A.

Taxes and Feed

1. Distinguish between taxes and fees.

Taxes are the enforced proportional contribution from persons and property levied by
the law-making body of the State by virtue of its sovereignty for the support of
government and for public needs. On the other hand, Fee is a charge imposed under
the police power for the purposes of regulation. It has been ruled that regulation and
taxation are two different things, the first being an exercise of the police power, whereas
the latter is not.

2. What are the doctrines in the Progressive Development case?

In the case of Progressive Development case, Quezon City imposed a

supervision fee on the privately-owned market which was owned by the Progressive
Development. Such fee is based on the gross receipts derived by the market from its
tenants, and Progressive argued that the imposition was a tax on income, which the
City had no authority to impose.

The Court sided with the Quezon City.

The underlying doctrine in this case was, if the generating of revenue is the
primary purpose and regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax.

To be considered a license fee, the imposition must: Relate to an occupation or

activity that so engages the public interest in health, morals, safety and development as
to require regulation for the protection and promotion of such public interest; and Bear a
reasonable relation to the probable expenses of regulation, taking into account not only
the costs of direct regulation but also its incidental consequences as well.

In this case, the Farmers Market was built by virtue of a Resolution passed by
the QC Council, authorizing Progressive to establish and operate a market with a permit
to sell fresh meat, fish, poultry and other foodstuffs. The same resolution imposed upon
Progressive, as a condition for continuous operation, the obligation to abide by and
comply with the ordinances, rules and regulations prescribed for the establishment,
operation and maintenance of markets in QC.

Thus, the Court ruled that the 5% tax imposed in by the QC Market Code
constitutes neither a tax on income, nor a city income tax (as distinguished from the
national income tax imposed by the NIRC), but rather a license tax nor fee for the
regulation of the business in which Progressive is engaged.
3. What is the doctrine in the Ferrer, Jr., case?

In the case of jose j. Ferrer, jr., vs. City mayor herbert bautista et. Al. Petitioner
seeks to declare unconstitutional and illegal Ordinance Nos. SP-2095, S-2011 and SP-
2235, S-2013 on the Socialized Housing Tax and Garbage Fee, respectively, which are
being imposed by the respondents.

In Social Housing Tax (SHT), the underlying principle is that; an ordinance based
on reasonable classification does not violate the constitutional guaranty of the equal
protection of the law. The requirements for a valid and reasonable classification are: (1)
it must rest on substantial distinctions; (2) it must be germane to the purpose of the law;
(3) it must not be limited to existing conditions only; and (4) it must apply equally to all
members of the same class.

For the purpose of undertaking a comprehensive and continuing urban

development and housing program, the disparities between a real property owner and
an informal settler as two distinct classes are too obvious and need not be discussed at
length. The differentiation conforms to the practical dictates of justice and equity and is
not discriminatory within the meaning of the Constitution. Notably, the public purpose of
a tax may legally exist even if the motive which impelled the legislature to impose the
tax was to favor one over another. It is inherent in the power to tax that a State is free to
select the subjects of taxation. Inequities which result from a singling out of one
particular class for taxation or exemption infringe no constitutional limitation.

It is a fundamental principle that municipal ordinances are inferior in status and

subordinate to the laws of the state. An ordinance in conflict with a state law of general
character and statewide application is universally held to be invalid. The principle is
frequently expressed in the declaration that municipal authorities, under a general grant
of power, cannot adopt ordinances which infringe the spirit of a state law or repugnant
to the general policy of the state. In every power to pass ordinances given to a
municipality, there is an implied restriction that the ordinances shall be consistent with
the general law.

Clearly, the SHT charged by the Quezon City Government is a tax which is within
its power to impose.

On garbage fee, LGUs are statutorily sanctioned to impose and collect such
reasonable fees and charges for services rendered. “Charges” refer to pecuniary
liability, as rents or fees against persons or property, while “Fee” means a charge fixed
by law or ordinance for the regulation or inspection of a business or activity.

The fee imposed for garbage collections under Ordinance No. SP-2235 is a
charge fixed for the regulation of an activity. The garbage fee was considered as a
"service charge" rather than a tax as it was actually a fee for a service given by the city
which had previously been provided at no cost to its citizens. Hence, not being a tax,
the contention that the garbage fee under Ordinance No. SP-2235 violates the rule on
double taxation must necessarily fail.

Nonetheless, although a special charge, tax, or assessment may be imposed by

a municipal corporation, it must be reasonably commensurate to the cost of providing
the garbage service. To pass judicial scrutiny, a regulatory fee must not produce
revenue in excess of the cost of the regulation because such fee will be construed as an
illegal tax when the revenue generated by the regulation exceeds the cost of the
regulation.

B. Taxes vs. Special Assessments

1. Distinguish between Taxes and Special Assessments under Sec. 240 of the
Local Government Code (“LGC”).

Taxes are the enforced proportional contribution from persons and property
levied by the law-making body of the State by virtue of its sovereignty for the support of
government and for public needs. On the other hand, Special Assessments or Special
Levy by local government units under Sec. 24 of Local Government Code, A province,
city or municipality may impose a special levy on the lands comprised within its
territorial jurisdiction specially benefited by public works projects or improvements
funded by the local government unit concerned: Provided, however, That the special
levy shall not exceed sixty percent (60%) of the actual cost of such projects and
improvements, including the costs of acquiring land and such other real property in
connection therewith: Provided, further, That the special levy shall not apply to lands
exempt from basic real property tax and the remainder of the land portions of which
have been donated to the local government unit concerned for the construction of such
projects or improvements.

2. Is the Special Assessment imposed in the Bacolod-Murcia Milling Co., Inc.,

case the same with the Special Assessment under Sec. 240 of the LGC?

C. Are taxes subject to set-off?

1. In general, may tax liabilities and any claim against the government be the
subject of set-off?

In general, taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract or judgment as is allowed to beset-
off. However, if the claims against the government have been appropriated for that
purpose. Where both claims have already become, due, demandable and fully
liquidated, compensation takes place by operation of law and both debts are extinguish
to the concurrent amount.

2. Did the Supreme Court allow “set-off” in the case of francia?

Francia has real properties in Pasay.  A portion of these real properties were
expropriated by national government and subject to just compensation.  But she was
not yet paid.  Now, Francia has unpaid real property taxes to the City of Pasay. 

        The SC said NO to the offset.  There is no debtor or creditor relationship between

the government and the taxpayer.  And under the peculiar facts of the case, the one
who expropriated is the national government.  And the liability of Francia for the real
property taxes is not to the national government, but to the local government of Pasay.

3. Did the Supreme Court allow “set-off” in the case of Philex?

Philex Mining has a pending claim for refund against the BIR for VAT or
percentage taxes.  Philex Mining was subject to an assessment of unpaid internal
revenue taxes.  There is a pending assessment of a tax deficiency of this amount by the
BIR.  Philex Mining asked for offsetting.   Peculiar in this case is Philex Mining has
pending liability for VAT/percentage tax.  It also has an application for a tax refund.  So,
Philex asked for set-off.

         The Supreme Court cannot allow Philex to refuse the payment of its tax liabilities
on the ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a tax is
that it is compulsory rather than a matter of bargain. Hence, a tax does not depend
upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by
raising the defense that it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer cannot refuse to pay his
taxes when they fall due simply because he has a claim against the government or that
the collection of the tax is contingent on the result of the lawsuit it filed against the
government. Moreover, Philex's theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give rise to confusion and abuse,
depriving the government of authority over the manner by which taxpayers credit and
offset their tax liabilities.
4. Why did the Supreme Court allow “set-off” in the case of Domingo vs.
Garlitos?

This is the only case where the Court allowed set-off or compensation.  Where
the claim for government for taxes and the taxpayer for services rendered have already
become overdue and demandable as well as fully liquidated, then, compensation takes
place by operation of law.  In this case, the taxpayer here has unpaid internal revenue
taxes to the government and the taxpayer has a claim for compensation for his services
against the government.  COA approved the release of those funds.  Both the claim of
the Government for inheritance taxes and the claim of the intestate for services
rendered have already become overdue and demandable as well as fully
liquidated.  Thus, compensation takes place by operation of law, in accordance with
Articles 1279 and 1290 of the Civil Code.  Both debts are extinguished to their current
amounts.

5. Was the “set-off doctrine” violated in the Air Canada Case?

No, the Supreme Court reject petitioner's contention that the Court of Tax
Appeals erred in denying its claim for refund of erroneously paid Gross Philippine
Billings tax on the ground that it is subject to income tax under Section 28(A) (1) of the
National Internal Revenue Code because (a) it has not been assessed at all by the
Bureau of Internal Revenue for any income tax liability; and (b) internal revenue taxes
cannot be the subject of set-off or compensation.

Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of
allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that it was
liable instead for the regular 32% tax on its taxable income received from sources within
the Philippines. Its determination of petitioner's liability for the 32% regular income tax
was made merely for the purpose of ascertaining petitioner's entitlement to a tax refund
and not for imposing any deficiency tax. In this regard, the matter of set-off raised by
petitioner is not an issue.

D. Double Taxation

1. What is double taxation?

Double Taxation is defined as taxing the same property twice when it should be
taxed but once. It has also been defined as taxing the same person twice by the same
jurisdiction over the same thing.

2. Is double taxation prohibited under the Constitution or Philippine Tax Laws?

According to the Supreme Court in the case of Villanueva v. City of Iloilo, there is
no constitutional prohibition against double taxation in the Philippines. It is something
not favored, but is nevertheless permissible. Double taxation is not forbidden by our
fundamental laws.

3. What are the requisites of prohibited/obnoxious double taxation?

To constitute prohibited/obnoxious double taxation, the following requisites

should be present; a) The property is taxed twice when it should be taxed only once, 2)
that both taxes are imposed on the same property or subject matter for the same
purpose by the same state, Government, or taxing authority, 3) within the same
jurisdiction or taxing district during the same taxing period, and 4) covering the same
kind or character of tax.

4. What is international juridical double taxation?

International Juridical Double Taxation usually takes place when a person is

resident of a contracting state and derives income from, or owns capital in, the other
contracting state and both state impose tax on that income or capital.

5. What is the purpose and rationale of the avoidance of International Juridical

Double Taxation?

The purpose of and rationale of the avoidance of International Juridical Double

Taxation is to imposed a comparable taxes in two or more states on the same taxpayer
in respect of the same subject and for identical periods.

The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.

6. How is double taxation/international juridical double taxation avoided,

eliminate or its effects minimized?

It is significant to note that our tax system provides for certain schemes in order
to avoid or minimize the harsh or burdensome effects of double taxation. These tax
reliefs or schemes are sometimes embodied in tax treaties or agreements with foreign
countries while others are imbedded in statutory provisions found under our existing
laws. These methods or schemes are enumerated as follows;

REDUCTION OF THE PHILIPPINE INCOME TAX RATE – A tax sparing rule wherein a
non-resident foreign corporation (NRFC) within the Philippines is reduced by imposing a
lower rate of 15% on the condition that the country to which the NRFC is domiciled shall
allow a credit against tax due from the NRFC, which taxes are deemed to have been
paid in the Philippines.
TAX CREDIT – where amount is subtracted from an individual or entity’s tax liability to
arrive at the total tax liability.

TAX DEDUCTIONS – Wherein the amount of tax is written off or treated as deduction
from an individual or entity’s gross income on which the resulting amount the tax liability
is calculated.

TAX EXEMPTIONS – Where there is a grant of immunity to particular persons or

corporation from the obligation to pay taxes.

TAX TREATIES – Wherein there is an agreement between two countries specifying

what items of income will be taxed by the authorities of the country where the income is
earned.

7. What is a most favored nation clause under a tax treaty?

A most-favored-nation (MFN) clause requires a country to provide any

concessions, privileges, or immunities granted to one nation in a trade agreement to all
other World Trade Organization member countries.

In international trade, MFN treatment is synonymous with non-discriminatory

trade policy because it ensures equal trading among all WTO member nations rather
than exclusive trading privileges. For example, if a nation reduces tariffs by 5% for one
nation, the MFN clause states that all WTO members will have their tariffs cut by 5%
into that nation.

8. What is the purpose of a most favored nation clause under and tax treaty?

The essence of the principle is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to which the country of residence of such
taxpayer is also a party provided that the subject matter of taxation is the same as that
in the tax treaty under which the taxpayer is liable.

9. Was the most favored clause under RP-US Tax Treaty applied in the SC
Johnson case?

No. The purpose of a most favored nation clause is to grant to the contracting
party treatment not less favorable than that which has been or may be granted to the
"most favored" among other countries. The most favored nation clause is intended to
establish the principle of equality of international treatment by providing that the citizens
or subjects of the contracting nations may enjoy the privileges accorded by either party
to those of the most favored nation.

The essence of the principle is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to which the country of residence of such
taxpayer is also a party provided that the subject matter of taxation, in this case royalty
income, is the same as that in the tax treaty under which the taxpayer is liable. Both
Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax
Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms despite the absence of a
matching credit (20% for royalties) would derogate from the design behind the most
grant equality of international treatment since the tax burden laid upon the income of the
investor is not the same in the two countries. The similarity in the circumstances of
payment of taxes is a condition for the enjoyment of most favored nation treatment
precisely to underscore the need for equality of treatment.

10. Is prior application of tax treaty relief necessary in order to avail of the
benefits of a tax treaty?

YES. Prior application of tax treaty relief is necessary in order to avail of the
benefits of a tax treaty.

The Philippine Constitution provides for adherence to the general principles of

international law as part of the law of the land. The time-honored international principle
of pacta sunt servanda demands the performance in good faith of treaty obligations on
the part of the states that enter into the agreement. In this jurisdiction, treaties have the
force and effect of law. “A state that has contracted valid international obligations is
bound to make in its legislations those modifications that may be necessary to ensure
the fulfillment of the obligations undertaken.” Thus, laws and issuances must ensure
that the reliefs granted under tax treaties are accorded to the parties entitled thereto.

11. Would the doctrine in Deutche Bank be applicable in deficiency tax

assessment case?

it must be remembered that a foreign corporation wishing to avail of the benefits

of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the
provisions of the tax treaty applies to it, before the benefits may be extended to such
corporation. In other words, a resident or non-resident foreign corporation shall be taxed
according to the provisions of the National Internal Revenue Code, unless it is shown
that the treaty provisions apply to the said corporation, and that, in cases the same are
applicable, the option to avail of the tax benefits under the tax treaty has been
successfully invoked.
 Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue,
it is provided that the availment of a tax treaty provision must be preceded by an
application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is
to prevent any erroneous interpretation and/or application of the treaty provisions with
which the Philippines is a signatory to. The implementation of the said Revenue
Memorandum Order is in harmony with the objectives of the contracting state to ensure
that the granting of the benefits under the tax treaties are enjoyed by the persons or
corporations duly entitled to the same.

12. How would you distinguish the factual circumstances in the Deutsche Bank
and Inter Public Place?

Deutsche Bank is about refund for overpayment on final withholding tax on gross
revenue taxable. While on the other hand, Interpublic Group of Companies is about
refund on final withholding tax on dividends.

E. Taxpayer’s suit

1. What are the requisites of a taxpayer’s suit?