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TAXATION LAWI. General Principles of TaxationA. Definition and concept of taxationB. Nature of taxationCongress passed a sin tax law that increased the tax rates on cigarettes by1,000%. The law was thought to be sufficient to drive many cigarette companiesout of business, and was questioned in court by a cigarette company that wouldgo out of business because it would not be able to pay the increased tax.The cigarette company is (1%) (2013 Bar Question)(A) wrong because taxes are the lifeblood of the government(B) wrong because the law recognizes that the power to tax is the power to destroy(C) correct because no government can deprive a person of his livelihood(D) correct because Congress, in this case, exceeded its power to taxSUGGESTED ANSWER:(B) wrong because the law recognizes that the power to tax is the power to destroyIn McCulloch v. Maryland Chief Justice Marshall declared that the power to tax involvesthe power to destroy. This maxim only means that the power to tax includes the power toregulate even to the extent of prohibition or destruction of businesses. The reason is thatthe legislature has the inherent power to determine who to tax, what to tax and howmuch tax is to be imposed. Pursuant to the regulatory purpose of taxation, thelegislature may impose tax in order to discourage or prohibit things or enterprisesinimical to the public welfare.In the given problem, the legislature’s imposition of prohibitive sin tax on cigarettes iscongruent with its purpose of discouraging the public form smoking cigarettes which arehazardous to health.C. Characteristics of taxationXYZ Corporation manufactures glass panels and is almost at the point ofinsolvency. It has no more cash and all it has are unsold glass panels. Itreceived an assessment from the BIR for deficiency income taxes. It wants topay but due to lack of cash, it seeks permission to pay in kind with glass panels.Should the BIR grant the requested permission? (1%) (2013 Bar Question)(A) It should grant permission to make payment convenient to taxpayers.(B) It should not grant permission because a tax is generally a pecuniary burden.(C) It should grant permission; otherwise, XYZ Corporation would not be able to pay.Page 1 of 195Law on Taxation

(D) It should not grant permission because the government does not have the storagefacilities for glass panels.SUGGESTED ANSWER:(B) It should not grant permission because a tax is generally a pecuniary burden. Thisprinciple is one of the attributes or characteristics of tax.D. Power of taxation compared with other powers1. Police power2. Power of eminent domainE. Purpose of taxation1. Revenue-raising2. Non-revenue/special or regulatorMoney collected from taxation shall not be paid to any religious dignitaryEXCEPT when: (2011 Bar Question)(A) the religious dignitary is assigned to the Philippine Army(B) it is paid by a local government unit(C) the payment is passed in audit by the COA(D) it is part of a lawmaker’s pork barrelSUGGESTED ANSWER:(A) the religious dignitary is assigned to the Philippine ArmyF. Principles of sound tax system1. Fiscal adequacy2. Administrative feasibilityA law that allows taxes to be paid either in cash or in kind is valid.SUGGESTED ANSWER:True. There is no law which requires the payment of taxes in cash only. However, a lawallowing payment of taxes in kind, although valid, may pose problems of valuation,hence, will violate the principle of administrative feasibility. (BAR 2009)3. Theoretical justiceG. Theory and basis of taxation1. Lifeblood theoryPage 2 of 195Law on Taxation

Briefly explain the following doctrines: lifeblood doctrine; necessity theory;benefits received principle; and doctrine of symbiotic relationship. (5%) (2016BAR)SUGGESTED ANSWER:The following doctrines, explained:a. Lifeblood Doctrine – Without revenue raised from taxation, the government will notsurvive, resulting in detriment to society. Without taxes, the government would beparalyzed for lack of motive power to activate and operate it. (CIR v. Algue, Inc.,G.R. No. L-28896, February 17, 1988, 158 SCRA 9)b. Necessity Theory – The exercise of the power to tax emanates from necessity,because without taxes, government cannot fulfill its mandate of promoting thegeneral welfare and well being of the people. (CIR v. Bank of Philippine Islads, G.R.No. 134062, April 17, 2007, 521 SCRA 373)c. Benefits received principle – Taxpayers receive benefits from taxes through theprotection the State affords to them. For the protection they get arises theirobligation to support the government through payment of taxes. (CIR v. Algue, Inc.,G.R. No. L-28896, February 17, 1988, 158 SCRA 9)d. Doctrine of symbiotic relationship - Taxation arises because of reciprocal relation ofprotection and support between the State and taxpayers. The State gives protectionand for it to continue giving protection, it must be supported by the taxpayers in theform of taxes. (CIR v. Algue, Inc., G.R. No. L-28896, February 17, 1988, 158 SCRA9)Which statement below expresses the lifeblood theory? (2012 BAR)a) The assessed taxes must be enforced by the government.b) The underlying basis of taxation is government necessity, for without taxation, agovernment can neither exist nor endure;c) Taxation is an arbitrary method of exaction by those who are in the seat of power;d) The power of taxation is an inherent power of the sovereign to impose burdens uponsubjects and objects within its jurisdiction for the purpose of raising revenues.SUGGESTED ANSWER:b) The underlying basis of taxation is government necessity, for without taxation, agovernment can neither exist nor endureTaxes are the lifeblood of the government, for without taxes, the government can neitherexist nor endure. A principal attribute of sovereignty, the exercise of taxing powerPage 3 of 195Law on Taxation

derives its source from the very existence of the state whose social contract with itscitizens obliges it to promote public interest and common good. The theory behind theexercise of the power to tax emanates from necessity; without taxes, governmentcannot fulfill its mandate of promoting the general welfare and well-being of the people.(National Power Corporation vs. City of Cabanatuan)Anne Lapada, a student activist, wants to impugn the validity of a tax on textmessages. Aside from claiming that the law adversely affects her since she sendsmessages by text, what may she allege that would strengthen her claim to the rightto file a taxpayer’s suit? (2011 Bar Question)(A) That she is entitled to the return of the taxes collected from her in case the courtnullifies the tax measure.(B) That tax money is being extracted and spent in violation of the constitutionallyguaranteed right to freedom of communication.(C) That she is filing the case in behalf of a substantial number of taxpayers.(D) That text messages are an important part of the lives of the people she represents.SUGGESTED ANSWER:(B) That tax money is being extracted and spent in violation of the constitutionallyguaranteed right to freedom of communication.Real property taxes should not disregard increases in the value of real propertyoccurring over a long period of time. To do otherwise would violate the canon ofa sound tax system referred to as: (2011 Bar Question)(A) theoretical justice.(B) fiscal adequacy.(C) administrative feasibility.(D) symbiotic relationship.SUGGESTED ANSWER:(B) fiscal adequacyExplain the principles of a sound tax system. (2015 Bar Question)SUGGESTED ANSWER:The principles of a sound tax system are the following:a. Fiscal adequacy which means that the sources of revenue should be sufficient to meetthe demands of public expenditures;b. Equality or theoretical justice which means that the tax burden should be proportionateto the taxpayer’s ability to pay (this is the so-called ability to pay principle); andPage 4 of 195Law on Taxation

c. Administrative feasibility which means that the tax law should be capable ofconvenience, just and effective administration.Which theory in taxation states that without taxes, a government would beparalyzed for lack of power to activate and operate it, resulting in its destruction?(2011 Bar Question)(A) Power to destroy theory(B) Lifeblood theory(C) Sumptuary theory(D) Symbiotic doctrineSUGGESTED ANSWER:(B) Lifeblood theory.The power to tax is the power to destroy. Is this always so? (2011 Bar Question)(A) No. The Executive Branch may decide not to enforce a tax law which itbelieves to be confiscatory.(B) Yes. The tax collectors should enforce a tax law even if it results to thedestruction of the property rights of a taxpayer.(C) Yes. Tax laws should always be enforced because without taxes the veryexistence of the State is endangered.(D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected.SUGGESTED ANSWER:(D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected.2. Necessity theory3. Benefits-protection theory (Symbiotic relationship)4. Jurisdiction over subject and objectsH. Doctrines in taxation1. Prospectivity of tax laws2. Imprescriptibility3. Double taxationJennifer is the only daughter of Janina who was a resident in Los Angeles,California, U.S.A. Janina died in the U.S. leaving to Jennifer one million shares ofSun Life (Philippines), Inc., a corporation organized and existing under the lawsof the Republic of the Philippines. Said shares were held in trust for Janina by theCorporate Secretary of Sun Life and the latter can vote the shares and receivedividends for Janina. The Internal Revenue Service (IRS) of the U.S. taxed theshares on the ground that Janina was domiciled in the U.S. at the time of herdeath.Page 5 of 195Law on Taxation

[a] Can the CIR of the Philippines also tax the same shares? Explain. (2.5%)[b] Explain the concept of double taxation. (2.5%) (2016 BAR)SUGGESTED ANSWER:(A) Yes. The property being a property located in the Philippines, it is subject to thePhilippine estate tax irrespective of the citizenship or residence of the decedent (Sec.85, NIRC). However, if Janina is a non-resident alien at the time of her death, thetransmission of the shares of stock can only be taxed applying the principle ofreciprocity (Sec. 104, NIRC).(8) Double taxation occurs when the same subject or object of taxation is taxed twicewhen it should be taxed but once. Double taxation is prohibited when it is an impositionof taxes on the same subject matter, for the same purpose, by the same taxing authoritywithin the same jurisdiction, during the same taxing period, with the same kind orcharacter of a tax (84 C.J.S.131-132). It is permissible if taxes are of different nature orcharacter, or the two taxes are imposed by different taxing authorities (Villanueva v. Cityof Iloilo, G.R. No. L-26521, December 28,1968, 26 SCRA 578).Choose the correct answer. Double Taxation - (1%) (2014 Bar Question)(A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on thesame subject matter, by the same taxing authority, within the same jurisdiction,during the same period, with the same kind or character of tax, even if the purposesof imposing the same are different.(B) is forbidden by law; and therefore, it is a valid defense against the validity of a taxmeasure.(C) means taxing the same property twice when it should be taxed only once; it istantamount to taxing the same person twice by the same jurisdiction for the samething.(D) exists when a corporation is assessed with local business tax as a manufacturer,and at the same time, value-added tax as a person selling goods in the course oftrade or business.SUGGESTED ANSWER :A. Double taxation is one of direct duplicate taxations wherein two (2) taxes must beimposed on the same subject matter, by the same taxing authority, within the samejurisdiction, during the same period, with the same kind of character of tax, even if thepurposes of imposing the same are different.a. Strict senseDifferentiate between double taxation in the strict sense and in a broad sense andgive an example of each. (2015 Bar Question)Page 6 of 195Law on Taxation

SUGGESTED ANSWER:Double taxation in the strict sense pertains to the direct double taxation. This meansthat the taxpayer is taxed twice by the same taxing authority, within the same taxingjurisdiction, for the same property and same purpose.On the other hand, double taxation in broad sense pertains to indirect double taxation.This extends to all cases in which there is a burden of two or more impositions. It is thedouble taxation other than those covered by direct double taxation.b. Broad sensec. Constitutionality of double taxationd. Modes of eliminating double taxationUpon his retirement, Alfredo transferred his savings derived from his salary as amarketing assistant to a time deposit with AAB Bank. The bank regularlydeducted 20% final withholding tax on the interest income from the time deposit.Alfredo contends that the 20% final tax on the interest income constituted doubletaxation because his salary had been already subjected to withholding tax.Is Alfredo’s contention correct? Explain your answer. (3%) (2017 BAR)SUGGESTED ANSWER:No. Double taxation means taxing for the same tax period the same thing or activitytwice, when it should be taxed but once, for the same purpose and with the same kindor character of tax. (CIR v. Citytrust Investment Phils., G.R. Nos. 139786, 140857,September 27, 2006) The 20% final tax is imposed on the interest income, while the taxearlier withheld is on the salary or compensation income. Thus, though both pertain toincome tax, they do not pertain to the same thing or activity and consequently, nodouble taxation exists.In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.based corporation which owns a chain of Filipino restaurants in the West Coast,U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax withrespect to a non-resident alien like

Law on Taxation c. Administrative feasibility which means that the tax law should be capable of convenience, just and effective administration. Which theory in taxation states that without taxes, a government would be paralyzed for lack of power to activate and operate it, resulting in its destruction? (2011 Bar Question)

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