Domondon Taxation - 2022 BAR Bulletin PDF

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Pre week notes specially prepared for the LEGAL EDUCATION BOARD
for the use of Candidates for the January 23, 2022 Bar
Examinations...

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DOMONDON Bar Review Series FREE PRE-WEEK

PRE-WEEK NOTES

TAXATION LAW Specially prepared for the LEGAL EDUCATION BOARD for the use of Candidates for the January 23, 2022 Bar Examinations, specially those affected by Typhoon Odette. The assistance of Central Book Store in printing and releasing these materials is greatly appreciated.

COLOR CODED: HYPOTHETICAL BAR REVIEW QUESTIONS & ANSWERS Based on the SYLLABUS FOR THE 2020/21 BAR EXAMINATIONS Per Bar Bulletin No. 31, s. 2022 issued January 4, 2022 Suggested answers are based on selected canonical jurisprudential doctrines up to March 31, 2021; laws, rules and regulations until June 30, 2019

by

ABELARDO T. DOMONDON AB, BSC, MA, JD, LLM, DCL (C.A.U.), PhD (CAND.) Lawyer-CPA-Customs Broker Commissioner, Legal Education Board

2022 SPECIAL EDITION

For VENNY VALDEZ my one and only whose inspiration and support brought me to where I am. For my late parents, JOSE CONCEPCION DOMONDON and INES JIMENEZ TORRES, who shall always be honored and remembered. 2022 Special Edition Copyright 2022 by Abelardo T. Domondon I am not registering this work with the Philippine Intellectual Property Office but I own the materials from the moment I created them. All persons are allowed free use of these materials which may be reproduced in any form or any means, electronic or mechanical, including photocopying or xeroxing without written permission from the author so long as the authorship is recognized. Please dessiminate and distribute to those in need of the materials. ABELARDO T. DOMONDON

BAR CANDIDATE’S PRAYER* Lord God, the creator of all, and fount of all knowledge and wisdom, I implore you to guide me in my undertaking to become a lawyer. Open my mind to absorb, remember and live the principles of law and justice distilled in my readings and in the lectures I attend. I beseech you to illumine the thoughts of the bar reviewers so they could be your instruments in guiding me. Fill me with your grace, so I would have a clear mind in identifying the issues raised in the bar questions. Give light for me to discover the correct, just and ethical answers to the bar questions so I could pass the Bar. Finally, grant me the serenity to accept whatever is thy will and show me the correct path to take for your greater glory. AMEN ___________ * A non-sectarian prayer written by Prof. Abelardo T. Domondon.

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FOREWORD Typhoon Odette has caused unspeakable devastation in the Visayan region. With barely a month before the Bar Examinations, a lot of the bar reviewees therein have lost their homes, their books and their momentum. The Legal Education Board and its stakeholders, the Integrated Bar of the Philippines (IBP), the Philippine Association of Law Schools (PALS) and the Association of Law Students of the Philippines (ALSP) have quickly joined their efforts to assist the reviewees in their dire predicament. Soon, not a few legal education institutions have made their pre-week reviewers available online to those seriously hit by Odette. On the other hand, with no time to waste, the reviewer is determined to read only what he must know, can process and might remember during crunch time. “Pre-Week Notes on Taxation”, written by seasoned bar reviewer and Commissioner of the LEB, Hon. Abelardo T. Doondon, delivers just that. A subject in which amendments and repeals are commonplace, the book walks the reader through the remaining as well as the new tax laws, so methodically as only an author who is a lawyer, certified public accountant, statistician, foreign service officer and most importantly, an educator – all rolled into one – can. Shorn of any condition for its publication and released without the author expecting or desiring earnings therefrom, it is intended for this book, foremost, to revive the bar 4

candidates’ optimism and take away from them any feeling of bar disaster. Given its unhindered availability, through the generosity of Mr. Paolo Sibal and Central Book Supply, anyone who wishes to expand his or her knowledge of Tax Law, affected or not by Typhoon Odette, will benefit exceedingly from this material. While the intellectual gain is invaluable, there is more to this work than the academic light it brings. In the midst of the uncertainty, panic and grief that Odette has inflicted upon the properties in the Visayas and the spirit of its people, and as the pandemic continues to have a grip on all nations, this book, a product of pure altruism, is a reminder of all that is still right and good in us, in others and in this world.

ANNA MARIE MELANIE B. TRINIDAD Chairperson, Legal Education Board

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PREFACE TO THE 2022 SPECIAL EDITION Bar Bulletin No. 31, S. 2022 is a game-changer because it sought to “(a) reduce the coverage; and (b) shorten the duration of the 2020/21 Bar Examinations to only two days: January 23, 2022, Sunday; and January 25, 2022, Tuesday.” All pre-week materials have to be adjusted to meet the reduced coverage as well the attendant limitation of the number of questions. From the former 18 to 20 questions with subdivisions, there are now only three (3) questions. The Bar Candidate is advised to concentrate on the basic objective questions as well as canonical doctrines from 2015 up to 2022, specially the case of La Sallian Educational Innovators (etc.), Inc. v. Commissioner of Internal Revenue, G.R. No. 202792, February 27, 2019. This Book was written as a labor of love for those who are going to take the January 23, 2022 Bar Examination in Taxation Law serving as a memory jogger so the reader should note the following marks: *** must know. ** should know. * nice to know. Without any star, just browse.

Master the concepts not the questions. This Pr Pre-Week e-Week Notes is a sum summary mary of the concepts that would pprobably robably be asked in the Januar Januaryy 23, 2022 Bar Examination in Taxation Law. The que questions stions mere merely ly illustrate how the concep concepts ts are applie appliedd to a set of ffacts. acts. All the best for the 2022 Bar Candidates especially for the victims of Typhoon “Odette.” My prayers are always with you. Ad Majorem Dei Gloriam. 267 Carandang Avenue Bigain 1st, San Jose, Batangas January 7, 2022 THE AUTHOR 6

i.

BASIC PRINCIPLES OF TAXATION IN THE CONSTITUTION

***1.

The exercise of the power of taxation is considered as plenary and unlimited because the very existence of the government is dependent for its existence upon the revenues collected from taxation. Are there any limitations imposed upon the power of taxation ? Why ? If there are, what in general are the limitations ? SUGGESTED ANSWER: Yes. The limitations exist in order to prevent an abuse of this otherwise unlimited power. The limitations on the power of taxation are the following: a. Inherent limitations. These are part and parcel of the power of taxation and originate from the very nature of taxation. b. Constitutional limitations. These are the restrictions imposed by the constitution. The limitations on power to tax, not assumed. [Kasamahan Realty Development Corporation (now known as Stag Trading Corporation) v. Commissioner of Internal Revenue, CTA Case No. 6204, February 16, 2005)

The failure of a tax measure to achieve its objectives is not a ground for its nullification. (Soriano v. Secretary of Finance, G.R. No. 184450, and companion cases, January 24, 2017)

Ch

***

2. Taxation as an attribute of sovereignty is peculiarly and essentially legislative. As a power, it had been described as broad, unlimited, supreme and plenary, subject only to constitutional restrictions and its inherent limitations. Discuss said inherent limitations. SUGGESTED ANSWER: The inherent limitations on the power of taxation which are also known as the elements, tenets or characteristics of taxation are: a. The tax imposed should be for a public purpose. b. There should be no improper delegation of the taxing power. c. The power to tax is limited to the territorial jurisdiction of the taxing government. d. Exemption of government entities is recognized. e. Observance of international comity such that property of foreign sovereigns, are not subject to taxation.

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Some authorities include double taxation. While this may be so, it is submitted that double taxation is properly a constitutional limitation.

***

3. The European Union General System of Preferences (EU GSP+) is a special incentive arrangement for sustainable development and good governance in the form of zero duties. It is a unilateral trade arrangement, which offers zero tariffs on 6,274 products or 66% of all EU tariff lines. It is a part of the broader Generalized System of Preferences (GSP) of the EU and, as a developmental tool it seeks to encourage export diversification in developing countries. Among the industries that enjoy the privilege is the pineapple industry. In order to continually enjoy protection under EU GSP+ the Philippines should ensure that the EU Monitoring Team must not identify a serious failure to its effective implementation of any of numerous International Drug Control conventions which include Conventions, UN Human Rights Conventions International Covenant on Civil and Political Rights (ICCPR), etc. Unfortunately, the EU GSP+ Momitoring Team, in its last visit, expressed grave concerns on the Philippines’ performance on human rights, the war on drugs, etc.. It now appears that the Philippines might lose the privilege of enjoying the benefits under the EU GSP+. To provide means for the rehabilitation and stabilization of the preserved pineapple industry so as to prepare it for the eventuality of the loss of the EU GPS+ privilege, Congress passes a law increasing the existing tax on the processing of preserved pineapple on a graduated basis. All collections made under the law are to accrue to a special fund to be spent only for the purposes enumerated therein, among which are to place the preserved pineapple industry in a position to maintain and ultimately to insure its continued existence despite the loss of the EU GSP+ privilege, and to afford laborers employed in the industry a living wage and to improve their working conditions. Mr. Omar Reyes, a pineapple planter, files a suit questioning the constitutionality of the law alleging that the tax is not for a public purpose as the same is being levied

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exclusively for the aid and support of the preserved pineapply industry. Decide the same. SUGGESTED ANSWER: The tax is valid because it is for a public purpose. It is an exercise of police power which is for the general welfare of the entire country because the preserved pineapple industry is one of the pillars of the Philippine economy which affects the welfare of the State. (Republic v. Bacolod-Murcia Co., G.R. No. L-19824, July 9, 1966) It is a pillar of the Philippine economy providing employment for thousands of workers, providing much needed foreign exchange, and otherwise contributes to economic development and progress. Public purpose is the heart of a tax law. [Planters Products, Inc. v. Fertiphil Corporation, 548 SCRA 485 (2008)]

***

4. Explain the general rule on non-delegation of the legislative authority to tax as well as its constitutional basis. SUGGESTED ANSWER: There should be no improper delegation of legislative authority to tax. The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008)

The constitutional principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. [Abakada Guro Party List (Formerly AASJS), etc. v. Ermita, G.R. No.168056, September 1, 2005]

A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim: potestas delegata non delegari potest which means that what has been delegated, cannot be further delegated . (Abakada, supra citations omitted)

This doctrine is based on the ethical principle that such delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another. (Abakada, supra)

***

5. What is the extent of the legislative power that may not be delegated ?

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SUGGESTED ANSWER: The legislative power that may not be delegated is the discretion to ascertain the following: a. basis, amount, or rate of tax; b. person or property that is subject to tax; c. exemptions and exclusions from tax; and d. manner of collecting the tax - may not be delegated away by Congress. (La Suerte Cigar & Cigarette Factory v. Court of Appeals, G.R. No. 125346, November 11, 2014, and companion cases, paraphrasing and arrangement supplied)

***

6. What are the exceptions to the rule against delegation of the taxing power ? SUGGESTED ANSWER: The following are some of the instances where there may be exceptions to the rule against delegation of the taxing power: a. When the constitution itself authorizes the delegation such as in the flexible tariff clause where the constitution has authorized Congress to delegalte to the President certain aspects of taxation; b. Where there is a valid delegation to administrative bodies provided there is compliance with the requirements of completeness and existence of sufficiently determinate standards to guide the delegate. Where the law leaves the hands of the lawmaker complete in all aspects there could be delegated to administrative authorities the power of subordinate legislation, i.e. the issuance of implementing rules and regulations. If the law is not complete, there may still be a valid delegation to administrative authorities provided that there exists sufficiently determinate standards that provide adequate guidelines or limitations in the law that map out the boundaries of the delegate’s authority and canalize the delegation. (Soriano v. Secretary of Finance, G.R. No. 184450, and companion cases, January 24, 2017)

This would prevent a total transference of the legislative authority to tax to the administrative authority who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative. [Abakada Guro Party List (Formerly AASJS), etc. v. Ermita, G.R. No. 168056, September 1, 2005]

***7.

What are the constitutional limitations or restrictions upon the taxing power ? SUGGESTED ANSWER: There are two kinds of constitutional limitations.

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a. Provisions directly affecting taxation. Direct or specific limitations. Provisions in the constitution that contain the words tax, taxation or others, of similar import. Some examples of the provisions directly affecting taxation are: 1) Prohibition against imprisonment for non-payment of poll tax. (CONST., art. III, sec. 20) 2) Majority vote of Congress for grant of tax exemptions. [Ibid., art. VI, sec. 28 (4)] 3) President’s veto power on appropriation, revenue, tariff bills. [Ibid., art. VI, sec. 27 (2)] b. Provisions indirectly affecting taxation. Indirect or general limitations. Provisions in the constitution that do NOT contain the words tax, taxation or others of similar import. Some examples of constitutional provisions indirectly affecting taxation: 1) Due process. (CONST., art. III, sec. 1) 2) Equal protection. (Ibid.) 3) Religious freedom. (Ibid., sec. 5) 4) Non-impairment of obligations of contract. (Ibid., sec. 10)

***

8. Taxation as an attribute of sovereignty is peculiarly and essentially legislative. As a power, it had been described as broad, unlimited, supreme and plenary, subject only to constitutional restrictions and its inherent limitations. The constitutional restrictions are the specific or direct limitations and the general or indirect limitations. What are the specific or direct constitutional limitations on the power of taxation ? SUGGESTED ANSWER: The specific or direct constitutional limitations on the power of taxation or those where there is mention of the word “tax”, “taxation” or any of their variations such as the following a. Prohibition against imprisonment for non-payment of poll tax. (CONST., art. III, sec. 20) b. Uniformity and equality of taxation. (Ibid., art. VI, sec. 28) c. Grant by Congress of authority to the president to impose tariff rates. (Ibid., art. VI, sec. 28, 2nd par.) d. Prohibition against taxation of religious, charitable entities, and educational entities. [Ibid., art. VI, sec. 28 (3)] e. Prohibition against taxation of non-stock, non-profit institutions. (Ibid., art. XIV, sec. 4) f. Majority vote of Congress for grant of tax exemptions. [Ibid., art. VI, sec. 28 (4)]

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g.

Prohibition on use of tax levied for special purpose. [Ibid.,

art. VI, sec. 29 (3)]

h. President’s veto power on appropriation, revenue, tariff bills. [Ibid., art. VI, sec. 27 (2)] i. Non-impairment of jurisdiction of the Supreme Court. (Ibid., art. VIII, sec. 5)

j. Grant of power to the local government units to create its (their) own sources of revenue. (Ibid., art. X, sec. 5) k. Flexible tariff clause. [Ibid., art. VI, sec. 28 (2)] l. Exemption from real property taxes. [Ibid., art. VI, sec. 28 (3)] m. No appropriation or use of public money for religious purposes. [[bid., art. VI, sec. 29 (2)] n. Mandate for Congress to evolve a progressive system of taxation. [Ibid, art. VI, Sec. 28 (1), 2nd sentence] o. Origination of appropriation, revenue or tariff bills. (Ibid., art. VI, sec. 24)

p.

Automatic release of LGU’s just share in national taxes .

(Ibid., art. X, sec. 6)

q. Tax exemption of grants, endowments, donations or contributions. [Ibid., art. XIV, sec. 4 (4)] NOTE NOT PART OF THE ANSWER: The reader should note that the specific or direct constitutional provisions include words like tax, taxation, revenue or tariff bills, use of public money, or words of similar import WHILE the general or indirect constitutional limitations do not include such words.

***

9. Under the 1987 Constitution, may the government tax income of non-profit educational institution operated by religious orders ? What policy considerations are to be taken into account ? SUGGESTED ANSWER: No. The revenue of non-stock, nonprofit educational institutions which are actually, directly and exclusively used for educational purposes, irrespective of whether or not they are operated by religious orders under the 1987 Constitution. are exempt from income taxation. (La Sallian Educational Innovators (etc.), Inc. v. Commissioner of Internal Revenue, G.R. No. 202792, February 27, 2019 citing 1987 Constitution, Article XIV)

The policy consideration is to encourage the establishment of educational institutions which are not profit motivated. The tax exemption would translate to lower tuition fees providing access to education for all

***9.

What does constitutional equality in taxation

mean?

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SUGGESTED ANSWER: Equality of taxation means that all persons who are similarly situated should be treated alike both in privileges conferred and burdens imposed. Constitutional equality in taxation means the application of the concept of equal protection of the laws which prohibits discrimination other than these instances where there is valid classification. Thus, persons who are similarly situated, or who belong to the same class, should ...