J. Dimaampao Notes PDF
J. Dimaampao Notes PDF
J. Dimaampao Notes PDF
by
JAPAR B. DIMAAMPAO
Associate Justice, Court of Appeals
Chairperson, Department of Shari'a and
Islamic Jurisprudence, PHILJA
and
Holder, 2018 Metrobank Foundation
Professorial Chair in Taxation Law
17 October 2018
CONTENTS
I Prologue
II Origin of Taxation
A. Canons of Taxation
IV Tax Remedies
A. Fundamental Principles
B. Specific Remedies
1. Government
2. Taxpayer
V Epilogue
TAX PRINCIPLES AND REMEDIES:
TOOLS TO INCLUSIVE ECONOMIC
GROWTH, DEVELOPMENT,
PROSPERITY AND STABILITY
The history of taxes stretches thousands of years into the past. Several ancient
civilizations, including Greeks and Romans levied taxes on their citizens to pay for
military expenses and other public services. Taxation evolved significantly as
empires expanded and civilizations became more structured.
The earliest known tax records, dating approximately six thousand years B.C.,
are in the form of clay tablets found in the ancient city-state of Lagash in the modern
day Iraq. This early form of taxation was kept to a minimum, except during periods
of conflict or hardship.
The Greeks, Egyptians and Romans also enforced tax policies that they used
to fund centralized governments. The Greeks levied several types of taxes that are
still enforced in many developed countries, including taxes on property and goods.
Unlike early Greek taxation, the Roman policies began to weigh heavily on its
citizens as the power and corruption of the empire's central government grew. The
excessive tax burden on productive Roman citizens during the 4th and 5th centuries
was a leading cause of the nation's eventual economic collapse.3
Fair taxation was a key issue for many English citizens during the medieval
period. Most citizens were subject to a poll tax which was a flat tax on every adult in
a jurisdiction, as well as property and church taxes. Every peasant that did not own
land had to pay property taxes on land that they rented. They were also obligated to
donate 10% of their labor or produce to the church.5
In 1215, a large portion of the English nobility revolted against their monarch,
King John, who had implemented new taxes and increased existing ones to finance
his military ambitions in continental Europe. The King levied more taxes to help pay
for a large-scale conflict, including hiring a large mercenary force, and to make up
for the loss of taxable territories in France during the war.6 Many land-owning
nobles did not trust King John's leadership and did not feel responsible for
supporting the effort.
3 The Cato Journal, Volume 14 Number 2: “How Excessive Government Killed Ancient Rome. Bruce Bartlett
Fall 1994. (http://www.cato.org/pubs/journal/cjv14n2-7.html).
did not apply to Muslim citizens. Stationary societies that did not convert to the
beliefs and traditions of Islam had to pay a special tax, which was more akin to
tribute, to their rulers.7 Muslim officials also taxed nomads by waiting at particular
locations, like water supplies, to collect dues from the elusive wandering clans.
The dispute between the American colonists and the English crown that
essentially led to the American Revolution is partially attributed to disputes
concerning fair taxation. The colonists' main grievance with the tax policy was
distilled into a simple phrase, “No taxation without representation.” While the
colonists were forced to pay taxes to England, including hefty duties on staples like
tea and stamps, they did not receive any direct representation in Parliament or in the
monarch's court.
Recent Tax History
When the United States was founded, the federal government levied
relatively few taxes. The country did not maintain a significant military force during
times of peace. Instead, it relied on local militiamen for protection from marauders
and local rebellions. The central government was also much smaller than it is now,
and required much less money to maintain. As the new country developed, it
encountered several crises and conflicts that prompted changes to the tax code.
The first federal income tax in the United States was created shortly after the
Civil War to pay for the debts accrued during the costly internal conflict. The tax
was not universal; it only applied to citizens above a certain income level.9 This
federal income tax was repealed in the 1870s, but a later administration created new
federal tax legislation in 1894.
Many European nations also adopted income taxes during the 19th century.
The unifying Prussian influence over many of the independent German states
helped entrench the principles of income tax in continental Europe. France began to
levy an income tax during World War 1, in response to the threat of a German
invasion.10
I
TAX PRINCIPLES
Adam Smith, now the Father of the Modern Political Economy, attempted to
systematize the rules governing a rational system of taxation, namely: 1) Canon of
equality or ability; 2) Canon of certainty; 3) Canon of convenience; and 4) Canon of
economy.
2. Canon of Certainty. This means that the taxpayer should have full
knowledge about his tax payment which includes the amount to be paid,
the mode it should be paid and the date of payment. If the taxpayer is
definite and certain about the amount of the tax and its time of payment,
he can adjust his income to his expenditure. In other words, everything
should be made clear, simple and absolutely certain for the benefit of the
taxpayer. Since it is a very important guiding rule in formulating tax laws
and procedures, it indeed minimizes tax evasion. This finds
underpinning in Adam Smith's words of wisdom:
“The tax which each individual is bound to pay ought to be certain, and
not arbitrary. The time of payment, the manner of payment, the quantity
to be paid, ought all to be clear and plain to the contributor, and to every
other person.”12
3) Canon of Convenience. This requires that the time of payment and the
mode of tax payment should be convenient to the taxpayer. Convenient
“Every tax ought to be levied at the time, or in the manner, in which it is
most likely to be convenient for the contributor to pay it.”13
“Every tax ought to be so contrived as both to take out and to keep out of
the pockets of the people as little as possible, over and above what it
brings into the public treasury of the state.”14
2) Theoretical Justice, which requires that the taxes levied must be based
upon the ability of the citizens to pay; and
On the other hand, vertical equity lays down this maxim: differently situated
people should be taxed differently.
“When the carriages which pass over a highly or a bridge, and the
lighters which sail upon a navigable canal, pay toll in proportion to
their weight or their tunnage, they pay for the maintenance of those
public works exactly in proportion to the wear and tear which they
occasion of them. It seems scare possible to invent a more equitable
way of maintaining such works.”21
SELECTED TAX PRINCIPLES
Lifeblood Doctrine
Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need.22
“xxx[T]he public will suffer if taxpayers will not be held liable for the
proper taxes assessed against them: “Taxes are the lifeblood of the
government, for without taxes, the government can neither exist nor
endure.” A principal attribute of sovereignty, the exercise of taxing
power derives its source from the very existence of the state whose social
contract with its citizens obliges it to promote public interest and
common good. The theory behind the exercise of the power to tax
emanates from necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the
people.”24
“Taxes are the lifeblood of the nation. The Philippines has been
struggling to improve its tax efficiency collection for the longest time
with minimal success. Consequently, the Philippines has suffered the
economic adversities arising from poor tax collections, forcing the
government to continue borrowing to fund the budget deficits. (We)
cannot turn a blind eye to this economic malaise by being unduly liberal
to taxpayers who do not comply with statutory requirements for tax
refunds or credits. The tax refund claims in the present cases are not a
pittance. Many other companies stand to gain if (We) were to rule
otherwise.”25
“(To) uphold the validity of the waivers would be consistent with the
public policy embodied in the principle that taxes are the lifeblood of the
government and their prompt and certain availability is an imperious
need. Taxes are the nation's lifeblood through which government
agencies continue to operate and which the State discharges its functions
for the welfare of its constituents. As between the parties, it would be
more equitable if petitioner's lapses were allowed to pass and
consequently uphold the Waivers in order to support this principle and
public policy.”27
Justice Malcolm believed that the power to tax “is an attribute of sovereignty.
It is the strongest of all the powers of government.” This led Chief Justice Marshall
of the U.S. Supreme Court, in the celebrated case of McCulloch v. Maryland, to
declare: “The power to tax involves the power to destroy.” This might well be
construed to mean that the power to tax includes the power to regulate even to the
extent of prohibition or destruction28 since the inherent power to tax vested in the
legislature includes the power to determine who to tax, what to tax and how much
tax is to be imposed.
“Justice Holmes, speaking for the Supreme Court, made reference to the
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities or
enterprise using the power to tax as “a tool for regulation”41 The power to tax which
was called by Justice Marshall as the “power to destroy”42 cannot be allowed to
defeat an instrumentality or creation of the very entity which has the inherent power
to wield it.
In order to justify the nullification of a tax law, there must be a clear and
unequivocal breach of the Constitution. It must be unreasonable and unjust, not
merely hypothetical, argumentative, or of doubtful implication.43
Due process does not require that the property subject to the tax or the
amount to be raised should be determined by judicial inquiry, and a notice and
hearing as to the amount of the tax and the manner in which it shall be apportioned
are generally not necessary to due process of law.44
Due process clause may be invoked where a taxing statute is so arbitrary that
it finds no support in the Constitution, as where it can be shown to amount to
confiscation of property.45
In one case,46 the Supreme Court sustained petitioners' claim that a real
property assessment is excessive, unwarranted, inequitable, confiscatory and
unconstitutional when it shown that the assessment exceeds the yearly rentals
earned from such property.
Decisional rules evince that the following are violative of due process:
a.
If the tax amounts to a confiscation of property;
b.
If the subject of confiscation is outside the jurisdiction of the taxing
authority;
c. If the law is imposed for a purpose other than a public purpose;
d. If the law which applied retroactively imposes unjust and oppressive
taxes;
e. Where the law is in violation of the inherent limitations on taxation.
“Equal protection” does not require equal rates of taxation on different classes
of property, nor prohibit unequal taxation so long as the inequality is not based
upon arbitrary classification. Legislation which, in carrying out a public purpose, is
The equal protection clause does not require the universal application of the
laws on all persons or things without distinction. This might in fact sometimes result
in unequal protection. What the clause requires is equality among equals as
determined according to a valid classification. By classification is meant the
grouping of persons or things similar to each other in certain particulars and
different from all others in these same particulars.48
Equality in taxation is accomplished when the burden of the tax falls equally
and impartially upon all the persons and property subject to it, so that no higher rate
or greater levy in proportion to value is imposed upon one person or species of
property than upon others similarly situated or of like character.
Uniformity requires that all taxable property shall be alike subjected to the
tax, and this requirement is violated if particular kinds, species or items of property
are selected to bear the whole burden of tax, while others, which should be equally
subject to it, are left untaxed.49
In other words, equality in taxation simply means that the tax shall be strictly
proportional to the relative value of the property.50 In contrast, uniformity in
taxation means that persons or things belonging to the same class shall be taxed at
the same rate.51
1. A tax is uniform when it operates with the same force and effect in every
place where the subject of it is found.52
2. Uniformity in taxation means that all taxable articles or kinds of property
of the same class shall be taxed at the same rate.53
3. The tax or license fee is uniform when it applies equally to all persons,
firms and corporations placed in similar situation.54
4. Uniformity means that all property belonging to the same class shall be
taxed alike.55
5. Inequalities which result from the singling out of one particular class for
taxation or exemption infringe no constitutional limitation.56
As a rule, taxes cannot be subject to compensation because the government and the
taxpayer are not creditors and debtors of each other. However, the Supreme Court
allowed the offsetting of taxes under the following exceptional cases:
In all these cases, the Supreme Court allowed offsetting of taxes only because the
determination of the taxpayer's liability is intertwined with the resolution of the
claim for tax refund of erroneously or illegally collected taxes under Section 229 of
the NIRC.62
In the interest of the general welfare and national security, the President, upon
recommendation of the National Economic and Development Authority (NEDA):
(1) increase, reduce or remove existing protective tariff rates of import duty, but in
no case shall be higher than one hundred percent (100%) ad valorem; (2) establish
import quota or ban importation of any commodity as may be necessary; and (3)
impose additional duty on all imports not exceeding ten percent (10%) ad valorem,
whenever necessary. This is known as the Flexible Power Clause enshrined in
Section 1608 of R.A. 10863 otherwise known as the Customs Modernization and
Tariff Act (CMTA).
The right of local government units to collect taxes due must always be upheld to
avoid severe tax erosion. This consideration is consistent with the State policy to
guarantee the autonomy of local governments and the objective of the Local
Government Code that they enjoy genuine and meaningful local autonomy to
empower them to achieve their fullest development as self-reliant communities and
make them effective partners in the attainment of national goals.
The power to tax is the most potent instrument to raise the needed revenues to
finance and support myriad activities of the local government units for the delivery
of basic services essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people.63
Tax evasion refers to the willful attempt to defeat or circumvent the tax law in order
to illegally reduce one's tax liability.
In contrast, tax avoidance delves into the act of taking advantage of legally available
tax-planning opportunities in order to minimize one's tax liability.64
In the landmark case of CIR v. The Estate of Benigno P. Toda, Jr.,65 the Supreme
Court reversing the Decisions of the Court of Tax Appeals and Court of Appeals,
held that the tax planning scheme adopted by Cibeles Corporation constituted tax
evasion, viz:
1. Tax avoidance is the tax saving device within the means sanctioned by
law while tax evasion, on the other hand, is a scheme used outside of
those lawful means and when availed of, it subjects the taxpayer to
further or additional civil or criminal liabilities.
2. All the three factors of tax evasion are present in this case. As early as
May 4, 1989, prior to the purported sale of the Cibeles property by
Cibeles Insurance Corporation (CIC) to Altonaga on August 30, 1989,
CIC received P40 million from Royal Match, Inc. (RMI), and not from
Altonaga. This P40 million was debited by RMI and reflected in its trial
balance as “other inv. ― Cibeles Bldg.” In addition, as of July 31, 1989,
another P40 million was reflected in RMI's trial balance as “other inv. ―
Cibeles Bldg.” These showed that the real buyer of the properties was
RMI, and not the intermediary Altonaga.
3. That Altonaga was a mere conduit finds support in the admission of the
Toda Estate that the sale to him was part of the tax planning scheme of
CIC.
4. The scheme resorted to by CIC in making it appear that there were two
sales of the subject properties, i.e., from CIC to Altonaga, and then from
Altonaga to RMI cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud.
5. The intermediary transaction – the sale of Altonaga, which was
prompted more on the mitigation of tax liabilities than for legitimate
business purposes constitutes one of tax evasion.
6. To allow a taxpayer to deny tax liability on the ground that the sale was
made through another and distinct entity when it is proved that the latter
was merely a conduit is to sanction a circumvention of the tax laws.
Hence, the sale to Altonaga should be disregarded for income tax
purposes and the two sale transactions should be treated as a single
direct sale by CIC to RMI.
7. The tax liability of CIC is governed by then Section 24 of the NIRC of
1986, as amended [now 27(A) of the Tax Reform Act of 1997]. CIC is
therefore liable to pay a 35% corporate tax for its taxable net income in
tax issued by the BIR must be upheld.
Given that taxes are the lifeblood of the nation, statutes that allow exemptions are
construed strictly against the grantee and liberally in favor of the government. Upon
this point, Justice Cooley made this edifying discourse—
“Since taxation is the rule and exemption the exception, the intention
to make an exception ought to be expressed in clear and unambiguous terms;
it cannot be taken to have been intended when the language of the statute on
which it depends is doubtful or uncertain; and the burden of establishing it is
upon him who claims it. Moreover, if an exemption is found to exist, it must
not be enlarged by the construction, since the reasonable presumption is that
the state has granted in express terms all it intended to grant at all, and that
unless the privilege is limited to the very terms of the statute, the favor
would be extended beyond dispute in ordinary cases. It applies not only to
the power to grant exemptions, which must be strictly construed, but also to
the exemption's construction as irrevocable, to the period of duration of the
exemption, to the amount of the exemption, to the scope of the exemption, to
charter or contract exemptions as well as other exemptions, and to a statute
exempting property from retroactive assessments. Since an exemption will
never be presumed, the fact that the charter of a corporation contains no
provision at all for taxation, and that there is no reservation of the power to
alter, amend or repeal the same, does not prevent the state from afterwards
taxing the corporation.”66
1. Where the statute granting the exemption expressly provides for a liberal
interpretation.
2. Special taxes relating to special cases and affecting only special classes of
persons.
3. Municipal property consistent with the policy of the state that exemption
is the rule and taxation the exemption.67
4. Exemptions to traditional exemptees, such as religious and charitable
institutions.68
5. Exemptions in favor of the government, its political subdivisions or
instrumentalities.69
6. If the taxpayer falls within the purview of exemption by clear legislative
intent.70
The second method for the elimination of double taxation applies whenever
the state of source is given a full or limited right to tax together with the state of
residence. In this case, the treaties make it incumbent upon the state of residence to
allow relief in order to avoid double taxation. There are two methods of relief – the
exemption method and the credit method. In the exemption method, the income or
capital which is taxable in the state of source or situs is exempted in the state of
residence, although in some instances it may be taken into account in determining
the rate of tax applicable to the taxpayer's remaining income or capital. On the other
hand, in the credit method, although the income or capital which is taxed in the state
of source is still taxable in the state of residence, the tax paid in the former is
credited against the tax levied in the latter. The basic difference between the two
methods is that in the exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax.75
Any internal revenue tax which has been assessed within the period of
limitation as prescribed in paragraph (a) of Section 222 of the NIRC may
be collected by distraint or levy or by a proceeding in court within five (5)
years following the assessment of the tax.
b) Tariff and Customs Code – It does not express any general statute of
limitations; it provides, however, that “when articles have been entered
and passed free of duty of final adjustments of duties made, with
subsequent delivery, such entry and passage free of duty or settlements
of duties will, after the expiration of three (3) years from the date of the
final payment of duties, in the absence of fraud or protest or compliance
audit pursuant to the provisions of this Code, be final and conclusive
upon all the parties, unless the liquidation of the import entry was merely
tentative.”77
c) Local Government Code – Local taxes, fees, or charges shall be assessed
within five (5) years from the date they became due. In case of fraud or
intent to evade the payment of taxes, fees or charges the same may be
assessed within 10 years from discovery of the fraud or intent to evade
action within five (5) years from date of assessment.78
(i) Local taxes, fees, or charges shall be assessed within five (5) years
from the date they became due. No action for the collection of such
taxes, fees, or charges, whether administrative or judicial, shall be
instituted after the expiration of such period.79
(ii) The basic real property tax and any other tax levied under Real
Property Taxation shall be collected within five (5) years from the
date they become due. No action for the collection of the tax, whether
administrative or judicial, shall be instituted after the expiration of
such period. In case of fraud or intent to evade payment of the tax,
such action may be instituted for the collection of the same within 10
years from the discovery of such fraud or intent to evade payment.80
The “direct injury” test in our jurisdiction holds that the person who impugns
the validity of a statute must have a personal and substantial interest in the case
such that he has sustained, or will sustain direct injury as a result.
(1) Chavez v. Public Estates Authority, where the Court ruled that the
enforcement of the constitutional right to information and the equitable diffusion
of natural resources are matters of transcendental importance which clothe the
petitioner with locus standi;
“given the transcendental importance of the issues involved, the Court may relax
the standing requirements and allow the suit to prosper despite the lack of direct
injury to the parties seeking judicial review” of the Visiting Forces Agreement;
(3) Lim v. Executive Secretary, while the Court noted that the petitioners may
not file suit in their capacity as taxpayers absent a showing that “Balikatan 02-01”
involves the exercise of Congress' taxing or spending powers, it reiterated its ruling
in Bagong Alyansang Makabayan v. Zamora, that in cases of transcendental
importance, the cases must be settled promptly and definitely and standing
requirements may be relaxed.82
Let us now delve into the systems of income taxation. The complexity of
income tax structure evokes this remark of the renowned genius Albert Einstein -
“(The) hardest thing in the world to understand is the income tax.”83
In this day and age, we hew to the Net Income Taxation. (NIT).
Presumably, these reliefs contemplate a net income regime which is just and
fair to taxpayers as it considers their ability to pay tax, in keeping with the principle
of theoretical justice. Unfortunately, NIT is not without flaw or glitch. Neither does
it command a plausible solution to a brisk revenue collection on the part of our
government.
In scrutiny, tax mavens opined that this system is prone to abuse and
corruption by taxpayers and tax collectors alike. Allowable deductions, intrinsic to
NIT, bestow upon revenue collectors a wide margin of discretion conducive to
abuse. Some unscrupulous revenue collectors manipulate these deductions in
rigging and concealing the taxable income of taxpayers. Indeed, a resort to such
sophisticated and artful manipulations of deductions constitutes tax shelters,
thereby resulting in the difficulty to capture the taxpayers' true income.
This regime, however, admits of exclusions from gross income: those items of
receipt that do not fall within the definition of income as contemplated by law for
tax purposes, i.e., damages awarded or recovered from suits, proceeds of life
insurance policies, return of premiums, compensation for injuries or sickness, and
income exempt under tax treaty. Quite palpably, these items are not subject to tax
because they are not in essence considered by law as profit or income.
Withal, the lower tax rate under this system is foreseen to attract more
taxpayers to invest and venture into business that, in effect, would yield to an
increase in revenue.
Advocates of the GIT postulate that this system may help curb corruption in
revenue collection by way of less complicated tax computation. Without tax
deductions, the real income of the taxpayer is easily calculated and the
corresponding taxes are duly imposed. By taxing income at gross, without any
deductions, the computation of one's tax liability becomes plain, clear and definite.
The pursuit towards a simpler method of tax regime gains light with the
current and burning proposal to shift towards the Gross Income Taxation. The NIT
ineludibly adhere to the principles of a sound tax system: fiscal adequacy,
administrative feasibility, and theoretical justice.
Under the Modified Gross Income Taxation, legitimate business expenses must
be allowed as deductions from the gross income. Therewithal, the resulting income
would then be covered by a lower tax rate. This method of computing tax liability
does away with the complicated and burdensome Compliance Requirements under
the NIT. Moreover, the lower tax rates and the allowance of legitimate business
expenses would inveigle more investors and create a lucrative business climate
under a less onerous tax system.
Discourse on TRAIN LAW strikes the right chord with the brewing
protestation against the amendments to the National Internal Revenue Code.
In fealty to the declared State policy which is to ensure that the government is
able to provide for the needs of those under its jurisdiction and care, the taxes that
may be collected under the TRAIN LAW shall provide basic services such as
education, health, infrastructure, and social protection for the people. Specifically,
these taxes are used to pay for our doctors, teachers, soldiers and other government
personnel and officials. They are likewise used to build schools, hospitals, road and
various infrastructure for connectivity, and industrial and agricultural facilities.
Indeed, prioritizing these investments would give the people an opportunity to
contribute in economic progress and nation-building.
A.
New rules consistent with the principle
of fiscal adequacy
2. Interest income from deposit under the foreign currency deposit system
received by resident individual – 15% Final income tax.
bank under the expanded foreign currency deposit system – 15% Final
income tax.
B.
New rules in accord with the principle of
administrative feasibility
a) Time for filing – within one (1) year from the decedent's death
b) Payment by installment – within two (2) years from the statutory date
for its payment without civil penalty and interest
c) Withdrawal from the decedent's bank deposit account – subject to a
final withholding of six percent (6%)
C.
New rules in congruence with the principle
of theoretical justice or equality
2. 13th Month Pay and Other Benefits. – Gross benefits received by officials
and employees of public and private entities: Provided, however, That the
total exclusion shall not exceed Ninety Thousand Pesos (P90,000) which
shall cover:
3. Estate tax rate: Six percent (6%) based on the value of net estate.
A. Fundamental Rules84
1. Government's remedies
2. Taxpayer's remedies
Where the law imposing the tax is silent on judicial relief, even where
administrative recourse is given, the taxpayer may nonetheless avail
himself of judicial action. In this regard, the laws of general
application, more particularly the settled rules of procedure, would
be applicable. As a rule of thumb, the judicial remedy would
ordinarily take the form of either declaratory relief86 or the payment
of the tax and a claim thereafter for its refund within the statute of
limitations. And in cases where a judicial review of an administrative
action is contemplated by the taxpayer, then the special civil actions
under the Revised Rules of Court might be considered.
B. Special/Selected Rules
Assessment precedes collection except when the unpaid tax is a tax due per
return as in the case of a self-assessed income tax under the pay-as-you-file system
in which case collection may be instituted without need of assessment pursuant to
Section 56 of the NIRC.
Section 6(B) of the National Internal Revenue Code (NIRC), envisioned the
Best Evidence Obtainable Rule, which edifies—
The statutory authority given to the Commissioner allows him access to all
relevant or material records and data in unearthing taxpayer's accurate and true
income. It places no limit or condition on the type or form of the medium by which
the record subject to the order of the BIR is kept. The purpose of the law is to enable
the BIR to get at the taxpayer's records in whatever form they may be kept. Such
records include computer tapes of the said records prepared by the taxpayer in the
course of business. In this era of developing information-storage technology, there is
no valid reason to immunize companies with computer-based, record-keeping
capabilities from BIR scrutiny. The standard is not the form of the record but where it
might shed light on the accuracy of the taxpayer's return.90
In American setting, the Best Evidence Obtainable Rule finds its mark in Harbin
v. Commissioner.92 Harbin filed his tax return for 1957 showing a small amount of
net income amounting to $42.91 from the operation of a restaurant, poolroom and a
bar, and a wagering income in the aggregate sum of $14,700. No explanation,
details or schedules were shown on the return as to the method used in arriving at
the wagering income. Harbin did not maintain books and records from which his
income from gambling could be ascertained.
With no other basis from which it may establish Harbin's income from
gambling, the Commissioner relied on his net income in the years 1952 and 1953.
The Commissioner then determined the average percentage of net income, after
deduction of expenses but before deduction of wagering excise taxes, and applied
this percentage to determine Harbin's net wagering income in 1957.
Still and all, the extent of evidence that may be considered under the Best
Evidence Obtainable Rule admits of limitations. This is aptly demonstrated in the
doctrinal case of Commissioner of Internal Revenue v. Hantex Trading Co., Inc.95
decided in Our jurisdiction.
The Supreme Court, however, drew the line against mere photocopies of
Consumption Entries as the only basis for assessment of tax deficiency. The
original copies thereof were of prime importance to the BIR. This is so because such
entries are under oath and are presumed to be true and correct under penalty of
falsification or perjury. Admissions in the said entries of the importer's documents
are admissions against interest and presumptively correct.96
Where the basic tax involved exceeds P1,000,000 or the settlement offered is
less than the prescribed minimum rates, the compromise shall be subject to the
approval of the Evaluation Board composed of the Commissioner and the four (4)
Deputy Commissioners.99
This general rule admits one exception, i.e., when the decision of the
Commissioner is pending appeal before the Court of Tax Appeals, the said court
may enjoin the collection of taxes if such collection will jeopardize the interest of the
government and/or the taxpayer. In such case, the CTA at any state of the
proceeding may suspend the collection of the tax and require the taxpayer either to
deposit the amount claimed or to file a surety bond for not more than double the
amount with the Court. The posting of a bond is not an absolute requirement, its
imposition lies within the sound discretion of the Tax Court.
In the recent case of Pacquiao v. CTA103, the Supreme Court echoed the
recognized exceptions to the filing of the required bond, viz:
1) The taxpayer need not file a bond if the method employed by the
collector in the collection of the tax is not sanctioned by law.104
2) The order of the Collector of Internal Revenue to effect collection of the
alleged income taxes through summary administrative proceeding had
been issued well beyond the three-year period of collection.105
The purpose of the rule is not only to prevent jeopardizing the interest of the
taxpayer, but more importantly, to prevent the absurd situation wherein the court
would declare that the collection by the summary methods of distraint and levy was
violative of law, and then, in the same breath, require the taxpayer to deposit or file
a bond as a prerequisite for the issuance of a writ of injunction.
B. Taxpayer's Remedies
There are two remedies accorded to the taxpayer under the Tax Code: 1)
administrative protest against the assessment and is filed before payment; and 2)
claim for refund filed with the Commissioner of Internal Revenue after payment.
A taxpayer claiming for refund has the burden of proving the concurrence of
the following requisites:
a. There must be a written claim for refund filed by the taxpayer with the
Commissioner;
b. The claim for refund must be a categorical demand for reimbursement;
c. The claim for refund must be filed within two (2) years from date of
payment of the tax or penalty regardless of any supervening cause.
“(A) x x x
“(B) x x x
“(C) Period within which Refund of Input Taxes shall be made. - In proper cases, the
Commissioner shall grant a refund for creditable input taxes within ninety (90) days
from the date of submission of the official receipts or invoices and other documents
in support of the application filed in accordance with Subsections (A) and (B)
hereof: Provided, That should the Commissioner find that the grant of refund is not
“In case of full or partial denial of the claim for tax refund, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim,
appeal the decision with the Court of Tax Appeals: Provided, however, That failure on
the part of any official, agent, or employee of the BIR to act on the application within
the ninety (90)-day period shall be punishable under Section 269 of this Code.
1. The prescriptive period within which the CIR shall grant a refund for
creditable input taxes is ninety (90) days from the submission of the
official receipts or invoices and other documents in support of the
application therefor;
2. In case the CIR finds the refund improper, he must state in writing the
legal and factual basis for the denial;
3. The taxpayer aggrieved may within thirty (30) days from receipt of the
CIR decision denying the claim, appeal the decision with the Court of Tax
Appeals;
4. Any official, agent, or employee of the BIR who fails to act on the
application within the ninety (90)-day period shall be punishable under
Section 269 which states:
“(j) Deliberate failure to act on the application for refund within the
prescribed period provided under Section 112 of this Act.
Rivetingly, the phrase “or failure on the part of the Commissioner to act on
the application within the period prescribed above” has been deleted. The
amended provision merely provides that failure on the part of any official, agent, or
employee of the BIR to act on the application within the ninety (90)-day period shall
be punishable under Section 269 of the Code.
The fundamental principle that technical rules of procedure are not ends in
themselves but are primarily designed to aid in the administration of justice. And in
cases before tax courts, Rules of Court applies only by analogy or in a suppletory
character and whenever practicable and convenient shall be liberally construed in
order to promote its objective of securing a just, speedy and inexpensive disposition
of every action and proceeding. The quest for orderly presentation of issues is not
an absolute. It should not bar the courts from considering undisputed facts to arrive
at a just determination of a controversy. This is because, after all, the paramount
consideration remains the ascertainment of truth. Section 8 of R.A. No. 1125 creating
the CTA also expressly provides that it shall not be governed strictly by the
technical rules of evidence.
Respondents argue that tax refunds are in the nature of tax exemptions and
are to be construed strictissimi juris against the claimant. Under the facts of this case,
petitioner has established its claim. Petitioner may have failed to strictly comply
with the rules of procedure; it may have even been negligent. These circumstances,
however, should not compel the Court to disregard this cold, undisputed fact: that
petitioner suffered a net loss in 1990, and that it could not have applied the amount
claimed as tax credits. Substantial justice, equity and fair play are on the side of
fairness and honesty in paying their taxes, so must it apply the same standard
against itself in refunding excess payments of such taxes. Indeed, the State must
lead by its own example of honor, dignity and uprightness.109
The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency assessment,
although not yet final, created a doubt as to and constitutes a challenge against the
truth and accuracy of the facts stated in said return which, by itself and without
unquestionable evidence, cannot be the basis for the grant of the refund.
Upon this doctrinal precept, the Supreme Court enunciated the following
jurisprudential teachings:
1. The settled rule is that defenses not pleaded in the answer may not be
raised for the first time on appeal. A party cannot, on appeal, change fundamentally
the nature of the issue in the case. When a party deliberately adopts a certain theory
and the case is decided upon that theory in the court below, he will not be permitted
to change the same on appeal, because to permit him to do so would be unfair to the
112
2. The faxed documents did not constitute substantial evidence, or that
relevant evidence that a reasonable mind might accept as adequate to support the
conclusion that it was in Germany where she performed the income producing
service which gave rise to the reported monthly sales in the months of March and
May to September 1995. She thus failed to discharge the burden of proving that her
income was from sources outside the Philippines and exempt from the application
of our income tax law.113
3. The assessment notice and the demand letter should have stated the facts
and the law on which they were based; otherwise, they were deemed void. The
appellate court held that while administrative agencies, like the BIR, were not
bound by procedural requirements, they were still required by law and equity to
observe substantive due process. The reason behind this requirement, said the CA,
was to ensure that taxpayers would be duly apprised of – and could effectively
protest – the basis of tax assessments against them. Since the assessment and the
demand were void, the proceedings emanating from them were likewise void, and
any order emanating from them could never attain finality.114
4. The best evidence obtainable may consist of hearsay evidence, such as the
testimony of third parties or accounts or other records of other taxpayers similarly
circumstanced as the taxpayer subject of the investigation, hence, inadmissible in a
regular proceeding in the regular courts. Moreover, the general rule is that
administrative agencies such as the BIR are not bound by the technical rules of
evidence. It can accept documents which cannot be admitted in a judicial
proceeding where the Rules of Court are strictly observed. It can choose to give
weight or disregard such evidence, depending on its trustworthiness.
However, the best evidence obtainable under Section 16115 of the 1977 NIRC,
as amended, does not include mere photocopies of records/documents. The
petitioner, in making a preliminary and final tax deficiency assessment against a
taxpayer, cannot anchor the said assessment on mere machine copies of
records/documents. Mere photocopies of the Consumption Entries have no
probative weight if offered as proof of the contents thereof. The reason for this is
that such copies are mere scraps of paper and are of no probative value as basis for
any deficiency income or business taxes against a taxpayer. Indeed, in United States
v. Davey, the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a
taxpayer's return is being checked, the government is entitled to use the original
records rather than be forced to accept purported copies which present the risk of
error or tampering.116
RECENT JURISPRUDENCE ON
CTA JURISDICTION
A dispute between PSALM and NPC and BIR, which are both wholly
government-owned corporations, and the BIR, a government office, over the
imposition of VAT on the sale of the two power plants is vested in the Secretary of
Justice. There is no question that original jurisdiction is with the CIR, who issues the
preliminary and the final tax assessments. However, if the government entity
disputes the tax assessment, the dispute is already between the BIR (represented by
the CIR) and another government entity, in this case, the petitioner PSALM. Under
Presidential Decree No. 242 (PD 242), all disputes and claims solely between
government agencies and offices, including government-owned or controlled
corporations, shall be administratively settled or adjudicated by the Secretary of
Justice, the Solicitor General, or the Government Corporate Counsel, depending on
the issues and government agencies involved.119
The Court of Tax Appeals has undoubted jurisdiction to pass upon the
constitutionality or validity of a tax law or regulation when raised by the taxpayer as
sanctioned by Section 7 of Republic Act No. 1125, as amended.
Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129
provides an exception to the original jurisdiction of the Regional Trial Courts over
actions questioning the constitutionality or validity of tax laws or regulations.
Except for local tax cases, actions directly challenging the constitutionality or
validity of a tax law or regulation or administrative issuance may be filed directly
before the Court of Tax Appeals.120
In the recent case of University Physicians Services, Inc. v. CIR,121 G.R. No.
205955, 7 March 2018, the Supreme Court, passing upon a novel issue, held that the
irrevocability rule is limited only to the option of carry-over such that a taxpayer is
still free to change its choice after electing a refund of its excess tax credit. But once
it opts to carry over such excess creditable tax, after electing refund or issuance of
tax credit certificate, the carry-over option becomes irrevocable. Accordingly, the
previous choice of a claim for refund, even if subsequently pursued, may no longer
be granted. xxx Sections 76 and 228, paragraph (c) of the NIRC, as amended,
unmistakably evince that choice of refund or tax credit certificate is not
irrevocable.122
EPILOGUE
In the same breath, tax remedies should ensure the collection of taxes and
provide ample safeguards against unreasonable and arbitrary investigation,
examination and assessment. Needless to say that unflawed and valid demand for
payment of taxes dispenses with the filing of protest thereby resulting in the speedy
collection of taxes. This will give a flicker of hope to the realization of the
government's poignant wish – flow of revenues like springs of living water and
rivers that never run dry.
Indeed, the adoption of sound tax principles and clear-cut rules on remedies
will propel sustainable and inclusive economic growth, development, prosperity
and stability. In the end, taxation is used as an instrument to attain economic
progress and stable governance.
With this empirical pronouncement, let us disabuse our minds from the
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