General Principles - Part III

This post is a sequel to the limitations of the taxing power of the state. This time let us proceed to the CONSTITUTIONAL LIMITATIONS - those limitations on the state's exercise of the taxing power specifically provided by the particular provisions of the Philippine Constitution.

a. Due process of law. As provided for, no person shall be deprived of life, liberty or property without due process of law. This covers two types: substantive, and procedural. Substantive due process relates to the circumstances and procedures in the passage of tax laws and ordinances, while the other relates to the procedural aspects in the implementation of the tax laws and ordinances. Applied to taxation, due process mandates that there should be a valid law imposing a tax to a particular taxpayer, and should the taxpayer failed to pay the same, it must be given each and every opportunity to explain itself and justify. No law imposing a tax, then the taxpayer shall not be collected such tax. On the other hand, granting that the taxpayer failed to pay in full but was not issued as assessment notice informing the facts and the law of the assessment, still, the taxpayer could not be held to pay. These are the essence of due process. The taxing authority, while implementing the necessary mandates of its office must give due respect to the established procedures the way it works in an organized society.

b. Equal protection of law. "...nor shall any person be denied equal protection of law". Equal protection relates to how a particular tax measure or ordinance is being applied to persons or class of persons similarly situated. Thus, if two entities falling on the same classification shall be taxed similarly. Example, if an ordinance imposes a tax on technicians and it happened that in a locality there was a single technician, such technician cannot complain for unequal application because the ordinance is made applicable to all technicians belonging to the same class.

c. Non-imprisonment for non-payment of debt or poll tax. Debt refers to a civil obligation that is payable in money or in kind, while poll tax or community tax refers to an charge or imposition administered by the local government unit (LGU) where the taxpayer is located. The prohibition admits the fact of inequality of distribution of wealth in the society and provides for instances in extreme poverty. This is likewise in furtherance of the basic doctrine in civil law that civil liability does not put the person liable behind bars. Applied to tax, while poll tax is a basic mandate in the Local Government Code, its non-payment does not entitle imprisonment.

d. Non-impairment of obligations of contracts. To impair is to damage or to harm and obligation referred to is the duty or commitment imposed upon by the valid contract entered into by the contracting parties. Applied to tax, a new tax law shall not be passed in such a way as to impair or to prejudice the obligation of a contracting party by virtue of a contract entered into with the state. This is to give due respect to the contractual terms the state is bind with respect to its contract with private individuals. A theoretical example of this is, if an exemption is granted by the state by virtue of a contract with a private entity for which a valuable consideration is involved, then no new law could later be passed to prejudice said exemption.

e. Rule of taxation shall be uniform and equitable. As stated in uniform application above, uniformity relates to classification of taxpayers to be subjected to tax. Equitable on the other hand relates to the ability to pay the tax of those that belong to the same class. In other words, it refers to how much will each pay and the constitution requires that there must be a reasonable classification and justification for the unequal imposition.

f. Separation of church and state. This is based on the sad experiences during the Spanish regime where the church had much to say about the governance of state. Applied to tax, no public money from taxes shall be spent for furtherance of religious activities. Thus, a municipality cannot spend public funds for the celebration of its municipal fiesta.

g. Exemption of educational, charitable, and religious institutions. The state acknowledges the valuable contribution of educating its inhabitants, benefits brought about by charities on various programs for general welfare, and the religious well-being of its inhabitants to the success and development of the society as a whole. Thus, to encourage private individuals and entities for the furtherance of this objectives, the constitution provided certain tax exemptions from income, real property and customs duties and taxes under specific circumstances and limitations. There must be showing of an actual, direct, and exclusive use and furtherance of such objectives in order to be exempt to prevent abuse and capitalization of such objectives to escape from tax.

h. Concurrence of the majority members of Congress in granting tax exemption. Tax exemptions are immunity from a particular tax that is being imposed to others similarly situated. The more exemptions, the less collections. Accordingly, in order to control and to see to it that only those necessarily entitled must be provided exemptions, the constitution require that such grant of tax exemption shall be concurred by the vote of the majority of the membership in the Congress. It should be noted that Philippines is on a bicameral congress, the senate and the lower house, thus, granting tax exemptions are not quite easy to legislate.

i. Non-impairment of the jurisdiction of the Supreme Court on tax cases. This is in furtherance of the principles of check and balances. The jurisdiction of the lower courts are based on the mercy of the laws passed for the purpose, thus, may be modified and revised from time to time. However, in the case of the Supreme Court, no law can take its power to become the final arbiter of tax cases.

j. Veto power of the President in tax bills. Generally, on bills passed by Congress, the President is empowered to either approve or disapprove a bill as a whole. If approved or not acted upon within a certain period of time, it becomes a law, and if vetoed, it does not become a law in its entirety. Tax bills however, can be granted either fully or partially. If a bill is granted partially, provisions which are approved becomes part of the law while those provisions vetoed upon becomes ineffective.

Please click here for Part II of the General Principles.

Please click here for Part I of the General Principles.


"Taxes affect lives, care for taxes and save lives"

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More taxes on alcoholic beverages, cigaretters and on Text messaging (SMS) CONTEMPLATED!

Collection deficit is now becoming a popular and urgent issue and government officials are now taking more steps to remedy the situation and improve Philippine economic condition.

Accordingly, the state is now reportedly contemplating to impose new taxes, if not revitalize the present tax imposition on certain articles and industries. One of which is the so called SIN taxes on alcoholic beverages, and on cigarettes as millions and millions of Filipinos are on to said items making it a great potential for tax collection improvement. Notably, the imposition of higher tax rate is premised on the state's exercise of police power to discourage the rampant use of these articles for their proven negative health effects.

Another item is the tax on short messaging service (SMS) or the commonly termed TEXT messaging. Philippines is a major contributor of messaging traffic as almost every Pinoy is equipped with these technological mobile phones and some are even maintaining a couple of these mobiles at the same time. On personal comment, admittedly, these will bring new revenues to the government, but will surely make a great impact on the average and less than average Pinoy depending on cellphones as its sole medium of communication among the family members, friends, relatives, and for other purposes.

As to date, however, no details yet on how, when, and how much will the new impositions would be.


"Taxes affect lives, care for taxes and save lives"

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Is BIR ruling madatory for the transfer of title over common areas of condominium?

Under RMO No.18-2009 dated April 26, 2009, BIR Ruling previously required before a Certificate Authorizing Registration (CAR) is issued for the transfer by real state developers to the condominium corporation under RA 4726 of titles over common areas IS NO LONGER REQUIRED.

This is based on the legal mandate of RA No. 4726 or the Condominium Act that titles over common areas of condominiums shall be placed in the name of the condominium corporation composed of unit owners of the same condominium.

By this new procedure, real property developers will experience a more simpler procedure as the headaches of securing a BIR Ruling is being dispensed with. This will likewise lessen the workload of the BIR on BIR rulings and they are expected to concentrate more on other ruling areas where tons of applications are filed and pending, thereby counting months and months, if not years to get a BIR Ruling released.


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How long will tax refund or tax credit be acted upon by the BIR?

RMC No. 29-09 dated April 16, 2009. Clarifies that on processing the claim for tax refund/credit certificates, the BIR Commissioner has only within 120 days from date of filing complete documents to process the following claims:

a. Input taxes from VAT zero-rated and/or effectively zero rated;

b. Excess income tax credits;

c. Erroneous tax payments

d. Excise tax from certain importations.

As a matter of procedures, these refunds undergo the normal tax verification procedures and Revenue Officers are encourage to exercise utmost care and prudence in the recommendation for granting tax refund and/or tax credit and sanctions awaits for erring officials.

Thus, applicants of the above claims are encouraged to prepare and complete immediately the required documents and papers so the application could be acted upon. If the BIR could not act immediately within the required time frame, normally two (2) years, then the applicant should elevate the case to the Court of Tax Appeals (CTA). CTA process may take sometime, some efforts and resources. Thus, if the application could be ironed out in the administrative level, then it may prove to be better.


"Taxes affect lives, care for tax and save lives"

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Target institutions of the 2008 audit program, PREPARE!

RMO 19-2009 dated May 28, 2009. As a tool to boost collection and improve the BIR's collection deficits, Revenue District Offices are ordered to adopt this 2008 audit program which concentrates on mandatory audit of establishments with gross sales or receipts exceeding P5M within the jurisdiction of Makati, Valenzuela, Quezon City and Manila.

Other mandatory audits are provided for retiring establishments with P10M gross sales or receipts, applications for refunds/tax credits, the health provider industry, review centers, TESDA accredited institutions, non-stock corporations, lending investors, and many more.

I suggest that if you belong to these institutions, kindly prepare, if not refresh and familiarize your tax issues for 2008. You may conduct an internal pre-audit tax compliance for 2008 tax filings and issues to anticipate potential exposures and adopt remedial measures. For better results, you can hire tax auditors to conduct said tax compliance for they are more familiar with the approaches of the BIR examinations by their constant dealings and transactions with the BIR examiners. Preparedness for tax audit may monetize big savings and less headaches.

"Taxes affect lives, care for tax and save lives"

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Where to file real property's DST, CGT or CWT of LARGE taxpayers?

RR No. 5-2009 dated March 16, 2009 reverts back the venue for filing and payment of documentary stamp tax (DST) and capital gains tax (CGT) or creditable withholding taxes (CWT) relative to the transfer of real properties by LARGE TAXPAYERS to the Revenue District Office where the property is located. Accordingly, the CAR shall be issued by the RDO of property location upon satisfaction of the requirements. The previous venue was with the large taxpayer's division of the region or at the main office in certain cases.

This is more convenient for the taxpayers and the BIR as the RDO of location is expectedly more familiar with the details and circumstances of the property to be transferred.


"Taxes affect lives, care for tax and save lives"

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General Principles – Part II

Limitations of taxing power

While the power does not emanate from a grant, as the same is necessarily inherent upon the existence of the state, exercise of the power is subject to those limitations inherent upon it and those expressly provided for by the Constitution as follows:

Inherent limitations. These limitations are those limitations that emanates from the very nature of the power of taxation. They are very basic and are built-in with the power. Some may be similar to the constitutional limitation but the constitutional limitation seems to be supreme as they are the most specific, thus, specifically intended to rule the application or exercise of the power of taxation. Hereunder are the INHERENT LIMITATIONS:

• Levy for public purpose. To levy a tax means to impose or to charge or to collect a tax from those to whom it is addressed. Technically however, to levy is to pass on laws or ordinances imposing a tax or duty upon specific group of taxpayers. Under this concept, the impelling reason for the imposition of the tax must be the welfare of the public, in general. This follows that the proceeds from such imposition shall inure to the benefit of the public.

In one case, a certain imposition was successfully passed for the purpose of upholding the welfare of the sugar industry. It was questioned on the ground that there is no PUBLIC purpose since the sugar industry does not allegedly represent the public. The issue was resolved in favor of the validity of the imposition. While sugar industry does not represent the entire public as the proceeds would not add to the general budget of the national government, nevertheless, the industry itself admits of a public nature whose circumstances and effects directly affect the public. The requirement of direct purpose does not admit of a direct public benefit from the imposition.

• Non-delegation of legislative power to tax. To delegate is to pass on or to entrust to another a certain duty or obligation. Power to tax is lodged with the legislative department. To my mind, this is because the legislative branch is theoretically the representative of the people and they are directly aware and in common contact with the instances and situations of their districts making them the ones knowledgeable of how best their district could be affected by the new taxes imposed. Likewise, this is premised on the legal maxim “delegate potestas, non delegari potest” which means, what has been delegated cannot be re-delegated so as not to hamper the objective of the delegation. However, there are at least two (2) instances where delegation is possible (a) delegation to the President of some tariff powers, and (b) Local government unit’s fiscal autonomy for their self serving needs.

• Exemption of government entities. Government is the people, by (not BUY) the people, for (not POOR) the people. Government exists for the people and whatever amount it makes, came from the people and such amount it use to finance its various activities to address the general welfare of its inhabitants. It is not constituted to engage in any trade or business but to deliver basic services and serve everyone within. Analytically, taxing the government itself will not generate more revenue. The money will only rotate and so no effect, at all, would be made. Suffice it to say however, there exist no express prohibition

• International comity has something to do with the friendly interaction and participation of different estates. This adheres to some amount of submission and compliance of certain international rules and covenants for mutual benefits and enjoyment of the states and its inhabitants. Bilateral agreements, conventions and international treaties fall under this category.

• Territorial jurisdiction relates to the area of jurisdiction and responsibility of a particular estate. Independent states power of taxation is generally confined only within its jurisdiction to give due respect and as courtesy to other states. A state, as a rule, can only impose and implement tax laws and rules within its jurisdiction in accordance with its wishes. Outside its jurisdiction, it is without power to do so. But then, it can tax on citizens or entities of other states doing a trade or business or deriving income within the jurisdiction of its state. See the case of Spratley islands for better picture. Issue on who owns spratley had long been outstanding for each party claims jurisdiction in accordance with its of the parties belief that it rightfully belongs to it.

Please click here for Part I of the General Principles.

Taxes affect lives, dare to care on taxes and save lives!

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Sex Video: Tax if Hayden Kho extra-judicially settles with Katrina Halili - No VIDEO download!

On this post, let us try to explore on another interesting application of Philippine tax rules in connection with the country's hottest sex video in town. Beforehand however, let me take the opportunity to share my personal views on the event.

Personally, it is with my deep regret that the same had came out and the same is hereby condemned. It is totally unnecessary and constitutes a culpable misconduct of an ethical professional to completely disregard the chastity and delicate feelings and personality of those involved. As other put it, ito ay PAMBABABOY. Of course, it may well happen that intimate happenings come across lovers brought about by their feelings and emotion, but taking those videos are of no moment. In the same token, I personally go with the move of the senate to inquire into the event for the advancement of such laws and regulations that may prevent if not totally eliminate a similar event in the future. Likewise, I admire the strong personality of Ms. Katrina in pursuing with her fight. I feel pity for her looking at her face during the Senate Probe this day. I wish her God Bless and hope she wins her Great Battle in life.

So much for the flow of emotions on the issue and lets get into the heart of the post, to explore for tax implication at the back of the issue. This is simply for tax discussion purposes only, and does not intend to degrade, whatsoever, the victims of the video.

Assuming for the sake of discussion that the issue had went over and the camp of Hyden Kho and Katrina Halili concludes for an extra-judicial or out-of-court settlement at certain amount, will the settlement be TAXABLE in the hands of Katrina?

Settlement is NOT TAXABLE. Well settled is the rule that moral damages for out-of-court settlement is not considered as income, thus, not taxable. If the settlement would include attorney's fees, the same shall not likewise be taxable and it merely represents REIMBURSEMENT of expenses. A similar case was held in the case of Bank of America N.A. – Manila Branch vs. Commissioner of Internal Revenue, CTA Case No. 6144,March 14, 2005.

However, if the settlement would include an amount for lost income during the time Katrina is prevented from work byrought about by the mandatory attendance in the issue, then, the author is on the view that the same shall be TAXABLE on the part of Katrina.

Taxes affect lives, dare to care on taxes and save lives!

(N.b. The picture in this post is not intended to promote pornography)

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Manny “Pacman” Pacquiao: Tax on boxing awards and prizes

With the duly concluded fight with Ricky Hatton and with the advent of his historic fights throughout the last decade, Manny "pacman" Pacquiao proves to be the Greatest of them all and the Pound for Pound King in the boxing arena. The question commonly being posed is, what keeps Pacman a great Fighter of his time?

Based on my personal observations, it is undeniable that Pacman is a faithful Roman Catholic and God fearing, a true Pinoy characteristic. He does not fight with his own strength alone, but he fights along with His creator above. This is evident prior to the commencement and at the end of every brave fight in the prestigious boxing ring he faces with his simple religious rite made at the corner of the ring. Another factor is his exemplary speed and power coupled with great ability and style. His team does its homework in studying the ups and downs of its opponent and designing effective styles and techniques specially designed for the particular opponent. I believe, each one of us applies a similar concept, to concentrate on each work at hand and see to it that it is successfully undertaken. Another notable factor is his hard work and strict discipline during his training with the end view of upgrading his personal power and ability. For all these, I, with all my heart salutes Pacman and say that truly, his a true Pinoy.

Apart from all these, let me try to unfold my views on how his winning from such boxing bouts are being taxed in his native land, Philippines. This is the very heart of this blog, to explore on the tax implications and and application of Philippine taxes. All of us knew that boxing industry pours in a lot of dollars to the respective pockets of related personalities and companies. Of course, it would not go far from the contenders, such as Pacman, Donaire, Viloria, Hatton, Marques, Penalosa, and more.

Believe it or not, our Philippine tax rules provides for a tax exemption for prizes and awards granted to athletes in sports competition based on the following requirements:

a. That there was a local or an international sports competition;
b. That the same was held locally or abroad;
c. That the sports competition is sanctioned by the national sports association recognized by the Philippine Olympic Committee;
d. That the contender is a Filipino; and
e. That the promoter is a Filipino individual or a corporation or company, of which 60% is owned by a Filipino or a domestic corporation.

Based on the above, the probability that prize and award of Pacman, and other boxers, on their great boxing bouts, are not far from being exempt from income tax in the Philippines, irregardless of the amount involved. This is without prejudice however, to the application of the foreign tax law where the bout was held and to the Tax Treaty between the said foreign country and the Philippines.

Taxes affects lives, dare to care on taxes and save lives!

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General Principles - Part I

Nature of the power to tax, purpose, and scope

Taxation is the act of levying the tax, i.e., the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of the government. It is merely a way of apportioning the cost if the government among those who in some measures are privileged to enjoy its benefits and, therefore, must bear its burdens. (71 Am Jur. 2^nd 342; 1 Cooley 72-73).

Tax is defined as the lifeblood of the government. Major revenue of the government is sourced from taxation so that in the most pressing times of financial and economic crisis, the agency authorized to administer taxes – the Bureau of Internal Revenue (BIR) should always be on the front line. As a matter of fact, BIR nowadays are becoming stricter in the implementation of the tax laws and are seeking ways to collect much revenue from taxes. Lately the BIR has widened the coverage of mandatory withholding of virtually all income payments certain taxpayers by the implementation of the Top Twenty Thousand Corporations (TTC) from the previous Top Ten Thousand Corporation list. Under the program, on top of those income payments subjected to expanded withholding tax, these corporations are required to withhold 1% for payments to its suppliers of goods and 2% for regular suppliers of services. Additionally, reportorial requirements are required to be submitted to BIR to monitor and verify compliance through its computer systems. Currently, the BIR is coming up with a similar scheme for individual taxpayers, expectedly, under the same procedures of TTC above. A draft regulation is now in place for comments at the BIR website.

By a simple definition, tax may be defined as an enforced proportional contribution levied by the law making body of the state to raise revenue to support the indispensable and all the necessary expenses of the government.

• Enforced as it involves the mandate of the law so that its imposition is mandatory to those covered by it. Unreasonable deviation from the mandate is subject to penalties imposable to an organized society which gives due respect to each and every humanly right. This implies that the sanction, nevertheless, undergoes a due process.
• Proportional as theoretically, tax is proportioned upon a taxpayer’s ability to pay. This goes to show that the cost of the entire governance in the state is being apportioned among the inhabitants through a certain rule of apportionment being put into play.
• Raise revenue goes with the very heart of taxation, to earn income for the government. Secondary however to this primary purpose, tax is being seconded to serve some other concerns for the majority. Example is the import duties and taxes of imported articles. At some point where quality of local and imported article is of no moment, imported ones prove to be more costly that the local ones because of this import duties and taxes being imposed as a way of encouraging the public to buy locally produced for the comparable quality.
• Support the expenses of the government is related to public purpose of the imposition of taxation. While the government is empowered to collect from among its inhabitants by the power of taxation, proceeds are bound to serve the public needs and expenditure only. For this purpose, a collection of taxes for a sugar industry was held to constitute as a public purpose for the sugar industry represents and directly affects the public.

Nature of the power of taxation as an inherent power

Power to tax, being inherent in an independent state for its existence and survival by the furtherance of its multifarious functions, the same does not require delegation from the supreme law of the land. However, exercise of such power upon the inhabitants is subject to limitations imposed by the power, by its very nature, or by the Supreme law of the land, the Philippine Constitution. To tax a subject matter, person, property or excise, there must be a valid law imposing the same. Validity of a tax measure presupposes the fact that it has overcome the test and scrutiny against it. Tax measures duly passed by the legislative department, the Congress or the local legislative under its delegated power, enjoy the presumption of validity and he who controverts has the duty of proving that the same is otherwise.

By nature, power to tax is inherent in a sovereign estate so that the grant of which is not necessary but the exercise is provided safeguards and limitations. This means that the state needs not be empowered by its constitution or any mandate for it to be allowed to tax. Such power co-exists with the state and thus, grant is not necessary. What are being provided by the supreme law of the land, the Constitution, are the guidelines and the limit on the exercise of the power. It wishes to curtail the exercise in such a way as not to abuse and misuse said power to the detriment of the majority and to the advantage of the selected few.

Under our tax system, compliance is initially voluntary on the part of the taxpayers. Nevertheless, the government through the administrative agency empowered to administer the tax, the BIR , is clothed with such remedies, under proper procedures, to imposed correct amount of taxes due to the government upon finding that the compliance based on the declarations in the return is insufficient. It can issue deficiency assessment and impose such measures provided under the law within the prescribed period to see to it that taxes are paid and that tax measures are complied with. This does not however follow that a taxpayer being assessed is doing an illegal business because non-payment of the tax does not make the business illegal.

Scope of the taxing power

To give a more meaningful power, power of taxation is essentially unlimited and plenary. This means that the state can tax on anything, anytime, anywhere, and at any amount. Example is the issue on taxing short messaging (SMS or commonly known as text message through mobile phones). The author in on the humble view that there could be nothing wrong on taxing this item as it primarily belongs to the state. What keeps them perhaps in the meantime is the impact to the poor and underprivileged depending primarily on the medium to communicate their loved ones from other places. This follows however, that the limitations and guidelines for the said purpose had been properly observed.

(N.B. In the next post will be the Limitations and other topics of General principles.)

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