public officer: (1) acted with
malice, bad faith, or negligence; or (2) where the public officer
violated a constitutional right of the plaintiff.
Same; Same; Statutory
Construction; Special law must prevail over a general law.—A
general statute is one which embraces a class of subjects or places
and does not omit any subject or place naturally belonging to such
class. A special statute, as the term is generally understood, is one
which relates to particular persons or things of a class or to a
particular portion or section of the state only. A general law and a
special law on the same subject are statutes inpari materia and
should, accordingly, be read together and harmonized, if possible,
with a view to giving effect to both. The rule is that where there
are two acts, one of which is special and particular and the other
general which, if standing alone, would include the same matter and
thus conflict with the special act, the special law must prevail
since it evinces the legislative intent more clearly than that of a
general statute and must not be taken as intended to affect the more
particular and specific provisions of the earlier act, unless it is
absolutely necessary so to construe it in order to give its words any
meaning at all.
Same; Same; Sections 38
and 39, Book I of the Administrative Code, laid down the rule on the
civil liability of superior and subordinate public officers for acts
done in the performance of their duties; while said provisions deal
in particular with the liability of government officials, the subject
thereof is general, i.e., “acts” done in the performance of
official duties, without specifying the action or omission that may
give rise to a civil suit against the official concerned.— On the
other hand, Sections 38 and 39, Book I of the Administrative Code,
laid down the rule on the civil liability of superior and subordinate
public officers for acts done in the performance of their duties. For
both superior and subordinate public officers, the presence of bad
faith, malice, and negligence are vital elements that will make them
liable for damages. Note that while said provisions deal in
particular with the liability of government officials, the subject
thereof is general, i.e.,“acts” done in the performance of
official duties, without specifying the action or omission that may
give rise to a civil suit against the official concerned.
Same; Same; Article 32 is
the special provision that deals specifically with violation of
constitutional rights by public officers.— Contrarily, Article 32
of the Civil Code specifies in clear and unequivocal terms a
particular specie of an “act” that may give rise to an action for
damages against a public officer, and that is, a tort for impairment
of rights and liberties. Indeed, Article 32 is the special provision
that deals specifically with violation of constitutional rights by
public officers. All other actionable acts of public officers are
governed by Sections 38 and 39 of the Administrative Code. While the
Civil Code, specifically, the Chapter on Human Relations is a general
law, Article 32 of the same Chapter is a special and specific
provision that holds a public officer liable for and allows redress
from a particular class of wrongful acts that may be committed by
public officers. Compared thus with Section 38 of the Administrative
Code, which broadly deals with civil liability arising from errors in
the performance of duties, Article 32 of the Civil Code is the
specific provision which must be applied in the instant case
precisely filed to seek damages for violation of constitutional
rights.
Remedial Law; Cause of
Action; Considering that bad faith and malice are not necessary in an
action based on Article 32 of the Civil Code, the failure to
specifically allege the same will not amount to failure to state a
cause of action.—The complaint in the instant case was brought
under Article 32 of the Civil Code. Considering that bad faith and
malice are not necessary in an action based on Article 32 of the
Civil Code, the failure to specifically allege the same will not
amount to failure to state a cause of action. The courts below
therefore correctly denied the motion to dismiss on the ground of
failure to state a cause of action, since it is enough that the
complaint avers a violation of a constitutional right of the
plaintiff.
Commission of Internal
Revenue vs. Javier, Jr., 199 SCRA 824 , July 31, 1991
Taxation; Court persuaded
that there is no fraud in the filing of the return and agrees fully
with the Court of Tax Appeals’ interpretation of Javier’s
notation on his income tax return filed on March 15, 1978.—We are
persuaded considerably by the private respondent’s contention that
there is no fraud in the filing of the return and agree fully with
the Court of Tax Appeals’ interpretation of Javier’s notation on
his income tax return filed on March 15, 1978 thus: “Taxpayer was
the recipient of some money from abroad which he presumed to be a
gift but turned out to be an error and is now subject of litigation;”
that it was an “error or mistake of fact or law” not constituting
fraud, that such notation was practically an invitation for
investigation and that Javier had literally “laid his cards on the
table.”
Same; Same; Fraud in
relation to the filing of income tax return discussed in Aznar vs.
Court of Appeals.—In Aznar v. Court of Appeals, fraud in relation
to the filing of income tax return, was discussed in this manner: xxx
The fraud contemplated by law is actual and not constructive. It must
be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give
up some legal right. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated by
law. It must amount to intentional wrong-doing with the sole object
of avoiding the tax. It necessarily follows that a mere mistake
cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in
making entries in the returns and in the assessment, respectively,
under the inventory method of determining tax liability, it would be
unfair to treat the mistakes of the petitioner as tainted with fraud
and those of the respondent as made in good faith.
Same; Same; Same; Courts
never sustain findings of fraud upon circumstances which create only
suspicion and the mere understatement of a tax is not itself proof of
fraud for the purpose of tax evasion.—Fraud is never imputed and
the courts never sustain find ings of fraud upon circumstances which,
at most, create only suspicion and the mere understatement of a tax
is not itself proof of fraud for the purpose of tax evasion.
Same; Same; Same; Same;
There was no actual and intentional fraud through willful and
deliberate misleading of the Bureau of Internal Revenue, case at bar;
Error or mistake of law is not fraud.—In the case at bar, there was
no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal
Revenue, headed by the herein petitioner. The government was not
induced to give up some legal right and place itself at a
disadvantage so as to prevent its lawful agents from proper
assessment of tax liabilities because Javier did not conceal
anything. Error or mistake of law is not fraud. The petitioner’s
zealousness to collect taxes from the unearned windfall to Javier is
highly commendable. Unfortunately, the imposition of the fraud
penalty in this case is not justified by the extant facts.
Obillos, Jr. vs.
Commissioner of Internal Revenue, 139 SCRA 436 , October 29, 1985
Taxation; The dictum that
the power to tax involves the power to destroy should be obviated.—To
regard the petitioners as having formed a taxable unregistered
partnership would result in oppressive taxation and confirm the
dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
Same; Partnership;
Co-ownership; Where the father sold his rights over two parcels of
land to his four children so they can build their residence, but the
latter after one (1) year sold them and paid the capital gains, they
should not be treated to have formed an unregistered partnership and
taxed corporate income tax on the sale and dividend income tax on
their shares of the profit's from the sale.—Their original purpose
was to divide the lots for residential purposes. If later on they
found it not feasible to build their residences on the lots because
of the high cost of construction, then they had no choice but to
resell the same to dissolve the coownership. The division of the
profit was merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state. It had to be
terminated sooner or later.
Same; Same; Same; Mere
sharing of gross income from an isolated transaction does not
establish a partnership.—Article 1769(3) of' the Civil Code
provides that ''the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have
a j oint or common right or interest in any property from which the
returns are derived". There must be an unmistakable intention to
form a partnership or joint venture.
Commissioner of
Internal Revenue vs. St. Luke's Medical Center, Inc., 682 SCRA 66 ,
September 26, 2012
Taxation; Tax Exemptions;
The Supreme Court holds that Section 27(B) of the National Internal
Revenue Code (NIRC) does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G).―The
Court partly grants the petition of the BIR but on a different
ground. We hold that Section 27(B) of the NIRC does not remove the
income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E)
and (G) on the other hand, can be construed together without the
removal of such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific
institutions, namely, proprietary non-profit educational institutions
and proprietary non-profit hospitals, among the institutions covered
by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph
of Section 30 in relation to Section 27(A)(1).
Same; Preferential Tax
Rate; Section 27(B) of the National Internal Revenue Code (NIRC)
imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit
hospitals.―Section 27(B) of the NIRC imposes a 10% preferential tax
rate on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and
non-profit. “Proprietary” means private, following the definition
of a “proprietary educational institution” as “any private
school maintained and administered by private individuals or groups”
with a government permit. “Non-profit” means no net income or
asset accrues to or benefits any member or specific person, with all
the net income or asset devoted to the institution’s purposes and
all its activities conducted not for profit.
Same; “Non-profit”
does not necessarily mean “charitable.”―“Non-profit” does
not necessarily mean “charitable.” In Collector of Internal
Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 (1962), this Court
considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily
funded by membership fees and dues. If it had profits, they were used
for overhead expenses and improving its golf course. The club was
non-profit because of its purpose and there was no evidence that it
was engaged in a profit-making enterprise.
Same; Tax Exemptions;
Charity is essentially a gift to an indefinite number of persons
which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government; The government
forgoes taxes which should have been spent to address public needs,
because certain private entities already assume a part of the
burden.―To be a charitable institution, however, an organization
must meet the substantive test of charity in Lung Center of the
Philippines vs. Quezon City, 433 SCRA 119 (2004). The issue in Lung
Center concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction.
Charity is essentially a gift to an indefinite number of persons
which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which should have
been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the
tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury.
Same; Same; Charitable
institutions are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting
it.―Charitable institutions, however, are not ipso facto entitled
to a tax exemption. The requirements for a tax exemption are
specified by the law granting it. The power of Congress to tax
implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that “[n]o law
granting any tax exemption shall be passed without the concurrence of
a majority of all the Members of Congress.” The requirements for a
tax exemption are strictly construed against the taxpayer because an
exemption restricts the collection of taxes necessary for the
existence of the government.
Same; Same; Income
Taxation; Real Estate Taxes; For real property taxes, the incidental
generation of income is permissible because the test of exemption is
the use of the property; The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion
of the property not devoted to charity.―For real property taxes,
the incidental generation of income is permissible because the test
of exemption is the use of the property. The Constitution provides
that “[c]haritable 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.” The test of exemption is not
strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property
in a certain way, i.e. for a charitable purpose. Thus, the Court held
that the Lung Center of the Philippines did not lose its charitable
character when it used a portion of its lot for commercial purposes.
The effect of failing to meet the use requirement is simply to remove
from the tax exemption that portion of the property not devoted to
charity.
Same; Same; The
Constitution exempts charitable institutions only from real property
taxes. In the National Internal Revenue Code (NIRC), Congress decided
to extend the exemption to income taxes.―The Constitution exempts
charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However,
the way Congress crafted Section 30(E) of the NIRC is materially
different from Section 28(3), Article VI of the Constitution. Section
30(E) of the NIRC defines the corporation or association that is
exempt from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but
requires that the institution “actually, directly and exclusively”
use the property for a charitable purpose.
Same; Same; Real Estate
Taxes; Income Taxation; To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property “actually, directly and
exclusively” for charitable purposes. To be exempt from income
taxes, Section 30(E) of the National Internal Revenue Code (NIRC)
requires that a charitable institution must be “organized and
operated exclusively” for charitable purposes. Likewise, to be
exempt from income taxes, Section 30(G) of the National Internal
Revenue Code (NIRC) requires that the institution be “operated
exclusively” for social welfare.―There is no dispute that St.
Luke’s is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke’s
from paying taxes. This only refers to the organization of St.
Luke’s. Even if St. Luke’s meets the test of charity, a
charitable institution is not ipso facto tax exempt. To be exempt
from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property
“actually, directly and exclusively” for charitable purposes. To
be exempt from income taxes, Section 30(E) of the NIRC requires that
a charitable institution must be “organized and operated
exclusively” for charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires that the institution
be “operated exclusively” for social welfare.
Same; Same; Even if the
charitable institution must be “organized and operated exclusively”
for charitable purposes, it is nevertheless allowed to engage in
“activities conducted for profit” without losing its tax exempt
status for its not-for-profit activities.―Even if the charitable
institution must be “organized and operated exclusively” for
charitable purposes, it is nevertheless allowed to engage in
“activities conducted for profit” without losing its tax exempt
status for its not-for-profit activities. The only consequence is
that the “income of whatever kind and character” of a charitable
institution “from any of its activities conducted for profit,
regardless of the disposition made of such income, shall be subject
to tax.” Prior to the introduction of Section 27(B), the tax rate
on such income from for-profit activities was the ordinary corporate
rate under Section 27(A). With the introduction of Section 27(B), the
tax rate is now 10%.
Same; Income Taxation;
Preferential Tax Rate; The Supreme Court finds that St. Luke’s is a
corporation that is not “operated exclusively” for charitable or
social welfare purposes insofar as its revenues from paying patients
are concerned; Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously
at the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B).―The Court finds that St. Luke’s is a
corporation that is not “operated exclusively” for charitable or
social welfare purposes insofar as its revenues from paying patients
are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the
clear and plain text of Section 30(E) and (G). Section 30(E) and (G)
of the NIRC requires that an institution be “operated exclusively”
for charitable or social welfare purposes to be completely exempt
from income tax. An institution under Section 30(E) or (G) does not
lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously
at the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B).
Same; Tax Exemptions; A
tax exemption is effectively a social subsidy granted by the State
because an exempt institution is spared from sharing in the expenses
of government and yet benefits from them.―A tax exemption is
effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and
yet benefits from them. Tax exemptions for charitable institutions
should therefore be limited to institutions beneficial to the public
and those which improve social welfare. A profit-making entity should
not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.
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ReplyDeletesuch important thing is that power to tax moreover, to borrow from Justice Malcolm, “is an attribute of sovereignty. It is the strongest of all the powers of government.
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