Tiu vs Videogram Regulatory Commission (Police Power; Unlimited reach of Taxation)

Facts: The case is a petition filed by petitioner on behalf of videogram operators adversely affected by Presidential Decree No. 1987, “An Act Creating the Videogram Regulatory Board” with broad powers to regulate and supervise the videogram industry.

A month after the promulgation of the said Presidential Decree, the amended the National Internal Revenue Code provided that:

“SEC. 134. Video Tapes. — There shall be collected on each processed video-tape cassette, ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally manufactured or imported blank video tapes shall be subject to sales tax.”

The rationale behind the tax provision is to curb the proliferation and unregulated circulation of videograms including, among others, videotapes, discs, cassettes or any technical improvement or variation thereof, have greatly prejudiced the operations of movie houses and theaters. Such unregulated circulation have caused a sharp decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the collection of sales, contractor’s specific, amusement and other taxes, thereby resulting in substantial losses estimated at P450 Million annually in government revenues.

Videogram(s) establishments collectively earn around P600 Million per annum from rentals, sales and disposition of videograms, and these earnings have not been subjected to tax, thereby depriving the Government of approximately P180 Million in taxes each year.

The unregulated activities of videogram establishments have also affected the viability of the movie industry.

Issues: (1) Whether or not tax imposed by the DECREE is a valid exercise of police power.

Held: Taxation has been made the implement of the state’s police power. The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. And while it was also an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.

We find no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No. 1987 as unconstitutional and void. While the underlying objective of the DECREE is to protect the moribund movie industry, there is no question that public welfare is at bottom of its enactment, considering “the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government revenues due to the drop in theatrical attendance, not to mention the fact that the activities of video establishments are virtually untaxed since mere payment of Mayor’s permit and municipal license fees are required to engage in business.”

Kapatiran ng mga Naglilingkod sa pamahalaan vs tan – vat law was declared valid. A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." It is principally aimed to rationalize the system of taxes on goods and services. (administrative feasibility)

Planters Products, Inc. vs. Fertiphil Corporation (Ponente: Reyes)

Doctrine/s:

(1) If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.

(2) The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose.

Facts:

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws. They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.

On 3 June 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in the Philippines. The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution component of not less than P10 per bag. This capital contribution shall be collected until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines. (Underscoring supplied)

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.

Fertiphil filed a complaint for collection and damages against FPA and PPI with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law. Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry.

In its Answer, FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also averred that Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate consumer, not the seller.

RTC: the imposition of the P10 CRC was an exercise of the State’s inherent power of taxation ; invalidated the levy for violating the basic principle that taxes can only be levied for public purpose. (PPI filed a M.R. -> denied; In a separate but related proceeding, SC allowed appeal but remanded to CA)

CA: affirmed with modification; even on the assumption that LOI No. 1465 was issued under the police power of the state, it is still unconstitutional because it did not promote public welfare; the levy was NOT for the benefit, as alleged, of Planters Foundation, Inc. (on the strength of the Letter

of Understanding (LOU) issued by then Prime Minister Cesar Virata on 18 April 1985 and affirmed by the Secretary of Justice in an Opinion dated 12 October 1987. (PPI filed a M.R. -> denied)

Issue/s:

(1) Whether the imposition of the levy was an exercise by the State of its taxation power.(2) Whether LOI 1465 constitutes a valid legislation pursuant to the exercise of taxation. (3) Whether LOI 1465 constitutes a valid legislation pursuant to the exercise of police power.

Held:

(1) Yes;

The imposition of the levy was an exercise by the State of its taxation power. While it is true that the power of taxation can be used as an implement of police power, the primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.

In Philippine Airlines, Inc. v. Edu, it was held that the imposition of a vehicle registration fee is not an exercise by the State of its police power, but of its taxation power, thus:

It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and Traffic Code that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. x x x Fees may be properly regarded as taxes even though they also serve as an instrument of regulation.

Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs’ license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61. (Underscoring supplied)

The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five percent. A plain reading of the LOI also supports the conclusion that the levy was for revenue generation. The LOI expressly provided that the levy was imposed "until adequate capital is raised to make PPI viable."

(2) No;

The P10 levy is unconstitutional because it was not for a public purpose. The levy was imposed to give undue benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose.

The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are continually expanding in light of the expansion of government functions, the inherent requirement that taxes can only be exacted for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of "public purpose."

Indications that it is not for the public purpose

1. The LOI expressly provided that the levy be imposed to benefit PPI, a private company.2. The LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI

becoming financially "viable."3. The levies paid under the LOI were directly remitted and deposited by FPA to Far East Bank and

Trust Company, the depositary bank of PPI which proves that PPI benefitted from the LOI4. The levy was used to pay the corporate debts of PPI.

(3) No;

Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for failing to comply with the test of "lawful subjects" and "lawful means." Jurisprudence states the test as follows: (1) the interest of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.

For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The law was enacted to give undue advantage to a private corporation.

Dispositive Portion: WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is AFFIRMED.

PUBLIC PURPOSE OF TAX

BAGATSING vs. RAMIREZ

74 SCRA 306

GR No. L-41631, December 17, 1976

"The entrusting of the tax collection to private entities does not destroy the public purpose of a tax ordinance."

FACTS: Aside from the issue on publication, private respondent bewails that the market stall fees imposed in the disputed City Ordinance No. 7522, which regulates public markets and prescribes fees for rentals of stalls, are diverted to the exclusive private use of the Asiatic Integrated Corporation since the collection of said fees had been let by the City of Manila to the said corporation in a "Management and Operating Contract."

ISSUE: Does the delegation of the collection of taxes to a private entity invalidates a tax ordinance and defeats its public purpose?

HELD: No. The assumption is of course saddled on erroneous premise. The fees collected do not go direct to the private coffers of the corporation. Ordinance No. 7522 was not made for the corporation but for the purpose of raising revenues for the city. That is the object it serves. The entrusting of the collection of the fees does not destroy the public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through which the money is dispensed is public or private. The right to tax depends upon the ultimate use, purpose and object for which the fund is raised. It is not dependent on the nature or character of the person or corporation whose intermediate agency is to be used in applying it. The people may be taxed for a public purpose, although it be under the direction of an individual or private corporation.

PASCUAL VS SECRETARY OF PUBLIC WORKS (SUPPLEMENT WITH BOOK RATIO)

FACTS: Pascual, in his official capacity as the Provincial Governor of Rizal, petitioned for a writ of certiorari against the dismissal of the case and dissolving of the preliminary injunction held by the Court of the First Instance. Petitioner prayed for that RA #920 be declared null and void, that the alleged Deed of Donation made by Zulueta be declared unconstitutional. Petitioner also prayed for an injunction enjoining Secretary of Public Works and Communications, Director of Public Works and Highways and the disbursing officers of the latter department from making and securing any further release of funds for the said road project. RA# 920 contained an item appropriating P85,000.00 which the petitioner alleged that it was for the construction of roads improving the private property of Jose Zuleta, a member of the Senate.

ISSUES:

1. Whether or not RA # 920 is unconstitutional.

2. Whether or not Pascual has the legal capacity or to sue.

HELD:

1. RA #920 is unconstitutional because the Congress is without power to appropriate public revenue for anything but public purpose.

2. Pascual has the personality to sue as a taxpayer recognizing the right of the taxpayer to assail the constitutionality of a legislation appropriating public funds.

CIR vs BOAC

Facts: British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation engaged in international airline business and is a member of the Interline Air Transport Association, and thus, it operates air transportation services and sells transportation tickets over the routes of the other airline members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against BOAC.

Issue: Whether the revenue derived by BOAC from ticket sales in the Philippines, constitute income of BOAC from Philippine sources, and accordingly taxable.

Held: The source of an income is the property, activity, or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payment for fares were also made here in the Philippine currency.

The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If it had been intended as an excise tax or percentage tax, it would have been placed under Title V of the Tax Code covering taxes on business.

ATLAS CONSOLIDATED MINING v CIR (refer to the book for the ratio) (destination/crossboarder doctrine)

FACTS:

Atlas is a corporation engaged in the mining industry registered. On August 1962, CIR assessed against Atlas for deficiency income taxes for the years 1957 and 1958. For the year 1957, it was the opinion of the CIR that Atlas is not entitled to exemption from the income tax under RA 909 because same covers only gold mines. For the year 1958, the deficiency income tax covers the disallowance of items claimed by Atlas as deductible from gross income. Atlas protested for reconsideration and cancellation, thus the CIR conducted a reinvestigation of the case.

On October 1962, the Secretary of Finance ruled that the exemption provided in RA 909 embraces all new mines and old mines whether gold or other minerals. Accordingly, the CIR recomputed Atlas deficiency income tax liabilities in the light of said ruling. On June 1964, the CIR issued a revised assessment entirely eliminating the assessment for the year 1957. The assessment for 1958 was reduced from which Atlas appealed to the CTA, assailing the disallowance of the following items claimed as deductible from its gross income for 1958: Transfer agent's fee, Stockholders relation service fee, U.S. stock listing expenses, Suit expenses, and Provision for contingencies. The CTA allowed said items as deduction except those denominated by Atlas as stockholders relation service fee and suit expenses.

Both parties appealed the CTA decision to the SC by way of two (2) separate petitions for review. Atlas appealed only the disallowance of the deduction from gross income of the so-called stockholders relation service fee.

ISSUE/HELD: W/N the ‘annual public relations expense’ (aka stockholders relation service fee) paid to a public relations consultant is a deductible expense from gross income

RATIO: Section 30 (a) (1) of the Tax Code allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language. To be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying in a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.

The SC has never attempted to define with precision the terms "ordinary and necessary." As a guiding principle, ordinarily, an expense will be considered "necessary" where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is "ordinary" when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term "ordinary" does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected.

There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the

question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure.

It appears that on December 1957, Atlas increased its capital stock. It claimed that its shares of stock were sold in the United States because of the services rendered by the public relations firm. The information about Atlas given out and played up in the mass communication media resulted in full subscription of the additional shares issued by Atlas; consequently, the ‘stockholders relation service fee’, the compensation for services carrying on the selling campaign, was in effect spent for the acquisition of additional capital, ergo, a capital expenditure, and not an ordinary expense. It is not deductible from Atlas gross income in 1958 because expenses relating to recapitalization and reorganization of the corporation, the cost of obtaining stock subscription, promotion expenses, and commission or fees paid for the sale of stock reorganization are capital expenditures. That the expense in question was incurred to create a favorable image of the corporation in order to gain or maintain the public's and its stockholders' patronage, does not make it deductible as business expense. As held in a US case, efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto are not business expense but capital expenditures.

Note: The burden of proof that the expenses incurred are ordinary and necessary is on the taxpayer and does not rest upon the Government. To avail of the claimed deduction, it is incumbent upon the taxpayer to adduce substantial evidence to establish a reasonably proximate relation petition between the expenses to the ordinary conduct of the business of the taxpayer. A logical link or nexus between the expense and the taxpayer's business must be established by the taxpayer.

DELEGATION

Pepsi vs butuan (non delegability)

Facts: Ordinance 110 was enacted by the City of Butuan imposing a tax of P0.10 per case of 24 bottles of softdrinks or carbonated drinks. The tax was imposed upon dealers engeged in selling softdrinks or carbonated drinks. When Ordinance 110, the tax was imposed upon an agent or consignee of any person, association, partnership, company or corporation engaged in selling softdrinks or carbonated drinks, with “agent or consignee” being particularly defined on the inserted provision Section 3-A. In effect, merchants engaged in the sale of softdrinks, etc. are not subject to the tax unless they are agents or consignees of another dealer who must be one engaged in business outside the City. Pepsi-Cola Bottling Co. filed suit to recover sums paid by it to the city pursuant to the Ordinance, which it claims to be null and void.

Issue: Whether the Ordinance is discriminatory. WON there is valid delegation

Held: The Ordinance, as amended, is discriminatory since only sales by “agents or consignees” of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales , and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the city, would be exempt from the tax. The classification made in the exercise of the authority to tax, to be valid must be reasonable, which would be satisfied if the classification is based upon substantial distinctions which makes real differences; these are germane to the purpose of legislation or ordinance; the classification applies not only to present conditions but also to future conditions substantially identical to those of the present; and the classification applies equally to all those who belong to the same class. These conditions are not fully met by the ordinance in question.

Then, again, the general principle against delegation of legislative powers, in consequence of the theory of separation of powers2 is subject to one well-established exception, namely: legislative powers may be delegated to local governments — to which said theory does not apply3 — in respect of matters of local concern.

69 SCRA 460 – Taxation – Delegation to Local Governments – Double Taxation

Pepsi cola vs leyte

Pepsi Cola has a bottling plant in the Municipality of Tanauan, Leyte. In September 1962, the Municipality approved Ordinance No. 23 which levies and collects “from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked.”

In December 1962, the Municipality also approved Ordinance No. 27 which levies and collects “on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of one centavo P0.01) on each gallon of volume capacity.”

Pepsi Cola assailed the validity of the ordinances as it alleged that they constitute double taxation in two instances: a) double taxation because Ordinance No. 27 covers the same subject matter and impose practically the same tax rate as with Ordinance No. 23, b) double taxation because the two ordinances impose percentage or specific taxes.

Pepsi Cola also questions the constitutionality of Republic Act 2264 which allows for the delegation of taxing powers to local government units; that allowing local governments to tax companies like Pepsi Cola is confiscatory and oppressive.

The Municipality assailed the arguments presented by Pepsi Cola. It argued, among others, that only Ordinance No. 27 is being enforced and that the latter law is an amendment of Ordinance No. 23, hence there is no double taxation.

ISSUE: Whether or not there is undue delegation of taxing powers. Whether or not there is double taxation.

HELD: No. There is no undue delegation. The Constitution even allows such delegation. Legislative powers may be delegated to local governments in respect of matters of local concern. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax. Under the New Constitution, local governments are granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI provides: “Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law.” Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the power of local taxation.

There is no double taxation. The argument of the Municipality is well taken. Further, Pepsi Cola’s assertion that the delegation of taxing power in itself constitutes double taxation cannot be merited. It must be observed that the delegating authority specifies the limitations and enumerates the taxes over which local taxation may not be exercised. The reason is that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law unlike in other jurisdictions. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the city or municipality.

OSMEÑA vs. ORBOS

220 SCRA 703

GR No. 99886, March 31, 1993

" To avoid the taint of unlawful delegation of the power to tax, there must be a standard which implies that the legislature determines matter of principle and lays down fundamental policy."

FACTS: Senator John Osmeña assails the constitutionality of paragraph 1c of PD 1956, as amended by EO 137, empowering the Energy Regulatory Board (ERB) to approve the increase of fuel prices or impose additional amounts on petroleum products which proceeds shall accrue to the Oil Price Stabilization Fund (OPSF) established for the reimbursement to ailing oil companies in the event of sudden price increases. The petitioner avers that the collection on oil products establishments is an undue and invalid delegation of legislative power to tax. Further, the petitioner points out that since a 'special fund' consists of monies collected through the taxing power of a State, such amounts belong to the State, although the use thereof is limited to the special purpose/objective for which it was created. It thus appears that the challenge posed by the petitioner is premised primarily on the view that the powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation power of the State.

ISSUE: Is there an undue delegation of the legislative power of taxation?

HELD: None. It seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF as a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a "special fund." With regard to the alleged undue delegation of legislative power, the Court finds that the provision conferring the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by which the authority must be exercised. In addition to the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic pump rates, P.D. 1956 expressly authorizes the ERB to impose additional amounts to augment the resources of the Fund.

Sufficient standard test

Completeness test

8 Phil 125 CASANOVAS vs HORD - NON IMPAIRMENT CLAUSE

FACTS:

In 1897, the Spanish Government, in accordance with the provisionsof the royal decree of 14 may 1867, granted J. Casanovas certain mines in theprovince of Ambos Camarines, of which mines the latter is now the owner. That these were validly perfected mining concessions granted to prior to 11April 1899 is conceded. They were so considered by the Collector of InternalRevenue and were by him said to fall within the provisions of section 134 of Act No. 1189, known as the Internal Revenue Act. That section is as follows:SEC. 134. On all valid perfected mining concessions granted prior toApril eleventh, eighteen hundred and ninety-nine, there shall be leviedand collected on the after January first, nineteen hundred and five, thefollowing taxes:2. (a) On each claim containing an area of sixty thousand square meters,an annual tax of one hundred pesos; (b) and at the same rateproportionately on each claim containing an area in excess of, or lessthan, sixty thousand square meters.3. On the gross output of each an ad valorem tax equal to three percentum of the actual market value of such output. The defendant accordingly imposed upon these properties the tax mentionedin section 134, which tax, as has before been stated, J. Casanovas paid underprotest.

ISSUE:

Whether Section 134 of Act 1189 is valid.

HELD:

The fact that this concession was made by the Government of Spain,and not by the Government of the United States, is not important. Ourconclusion is that the concessions granted by the Government of Spain to theplaintiff, constitute contracts between the parties; that section 134 of theInternal Revenue Law impairs the obligation of these contracts, and istherefore void as to them.We think that this section is also void because in conflict with section 60 of theact of Congress of July 1, 1902. This section is as follows:

That nothing in this Act shall be construed to effect the rights of anyperson, partnership, or corporation, having a valid, perfected miningconcession granted prior to April eleventh, eighteen hundred and ninety-nine, but all such concessions shall be conducted under the provisions of the law in force at the time they were granted, subject at all times tocancellation by reason of illegality in the procedure by which they wereobtained, or for failure to comply with the conditions prescribed asrequisite to their retention in the laws under which they were granted:

Provided, That the owner or owners of every such concession shall causethe corners made by its boundaries to be distinctly marked withpermanent monuments within six months after this act has beenpromulgated in the Philippine Islands, and that any concessions, theboundaries of which are not so marked within this period shall be freeand open to explorations and purchase under the provisions of this act.

This section seems to indicate that concessions, like those in question, can be canceled only by reason of illegality in the procedure by which they were obtained, or for failure to comply with the conditions prescribed as requisitefor their retention in the laws under which they were granted. There is nothingin the section which indicates that they can be canceled for failure to comply with the conditions prescribed by subsequent legislation. In fact, the realintention of the act seems to be that such concession should be subject to theformer legislation and not to any subsequent legislation. There is no claim inthis case that there was any illegality in the procedure by which theseconcessions were obtained, nor is there any claim that the plaintiff has notcomplied with the conditions prescribed in the said royal decree of 1867. The

judgment of the court below is reversed, and judgment is ordered in favorof the plaintiff and against the defendant for P9,600, with interest thereon, at6 per cent, from the 21st day of February, 1906, and the costs of the Court of First Instance. No costs will be allowed to either party in this court.

Tolentino v Secretary of Finance – NON IMPAIRMENT CLAUSE (see pages 103 and 108 for longer facts)

Cagayan Electric Power & Light Co. Inc. v CIR 138 SCRA 629 – EXCEPTION TO NON IMPAIRMENT CLAUSE

FACTS:

Cagayan Electric is a holder of a legislative franchise under RA 3247 where payment of 3% tax on gross earning is in lieu of all taxes and assessments upon privileges. In 1968, RA 5431 amended the franchise by making all corporate taxpayers liable for income tax. In 1969, through RA 6020, its franchise was extended to two other towns and the tax exemption was reenacted. The commissioner required the company to pay deficiency income taxes for the intervening period (1968-1969).

ISSUE:

Is CEPALCO liable for the tax?

RULING:

Yes. Congress could impair the company’s legislative franchise by making it liable for income tax. The Constitution

provides that a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires. However, it cannot be denied that the said 1969 assessment appears to be highly controversial. It had reason not to pay income tax because of the tax exemption its franchise. For this reason, it should be liable only for tax proper and should not be held liable for surcharge and interest.

Phil. Power and Development Co. vs. CIR – EXCEPTION TO NON IMPAIRMENT CLAUSE – NO DIGEST

YMCA v. Collector of Internal Revenue [GR 7988, 19 January 1916]

First division, Moreland (J): 4 concur

Facts: The Young Men's Christian Association came to the Philippines with the army of occupation in 1898. The association is nonsectarian, it is preeminently religious; and the fundamental basis and groundwork is the Christian religion. All of the officials of the association are devoted Christians, members of a church, and have dedicated their lives to the spread of the Christian principles and the building of Christian character. Its building is located in Calle Concepcion, Ermita, which was formally dedicated on 20 October 1909. The building is composed of three parts. The main structure is three stories high and includes a reception hall, social hall and game rooms, lecture room, library, reading room and rooming

apartments. The small building lying to the left of the principal structure is the kitchen and servants' quarters. The bowling alleys, swimming pool, locker rooms and gymnasium-auditorium are located at the large wing to the right (athletic building).The association claimed exemption from taxation on ground that it is a religious, charitable and educational institution combined, under Section 48 of the Charter of the City of Manila. The city of Manila, contending that the property is taxable, assessed it and levied a tax thereon. It was paid under protest and this action begun to recover it on the ground that the property was exempt from taxation under the charter of the city of Manila. The decision was made in favor of the city, and the association appealed.

Issue: Whether the institution must be devoted exclusive for religious purposes, or exclusively for charitable purposes, or exclusively to educational purposes, to be entitled to tax exemption.

Held: It may be admitted that there are 64 persons occupying rooms in the main building as lodgers or roomers and that they take their meals at the restaurant below. These facts, however, are far from constituting a business in the ordinary acceptation of the word; as there is no profit realized by the association in any sense; and that the purpose of the association is not, primarily, to obtain the money which comes from the lodgers and boarders. The real purpose is to keep the membership continually within the sphere of influence of the institution; and thereby to prevent, as far as possible, the opportunities which vice presents to young men in foreign countries who lack home or other similar influences. There is no doubt about the correctness of the contention that an institution must devote itself exclusively to one or the other of the purposes mentioned in the statute before it can be exempt from taxation; but the statute does not say that it must be devoted exclusively to any one of the purposes therein mentioned. It may be a combination of two or three or more of those purposes and still be entitled to exemption. The YMCA cannot be said to be an institution used exclusively for religious purposes, or exclusively for charitable purposes, or exclusively to educational purposes; but the Court believed that it is an institution used exclusively for all three purposes. As such, it is entitled to be exempted from taxation.

Bishop of Nueva Segovia v. Provincial Board, Ilocos Norte [GR 27588, 31 December 1927]

En Banc, Avancena (J): 5 concur

Facts: The Roman Catholic Apostolic Church, represented by the Bishop of Nueva Segovia, possesses and is the owner of a parcel of land in the municipality of San Nicolas, Ilocos Norte, all four sides of which face on public streets. On the south side is a part of the church yard, the convent and an adjacent lot used for a vegetable garden, containing an area of 1,624 square meters, in which there is a stable and a well for the use of the convent. In the center is the remainder of the churchyard and the church. On the north side is an old cemetery with two of its walls still standing, and a portion where formerly stood a tower, the base of which may still be seen, containing a total area of 8,955 square meters. As required by the provincial board, the Church paid on 3 July 1925, under protest, the land tax on the lot adjoining the convent and the lot which formerly was the cemetery with the portion where the tower stood. The Church filed an action for the recovery of the sum paid by it to Board by way of land tax, alleging that the collection of this tax is illegal.

The lower court absolved the Board from the complaint in regard to the lot adjoining the convent and declared that the tax collected on the lot, which formerly was the cemetery and on the portion where the tower stood, was illegal. Both parties appealed from this judgment.

Issue: Whether the churchyard, the adjacent lot used for a vegetable garden, and the old cemetery, besides the church and the convent, are exempt from land taxes.

Held: The exemption in favor of the convent in the payment of the land tax (sec. 344 [c] Administrative Code) refers to the home of the priest who presides over the church and who has to take care of himself in order to discharge his duties. It therefore must, in this sense, include not only the land actually occupied by the church, but also the adjacent ground destined to the ordinary incidental uses of man. Except in large cities where the density of the population and the development of commerce require the use of larger tracts of land for buildings, a vegetable garden belongs to a house and, in the case of a convent, its use is limited to the necessities of the priest, which comes under the exemption. Also, land used as a lodging house by the people who participate in religious festivities, which constitutes an incidental use in religious functions, not for commercial purposes, comes within the exemption. It cannot be taxed according to its former use (cemetery).

Herrera vs. Quezon City Board of Assessment Appeals

G.R. L-15270

Facts:

In 1952, the Director of the Bureau of Hospitals authorized Jose V. Herrera and Ester Ochangco Herrera to establish and operate the St. Catherine’s Hospital. In 1953, the Herreras sent a letter to the Quezon City Assessor requesting exemption from payment of real estate tax on the hospital, stating that the same was established for charitable and humanitarian purposes and not for commercial gain. The exemption was granted effective years 1953 to 1955. In 1955, however, the Assessor reclassified the properties from “exempt” to “taxable” effective 1956, as it was ascertained that out 32

beds in the hospital, 12 of which are for pay-patients. A school of midwifery is also operated within the premises of the hospital.

Issue: Whether St. Catherine’s Hospital is exempt from reallty tax.

Ruling:

The admission of pay-patients does not detract from the charitable character of a hospital, if all its funds are devoted exclusively to the maintenance of the institution as a public charity. The exemption in favour of property used exclusively for charitable or educational purpose is not limited to property actually indispensable therefore, but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purpose, such as in the case of hospitals — a school for training nurses; a nurses’ home; property used to provide housing facilities for interns, resident doctors, superintendents and other members of the hospital staff; and recreational facilities for student nurses, interns and residents. Within the purview of the Constitution, St. Catherine’s Hospital is a charitable institution exempt from taxation.

Abra v. Hernando [GR L-49336, 31 August 1981]

Second Division, Fernando (J): 3 concur, 1 concur in result, 1 on leave

Facts: The provincial assessor made a tax assessment on the properties of the Roman Catholic Bishop of

Bangued. The bishop claims tax exemption from real estate tax, through an action for declaratory relief. Judge Hernando of the CFI Abra presided over the case. The Province of Abra filed a motion to dismiss, based on lack of jurisdiction, which was denied. It was followed by a summary judgment granting the exemption without hearing the side of the province.

Issue: Whether the properties of the Roman Catholic Bishop of Bangued are tax exempt.

Held: Exemption from taxation is not favored and is never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi juris. Herein, the judge accepted at its face the allegation of Bishop – that the certain parcels of land owned by it, are used "actually, directly and exclusively" as sources of support of the parish priest and his helpers and also of the Bishop – instead of demonstrating that there is compliance with the constitutional provision that allows an exemption. There was an allegation of lack of jurisdiction (contesting that the validity of the assessment may be questioned before the Local Board of Assessment Appeals and not the court), and of lack of cause of action (contesting that declaratory relief is not proper, as there had been breach or violation of the right of government to assess and collect taxes on such property), which should have compel the judge to accord a hearing to the petitioner rather than deciding the case immediately in favor of the Bishop.

ESSO Standard vs. Acting Commissioner of Customs – Tax exemption

ESSO STANDARD EASTERN, INC. vs. ACTING COMMISSIONER OF CUSTOMS

18 SCRA 488

GR No. L-21841, October 28, 1966

"Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority."

FACTS: Petitioner, engaged in the industry of processing gasoline, oils etc., claims for the refund of special import taxes paid pursuant to the provision of RA 1394 which imposed a special import tax "on all goods, articles or products imported or brought into the Philippines." Exempt from this tax, by express mandate of Section 6 of the same law are "machinery, equipment, accessories, and spare parts, for the use of industries, miners, mining enterprises, planters and farmers". Petitioner argued that the importation it made of gas pumps used by their gasoline station operators should fall under such exemptions, being directly used in its industry. The Collector of Customs of Manila rejected the claim, and so as the Court on Tax Appeals. The CTA noted that the pumps imported were not used in the processing of gasoline and other oil products but by the gasoline stations, owned by the petitioner, for pumping out, from underground barrels, gasoline sold on retail to customers.

ISSUE: Is the contention of the petitioner tenable? Does the subject imports fall into the exemptions?

HELD: No. The contention runs smack against the familiar rules that exemption from taxation is not favored, and that exemptions in tax statutes are never presumed. Which are but statements in adherence to the ancient rule that exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Tested by this precept, we cannot indulge in expansive construction and write into the law an exemption not therein set forth. Rather, we go by the reasonable assumption that where the State has granted in express terms certain exemptions, those are the exemptions to be considered, and no more. Since the law states that, to be tax-exempt, equipment and spare parts should be "for the use of industries", the coverage herein should not be enlarged to include equipment and spare parts for use in dispensing gasoline at retail.

Villanueva vs. Iloilo City – LOCAL TAXATION

GR L-26521, 28 December 1968

En Banc, Castro (J): 8 concur

Facts: On 30 September 1946, the Municipal Board of Iloilo City enacted Ordinance 86 imposing license tax fees upon tenement house (P25); tenemen house partly engaged or wholly engaged in and dedicated to business in Baza, Iznart, and Aldeguer Streets (P24 per apartment); and tenement house, padtly or wholly engaged in business in other streets (P12 per apartment). The validity of such ordinance was challenged by Eusebio and Remedios Villanueva, owners of four tenement houses containing 34 apartments. The Supreme Court held the ordinance to be ultra vires. On 15 January 1960, however, the municipal board, believing that it acquired authority to enact an ordinance of the same nature pursuant to the Local Autonomy Act, enacted Ordinance 11 (series of 1960), Eusebio and Remedios Villaniueva assailed the ordinance anew.

Issue: Whether Ordinance 11 violate the rule of uniformity of taxation.

Held: The Court has ruled that tenement houses constitute a distinct class of property; and that taxes are uniform and equal when imposed upon all property of the same class or character within the taxing authority.

The fact that the owners of the other classes of buildings in Iloilo are not imposed upon by the ordinance, or that tenement taxes are imposed in other cities do not violate the rule of equality and uniformity. The rule does not require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. So long as the burden of tax falls equally and impartially on all owners or operators of tenement houses similarly classified or situated, equality and uniformity is accomplished. The presumption that tax statutes are intended to operate uniformly and equally was not overthrown herein.

CIR vs. PASCOR – Taxation Avoidance and Evasion

309 SCRA 402

GR No. 128315 June 29, 1999

"An assessment is not necessary before a criminal charge can be filed."

FACTS: The BIR examined the books of account of Pascor Realty and Devt Corp for years 1986, 1987 and 1988, from which a tax liability of 10.5 Million Pesos was found. Based on the recommendations of the examiners, the CIR filed an information with the DOJ for tax evasion against the officers of Pascor. Upon receipt of the subpoena, the latter filed an urgent request for reconsideration/reinvestigation with the CIR, which was immediately denied upon the ground that no formal assessment has yet been issued by the Commisioner. Pascor elevated the CIR's decision to the CTA on a petition for review. The CIR filed a Motion to Dismiss on the ground of lack of jurisdiction of CTA as there was no formal assessment made against the respondents. The CTA dismissed the motion, hence this petition.

ISSUE: Is a formal assessment necessary in the filing of a criminal complaint?

HELD: No. Section 222 of the NIRC states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.

Questions:

1) When is taxation equitable?- When its burden falls on those better able to pay;

2) When it is progressive?- When its rate goes up depending on the resources of the persons affected

3) What are the principles of a sound tax system?- Fiscal adequacy

- Theoretical justice

- Administrative feasibility4)