You are on page 1of 9

Escape from taxation (EM)

a) Shifting of tax burden

-The transfer of the burden of tax by the original payer or the one on
whom the tax was assessed or imposed to another or someone else
without violating the law

(i) Ways of shifting the tax burden

1. Forward shifting When the burden of tax is transferred from


a factor of production through the factors of distribution until it
finally settles on the ultimate purchaser or consumer.
2. Backward shifting When the burden is transferred from the
consumer through the factors of distribution to the factors of
production.
3. Onward shifting When the tax is shifted two or more times
either forward or backward.
(ii) Taxes that can be shifted

-It applies to indirect taxes since the law allows the burden of the
tax to be transferred. In case of direct tax, the shifting of burden
can only be via a contractual provision. Note: Examples of taxes
when shifting may apply are VAT, percentage tax, excise tax on
excisable articles, ad valorem tax that oil company pays to BIR
upon removal of petroleum products from its refinery.

(iii) Meaning of impact and incidence of taxation

Impact of taxation- Otherwise known as the burden of taxation, it


is the economic cost of the tax. The impact of taxation may fall on
another person not statutorily liable to pay the tax.

Incidence of taxation- The incidence of taxation is upon the


person statutorily liable to pay the tax. Note: Where the burden of
the tax is shifted to the purchaser, the amount passed on to it is no
longer a tax but becomes an added cost on the goods purchased,
which constitutes a part of the purchase price.
b) Tax avoidance

-It is the scheme where the taxpayer uses legally permissible


alternative method of assessing taxable property or income, in order to
avoid or reduce tax liability. Note: Also known as Tax Minimization,
tax avoidance is the tax saving device within the means sanctioned by
law. This method should be used by the taxpayer in good faith and at
arms length.
Delpher Trades Corp. vs. IAC, 157 SCRA 349 (1988)
FACTS:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the
owners of 27,169 square meters of real estate Identified as Lot. No.
1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by
Transfer Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction
Components International Inc. the same property and providing
that during the existence or after the term of this lease the lessor
should he decide to sell the property leased shall first offer the
same to the lessee and the letter has the priority to buy under
similar conditions.
4 months later, lessee Construction Components International, Inc.
assigned its rights and obligations under the contract of lease in
favor of Hydro Pipes Philippines, Inc. with the signed conformity and
consent of lessors Delfin Pacheco and Pelagia Pacheco.
The contract of lease, as well as the assignment of lease were
annotated at the back of the title, as per stipulation of the parties.
On January 3, 1976, a deed of exchange was executed between
lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter the leased
property together with another parcel of land for 2,500 shares of
stock of defendant corporation with a total value of P1,500,000.00
On the ground that it was not given the first option to buy the
leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended
complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation
acquired the property from Pelagia Pacheco and Delphin Pacheco.
The CFI of Bulacan ruled in favor of the plaintiff.
The IAC affirmed the decision of the CFI.
ISSUE:
Whether or not the "Deed of Exchange" of the properties executed
by the Pachecos on the one hand and the Delpher Trades
Corporation on the other was meant to be a contract of sale which,
in effect, prejudiced the private respondent's right of first refusal
over the leased property included in the "deed of exchange."

ARGUMENTS:
Eduardo Neria, a CPA and son-in-law of the late Pelagia Pacheco
testified that Delpher Trades Corporation is a family corporation
and that the corporation was organized by the children of the two
spouses (spouses Pelagia Pacheco and Benjamin Hernandez and
spouses Delfin Pacheco and Pilar Angeles in order to perpetuate
their control over the property through the corporation and as a
means to avoid taxes.
Under this factual backdrop, the petitioners contend that there was
actually no transfer of ownership of the subject parcel of land since
the Pachecos remained in control of the property. Thus, the
petitioners allege: "Considering that the beneficial ownership and
control of Petitioner Corporation remained in the hands of the
original co-owners, there was no transfer of actual ownership
interests over the land when the same was transferred to Petitioner
Corporation in exchange for the latter's shares of stock. The
transfer of ownership, if anything, was merely in form but not in
substance. In reality, Petitioner Corporation is a mere alter ego or
conduit of the Pacheco co-owners
On the other hand, the private respondent argues that Delpher
Trades Corporation is a corporate entity separate and distinct from
the Pachecosn and that there was actual transfer of ownership
interests over the leased property when the same was transferred
to Delpher Trades Corporation in exchange for the latter's shares of
stock.

RULING:
No, it was not meant to be a contract of sale.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or
from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47
Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at
bar, in exchange for their properties, the Pachecos acquired 2,500
original unissued no par value shares of stocks of the Delpher
Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The essence of the
stock subscription is an agreement to take and pay for original
unissued shares of a corporation, formed or to be formed.
It is to be stressed that by their ownership of the 2,500 no par
shares of stock, the Pachecos have control of the corporation. Their
equity capital is 55% as against 45% of the other stockholders, who
also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of
the Pachecos. What they really did was to invest their properties
and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take
control of their properties and at the same time save on inheritance
taxes.
The records do not point to anything wrong or objectionable about
this "estate planning" scheme resorted to by the Pachecos. "The
legal right of a taxpayer to decrease the amount of what otherwise
could be his taxes or altogether avoid them, by means which the
law permits, cannot be doubted.
The "Deed of Exchange" of property between the Pachecos and
Delpher Trades Corporation cannot be considered a contract of
sale. There was no transfer of actual ownership interests by the
Pachecos to a third party. The Pacheco family merely changed their
ownership from one form to another. The ownership remained in
the same hands. Hence, the private respondent has no basis for its
claim of a light of first refusal under the lease contract.
c) Tax evasion
- It is the scheme where the taxpayer uses illegal or fraudulent means
to defeat or lessen payment of a tax. Note: Tax evasion is a scheme
used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal
liabilities.
Tax evasion is somestimes referred to as Tax Dodging.
CIR vs. Estate of Benigno P. Toda, Jr., G.R. No. 147188, 14
Sept. 2004
Facts:
Cebiles Insurance Corporation authorized Benigno P. Toda, Jr., President
and owner of 99.991% of its issued and outstanding capital stock, to sell the
Cibeles Building and the two parcels of land on which the building stands for
an amount of not less than P90 million.

Toda purportedly sold the property for P100 million to Rafael A. Altonaga.
However, Altonaga in turn, sold the same property on the same day to Royal
Match Inc. for P200 million. These two transactions were evidenced by
Deeds of Absolute Sale notarized on the same day by the same notary public.

For the sale of the property to Royal Dutch, Altonaga paid capital gains tax
[6%] in the amount of P10 million.
Issue:
Whether or not the scheme employed by Cibelis Insurance Company
constitutes tax evasion.

Ruling:
Yes! The scheme, explained the Court, 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.

Fraud in its general sense, is deemed to comprise anything calculated to


deceive, including all acts, omissions, and concealment involving a breach of
legal or equitable duty, trust or confidence justly reposed, resulting in the
damage to another, or by which an undue and unconscionable advantage is
taken of another.

It is obvious that the objective of the sale to Altonaga was to reduce the
amount of tax to be paid especially that the transfer from him to RMI would
then subject the income to only 5% individual capital gains tax, and not the
35% corporate income tax. Altonagas sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax
shelter. Altonaga never controlled the property and did not enjoy the normal
benefits and burdens of ownership. The sale to him was merely a tax ploy, a
sham, and without business purpose and economic substance. Doubtless, the
execution of the two sales was calculated to mislead the BIR with the end in
view of reducing the consequent income tax liability.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which


was prompted more on the mitigation of tax liabilities than for legitimate
business purposes constitutes one of tax evasion.

Generally, a sale or exchange of assets will have an income tax incidence


only when it is consummated. The incidence of taxation depends upon the
substance of a transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the means
employed to transfer legal title. Rather, the transaction must be viewed as a
whole, and each step from the commencement of negotiations to the
consummation of the sale is relevant. A sale by one person cannot be
transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To permit the true nature of the
transaction to be disguised by mere formalisms, which exist solely to alter
tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.

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 our tax laws. Hence, the
sale to Altonaga should be disregarded for income tax purposes. The two sale
transactions should be treated as a single direct sale by CIC to RMI.

5. Exemption from taxation(EM)


a) Meaning of exemption from taxation

- It is the grant of immunity, express or implied, to particular persons or


corporations, from a tax upon property or an excise tax which persons or
corporations generally within the same taxing districts are obliged to pay
b) Nature of tax exemption

1. Personal in nature and covers only taxes for which the grantee is
directly liable. Note: It cannot be transferred or assigned by the person to
whom it is given without the consent of the State.
2. Strictly construed against the taxpayer.
3. Exemptions are not presumed. But when public property is involved,
exemption is the rule, and taxation, the exception.

Manila Electric Company vs. Vera, 67 SCRA 351 (1975)


Facts: MERALCO is the holder of a franchise to construct, maintain, and operate an
electric light, heat, and power system in the City of Manila and its suburbs.
In 1962, MERALCO imported and received from abroad on various dates copper
wires, transformers, and insulators for use in the operation of its business on which,
the Collector of Customs, as Deputy of Commissioner of Internal Revenue, levied
and collected a compensating tax amounting to a total of P62,335.00. A claim for
refund of said amount was presented by MERALCO and because no action was
taken by the Commissioner of Internal Revenue on its claim, it appealed to the Court
of Tax Appeals by filing a petition for review on February 25, 1964 (CTA Case No.
1495). On November 28, 1968, the Court of Tax Appeals denied MERALCO claim,
forthwith, the case was elevated to the Court on appeal (L-29987).
Again in 1963, MERALCO imported certain quantities of copper wires, transformers
and insulators also to be used in its business and again a compensating tax of
P6,587.00 on said purchases was collected. Its claim for refund of the amount having
been denied by the Commissioner of Internal Revenue on January 23, 1964,
MERALCO riled with the Court of Tax Appeals CTA Case No. 1493. On September
23, 1964 the Court of Tax Appeals decided against petitioner, and the latter filed with
this Court the corresponding Petition for Review of said decision docketed herein as
G.R. No. L-23847.
Petitioner bases its claim for exemption from the compensating tax on poles, wires,
transformers and insulators purchased by it from abroad on paragraph 9 of its
franchise. Petitioner also contends that the ruling of this Court in the cases of Panay
Electric Co., Manila Gas Corporation, and Borja (supra) are not applicable to its
situation.
ISSUE: Whether or not the Manila Electric Company (MERALCO) exempt from
payment of a compensating tax on poles, wires, transformers, and insulators
imported by it for use in the operation of its electric light, heat, and power system?
RULING: NO. The Supreme Court finds no merit in petitioner's cause. One who
claims to be exempt from the payment of a particular tax must do so under clear and
unmistakable terms found in the statute. Tax exemptions are strictly construed
against the taxpayer, they being highly disfavored and may almost be said "to be
odious to the law." He who claims an exemption must be able to print to some
positive provision of law creating the right; it cannot be allowed to exist upon a mere
vague implication or inference.
Petitioner's submission that its right to exemption is supported by the "plain and
unambiguous" term of paragraph 9 of its franchise is positively without basis. The
controlling reason for the denial of petitioner's claim in these cases, the Court do not
see in paragraph 9 of its petitioner's franchise, on the assumption that it does exist as
worded, what may be considered as "plain and unambiguous terms" declaring
petitioner MERALCO exempt from paying a compensating tax on its imports of
poles, wires, transformers, and insulators. The provision in paragraph 9 of its
franchise only exempt petitioner from the payment of property, tax on its poles,
wires, transformers, and insulators; it does not exempt it from payment of taxes like
the one in question which, by mere necessity or consequence alone, fall upon
property. Thus, while the grantee is to pay tax on its plant, its poles, wires,
transformers, and insulators as forming part of the plant or installation(significantly
the enumeration is in parenthesis and follows the word "plant") are exempt and as
such are not to be included in the assessment of the property tax to be paid
There is no valid reason for the court not to apply to petitioner the ruling of the Court
in Panay Electric Co. and Borja, supra, for MERALCO is similarly situated.
The court further rules that the tax imposed on a public utilitys earnings shall be in
lieu of all taxes and assessments of whatsoever nature is not necessarily to be given
ta literal meaning when it will not be reasonable to assume that legislative body
intended that the tax shall take place of a tax of a kind not then known or in use. And
there is no analogy between tax exemption of new and necessary industries in RA
901 and the tax exemption provision in MERALCOs franchise.

Rodriguez vs. Collector, G.R. No. L-23041, 31 July 1969


Facts:

c) Kinds of tax exemption


(i) Express
Expressly granted by organic or statute law

(ii) Implied

-When particular persons, properties or excises are deemed exempt


as they fall outside the scope of the taxing provision.

CIR vs. PLDT, G.R. No. 140230, 15 December 2005


Facts:

For equipment, machineries and spare parts it imported from October 1, 1992 to May 31, 1994, PLDT
paid the BIR the amount of P164,510,953.00, broken down as follows: (a) compensating tax of
P126,713,037.00; (b) advance sales tax of P12,460,219.00 and (c) other internal revenue taxes of
P25,337,697.00. For similar importations made between March 1994 to May 31, 1994, PLDT paid
P116,041,333.00 value-added tax (VAT). (Note: PLDT did not necessarily pay VAT directly to the BIR.)

After a ruling was handed down by the BIR to the effect that the PLDT is exempt from paying all taxes
on its franchise and earnings including the VAT because of the 3% franchise tax imposed on it by Section
12 of RA 7082, the PLDT claimed from the BIR a tax credit/refund of the VAT, compensating taxes,
advance sales taxes and other taxes it had been paying. When its claim was not acted upon by the BIR,
PLDT went to the CTA. The CTA ruled for PLDT, but made deductions (refundable amounts which
period to claim had already prescribed) from the total tax refund prayed for by PLDT. The CIR appealed
to the CA. The CA affirmed the CTAs decision. The CIR appealed to the SC, saying that the CA erred in
ruling that because of the 3% franchise tax the PLDT is exempt from paying all taxes, including indirect
taxes.

Issue:

WON the 3% franchise tax exempts the PLDT from paying all other taxes, including indirect taxes.

Held:

No.

1. Direct taxes are those exacted from the very person who, it is intended or desired, should pay
them. They are impositions for which a taxpayer is directly liable on the transaction or business
he is engaged in.
2. Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in
the expectation and intention that he can shift the burden to someone else. In other words, indirect
taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden
thereof can be shifted or passed on to another person, such as when the tax is imposed upon
goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax
to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part
of the price of goods sold or services rendered.
3. The NIRC classifies VAT as an indirect tax the amount of [which] may be shifted or passed
on to the buyer, transferee or lessee of the goods. The 10% VAT on importation of goods is in
the nature of an excise tax levied on the privilege of importing articles. It is imposed on all
taxpayers who import goods. It is not a tax on the franchise of a business enterprise or on its
earnings, as stated in Section 2 of RA 7082.
4. Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods
for sale or of raw materials to be processed into merchandise can shift the tax or lay the
economic burden of the tax on the purchaser by subsequently adding the tax to the selling price
of the imported article or finished product.

(iii) Contractual

Agreed to by the taxing authority in contracts lawfully entered


into by them under enabling laws.

Prov. of Misamis Oriental vs. Cagayan Electric Power


and Light Co. Inc., G.R. No. L-45355, 12 January 1990

Facts: Cagayan Electric Power and light Co, Inc. (CEPALCO) was granted
a franchise in 1961 under RA 3247 to install, operate and maintain an
electric light, heat and power system in Cagayan de Oro and its suburbs. In
1973, the Local Tax Code (PD 231) was promulgated, where Section 9
thereof providing for a franchise tax. Pursuant thereto, the province of
Misamis Oriental enacted Provincial Revenue Ordinance 19, whose Section
12 also provides for a franchise tax. The Provincial Treasurer demanded
payment of the provincial franchise tax from CEPALCO. CEPALCO paid
under protest.

Issue: Whether CEPALCO is exempt from the provincial franchise tax.

Held: Local Tax Regulation 3-75 issued by the Secretary of Finance in


1976 made it clear that the franchise tax provided in the Local Tax Code
may only be imposed on companies with franchise that do not contain the
exempting clause, i.e. in-lieu-of-all-taxes-proviso. CEPALCOs franchise
i.e. RA 3247, 3571 and 6020 (Section 3 thereof), uniformly provides that
in consideration of the franchise and rights hereby granted, the grantee
shall pay a franchise tax equal to 3% of the gross earnings for electric
current sold under the franchise, of which 2% goes to the national Treasury
and 1% goes into the treasury of the municipalities of Tagoloan, Opol,
Villanueva, Jasaan, and Cagayan de Oro, as the case may be: Provided, that
the said franchise tax of 3% of the gross earnings shall be in lieu of all taxes
and assessments of whatever authority upon privileges, earnings, income,
franchise and poles, wires, transformers, and insulators of the grantee from
which taxes and assessments the grantee is hereby expressly exempted.

d) Rationale/grounds for exemption

1.Tax exemption may be based on contract in which case the public represented
by the government is supposed to receive a full equivalent therefor. Ordinarily,
the provisions of a contract of exemption from taxation are contained in the
charter of the corporation (law under which is organized) to which the exemption
is granted.
2.It may be based on some ground of public policy.(supra), such as, for example
to encourage new and necessary industries, or to poster charitable and
other benevolent institutions; or such as, at least makes the public at large
interested in encouraging or favoring the class or interest in whose behalf the
exemption is made. In this case, the government need not receive any
consideration in return for tax exemption.
3.It may be created in a treaty on grounds of reciprocity, or to
4.lessen the rigors of international double or multiple taxation which occurs
where there are many taxing jurisdictions, as in the taxation of income and
intangible personal property.
5.States that taxes are not subject to set-off or legal compensation because the
government and the taxpayer are not mutual creditor and debtor of each other.
6.A person cannot refuse to pay tax on the basis that the government owes him an
amount equal to or greater than the tax being collected. The collection of tax
cannot await the results of a lawsuit against the government.
7.An exception to this rule is where both claims of the government
and the taxpayer against each other have already become due, demandable and
fully liquidated.

e) Revocation of tax exemption

a. Forfeiture of Refund- A refund check or warrant issued in accordance with the pertinent provisions of
this Code, which shall remain unclaimed or uncashed within 5 (five) years from the date the said
warrant or check was mailed or delivered, shall be forfeited in favor of the Government and the
amount thereof shall revert to the general fund.
b. A tax credit Certificate issued in accordance with the pertinent provisions of the Tax Code, which
shall remain unutilized after five 5 years from the date of issuance, shall unless revalidated, be
considered invalid, and shall not be allowed as payment for internal revenue tax liabilities of the taxpayer
and the amountcovered y the certificate shall revert to the general fund.

You might also like