Denial of due process by: Maria Noeli V.

Francisco
It is unmistakable that the state has the inherent power of taxation, which has been defined as the power by which the state raises revenue necessary to defray the expenses of the government.

Indeed, it is recognized that this power is borne out of necessity: the government has to function and provide for the various needs of the nation. However, just like the police power and power of eminent domain, the Constitution has provided for limitations to lessen incidences of abuse and to serve as protection for the citizenry. One of the limitations to the exercise of the power of taxation provided by the Constitution is the observance of due process of law, substantive or procedural. Under this limitation, one is given the right to be notified and be heard regarding a particular issue. In tax practice, it becomes all the more significant in cases of assessments against taxpayers. Thus, in a recent case decided by the Court of Tax Appeals (CTA), it was stressed that the non-observance of the procedural due process in the service and issuance of the assessment notices, Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN), has the effect of rendering them void ab initio. There being no valid assessment, when prescription sets in, taxpayers can no longer be held liable for the alleged discrepancies found for the tax period stated therein. In the said case, the Bureau of Internal Revenue (BIR) alleged that the FAN had been validly served to petitioner by registered mail to the taxpayers previous address as appearing in its Income Tax Return for the tax period covered by the assessment notice. In rebuttal, the petitioner denied having received the FAN by proving that it had not in fact been served and received and that the BIR officials had actual knowledge of the change of its business address. In resolving the issue, the CTA ruled that in case a taxpayer denies receiving an assessment from the BIR, the latter has the burden of proving that indeed a copy of the assessment was sent to the taxpayer. In support of this ruling, the CTA cited the case of Barcelon, Roxas, Inc. vs. Commissioner of Internal Revenue (G.R. No. 157064, August 7, 2006), where the Supreme Court (SC) explained that in case the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to the respondent to prove by contrary evidence that the petitioner received the assessment by mail. The SC has consistently held that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial thereof shifts the burden to the party favored

by the presumption to prove that the mailed letter was indeed received by the addressee. Based on this, the CTA found that the respondent failed to discharge the duty of proving the receipt of the assessment by the petitioner. It was clear that the petitioner had not been served a copy of the FAN, despite the fact that the respondent had been informed that the petitioner has yet to receive a copy of the FAN. Likewise, the respondent was actually informed of the new address of the petitioner, not only through the returns bearing the new address but also due to the fact that the respondents officers had actually visited the new office of the petitioner. Therefore, no FAN was validly served on the petitioner. The issue on the denial of procedural process, which renders the FAN void ab initio, was emphasized more clearly by the fact that the FAN was issued on the same date that the PAN was served upon the petitioner. The CTA agreed with the petitioner and explained that in order for an assessment to be valid, the procedural requirements provided under Section 228 of the National Internal Revenue Code (NIRC) of 1997 (Protesting an Assessment), as amended, and Revenue Regulations Nos. 12-85 (Section 3. Time to Reply) and 12-99 (Section 3. Due Process Requirement in the Issuance of Deficiency Tax Assessment), and Revenue Memorandum Order No. 37-94 (C. Review of Reports of Investigation and Service of Pre-assessment Notices) must be complied with. The cited provisions of law and regulations clearly illustrate the process to be followed in assessment cases in order for the taxpayer to be afforded due process. In summary, after the Revenue Officer conducts a re-investigation, the taxpayer shall be notified in writing of the purposes of the Informal Conference. If there is sufficient basis for the assessment, a PAN shall be issued and sent to the taxpayer, who is then given 15 days to make a reply and is also permitted to examine the records and present his arguments in writing. In case of failure to respond to the PAN, the taxpayer shall be sent a FAN, which shall state the facts and the law on which the assessment is based. The taxpayer may file a protest based on the FAN within 30 days and then submit the relevant supporting documents within 60 days. Otherwise, the assessment shall become final.

By serving the PAN and issuing the FAN on the same date, the respondent patently violated the above-cited provisions and therefore denied the petitioners right to due process. Citing BPI Data Systems Corporation vs. Commissioner of Internal Revenue(CTA Case No. 4530, January 12, 1994), the CTA stated that due to the failure of the respondent to strictly comply with the procedure prescribed by law and the failure of the petitioner to receive a copy of the alleged assessment, the latter was not afforded its right to be heard for it was denied the

opportunity to protest or dispute the alleged assessment. The CTA went on to say that it cannot bestow the presumption of correctness on the assessment in the absence of any showing that administrative remedies granted by law have been properly exhausted or that petitioner has failed to file a protest on the assessment within the prescribed period despite receipt thereof.

Thus, since petitioner was not sent a FAN, the assessment is void. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that taxpayer should be able to present their case and adduce supporting evidence (Commissioner of Internal Revenue vs. Azucena T. Reyes, G.R. Nos. 159694 and 163581, January 27, 2006).

Interestingly, the CTA has ruled in Direct Container Lines vs. CIR (CTA Case No. 7616, September 10, 2009) that the issuance of the PAN may be dispensed with without having violated due process of law where the taxpayer, after protesting to the Post Reporting Notice, subsequently received a FAN. It is to be stressed, however, that in the case at bar the BIR had already issued the PAN and, therefore, the taxpayer should have been given the opportunity to present its case through the observance of the procedural due process provided under existing tax laws rules and regulations. Thus, the taxpayer should have had the opportunity to reply to the PAN within the reglementary period of 15 days before a FAN was issued. Failing to do so, the respondent is deemed to have violated the taxpayers right to due process of law.
http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/DC988F_17-11-10

It is contended that the ordinance Nos. 38 and 46 in question are unfair, unjust, arbitrary and violate the principle on uniformity of taxation, the amount of tax or license free to be collected not being based on the value but on the weight of the product. Such tax or license fee becomes uniform by making the weight the basis thereof as provided for in the ordinances in question. A P0.05 tax or license fee for 100 kilos of fraction thereof per month is not arbitrary but reasonable. The tax or license fee provided for in the ordinance in question is imposed on every person, firm, or corporation engage in the City of Cebu in business of buying and selling and storing copra in his or its warehouse located within the city. It, as well as the

exemption,1 applies equally to all persons, firm and corporations place in similar situation. Market fluctuation in the value of price of the merchandise, article, or good subject to tax or license fee does not make ununiform the rate of such tax or license fee. The fact that the price of copra has been steadily going down, whereas that of going up, does not render the tax arbitrary. Precisely, the tax or license fee provided for in the ordinances in question based on the weight regardless of value is what makes the tax or fee uniform. The tax or license fee does not deprive the owner of the copra and of the warehouse of this property without due process of law, because it is reasonable tax or fee and it does not deprive the dealer of his copra and the owner of the warehouse where it is kept of his property. If the copra dealer does not want to pay the city tax or fee, he may buy and sell the store the copra elsewhere. It is not a tax on export because it is imposed not only upon copra to exorted but also upon copra sold and to used for domestic purposes, if stored in any warehouse in the City of Cebu and the weight thereof is 100 kilos or more. The tax or license fee in question is not among those prohibited or beyond the power of the municipal councils and municipal districts council to impose, as provided for in section 3, Commonwealth Act No. 472. Besides Commonwealth Act No. 472 applies only to municipal council and municipal district council and not to cities Like the City of Cebu which has it own charter. G.R. No. L-4887 UY MATIAO & CO., INC., plaintiff-appellee, vs. THE CITY OF CEBU, MIGUEL RAFFIAN, as MAYOR; ANATOLIO YNCLINO, as City Treasurer and JESUS E. ZABATE,

MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that

gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account.[31] Thus, pegging the tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not realized gain.[32] We disagree. Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. 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 the common good.[33] Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely legislative.[35] Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.[36] It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it.[37] Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality. The constitutional safeguard of due process is embodied in the fiat [no] person shall be deprived of life, liberty or property without due process of law. In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure [39] when it amounts to a confiscation of property.[40] But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer.[41] There must be a factual foundation to such an unconstitutional taint.[42] This merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character.[43] Petitioner is correct in saying that income is distinct from capital. [44] Income means all the wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while

income denotes a flow of wealth during a definite period of time. [45] Income is gain derived and severed from capital.[46] For income to be taxable, the following requisites must exist: (1) there must be gain; (2) the gain must be realized or received and (3) the gain must not be excluded by law or treaty from taxation.[47] Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods[48] and other direct expenses from gross sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross income. CHAMBER OF REAL ESTATE AND BUILDERS G.R. No. 160756

ASSOCIATIONS, INC.,
v.

THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO,

At any rate, we see nothing of consequence in drawing any distinct between the operation and effect of the due-process clause as it applies to the individual states and to the national government of the United States. The question here involved is essentially not one of due-process, but of the power of the Philippine Government to tax. If that power be conceded, the guaranty of due process cannot certainly be invoked to frustrate it, unless the law involved is challenged, which is not, on considerations repugnant to such guaranty of due process of that of the equal protection of the laws, as, when the law is alleged to be arbitrary, oppressive or discriminatory. G.R. No. L-46720 June 28, 1940

WELLS FARGO BANK & UNION TRUST COMPANY, petitioner-appellant, vs. THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 18 5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say

that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19 G.R. No. L-59431 July 25, 1984 ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA,

a. Due process of law. As provided for, no person shall be deprived of life, liberty or property without due process of law. This covers two types: substantive, and procedural. Substantive due process relates to the circumstances and procedures in the passage of tax laws and ordinances, while the other relates to the procedural aspects in the implementation of the tax laws and ordinances. Applied to taxation, due process mandates that there should be a valid law imposing a tax to a particular taxpayer, and should the taxpayer failed to pay the same, it must be given each and every opportunity to explain itself and justify. No law imposing a tax, then the taxpayer shall not be collected such tax. On the other hand, granting that the taxpayer failed to pay in full but was not issued as assessment notice informing the facts and the law of the assessment, still, the taxpayer could not be held to pay. These are the essence of due process. The taxing authority, while implementing the necessary mandates of its office must give due respect to the established procedures the way it works in an organized society.
http://philtaxation.blogspot.com/2009/06/general-principles-part-iii.html

2. To repeat the challenged ordinance cannot be considered ultra vires as there is more than ample statutory authority for the enactment thereof. Nonetheless, its validity on constitutional grounds is challenged because of the allegation that it imposed double taxation, which is repugnant to the due process clause, and that it violated the requirement of uniformity. We do not view the matter thus.

As to why double taxation is not violative of due process, Justice Holmes made clear in this language: "The objection to the taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause] no more forbids double taxation than it does doubling the amount of a tax, short of confiscation or proceedings unconstitutional on other grounds."8With that decision rendered at a time when American sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To some, it delivered the coup de grace to the bogey of double taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in the United States, as with us, its ghost as noted by an eminent critic, still stalks the juridical state. In a 1947 decision, however,9 we quoted with approval this excerpt from a leading American decision:10 "Where, as here, Congress has clearly expressed its intention, the statute must be sustained even though double taxation results." G.R. No. L-24756 October 31, 1968

CITY OF BAGUIO, plaintiff-appellee, vs. FORTUNATO DE LEON, defendant-appellant. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. Cooley, The Law of Taxation, Vol. 1, Fourth Edition, 149-150.