TAXATION LAW I l PREMIDS l Atty.
Amago l By: Tanya Ibanez
HISTORY OF TAXATION
HISTORICAL BACKGROUND
EGYPT
Tax on cooking oil
During the reign of the Egyptian pharaohs, tax collectors were known
as scribes. The scribes imposed taxes on cooking oil and to ensure that
the people were not avoiding said tax, the scribes would audit the
households.
GREECE
Taxes for wartime expenditure
The Athenians would impose a tax in times of war, known as aseisphora
which was used to pay for wartime expenditure. They were the first
ones to introduce the concept of tax refund/credit/carry-over, because
when additional resources were gained by the war effort, such were
used to refund the tax to the citizens.
Monthly poll tax
Athenians imposed a monthly poll tax on foreigners, or those who did
not have both an Athenian mother and father. One drachma for men
and a half drachma for women. The tax was referred to as metoikion.
ROMAN EMPIRE
Customs duties tax
Tax collectors in this time were known as publican. The earliest in Rome
were customs duties on imports and exports called portoria. The
Romans were to the first ones to introduce the Tax Haven, where in one
particular area no tax were collected.
Inheritance tax
Caesar Augustus, the most brilliant tax strategist of the Roman Empire,
virtually eliminated the publicani as tax collectors for the central
government. During this period, cities were given the responsibility for
collecting taxes. Augustus instituted a 5% inheritance tax to provide for
retirement funds for the military.
Sales tax
Also, a 1 percent sales tax was imposed.
GREAT BRITIAN
Income tax
Great Britain was the first to introduce income tax. The first tax assessed
in England was during the occupation by the Roman Empire.
Legend has it that Leofric, Earl of Mercia, imposed very high taxes. His
wife, Lady Godiva, asked him that the taxes be reduced. He obliged, on
the condition that Lady Godiva roam the town naked while riding a
horse. Lady Godiva did so, hence the tax was minimized.
PHILIPPINES
In the Philippines, taxation can be traced during the Spanish era where
several taxes and monopolies were established.
Resident tax
The resident tax during the Spanish times were known as tribute. It may
be paid in cash or kind. In 1884, however, the tribute was replaced by
the cedula personal or personal identity paper, which is equivalent to
the present community tax certificate.
Bandala system
A form of direct taxes that the Spaniards implemented where the natives
were coerced to sell their products to the government at very low prices.
The collection of taxes were specific in a particular area rebellious to the
Spaniards.
Cedula Personal
A legal identity document issued by cities and municipalities to all
persons that have reached the age of majority and upon payment of a
community tax. The cedula served as an identification card that had to
be carried at all times. One who cannot present the same could be
detained for being indocumentado.
TN: Andres Bonifacio and other Katipuneros tore their cedulas in August
1896, sparking the start of the Philippine Revolution.
Community tax
This was imposed by the Americans when CA No. 465 took effect,
mandating the imposition of a base resident tax of 50 cents and an
additional tax of one peso based on factors such as income and real
estate holdings. The payment of this tax merits the issue of a residence
certificate.
Eventually, Philippines passed the Local Government Code, after gaining
independence, mandating the payment of community tax and proof of
entries is the community tax certificate.
Polo y servicio
Forced labor for 40 days of men ranging from 16 to 60 years old who
were obligated to give personal services to the community projects. One
could be exempted from the polo by paying a fee called falla.
DIFFERENT TAXES UNDER THE NIRC
Different taxes under the National Internal Revenue Code
A. Income tax
A. Individuals
B. Corporation
C. Other persons
B. Business taxes
A. Value-added tax
B. Other percentage taxes
C. Transfer taxes
A. Donors tax
B. Estate tax
TN: Taxation is a destructive power of the State which interferes with
personal and property rights of the people and takes a portion of their
property from them for the support of the government. Being a destructive
power, it can be used to kill and activity or business if it wants to. Thus, it
must be exercised with caution.
DEFINITION OF TAXATION
TAXATION
It is the inherent power of the State to demand enforced contributions
from the people to raise revenue in order to defray the necessary
expenses of the government.
Q. Define taxes.
Taxes are the enforced proportional contributions from properties and
persons levied by the State by virtue of its sovereignty for the support
of the government and all public needs.
TN: Taxation refers to the power to collect money, while tax is the money itself.
Q. Can an LGU validly enact a law imposing amusement tax on
local swimming pools not provided in the LGC or other laws?
No. Cebu City is not sovereign thus there is no inherent power of
taxation. Thus, it can impose only those taxes delegated to it by the
legislative branch of the national government. Only Congress have an
unlimited power to exercise the power to tax.
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TAXATION LAW I l PREMIDS l Atty. Amago l By: Tanya Ibanez
Q. May a legislative body enact laws to raise revenue in the
absence of a constitutional provision granting such body the
power to tax?
Yes. Taxation is inherent in the State, being an attribute of sovereignty.
Thus, the legislature can enact laws to raise revenues even without the
grant of said power in the Constitution. It must be noted that
Constitutional provisions relating to taxation do not operate as grants of
power to the Government, but merely constitute as limitations upon a
power which would otherwise be practically without limit.
Re: How tax refunds are construed
Paseo Realty v. CA
Taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their
property for the support of the government. And since taxes are what
we pay for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer and
liberally in favor of the taxing authority.
A claim of refund or exemption from tax payments must be clearly
shown and be based on language in the law too plain to be mistaken.
Elsewise stated, taxation is the rule, exemption therefrom is the
exception.
Case discussion: The confusion as to petitioners entitlement to a refund could
altogether have been avoided had it presented its tax return for 1990. The grant
of a refund is founded on the assumption that the tax return is valid, i.e., that the
facts stated therein are true and correct. Without the tax return, it is error to grant
a refund since it would be virtually impossible to determine whether the proper
taxes have been assessed and paid.
Re: Scope of authority of a province to impose amusement tax
Pelizloy Realty v. Province of Benguet
The power to tax is an attribute of sovereignty, and as such, inheres in
the State. Such, however, is not true for provinces, cities, municipalities
and barangays as they are not the sovereign. Rather, they are mere
territorial and political subdivisions of the Republic of the Philippines.
A municipal corporation unlike a sovereign state is clothed with no
inherent power of taxation. The charter or statute must plainly show an
intent to confer that power or the municipality, cannot assume it. And
the power when granted is to be construed in strictissimi juris. Any doubt
or ambiguity arising out of the term used in granting that power must
be resolved against the municipality. Therefore, the power of a province
to tax is limited to the extent that such power is delegated to it either
by the Constitution or by statute.
Case discussion: Resorts, swimming pools, bath houses, hot springs and tourist
spots do not belong to the same category or class as theatres, cinemas, concert
halls, circuses, and boxing stadia. It follows that they cannot be considered as
among the other places of amusement contemplated by Section 140 of the LGC
and which may properly be subject to amusement taxes.
NATURE OF THE POWER OF TAXATION
Nature of the power of taxation
A. Inherent attribute of sovereignty
B. Legislative in character
C. Subject to constitutional and inherent limitations (will be
discussed later in Chapter XIV)
INHERENT ATTRIBUTE OF SOVEREIGNTY
INHERENT ATTRIBUTE OF SOVEREIGNTY
The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government. It exists apart from constitutions and without being
expressly conferred by the people. Hence, it can be exercised by the
government even if the Constitution is entirely silent on the subject.
Basis Lifeblood theory
The power to tax proceeds upon the theory that the existence of a
government is a necessity. No sovereign State can continue to exist
without the means to pay its expenses, and for those means, it has the
right to compel all citizens and property within its limit to contribute.
Manifestations
A. Taxes can be imposed even in the absence of a constitutional
provision.
B. The state can select the object and subject matter of taxation.
Thus, unlimited.
C. No injunction in the collection of taxes.
Xpn: There is a pending case filed in the CTA to enjoin the collection of tax.
D. Taxation is not subject to set-off.
Xpn: When both debts are due and demandable and has been fully
liquidated.
Q. What is the concept of equitable recoupment?
A claim for refund barred by prescription may be allowed to offset
unsettled tax liabilities. This doctrine finds no application in the
Philippines.
Concurring and Dissenting Opinion of Justice Leonen in Manila
Memorial v. Sec of DSWD
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. Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any
other statute, tax legislation carries a presumption of constitutionality.
The power to tax is a principal attribute of sovereignty. Such inherent
power of the State anchors on its "social contract with its citizens which
obliges it to promote public interest and common good.
LEGISLATIVE IN CHARACTER
LEGISLATIVE IN CHARACTER
The power to tax is peculiarly and exclusively legislative and cannot be
exercised by the executive or judicial branch of the government. Hence,
only Congress, our national legislative body, can impose taxes. However,
the levy of a tax may also be made by a local legislative body, subject
to such limitations as may be provided by law.
GR: The power to tax is essentially a legislative function and which the
central legislative body cannot delegate to other branches.
XPNS: (Permissive delegation of the power to tax)
A. To local governments in respect of matters of local concern
TN: Through the Local Government Code of 1991
B. When allowed by the Constitution
TN: To the President with respect to tariff rates, import and export quotas,
flexible tariff clause, etc.
C. Administrative regulations (Assessment and Collection)
TN: Two tests to determine the validity of the delegation to administrative
agencies:
1. Completeness test
2. Sufficient standard test
Basis of the legislative power to tax
Taxes are a grant of the people who are taxed and the grant must be
made by the immediate representatives of the people. Hence, it should
be our representatives who must levy and impose taxes.
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Scope of Taxation
Subject to constitutional and inherent restrictions, the power of taxation
is regarded as supreme, unlimited and comprehensive. The principle
check on its abuses rests only on the responsibility of the members of
the legislature to their constituents.
Extent of the legislative power to tax
Subject to constitutional and inherent restrictions, the legislature has
the discretion to determine the incident of the power to tax.
A. Purpose tax must be for a public purpose. The legislative
bodys determination however on the question of what is a public
purpose is not conclusive. The courts can inquire into whether the
purpose is really public or private.
Judicial action is limited only to a review where it involves:
a. The determination of the validity of the tax in relation to
constitutional precepts or provisions, or
b. The determination in an appropriate case of the application
of a tax law
Planters Products v. Fertiphil Corp.
The term "public purpose" is not dened. It is an elastic concept
that can be hammered to t modern standards. It does not only
pertain to those purposes which are traditionally viewed as
essentially government functions, such as building roads and
delivery of basic services, but also includes those purposes
designed to promote social justice. Thus, public money may now
be used for the relocation of illegal settlers, low-cost housing and
urban or agrarian reform.
While the categories of what may constitute a public purpose are
continually expanding in light of the expansion of government
functions, the inherent requirement that taxes can only be
exacted for a public purpose still stands. Public purpose is the
heart of a tax law. When a tax law is only a mask to exact funds
from the public when its true intent is to give undue benet and
advantage to a private enterprise, that law will not satisfy the
requirement of "public purpose".
Case discussion: the LOI provides that the imposition of the P10 levy was
conditional and dependent upon PPI becoming nancially viable. This
suggests that the levy was actually imposed to benet PPI. Worse, the levy
was used to pay the corporate debts of PPI (Planters Products Inc). The
letter of understanding and the plain text of the LOI clearly indicate that
the levy was exacted for the benefit of a private corporation.
B. Subjects and objects of taxation refer to the coverage and
the kind or nature of the tax. They may be persons, property,
businesses, transactions, rights or privileges.
A state is free to select the subject of taxation and it has been
repeatedly held that the inequalities which result from the singling
out of one particular class for taxation or exemption infringe no
constitutional limitation so long as such is reasonable and not
arbitrary.
C. Amount and rate of tax as a general rule, the legislature may
levy a tax of any amount or rate it sees fit. If the taxes are
oppressive or unjust, the only remedy is the ballot box and the
election of new representatives.
However, the tax must be reasonable, one that would not go
against the deprivation of property without due process of law.
D. Manner and mode of enforcement and collection these
refer to the administration of the tax or the implementation of tax
laws. The legislature possesses the sole power to prescribe the
mode or method by which the tax shall be collected, and to
designate the officers through whom its will shall be enforced.
Congress should provide sufficient standards on how taxes is
supposed to be collected.
Examples: withholding tax, creditable, etc.
E. Situs of taxation refers to the place of taxation. In
determining the same, the nature of the taxes must be
considered.
Examples:
Community tax residence of the taxpayer
Real property tax location of the property
F. Apportionment of the tax refers to the determination of
which portion of the society gets to be benefited by the tax. It
could either of general or limited application.
G. Grant tax exemption or condonation The power to tax
carries with it the power to grant exemption therefrom.
Exemptions are interpreted strictly against the taxpayer and
liberally in favor of the government.
H. Kind of tax to be collected it can be based on income, sales,
import or export, etc.
I. Provision of administrative and judicial remedies that
may be availed by the taxpayers and the government
SUBJECT TO CONSTITUTIONAL & INHERENT LIMITATIONS
CONSTITUTIONAL AND INHERENT LIMITATIONS
These limitations are those provided in the fundamental law or implied
therefrom, while the rest spring from the nature of the taxing power
itself although they may or may not be provided in the Constitution.
Inherent limitations
A. Public purpose
B. Exemption from taxation of government entities
C. Non-delegation of the legislative power to tax
D. International comity
E. Territorial jurisdiction
Constitutional limitations
Direct Constitutional limitations
A. Revenue bill must originate exclusively in the House but the
Senate may propose with amendments
B. Concurrence of a majority of all the members of Congress for the
passage of a law granting tax exemption
C. Rule of uniformity and equity in taxation
D. Progressive system of taxation
E. Exemption of religious, charitable and education entities, non-
profit cemeteries, and churches from property taxation
F. Exemption is non-stock, non-profit education institution from
taxation
G. Non-impairment from non-payment of a poll tax
H. Non-impairment of the jurisdiction of the SC in tax cases
Indirect Constitutional limitations
A. Due process of law
B. Equal protection of the laws
C. Non-impairment of the obligations and contracts
D. Non-infringement of religious freedom
E. No appropriation for religious purposes
F. Non-infringement of the freedom of the press
G. Power of the President to veto any particular item/s in a revenue
or tariff bill
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TAXATION LAW I l PREMIDS l Atty. Amago l By: Tanya Ibanez
THEORIES OF TAXATION
Theories of taxation
A. Lifeblood theory
B. Necessity theory
C. Benefits received or compensation theory
LIFEBLOOD THEORY
LIFEBLOOD THEORY
Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need. Without taxes, the government would
be paralyzed for lack of motive power to activate and operate it.
CIR v. Metro Star Superama
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance. On the other hand, such collection
should be made in accordance with law as any arbitrariness will negate
the very reason for government itself.
But even as we concede the inevitability and indispensability of taxation,
it is a requirement in all democratic regimes that it be exercised
reasonably and in accordance with the prescribed procedure. If it is not,
then the taxpayer has a right to complain and the courts will then come
to his succor. For all the awesome power of the tax collector, he may
still be stopped in his tracks if the taxpayer can demonstrate that the
law has not been observed.
Case discussion: The Tax Code requires that the taxpayer must first be informed
that he is liable for deficiency taxes through the sending of a Preliminary
Assessment Notice. He must be informed of the facts and the law upon which the
assessment is made. To proceed heedlessly with tax collection without first
establishing a valid assessment is evidently violative of the cardinal principle in
administrative investigations that taxpayers should be able to present their case
and adduce supporting evidence.
NECESSITY THEORY
NECESSITY THEORY
The power to tax proceeds upon the theory that the existence of a
government is a necessity. No sovereign State can continue to exist
without the means to pay its expenses, and for those means, it has the
right to compel all citizens and property within its limit to contribute.
BENEEFITS RECEIVED THEORY
BENEFITS RECEIVED OR COMPENSATION THEORY
This theory is the basis of taxation and is founded on the reciprocal
duties of protection and support between the State and its inhabitants.
TN: Inhabitants and not citizens because even aliens are taxed.
Concurring and Dissenting Opinion of Justice Leonen in Manila
Memorial v. Sec of DSWD
It is said that taxes are what we pay for civilized society. Without taxes,
the government would be paralyzed for lack of the motive power to
activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard-earned income to the taxing authorities,
every person who is able to must contribute his share in the running of
the government.
The government, for its part, is expected to respond in the form of
in/tangible benets intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is
the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
Take Note:
Theory of Taxation Lifeblood/Necessity Theory
Basis of Taxation Benefits Received Theory
PURPOSE AND OBJECTIVE OF TAXATION
THE FOUR (4) Rs OF TAXATION
THE FOUR (4) RS OF TAXATION:
TN: According to Atty. Amago, these four refer more to the effects of taxation.
A. Revenue purpose of taxation is to raise revenue in order to
defray the expenses of the government.
B. Redistribution people who earn more, pay more taxes, so
their wealth is used for the benefit of everyone, including the less
wealthy individuals.
TN: This is the justification of estate tax.
C. Re-pricing higher taxes are imposed on articles which are
considered dangerous to the health of the people, i.e. alcoholic
drinks, cigarettes, etc. To address externalities and prevent
citizens from using such dangerous products, higher taxes may
be imposed to curtail such practice. The end goal is to change the
behaviour of the citizens or to promote a certain policy.
D. Representation Our representatives are the ones imposing
the tax, but since the people are the ones putting them in power,
the people can demand something from them efficient and
effective government service. There is the sense of accountability.
No taxation without representation
PRIMARY PURPOSE OF TAXATION
REVENUE RAISING
The primary purpose of taxation has always been to raise revenue. A
law which has for its intention the raising of revenue, is an exercise of
the power of taxation.
TN: Of the three inherent powers of the State, only the power of taxation
has for its purpose the raising of revenue.
SECONDARY PURPOSE OF TAXATION
NON-REVENUE RAISING
TN: Also known as the sumptuary purpose of taxation.
A. Regulation Taxes can be used to curtail or improve a particular
industry. Taxes can be levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of a threatened
industry which is affected with public interest.
Example: to protect local industries, higher taxes is imposed on
foreign investors in order to level the playing field and prevent
unfair competition; re-pricing.
Tio v. Videogram Regulatory Board
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
industry over another.
It is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that
inequities which result from a singling out of one particular class
for taxation or exemption infringe no constitutional
limitation. Taxation has been made the implement of the state's
police power.
Case discussion: The levy of the 30% tax is for a public purpose. It was
imposed primarily to answer the need for regulating the video industry,
particularly because of the rampant film piracy, the flagrant violation of
intellectual property rights, and the proliferation of pornographic video
tapes. And while it was also an objective of the decree to protect the movie
industry, the tax remains a valid imposition.
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B. Promotion of general welfare Taxation can be used as an
implement of police power for the purpose of promoting general
welfare. But sometimes, the use of the power of taxation as an
implement of taxation, can destroy industry.
Panhandle Oil v. Mississipi
Re: Marshall Dictum
The power to tax involves the power to destroy.
McCulloch v. Maryland
Re: Holmes Dictum
The power of taxation does not involve the power to destroy as
long as this court sits.
Reyes v. Almanzor
Re: How were the doctrines reconciled?
While taxation is plenary and unlimited, it has restrictions. Both
the due process of law and equal protection clauses of the
Constitution may be invoked to invalidate revenue measures. It is
the Courts role to see to it that the exercise of the power does
not transgress these limitations.
How to reconcile according to Atty. Amago:
The power to tax can be used to destroy only if it used as an
implement of police power, as when you try to regulate a
particular act, to the extent that industries can really close down.
Hence, the power to tax is a power to destroy only if you are
looking at the power to tax as an implement of police power. But
in all other instances, no, because the court will always be there
to see whether the inherent and constitutional limitations are
violated.
C. Reduction of social inequalities Progressive system of
taxation prevents the undue concentration of wealth in the hands
of a few individuals. Progressivity is the keystone on the principle
that those who are able to pay, shoulders the bigger portion of
the burden. Whatever one earns is for the benefit of all.
D. Encourage economic growth Refers to exemptions and
incentives granted to foreign investors to entice them to invest in
the country. This is also to encourage higher reserves of foreign
currencies, so the value of the peso in relation to foreign
exchange will be higher. The more foreign reserves, the higher
the value of the currency.
SCOPE OF TAXATION
SCOPE OF TAXATION
A. Unlimited
B. Comprehensive
C. Plenary
D. Supreme
Pepsi Cola v. Municipality of Tanauan
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. It is a
power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of
government without infringing upon the theory of separation of powers.
The exception, however, lies in the case of municipal corporations, to
which, said theory does not apply. Legislative powers may be delegated
to local governments in respect of matters of local concern. This is
sanctioned by immemorial. By necessary implication, the legislative
power to create political corporations for purpose of local self-
government carries with it the power to confer on such local government
agencies the power to tax.
Case discussion: The plenary nature of the delegated power of local governments
would not suce to invalidate the law as conscatory and oppressive. In
delegating the authority, the State is not limited to the measure of that which is
exercised by itself. When it is said that the taxing power may be delegated to
municipalities and the like, it is meant that there may be delegated such measure
of power to impose and collect taxes the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy
the State has not deemed wise to tax for more general purposes.
Plenary the legislative body has the power to impose taxes as they may deem
expedient. After all, they can determine the subjects and objects of taxation.
Tio v. Videogram Regulatory Board
A tax does not cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed. The power to
impose taxes is one so unlimited in force and so searching in extent,
that the courts scarcely venture to declare that it is subject to any
restrictions whatever, except such as rest in the discretion of the
authority which exercises it.
ASPECTS OF TAXATION
ASPECTS OF TAXATION
A. Levy or imposition
B. Assessment
C. Collection
Levy or imposition
Refers to the enactment of a law by Congress. The power to levy taxes
which involves tax policy is essentially legislative in character, although
it may be delegated to executive agencies with respect to administrative
matters, provided that adequate guidelines or safeguards prescribed are
followed in the administration of tax laws. (Subordinate legislation)
Tax administration exercised by the executive department of
government, particularly the BIR with respect to internal revenue taxes.
A. Assessment applying the law passed by Congress to the
specific person, property or activity covered by it. Involves the
determination of how much tax is due.
TN: In the Philippines, we follow self-assessment. If ever it is not enough,
there is the involuntary assessment by the BIR.
B. Collection process or method of implementing the tax laws for
the purpose of satisfying the tax obligations, as when money is
actually taken from the taxpayers.
Agencies involved in the collection of taxes are:
a. Bureau of Internal Revenue
b. Bureau of Customs
c. Provincial, City, and Municipal Assessor and Treasurers
TN: Other aspects of taxation: (1) Payment involves the act of compliance by
the taxpayer of his tax obligation, as when he actually pays his taxes; (2) Refund
taxes paid will be returned to the taxpayers as when there is an erroneous or
illegal collection of taxes.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
A. Fiscal adequacy It means that the revenues generated should
be sufficient to meet the demands of public expenditure. Taxes
should not be too much nor too less. Also, it must be elastic or
capable of expanding or contracting annually in response to
variations in public expenditures and to address contingencies.
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B. Theoretical justice or equity The tax burden should be
distributed in proportion to the taxpayers ability to pay. Similarly
situated taxpayers should pay equal taxes, while those who have
more should pay more.
C. Administrative feasibility It means that tax laws should be
capable of convenient, just and effective administration. One
which can be easily implemented to assure smooth flow of funds
to the Treasury, in such a way that it can be enforced uniformly
by the government, convenient as to time and manner, and not
unduly burdensome upon, or discouraging to business activity.
D. Economic efficiency A combination of fiscal adequacy and
administrative feasibility. The cost of collecting taxes should not
be higher than the benefits derived from it.
DISTINGUISHED FROM OTHER INHERENT POWERS
TAXATION V. POLICE POWER
Planters Products v. Fertiphil Corp.
Police power and the power of taxation are inherent powers of the State.
These powers are distinct and have different tests for validity. Police
power is the power of the State to enact legislation that may interfere
with personal liberty in order to promote the general welfare, while the
power of taxation is the power to levy taxes to be used for public
purpose.
The main purpose of police power is the regulation of a behaviour or
conduct, while taxation is revenue generation. The lawful subjects and
lawful means tests are used to determine the validity of a law enacted
under the police power. The power of taxation, on the other hand, is
circumscribed by inherent and constitutional limitations.
The imposition of the levy was an exercise by the State of its taxation
power. While it is true that the power of taxation can be used as an
implement of police power, the primary purpose of the levy is revenue
generation. If the purpose is primarily revenue, or if revenue is at least,
one of the real and substantial purposes, then the exaction is properly
called a tax.

Taxation Police Power Philippine Airlines v. Edu

The imposition of a vehicle registration fee is not an exercise by the
Promotion of general State of its police power, but of its taxation power. The legislative intent
Purpose Raise revenue
welfare
and purpose behind the law requiring owners of vehicles to pay for their
Limited to the cost of registration is mainly to raise funds for the construction and
Amount of exaction Unlimited maintenance of highways and to a much lesser degree, pay for the
regulation
operating expenses of the administering agency. Fees may be properly
Generally, it can Superior than the non- regarded as taxes even though they also serve as an instrument of
Non-impairment of
impair contracts, impairment clause of the regulation.
contracts
unless there is a Constitution
valuable consideration
Taxation may be made the implement of the state's police power/ If the
Scope purpose is primarily revenue, or if revenue is, at least, one of the real
(rights which cannot and substantial purposes, then the exaction is properly called a tax. Such
Property rights Liberty and property rights
be taken away is the case of motor vehicle registration fees.
without due process
of law) TN: Motor vehicle registration fee and chauffeurs license fee are powers of
taxation, whereas the special permit fee and additional fee for charge of
Can be bargained or registration is an exercise of police power because such fees are very minimal to
Bargain
compromised and be be revenue-raising.
(surrender) Cannot be bargained
subject to abatement
Ex. Tax amnesty
CIR v. Central Luzon Corp.
Enjoyment of Altruistic feeling of The privilege enjoyed by senior citizens does not come directly from the
Compensation
governments services contributing to societys State, but rather from the private establishments concerned.
(benefits)
welfare Accordingly, the tax credit benefit granted to these establishments can
be deemed as their just compensation for private property taken by the
Property taken Generally money Any kind of property State for public use.

The taxation power can also be used as an implement for the exercise
TAXATION V. EMINENT DOMAIN of the power of eminent domain. Tax measures are but enforced
contributions exacted on pain of penal sanctions and clearly for a public
purpose.
Taxation Eminent Domain
Carlos Superdrug v. DSWD
Who can exercise Only the government By the government and In this case, the Congress changed the tax credit scheme to a mere tax
even public utility deduction. The Court held that the Expanded Senior Citizens Act is a
companies legitimate exercise of police power and not eminent domain. The basic
reason for the passage of the law is social justice and general welfare
Purpose To raise revenues Public convenience of the senior citizens. Hence, property rights must bow to the primacy
of police power because property rights, though sheltered by due
Generally, it can Can impair contracts process, must yield to general welfare.
Non-impairment of
impair contracts, (ex. when the property has
contracts already been sold to someone
unless there is a
else, the government can still Manila Memorial Park v. Sec of DSWD
valuable consideration
take the same) The 20% discount is a price regulatory measure affecting the ability of
private establishments to price their products and services relative to a
Persons affected
Taxpayers Owner of the private special class of individuals, the senior citizens, for which the Constitution
property affords preferential concern.

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These establishments have the capacity to revise their pricing strategy
so that whatever reduction in profits they may sustain can be recouped
through higher mark-ups or from other products not subject of
discounts. As a result, the discounts resulting from sales to senior
citizens will not be confiscatory or unduly oppressive. In sum, the 20%
discount and tax deduction are valid exercises of police power of the
State absent a clear showing that it is arbitrary, oppressive or
confiscatory. The Central Luzon case was a mere obiter dictum.
TAXES DEFINED
TAXES DEFINED
The enforced proportional contributions, generally payable in money
and paid at regular periods or intervals, levied from persons and
property or the exercise of a right or privilege, by the State which has
jurisdiction over the subject or object of taxation, through the legislative
body of the State, for the support of the government and for all public
needs.
TN: All taxes are revenues, but not all revenues are taxes.
A. Internal Revenue taxes Provided under the NIRC
a. Income tax
b. Business tax
c. Transfer tax
d. Donors and estate tax
e. Percentage tax
f. Excise tax
g. Documentary stamp tax
B. Local/Municipal taxes Provided under the LGC
C. Tariff and customs duties Provided under the TCC
D. Taxes and tax incentives under special laws Common
example is the PEZA law which provides 5% tax in lieu of all taxes
for businesses catered within its territory.
ESSENTIAL CHARACTERISTICS OF TAXES
ESSENTIAL CHARACTERISTICS OF TAXES
A. Enforced contribution Not dependent upon the will or
contractual assent of the person taxed. Hence, whether the
taxpayer likes it or not, he is compelled to pay taxes. It is a legal
and mandatory obligation.
B. Generally payable in money Tax is a pecuniary burden
payable in money.
XPNS:
1. Tax credit certificate or backpay certificate When taxes are
paid in excess of that due, the government issues a
certificate where said excess in taxes will be deducted from
the taxes payable the following year.
2. Tax liens Forfeiture of property by reason of failure to pay
real property tax but this property will be sold and the
proceeds shall be used to satisfy the tax obligation.
C. Proportionate in character It is assessed in accordance with
some reasonable rule of apportionment which is usually based on
the ability of the taxpayer to pay.
D. Levied on persons, property, rights, act, privileges or
transactions within the taxing authoritys jurisdiction in
accordance with the principle of territoriality.
E. Levied by the State which has jurisdiction over the
subject or object of taxation
F. Levied by the lawmaking body of the State The power to
tax is a legislative power but is also granted to local governments,
subject to such guidelines and limitations as law may provide.
G. Levied for public purpose The public purpose of the
imposition is implied in the levy of tax. A tax levied for a private
purpose constitutes taking of property without due process of law.
Q. What are the requisites of a valid tax? (PUJ-DL)
1. It must be for a public purpose
2. The rule on taxation should be uniform
3. Subject taxed must be within the jurisdiction of the taxing
authority
4. The assessment and collection must be in consonance with the
due process clause
5. The tax must not infringe the inherent and constitutional
limitations of the power of taxation
CLASSIFICATION OF TAXES
AS TO SUBJECT MATTER OR OBJECT
A. Personal, Poll, or Capitation tax imposed on persons
residing within a specified territory, whether citizens or not,
without regard to their property or the occupation or business in
which they may be engaged.
Example: Community tax
B. Property tax levied on property, real or personal, in
proportional to its value or in accordance with some rule of
apportionment.
Example: Real estate tax
C. Excise tax imposed upon the performance of an act, the
enjoyment of a privilege, or the engagement in an occupation or
business.
Examples: Income tax, donors tax, estate tax.
AS TO BURDEN OR INCIDENCE
A. Direct tax demanded from the very person who, as intended
should pay the tax which he cannot shift to another.
Examples: Income tax, estate tax, donors tax, community tax)
B. Indirect tax demanded in the first instance from one person
with the expectation that he can shift the burden to someone else,
not as taxes, but as part of the purchase price.
Examples: VAT, percentage tax, excise tax, customs duties
AS TO TAX RATE
A. Specific tax imposed by the head or number, or by some
standard of weight or measurement. Requires statistics. No need
for an appraisal.
Examples: Wines, fermented liquors, etc.
B. Ad valorem tax of a fixed proportion of the value of the
property with respect to which the tax is assessed. It requires the
intervention of assessors or appraisers to estimate the value of
such property before the amount due from each taxpayer can be
determined. Ad valorem according to value.
Examples: Income tax, real estate tax, excise tax on automobiles
C. Mixed Basis of the tax is the value of the article and weight.
Example: Customs duties
AS TO PURPOSE
A. General, Fiscal or Revenue tax levied for the general or
ordinary purposes of the government, i.e. raise revenue for
governmental and public needs. These funds can be used for
whatever purpose.
Examples: Income tax, VAT, and almost all taxes.
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B. Specific or Regulatory tax levied for special purposes, i.e. to
achieve some social or economic ends, irrespective of whether
revenue is actually raised or not.
TN: These funds can be used only for the specific purpose which the law
creating it indicated.
AS TO SCOPE OR AUTHORITY IMPOSING THE TAX
A. National taxes imposed by the national government
Examples: NIR taxes, customs duties, national taxes imposed by laws
Primary purpose test (To be considered a license fee)
A. The imposition must relate to an occupation or activity that so
engages the public interest in health, morals, development and
safety, as to require regulation for the protection and promotion
of such public interest.
B. Imposition must 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.

B. Municipal or Local taxes provided in the LGC and imposed by
local governments.
Examples: Business taxes that may be imposed under the LGC
AS TO GRADUATION
A. Proportion based on a fixed percentage of the amount of the
property receipts or other basis to be taxed.
Examples: Real estate tax, corporate tax (fixed at 30% regardless of how
much income the corporation earns)
B. Progressive rate of which increases as the tax base or bracket
increases.
Examples: Income tax
C. Regressive tax rate decreases as the tax base or bracket
increases.
Example: VAT (regressive as to its effect)
TN: A regressive tax must not be confused with regressive system of taxation. In
a society where the majority of the people have low incomes, it exists when there
are more indirect taxes imposed than direct taxes. Since the low-income sector of
the population as a whole buys more consumption goods on which the indirect
taxes are collected, the burden of indirect taxes rests more on them than on the
more affluent groups.
TN: A charge of a fixed sum which bears no relation at all to the cost of inspection
and regulation may be held to be a tax rather than an exercise of the police power.
Fees may be regarded as taxes
Fees may be properly regarded as taxes even though they also served
as an instrument of regulation. If the revenue is primarily revenue, or if
revenue is at least one of the real and substantial purposes, then the
exaction is properly called a tax.
Lutz v. Araneta
Police power may be exercised for the purpose of requiring licenses for
which license fees may have to be paid. The amount of the license fees
for the regulation of useful occupations should only be sufficient to pay
for the cost of the license & the necessary expense of police surveillance
and regulation. For non-useful occupations, the license fee may be
sufficiently high to discourage the activity sought to be regulated.
TAX V. TOLL FEE
Toll A sum of money for the use of something, generally applied to
the consideration which is paid for the use of a road, bridge or the like,
of a public nature.
Tax Toll fee

TAXES DISTINGUISHED FROM OTHER IMPOSITIONS Basis A demand of sovereignty

A demand of
proprietorship
Importance of distinguishing taxes from other impositions
The different kinds of impositions mentioned below are not considered Depends upon the cost of
construction or
taxes. Hence, if they are not considered taxes, the requirements for a Amount Unlimited
maintenance of the public
valid tax (PUJ-DL) need not be complied with. improvement used

For the support of the For the use of anothers

TAX V. LICENSE FEE Purpose
government property
License is in the nature of a special privilege, or authority to do what Imposed by the
is within its terms. It makes lawful an act which would otherwise be Imposed only by the
Authority government or by private
unlawful. A license granted by the State is always revocable. government
individuals or entities

License fee a charge imposed under the police power for regulation. Paid after the start of
Time of payment Before use and after use
business
Tax License Fee
Cannot be surrendered,
Can be waived
Purpose Revenue-raising Regulation Surrender except for lawful
considerations
Basis Taxation power Police power

Limited to the cost of the TAX V. COMPROMISE PENALTY

Amount Unlimited license and expenses of
regulation Compromise penalty sanction imposed as a punishment for
violation of a law or acts deemed injurious. This is paid in lieu of
Paid before the
Time of Paid after the start of prosecution.
commencement of the
payment business
business
Tax Compromise Penalty
Effect of non- Does not make
Business is illegal Purpose Raise revenue Regulate conduct
payment business illegal

Cannot be bargained, May be with or without Imposed only by the May be imposed by the
Surrender Authority government government or private
except for lawful consideration
consideration individuals or entities

Government can grant Government cannot grant Cannot be a subject of Can be a subject of set-off
Set-off
Exemptions set-off or compensation (see Art 1279 NCC)
exemptions exemptions

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TAX V. SPECIAL ASSESSMENT TAX V. SUBSIDY

Special assessment a charge imposed lands especially benefited by Subsidy a sum of money granted by the government or a public body
public works or improvements financed by the government. It is not a to assist an industry or business so that the price of a commodity or
personal liability of the person assessed. His liability is limited only to service may remain low or competitive.
the land involved. It based wholly on benefits and not necessity.
It is a pecuniary aid or directly granted by the government to an
Tax Special Assessment individual or private commercial enterprise and even to foreign
establishments deemed beneficial to the public.
Basis Based on necessity Based wholly on benefits
Tax not given or granted by the government, but rather collected by
Levied on persons, the government from its people.
Subject
property, rights or Levied only on land
privileges
Tax Subsidy
Exceptional both to the time
Scope General application Collected by the government from Granted by the government to
and place
the people establishments deemed beneficial to
Not a personal liability of the the public
Personal liability of the
Person liable person assessed. His liability Mandatory Voluntary
taxpayer
is limited only to the land
involved
TAX V. REVENUE
Republic v. Bacolod
The purpose of a special assessment is to finance the improvement of Revenue refers to all funds or income derived by the government,
particular properties, with the benefits of the improvements accruing or whether from tax or from whatever source and whatever manner.
inuring to the owners thereof, who, after all, pay the assessment. The
purpose of an ordinary tax on the other hand, is to provide the TN: All taxes are revenues, but not all revenues are taxes.
Government with revenues needed for the financing of state affairs.
Thus, while the refusal of a citizen to pay his ordinary taxes may not Internal Revenue taxes imposed by the legislature other than duties
indeed be sanctioned because it would impair government functions, the on imports and exports.
same would not hold true in the case of a refusal to comply with a special
assessment. TAX V. TARIFF AND CUSTOMS DUTIES

TAX V. DEBT
Tax Tariff Customs duties

Tax Debt All embracing term to

Taxes imposed on
include various kinds of
Based on contract or A kind of tax imposed goods coming in and
Basis Based on law enforced contributions
judgment on articles which are out of the country
upon persons for the
traded internationally (imports and exports)
attainment of public
Generally cannot be purposes
Assignability Assignable
assigned
National and Local National National
Generally paid in May be paid in kind
Mode of payment
money General or specific Specific in scope Specific in scope

Cannot be a subject of Can be a subject of set-

Set-off BIR Bureau of Customs Bureau of Customs
set-off off

Taxpayer can be
Person cannot be
imprisoned for non-
Effect of non-payment imprisoned for non-
payment of tax, except
payment of debt
poll tax

Imposed by public Can be imposed by

Authority
authority private individuals

Prescriptive periods are Civil Code governs the

Prescription
determined under the prescriptive period of
NIRC debts

Draws interest if
Interest Does not draw interest
stipulated in writing or
unless delinquent
where there is default

Francia v. IAC
The income tax liability cannot be compensated with the amount owed
by the government as compensation for his expropriated property.
Taxes are of distinct kind, essence and nature than ordinary obligations.
Taxes and debts cannot be the subject of compensation because the
government and the taxpayer are not mutually creditors and debtors of
each other and a claim for taxes is not a debt, demand contract, or
judgment as is allowable to be set off.
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LIMITATIONS ON THE POWER OF TAXATION
CONSTITUTIONAL AND INHERENT LIMITATIONS
These limitations are those provided in the fundamental law or implied
therefrom, while the rest spring from the nature of the taxing power
itself although they may or may not be provided in the Constitution.
INHERENT LIMITATIONS
Inherent limitations (PENIT)
Those limitations which are based on taxations nature as a power. They
exist despite the absence of an express constitutional provision thereon.
Hence, they need not be contained in any law or constitution. Violation
of any of the inherent limitations amounts to a taking of property without
due process of law and therefore void.
A. Public purpose
B. Exemption from taxation of government entities
C. Non-delegation of the legislative power to tax
D. International comity
E. Territorial jurisdiction
PUBLIC PURPOSE
THE LEVY MUST BE FOR A PUBLIC PURPOSE
The right of taxation can only be used in aid of a public object. It cannot
be exercised in aid of enterprises strictly private and for the benefit of
individuals, even though in a remote or collateral way, the public may
be benefited thereby.
Planters Products v. Fertiphil Corp.
The term "public purpose" is not dened. It is an elastic concept that
can be hammered to t modern standards. It does not only pertain to
those purposes which are traditionally viewed as essentially government
functions, such as building roads and delivery of basic services, but also
includes those purposes designed to promote social justice. Thus, public
money may now be used for the relocation of illegal settlers, low-cost
housing and urban or agrarian reform.
Q. What is the test to determine public purpose?
Pascual v. Sec of Public Works
Whether the statute is designed to promote the public interest, as
opposed to the furtherance of the advantage of individuals, although
each advantage to individuals might incidentally serve the public.
Case discussion: The appropriation of amount for the construction on a land owned
by private individual is invalid imposition since it results in the promotion of private
enterprise; it benefits the property of a particular individual. The provision that the
land thereafter be donated to the government does not cure this defect. The rule
is that if the public advantage or benefit is merely incidental in the promotion of a
particular enterprise, such defect shall render the law invalid. On the other hand,
if what is incidental is the promotion of a private enterprise, the tax law shall be
deemed for public purpose.
Determination that the tax is for public purpose
A. Proceeds of the tax must be used for the support of the
government, specifically on its governmental functions
B. Proceeds of the tax must be for any of the recognized objects of
the government
C. Proceeds of the tax must be to promote the welfare of the
community
TN: The test is not as to who receives the money, but the character or
the purpose of which it is expected. Also, the test is not the immediate
result of the expenditure but the ultimate result.
Q. When is the reckoning period in determining the purpose of
the levy?
To determine if it is for public purpose, it must reckoned on the date
when the law is passed and not on the time of implementation.
Lutz v. Araneta
Re: For public purpose although it is for a specific industry
The tax is levied with a regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar industry. In other
words, the act is primarily an exercise of the police power.
The protection and promotion of the sugar industry is a matter of public
concern. Sugar production is one of the great industries of the
Philippines, with sugar occupying a leading position among its export
products. It is a great source of the states wealth, hence, its promotion,
protection and advancement redounds greatly to the general welfare.
Thus, the legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the
legislative discretion must be allowed full play, subject only to the test
of reasonableness.
Q. Why is it that only those people engaged in the sugar
industry are the ones burdened to pay the tax?
That the tax to be levied should burden the sugar producers themselves
can hardly be a ground of complaint. Indeed, it appears rational that the
tax be obtained precisely from those who are to be beneted from the
expenditure of the funds derived from it. At any rate, it is inherent in
the power to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that inequalities which result from a
singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.
Caltex v. COA
Taxation is no longer envisioned as a measure to raise revenue to
support the existence of the government. Taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and
stabilization of a threatened industry which is affected with public
interest as to be within the police power of the State.
The oil industry is greatly imbued with public interest as it vitally affects
the general welfare. Any unregulated increase in oil prices could hurt
the lives of a majority of the people and cause economic crisis of untold
proportions. It would have a chain reaction in terms of demands for
wage increase and upward spiralling of the cost of basic commodities.
Hence, the stabilization of oil prices is of prime concern which the state,
via its police power, may properly address.
CONCEPTS RELATIVE TO PUBLIC PURPOSE
1. Inequalities resulting from the singling out of one particular class
for taxation or exemption infringe no constitutional limitation
2. Individual taxpayers need not derive direct benefits from the tax
3. Public purpose is continually expanding, areas formerly left to
private initiative may not be undertaken by the government if it
is to meet the increasing social challenges of the time.
4. Public purpose is determined at the time of the enactment of the
tax law and not at the time of its implementation.
TAXPAYERS SUIT
Where a taxpayer questions the validly of a law appropriating public
funds. It is a question of whether the public money is used for public
purpose or not.
TN: The act complained of is directly involved in the illegal disbursement
of public funds. However, the public funds must be derived from
taxation.
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Proper party
One who has sustained or is in imminent danger of sustaining and injury
as a result of the act complained of. To be a proper party, one must
have legal standing.
TN: Taxpayers have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore question
the constitutionality of statutes requiring expenditure of public money.
Important concepts to remember:
1. The public funds must be derived from taxation
2. Does not apply to donations and contributions made by public
individuals or private entities
3. Taxpayer is not relieved from the obligation to pay tax just because
of his belief that it is being misappropriated
4. A taxpayer has no legal standing to question acts which do not
involve the use of public funds.
NON-DELEGATION OF THE LEGISLATIVE POWER TO TAX
NON-DELEGATION OF THE LEGISLATIVE POWER TO TAX
The power of taxation peculiarly and exclusively belongs to the
legislative body of the government and therefore may not be delegated
as a rule.
General rule: The power of taxation is vested to the legislative branch
of the national government and therefore cannot be delegated.
Exceptions:
1. Delegation to local governments
2. Delegation to the President
3. Delegation to administrative bodies
Matters which cannot be delegated.
1. Nature of taxation
2. Object and purpose
3. Subject or coverage
4. Amount or rate of tax
5. Manner, means and agencies of collection
6. Situs
EXCEPTIONS
Delegation to Local Government Units
Article 10, Section 5, Constitution
Each LGU shall have the power to create its own sources of revenues
and to levy taxes, fees, charges, subject to such guidelines and
limitations as the Congress may provide, consistent with the basis policy
of local autonomy.
TN: Hence, the Congress passed the Local Government Code of 1991
which embodies the guidelines on how LGUs can exercise such power.
Q. Can a municipality pass an ordinance imposing a tax on any sale or
transfer of real property located within its territory?
No. The Local Tax Code only allows provinces and cities to impose a tax
on the transfer of ownership of real property. Municipalities are
prohibited from imposing said tax that provinces are specifically
authorized to levy. While it is true that the Constitution has given broad
powers of taxation to LGUs, this delegation however is subject to such
limitations as may be provided by law.
Basco v. PAGCOR
A mere municipal corporation has no inherent right to impose taxes.
Thus, the Charter must plainly show an intent to confer such power,
otherwise the municipality cannot assume it. Its power to tax therefore
must always yield to a legislative act which is superior, having been
passed upon by the State itself which has the inherent power to tax.
Delegation to the President
A. Impose tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts.
B. Flexible tariff clause the authority given to the President, upon
the recommendation of NEDA, to adjust the tariff rates under Sec.
401 of the Code in the interest of national economy, general
welfare and/or national security.
Reason: Impelled by necessity. These matters pertain to international trade.
In the enactment of laws, the process attendant thereto is very cumbersome.
If we let Congress fix tariff rate, it would take a really long time. But any
such delegation to the President must be done by Congress through the
enactment of a law.
Delegation to administrative bodies
Limited to the administrative implementation that calls for some degree
of discretionary powers under sufficient standards expressed by law or
implied from the policy and purposes of the Act.
A. Power to value property for purposes of taxation
B. Power to assess and collect taxes
C. Power to perform an innumerable details of computation,
appraisal and adjustment
TN: When Congress delegates legislative powers to the various administrative
agencies, i.e. BIR, BOC, what is delegated is the power of subordinate legislation
confers upon the administrative bodies the power and authority to fill in the
details which are lacking in the law and which Congress may not have the
competence or opportunity to fill in.
Q. What are the two tests of a valid delegation?
1. Completeness test the law should already be complete in all its
terms and conditions before it leaves the Congress so that when
the law reaches the hands of the delegate, the latter has nothing
else to d but enforce the same.
2. Sufficient standard test even if the law is not complete in itself,
but any such delegation of authority may be upheld as valid if such
delegation is accompanied by sufficient stands as to map out the
boundaries of the exercise of the delegates delegated authority.
TN: These standards may take the form of legislative policies as may be
mentioned in the law itself or in another related law which would recite the
circumstances under which such delegated authority may be validly
performed.
EXEMPTION FROM TAXATION
EXEMPTION FROM TAXATION OF GOVERNMENT ENTITIES
TN: Refers only to REAL ESTATE TAX
If the taxing authority is the National Government
GR: Agencies and instrumentalities of the government performing
governmental functions are tax exempt. If performing proprietary
function, taxable.
A. Governmental function tax exempt
B. Proprietary function taxable
XPN: Even if performing proprietary function, if the franchise or law
creating them exempts them tax exempt.
If the taxing authority is the LGU
RA 7160 expressly prohibits LGUs from levying tax on the National
Government, its agencies and instrumentalities and other LGUs.
NDA v. Cebu City
Re: GOCCs with respect to tax exemption
The Republic, like any individual, may form a corporation with
personality and existence distinct from its own. The separate personality
allows a GOCC to hold and possess properties in its own name and thus
permit greater independence and flexibility in its operations. It may
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therefore be stated that tax exemption of property owned by the
Republic refers to properties owned by the Government and by its
agencies which do not have separate and distinct personalities
(unincorporated entities)
Case discussion: When a land is reserved, the land remains the absolute property
of the government. The latter does not part with its title by reserving them, but
simply gives notice that it desires them for a certain purpose. As its title remains
with the Republic, the reserved land is covered by the tax exemption. The reserved
land is tax-exempt but the warehouse constructed on such reserved land should
be assessed real estate tax as such improvement does not belong to the Republic.
Hence:
A. TAX EXEMPT GOCCs with original charter; attached to the
government; unincorporated
B. TAXABLE GOCCs with special charter; personality distinct from
the government; incorporated
Government entities exempted from income tax:
A. GSIS
B. SSS
C. PHIC
D. PCSO
E. PAGCOR (but not exempted from business tax)
PAGCOR v. BIR
There was no need for Congress to grant tax exemption to PAGCOR with
respect to its income from gaming operations as the same is already
exempted from all taxes of any kind or form, income or otherwise,
whether national or local, under its Charter, save only for the ve
percent (5%) franchise tax.
Where a general law is enacted to regulate an industry, it is common
for individual franchises subsequently granted to restate the rights and
privileges already mentioned in the general law, or to amend the later
law, as may be needed, to conform to the general law. 19 However, if
no provision or amendment is stated in the franchise to eect the
provisions of the general law, it cannot be said that the same is the
intent of the lawmakers, for repeal of laws by implication is not favored.
In this regard, we agree with petitioner that if the lawmakers had
intended to withdraw petitioner's tax exemption of its gaming income,
then Section 13 of PD 1869 should have been amended expressly in R.A.
No. 9487, or the same, at the very least, should have been mentioned
in the repealing clause of R.A. No. 9337.
1. Petitioner's tax privilege of paying ve percent (5%) franchise tax
in lieu of all other taxes with respect to its income from gaming
operations, pursuant to P .D. 1869, as amended, is not repealed
2. Petitioner's income from gaming operations is subject to the ve
percent (5%) franchise tax only
3. Petitioner's income from other related services is subject to
corporate income tax only
Bar Question:
A tobacco corporation bought a parcel of land and donated the same to a
municipality for the sole purpose of devoting said land as a relocation site. Through
an ordinance, the municipality ordained that the lots be finally transferred and
donated to the beneficiaries. Determine the tax consequence of the foregoing
disposition with respect to the municipality.
The Municipality is not subject to any donors tax on the value of the land it
subsequently donated, it being exempt from taxes as a political subdivision of the
National Government.
INTERNATIONAL COMITY
INTERNATIONAL COMITY
The respect accorded by nations to each other because they are
sovereign equals. Thus, one state cannot exercise its sovereign powers
over another, and hence the property or income of a foreign state or
government may not be subject of taxation by another state.
TN: Under international comity, a state must recognize the generally accepted
tenets of international law, among which are the principles of sovereign equality
among states and freedom from suit without their consent these limit the
authority of a government to effectively impose taxes on a sovereign state.
Reasons:
1. Doctrine of sovereign equality among states as between equals,
there is no sovereign. One state cannot exercise its sovereign
powers over another.
2. Under international law, a foreign government may not be sued
without its consent Hence, it is useless to impose a tax which
could not be collected.
3. Usage among states when a foreign sovereign enters the
territorial jurisdiction of another, there is an implied
understanding that the former does not intend to degrade its
dignity by placing itself under the jurisdiction of another.
Bar Question:
A multinational corporation doing business in the Philippines donated 100 shares
of stock of said corporation to Mr. Cortez, its resident manager in the Philippines.
What is the tax liability if any of the said corporation?
Foreign corporations effecting a donation are subject to donors tax only if the
property donated is located in the Philippines. Accordingly, donation of a foreign
corporation of its own shares of stocks in favor of resident employees is not subject
to donors tax. However, if 85% of the business of the foreign corporation is
located in the Philippines, or the shares have acquired business situs in the
Philippines, the donation may be taxed in the Philippines, subject to the rule of
reciprocity.
TERRITORIAL JURISDICTION
TERRITORIAL JURISDICTION
A state may not tax property lying outside its borders or lay an excise
or privilege tax upon the exercise or enjoyment of a right or privilege
derived from the laws of another state and therein exercised and
enjoyed.
GR: Taxation may be exercised only within the territorial jurisdiction of
the taxing authority.
XPN: Where privity of relationship exists. Hence, a person may be taxed
where there is between him and the taxing state a privity of relationship
justifying the levy. Thus, a citizens income may be taxed even if he
resides abroad as the personal jurisdiction of his government over him
remains.
TN: In this case, the basis of the power to tax is not dependent on the source of
the income, location of the property or upon the residence of the taxpayer but
upon his relation as a citizen to the state. As such citizen, he is entitled, wherever
he may be, inside or outside of his country, to the protection of his government.
Reasons:
1. Tax laws do not operate beyond a countrys territorial limits
2. Property which is wholly and exclusively within the jurisdiction of
another state receives none of the protection for which a tax is
supposed to be a compensation.
Foreign embassies
Foreign embassies are not subject to tax because they are considered
extensions of the foreign country they represent.
Situs of taxation
Within the territorial jurisdiction, the taxing authority may determine the
situs. Situs of taxation literally means the place of taxation.
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CONSTITUTIONAL LIMITATIONS
DIRECT CONSTITUTIONAL LIMITATIONS
Direct constitutional limitations
A. Revenue bill must originate exclusively in the House of
Representatives but the Senate may propose amendments
B. Concurrence of a majority of all the members of Congress for the
passage of a law granting tax exemption
C. Rule of uniformity and equity in taxation
D. Progressive system of taxation
E. Exemption of religious, charitable and educational entities, non-
profit cemeteries, and churches from property taxation.
F. Exemption of non-stock, non-profit educational institutions from
taxation
G. Non-imprisonment for non-payment of a poll tax
H. Non-impairment of the jurisdiction of the SC in tax cases
REVENUE BILLS MUST ORIGINATE FROM THE HREP
Article VI, Section 24
All appropriation, revenue or tariff bills shall originate from the House of
Representatives, but the Senate may propose or concur with
amendments.
TN: Whats required to originate from HREP is the bill and not the law or statute.
Tolentino v. Secretary of Finance
Re: VAT originating from the Senate and not the HREP
To insist that a revenue statute and not only the bill which initiated the
legislative process culminating in the enactment of the law must
substantially be the same with the house bill, would be to deny senates
power not only to concur with amendments but also to propose
amendments. It would violate the co-equality of legislative power of the
two houses and in fact make the HREP superior to the Senate.
It is not the statute that must originate in the HREP but the bill. The
Constitution simply requires that there must be that initiative coming
from the HREP relative to appropriation, revenue and tariff bills. The
Constitution does not prohibit the filing in the Senate of a substitute bill
in anticipation of its receipt of the bill from the HREP, as long as action
by the Senate is withheld until receipt of the bill coming from the HREP.
What is prohibited is for the Senate to enact revenue measures on its
own without a bill originating from the HREP. But once he revenue bill
was passed by the HREP and sent to the Senate, the latter can pass its
own version on the same subject matter by virtue of its power to
propose or concur with amendments. This is in consonance with the
principle of co-equality between the two branches of Congress.
UNIFORM, EQUITABLE AND PROGRESSIVE SYSTEM
Article III, Section 28
The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
A. Uniformity in taxation alt taxable articles or kinds of property
of the same class shall be taxed at the same rate.
B. Equity uniformity in taxation is effected through the
apportionment of the tax burden among the taxpayers which
must under the Constitution must be equitable fair, just,
reasonable and proportionate to the taxpayers ability to pay.
C. Progressive There shall be more direct taxes than indirect
taxes, with ability to pay as the principal criterion. Hence, the tax
rate increases as the tax bracket increases.
Q. Is progressive system of taxation directory or mandatory?
It is merely directory because we even have regressive taxes (VAT)
the lesser money you have, the more you can feel the impact. It is
regressive as to effect. Such a provision is placed in the Constitution as
moral incentives to legislation and not as judicially enforceable rights.
Q. Is classification allowed?
Yes. Uniformity in taxation does not prohibit the classification of the
objects of taxation or the entities or subjects upon which taxes are
imposed. However, to withstand any constitutional infirmity, such
classification must comply with certain guidelines.
A. It is based upon substantial distinctions which make real
differences
B. These are germane to the purpose of the legislation or ordinance
C. The classification applies, not only to present conditions, but, also,
to future conditions substantially identical to those of the present
D. The classification applies equally to all those who belong to the
same class
Bar Question:
The City of Makati, in order to solve the traffic problem in its business districts,
decided to impose a tax, to be paid by the driver, on all private cars entering the
city during peak hours from 8:00 am to 9:00 am from Mondays to Fridays, but it
exempts those cars carrying more than two occupants, excluding the driver. Is the
ordinance valid?
No. The ordinance is in violation of the rule of uniformity and equality, which
requires that all subjects or objects of taxation, similarly situated must be treated
alike and must not be classified in an arbitrary manner. The ordinance exempts
cars carrying more than two occupants and taxes only private cars, exempting
public vehicles, although both contribute to the traffic problem. Also, the tax is
imposed not on the registered owner but the driver, who has no control over the
route of the vehicle. The ordinance does not just violate the rule of uniformity, the
same is likewise unjust.
EXEMPTION FROM REAL PROPERTY TAXES
Article VI, Section 28 (3)
Charitable institutions, churches, parsonages, or convents appurtenant
thereto, mosques, and non-profit cemeteries, and all lands, buildings
and improvements actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation.
TN: This is a self-executing provision.
Important principles:
A. The tax exemption of religious, charitable and educational
institutions covers real property tax only.
B. The test is usage and not ownership.
C. The exemption extends to facilities which are incidental to or
reasonably necessary for the accomplishment of said purpose
Test of exemption Nature of use Scope of exemption
Actual, direct Real property taxes on
and exclusive facilities which are:
use for religious, a. Actual
Use of the property, charitable and b. Incidental
and not the educational c. Reasonably
ownership. purposes necessary for the
accomplishment of
said purpose
Q. Is the income of the church taxable?
No. It is not taxable. While it is true that Section 28 Art 6 deals only with
real property tax exemption, but income tax exemption is provided
under Sec 30 of the National Internal Revenue Code.
Sec 30. The following organizations shall not be taxed under this Title in respect
to income received by them as such: (E) Non-stock corporation or association
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organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inures to the benefit of any member, organizer, officer or
any specific person.
Herrera v. Quezon City
TN: This was decided under the 1935 Constitution (there was no
provision yet on actually, directly and exclusive used only
exclusively used.
The admission of pay-patients does not detract from the charitable
character of a hospital, if all its funds are devoted exclusively to the
maintenance of the institution as a public charity.
The exemption in favor of property used exclusively for charitable or
educational purpose is not limited to property actually indispensable
therefore, but extends to facilities which are incidental to and reasonably
necessary for the accomplishment of said purpose, such as in the case
of hospitals a school for training nurses, a nurses home, property
used to provide housing facilities for interns, resident doctors,
superintendents and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents such as
athletic fields and farms. Thus, within the purview of the Constitution,
St. Catherines Hospital is a charitable institution exempt from taxation.
TN: This is no longer controlling because this case was decided during the 1935
Constitution where there was no provision yet on actually, directly and exclusively
used. Hence, if asked in the exam, the controlling doctrine is that laid down in
Phil Lung Center v. QC.
Abra Valley v. Aquino
TN: This was decided under the 1935 Constitution
Facts: Abra Valley is an educational corporation and institution of higher
learning duly incorporated with the SEC. The elementary students are
housed in a two-storey building across the street, while the high school
and college students are housed in the main building. The director with
his family is in the second floor of the main building.
Also, the ground floor of the college building is used and rented by a
commercial establishment, the Northern Marketing Corporation. Abra
Valleys contention is that the primary use of the lot and building for
educational purposes and not the incidental use thereof determines
exemption from property taxes under Sec 22 Art 6 1935 Constitution.
Held:
The test of exemption from taxation is the use of the property for
purposes mentioned in the Constitution. It must be stressed however,
that while this Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for educational purposes",
reasonable emphasis has always been made that exemption extends to
facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes. Otherwise stated, the use of the
school building or lot for commercial purposes is neither contemplated
by law, nor by jurisprudence.
Thus, while the use of the second floor of the main building in the case
at bar for residential purposes of the Director and his family, may find
justification under the concept of incidental use, which is complimentary
to the main or primary purpose educational, the lease of the first floor
thereof to the Northern Marketing Corporation cannot by any stretch of
the imagination be considered incidental to the purpose of education.
Hence, the school building as well as the lot where it is built should be
taxed not because the second floor of the same is being used by the
Director and his family for residential purposes, but because the first
floor thereof is being used for commercial purposes. However, since only
a portion is used for purposes of commerce, it is only fair that half of
the assessed tax be returned to the school involved.
Phil. Lung Center v. QC
Philippine Lung Center is not tax exempt. Under the Constitution, in
order to be entitled to exemption from real property tax, there must be
clear and unequivocal proof that:
1. It is a charitable institution and
2. Its real properties are actually, directly and exclusively used for
charitable purposes.
While portions of the hospital are used for treatment of patients and the
dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals and
enterprises.
Exclusive is defined as possessed and enjoyed to the exclusion of others,
debarred from participation or enjoyment. If real property is used for
one or more commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation. The words "dominant use"
or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitution and the law.
What is meant by actual, direct and exclusive use of the property is the
direct and immediate and actual application of the property itself to the
purposes for which the charitable institution is organized. It is not the
use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.
TN: In the Herrera case, the meaning of exclusive use is the principal or
dominant use. In fact, it likewise considers incidental use. Hence, as long as it is
related to the principal purpose, then it can be exempted. However, in the Lung
center case, exclusively is synonymous to solely. Hence, to be exempted from
real property tax, the property should be solely for charitable purpose and not just
mere incidental to the principal purpose. This is the controlling doctrine.
City Assessor of Cebu v. Ass. of Benevola de Cebu
Is a medical arts center built by a hospital to house its doctors a separate
commercial establishment or an appurtenant to the hospital? This is the
core issue to be resolved in the instant petition where petitioner insists
on a 35% assessment rate on the building which he considers
commercial in nature contrary to respondent's position that it is a special
real property entitled to a 10% assessment rate for realty tax.
The CHH Medical Arts Center (CHHMAC) is an integral part of CHH. It is
definitely incidental to and reasonably necessary for the operations of
Chong Hua Hospital.
The doctors and medical specialists holding clinics in CHHMAC are those
duly accredited by CHH. They are consultants of the hospital and the
ones who can treat CHH's patients conned in it. This fact alone takes
away CHHMAC from being categorized as "commercial" since a tertiary
hospital like CHH is required by law to have a pool of physicians who
comprises the required medical departments in various medical fields.
The fact that the physicians are holding office in a separate building
does not take away the essence and nature of their services vis--vis
the over-all operation of the hospital and the benefits to the hospitals
patients. Their transfer to a more spacious and, perhaps, convenient
place and location for the benefit of the hospitals patients does not
remove them from being an integral part of the overall operation of the
hospital.
Respondents charge of rentals for the offices and clinics its accredited
physicians occupy cannot be equated to a commercial venture, which is
mainly for profit.
First, CHHMAC is only for its consultants or accredited doctors and
medical specialists. Second, the charging of rentals is a practical
necessity: (1) to recoup the investment cost of the building, (2) to cover
the rentals for the lot CHHMAC is built on, and (3) to maintain the
CHHMAC building and its facilities. Third, as correctly pointed out by
respondent, it pays the proper taxes for its rental income. And, fourth,
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if there is indeed any net income from the lease income of CHHMAC,
such does not inure to any private or individual person as it will be used
for respondents other charitable projects.
American Bible Society v. City of Manila, 1957
Facts: American Bible Society is engaged in the distribution and sales of
bibles and religious articles. The City Treasurer of Manila informed the
plainti that it was conducting the business of general merchandise
without providing itself with the necessary Mayor's permit and municipal
license, in violation of Ordinance No. 3000, as amended, and Ordinance
No. 2529, as amended, and required plainti to secure the
corresponding permit and license.
Held: The constitutional guaranty of the free exercise and enjoyment of
religious profession and worship carries with it the right to disseminate
religious information. Any restraint of such right can only be justied like
other restraints of freedom of expression on the grounds that there is a
clear and present danger of any substantive evil which the State has the
right to prevent.
It may be true that in the case at bar the price asked for the bibles and
other religious pamphlets was in some instances a little bit higher than
the actual cost of the same, but this cannot mean that appellant was
engaged in the business or occupation of selling said "merchandise" for
prot. For this reason we believe that the provisions of City of Manila
Ordinance No. 2529, cannot be applied to appellant, for in doing so it
would impair its free exercise and enjoyment of its religious profession
and worship as well as its rights of dissemination of religious belief.
EXEMPTION OF NON-S, NON-P EDUCATIONAL EST.
Article XIV, Section 4 (3)
All revenues and assets of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational purposes shall be
exempt from taxes and duties.
Proprietary educational institutions, including those cooperatively
owned, may likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends and
provisions for reinvestment.
Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax.
Important principles:
A. The exemption covers income, property, and donors taxes,
custom duties, and other taxes imposed by either or both the
national government or political subdivisions on all revenues,
assets, property or donations, used actually, directly and
exclusively for educational purposes.
TN: In case of religious and charitable entities and non-profit cemeteries,
the exemption is limited only to property tax.
B. The exemption does not cover revenues derived from, or assets
used in, unrelated activities or enterprise.
C. Lands, buildings, and improvements actually, directly and
exclusively used for educational purposes are exempt from
property tax (Sec 28 (3) Art VI), whether the educational institution
is proprietary or non-profit.
D. The test is usage and not ownership.
E. Similar tax exemptions may be extended to proprietary educational
institutions by law subject to such limitations as it may provide,
including restrictions on dividends and provisions for reinvestment.
The restrictions are designed to insure that the tax-exemption
benefits are used for educational purposes.
Example: UC (Proprietary)
Not tax exempt but given a special rate of 10%.
School building/area exempted from property tax
Rent income of UC taxable at 30% (normal corporate income tax)
TN: Where an educational institution is private and non-profit but a stock
corporation, it is subject to income tax but at a preferential rate of 10%.
Same thing is true for charitable hospitals or institutions.
Requisites for the application of the 10% preferential rate:
1. It must be private
2. It has permit to operate as an educational institution
3. It is non-profit
4. Its gross income from unrelated trade or business must not exceed
50% of its total gross income from all sources, otherwise, it will be
subject to the 30% corporate income tax rate
Summary of rules:
A. If non-stock, non-profit educational institution tax exempt
B. Even if for profit preferential rate at 10% provided its gross income
from unrelated trade must not exceed 50% of its total gross income
The 10% preferential tax rate does not apply to the following:
A. The passive income derived by the educational institution, which is
subject to final income tax, i.e. rent income or interest in income
B. Engaged in unrelated trade or business or other activity where the
gross income from such exceeds 50% of the total gross income
Q. Distinguish Article VI from Article XIV.
Article VI, Section 28 (3) Article XIV, Section 4 (3)
Charitable institutions, churches
and parsonages or convents
appurtenant thereto, mosques,
non-profit cemeteries, and all Non-stock, non-profit educational
lands, buildings, and institutions
improvements, actually, directly,
and exclusively used for religious,
charitable, or educational
purposes.
Income, property, donors taxes
Property taxes and customs duties
Perpetual Succour v. CIR
This is a CTA decision. Not yet affirmed by the SC.
When a hospital is proprietary or private, which is not for profit and its
gross income from unrelated trade, business or other activity does not
exceed 50% of its total gross income from all sources, it is subject to
10% tax rate. On the other hand, when a hospital is non-stock, meaning
its capital stock is not divided into shares, and is not authorized to
distribute to the holders of such shares dividends, operated exclusively
for religious or charitable purpose, no part of its net income or asset
belong to or inure to the benefit of any specific person, then the hospital
will fall under the provision of Section 30 (E) of the NIRC.
Sec 30. The following organizations shall not be taxed under this Title in respect
to income received by them as such: (E) Non-stock corporation or association
organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inures to the benefit of any member, organizer, officer or
any specific person.
The admission of pay-patients does not detract from the charitable
character of a hospital, if all its funds are devoted exclusively to the
maintenance of the institution as a public charity. In other words, where
the rendering of charity is its primary object, and the funds derived from
payments made by patients able to pay are devoted to the benevolent
purposes of the institution, the mere fact that a profit has been made
will not deprive the hospital of its benevolent character.
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CIR v. CA
Is the income derived from rentals of real property owned by the Young
Mens Christian Association of the Philippines, Inc. (YMCA) established
as a welfare, educational and charitable non-profit corporation subject
to income tax?
Yes. Under the NIRC, income of whatever kind and character of non-
stock non-profit institutions from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless
of the disposition made of such income, shall be subject to the tax.
Hence, rental income derived by a tax-exempt organization from the
lease of its properties, real or personal, is not exempt from income
taxation, even if such income is exclusively used for the accomplishment
of its objectives.
Moreover, for the YMCA to be granted income exemption under the
Constitution, it must prove with substantial evidence that (1) it falls
under the classification non-stock, non-profit educational institution and
(2) the income it seeks to be exempted from taxation is used actually,
directly, and exclusively for educational purposes.
To begin with, YMCA is not even an educational institution within the
purview of the Constitution. The term educational institution, when used
in laws granting tax exemptions, refers to a school, seminary, college or
educational establishment. Therefore, YMCA cannot be deemed one of
the educational institutions covered by the constitutional provision under
consideration.
TN: YMCA cannot avail of Art VI, Sec 28 since it covers only real property taxes.
Q. Are income derived from profit-generating activities of non-
stock non-profit educational institutions subject to income tax?
There seems to be a conflict between the Constitution and the NIRC
regarding this matter.
If you look at the Constitution, it provides that: All revenues and assets
of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and
duties.
It is clear that the Constitution does not distinguish with respect to the
source or origin of the income. Hence, whether the income was derived
from profit-generating activities or not, it will still be tax exempt.
The NIRC, while echoing said exemption, however provided a condition,
to wit: The income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any
of their activities conducted for profit regardless of the disposition made
of such income, shall be subject to tax imposed under this Code.
In other words, the NIRC is trying to say is that income derived by a
non-stock, non-profit educational institutions from profit-generating
activities are now taxable. It in effect made a distinction with respect to
the source or origin of the income, a distinction that the Constitution
itself did not make. This would appear contradictory to the all-
encompassing exemption provided in the Constitution.
Applying the doctrine of constitutional supremacy, the condition
imposed by the Tax Code requiring such institutions to limit the sources
of their income to educational activities only should be deemed void and
of no effect for running contrary to the constitutional exemption.
However, the Supreme Court has not yet declared this condition as
unconstitutional. Consequently, while the fight to render void the last
paragraph of Section 30 of the Tax Code continues, until it is finally
resolved, those advertisements, rental income and other such income
derived from profit-generating activities of non-stock non-profit
educational institutions are all subject to income tax.
Important: On 8 June 2011, the Court of Tax Appeals en banc
promulgated a Decision holding that a non-stock non-profit educational
institution is entitled to the constitutional tax exemption, regardless of
source, as long as the institution is able to prove that these revenues
were actually, directly and exclusively used for educational purposes.
However, until this is affirmed by the Supreme Court, the BIR will
continue and has continued to tax all income of educational institutions
from activities conducted for profit.
MAJORITY VOTE OF CONGRESS FOR TAX EXEMPTIONS
Article VI, Section 28
No law granting any tax exemption shall be passed without the
concurrence of a majority of all the members of Congress.
Votes required
A. For the grant of tax exemption absolute majority of the
members of Congress (50+1 of all the members voting
separately)
B. For withdrawal of tax exemption relative majority or majority of
the quorum
TN: Tax amnesties, tax condonations and tax refunds are considered grants in the
nature of tax exemptions. Hence, absolute majority is required.
NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX
Article III, Section 20
No person shall be imprisoned for debt or non-payment of a poll tax.
Poll tax a tax of a fixed amount fixed on persons residing within a
specified territory, whether resident or not, without regard to their
property or the occupation of business which they may be engaged.
NON-IMPAIRMENT OF THE JURISDICTION OF THE SC
Article VIII, Section 2
The Congress shall have the power to define, prescribe, and apportion
the jurisdiction of the various courts but may not deprive the Supreme
Court of its jurisdiction over cases enumerated in Section 5 hereof.
Article VIII, Section 5 (2)
The Supreme Court shall have the following powers: xxx (2) Review,
revise, modify or affirm on appeal or certiorari, as the laws or the Rules
of Court may provide, final judgments and orders of lower courts in xxx
(b) all cases involving the legality of any tax, impost, assessment or toll
or any penalty imposed in relation thereto.
Article VI, Section 30
No law shall be passed increasing the appellate jurisdiction of the
Supreme Court without its advice and concurrence
San Miguel Corp v. Avelino
Even the legislative body cannot deprive the SC of its appellate
jurisdiction over all cases coming from inferior courts where the
constitutionality or validity of an ordinance or the legality of any tax,
impost, assessment, or toll is in question.
Q. What is the scope of judicial review in taxation?
Limited only to the interpretation and application of tax laws. Its power
does not include inquiry into the policy of legislation. Neither can it
legitimately question or refuse to sanction the provisions of any law
consistent with the Constitution.
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INDIRECT CONSTITUTIONAL LIMITATIONS
Indirect constitutional limitations
A. Due process of law
B. Equal protection of the laws
C. Non-impairment of the obligations of contracts
D. Non-infringement of religious freedom
E. No appropriation for religious purposes
F. Non-infringement of the freedom of the press
G. Power of the President to veto any particular items in a revenue
or tariff bill
DUE PROCESS OF LAW
Article III, Section 1
No person shall be deprived of life, liberty or property without due
process of law, nor shall any person be denied the equal protection of
the laws.
TWO KINDS OF DUE PROCESS
A. Substantive due process an act is done under the authority
of a valid law or the Constitution itself.
Requires that a tax statute must be within the constitutional
authority of Congress to pass
It must be reasonable, fair and just
To grant exemption, the constitution mandates that it must
be passed by a vote of all members of Congress
TN: Anything that contradicts with the direct constitutional limitations
is an infringement of substantive due process.
B. Procedural due process an act is done after compliance with
fair and reasonable methods or procedure prescribed by law.
Requires notice and hearing or at least an opportunity to be
heard
Q. What are the requirements of due process in taxation?
A. It must be for a public purpose
B. Imposed within the taxing authoritys territorial jurisdiction
C. Assessment or collection is not arbitrary or oppressive
Q. Give instances of violations of the due process clause.
1. If the law violates the inherent limitations on taxation.
2. If the tax amounts to confiscation of property
3. If the subject of confiscation is outside the jurisdiction of the
taxing authority
4. If the tax is imposed for a purpose other than a public purpose
5. If the law which is applied retroactively imposes just and
oppressive taxes
IMPORTANT PRINCIPLES
A. The validity of a statute must be contested only by one who
sustained or stands to sustain direct injury in consequence of its
performance
XPN: Transcendental importance, taxpayers suit
B. There must be proof of arbitrariness, otherwise, the presumption
of constitutionality applies.
C. Due process requires hearing before adoption of legislative rules
by administrative bodies of interpretative rulings
D. Compliance of strict procedural requirements must be followed to
avoid a collision course between the states power to tax and the
individuals recognized rights
E. Due process clause may be correctly invoked only when there is
a clear contravention of inherent or constitutional limitations
Sison v. Ancheta
The 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 the confiscation of property. However, 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 as would lead to such a conclusion. Absent such a showing,
the presumption of validity must prevail.
Chamber of Real Estate v. Romulo
A group of real estate brokers questioned the validity of the imposition
of minimum corporate income tax (MCIT) of 2% on corporations gross
income and a creditable withholding tax (CWD) on sales of real
properties. They contend that the MCIT violates the due process clause
because it levies income tax even if there is no realized gain since the
basis for the income tax is the gross selling price instead of the net
taxable income.
Formula:
All income for taxable year less exclusions = Gross income
Less allowable deductions = Net income
Less personal and additional exemptions = Taxable net income
Multiply with appropriate tax rate = Income tax due
Less creditable withholding tax or tax credits = Net income tax payable
On the issue of MCIT
The MCIT was introduced as a result of the perceived inadequacy of the
self-assessment system in capturing the true income of corporations. It
is a means to ensure that everyone will make some minimum
contribution. As a tax on gross income, it prevents tax evasion and
minimizes tax avoidance schemes achieved through sophisticated and
artful manipulations of deductions and other stratagems.
In fact, there is even a safeguard where the MCIT commences only on
the fourth taxable year immediately following the year in which the
corporation commenced its operations. This grace period allows a new
business to stabilize rst and make its ventures viable before it is
subjected to the MCIT.
MCIT is constitutional because of the following reasons:
1. There was a legitimate governmental end.
2. MCIT is not a tax on the capital but on gross income.
TN: Gross income is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and other direct
expenses from gross sales
3. Tax deductions on gross income are a matter of legislative grace.
TN: Congress has the power to condition, limit or deny deductions from
gross income in order to arrive at the net that it chooses to tax
4. Petitioner did not present any proof or any empirical data to show
that the implementation of the MCIT resulted in the confiscation of
their property.
On the issue of CWD
The collection of income tax via the CWT on a per transaction basis, i.e.,
upon consummation of the sale, is not contrary to the Tax Code.
Withholding tax is just a manner of collection. It is still an income tax,
only that it was made in installment basis.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to cancel its possible future tax obligation. They are
installments on the annual tax which may be due at the end of the
taxable year. The withholding agent buyers act of collecting the tax at
the time of the transaction, by withholding the tax due from the income
payable, is the very essence of the withholding tax method of tax
collection.
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EQUAL PROTECTION OF THE LAWS
Article III, Section 1
No person shall be deprived of life, liberty, or property without due
process of law, nor shall any person be denied the equal protection of
the laws.
Equal protection of the laws
A. The equal protection clause means that no person or class of
persons shall be deprived of the same protection of laws which is
enjoyed by other persons or other classes in the same place and
in the like circumstances
B. All persons subject to legislation shall be treated alike under
similar circumstances and conditions both in the privileges
conferred and liabilities imposed.
C. All persons, businesses, and properties should be taxed at the
same rate, so long as they belong to the same classification.
Requirements for a valid classification
A. Classification rests on substantial distinctions which make real
differences
B. Classification is germane to achieve the legislative purpose
C. The law applies, all things being equal, to both present and future
conditions
D. The classification applies equally well to all those belonging to the
same class.
Criteria for equal protection
A. When the law operates uniformly
On all persons
Under similar circumstances
B. All persons are treated in the same manner
The conditions not being different
Both in privileges conferred and liabilities imposed
Favouritism and preferences are not allowed
Q. Does the equal protection clause require territorial
uniformity of laws?
No. It is well-settled that the equal-protection guarantee does not
require territorial uniformity of laws. As long as there are actual and
material differences between territories, there is no violation of the
constitutional clause.
1 Cooley 608
The doctrine does not require that persons or properties different in fact
be treated in laws as though they were the same. Indeed, to treat them
the same or alike may offend the Constitution. What the Constitution
prohibits is class legislation which discriminates against some and favors
others. As long as there are rational or reasonable grounds for so doing,
Congress may, therefore, group the persons or properties to be taxed
and it is sufficient if all of the same class are subject to the same rate
and the tax is administered impartially upon them
Chamber of Real Estate v. Romulo
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their
manner of doing business is not much dierent from that of a real estate
Enterprise. Like a manufacturing concern, a real estate business is
involved in a continuous process of production and it incurs costs and
expenditures on a regular basis. The only dierence is that "goods"
produced by the real estate business are house and lot units.
The taxing power has the authority to make reasonable classifications
for purposes of taxation. Inequalities which result from singling out a
particular class for taxation, or exemption, infringe no constitutional
limitation. The real estate industry is, by itself, a class and can be validly
treated differently from other business enterprises.
What distinguishes the real estate business from other manufacturing
enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the number
of transactions involved. The income from the sale of a real property is
bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every month
involving both minimal and substantial amounts. To require the
customers of manufacturing enterprises, at present, to withhold the
taxes on each of their transactions with their tens or hundreds of
suppliers may result in an inecient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax system.
People v. Cayat
Facts: Cayat was a native of Baguio, Benguet, Mountain Province. He
was accused for violating Act No. 1639 which declared unlawful for any
native of the Philippine islands who is a member of a non-Christian Tribe
to have in his possession, drink any beer, wine or intoxicating liquors of
any kind, other than the so-called native wines and liquors which the
members of the tribes have been accustomed.
It is an established principle of constitutional law that the guaranty of
the equal protection of the laws is not violated by a legislation based on
reasonable classication. And the classication, to be reasonable, (1)
must rest on substantial distinctions; (2) must be germane to the
purposes of the law; (3) must not be limited to existing conditions only;
and (4) must apply equally to all members of the same class.
Act No. 1639 satises these requirements.
A. Classification rests on substantial distinctions which make real
differences
The classication rests on real or substantial, not merely imaginary or
whimsical, distinctions. It is not based upon "accident of birth or
parentage," as counsel for the appellant asserts, but upon the degree of
civilization and culture. "The term 'non-Christian tribes' refers, not to
religious belief, but, in a way, to the geographical area, and, more
directly, to natives of the Philippine Islands of a low grade of civilization,
usually living in tribal relationship apart from settled communities."
B. Classification is germane to achieve the legislative purpose
Designed to insure peace and order in and among the non-Christian
tribes. It has been the sad experience of the past, as the observations of
the lower court disclose, that the free use of highly intoxicating liquors by
the non-Christian tribes have often resulted in lawlessness and crimes,
thereby hampering the eorts of the government to raise their standard
of life and civilization.
C. The law applies, all things being equal, to both present and
future conditions
It is intended to apply for all times as long as those conditions exist. The
Act was not predicated, as counsel for appellant asserts, upon the
assumption that the non-Christians are "impermeable to any civilizing
inuence." On the contrary, the Legislature understood that the
civilization of a people is a slow process and that hand in hand with it
must go measures of protection and security.
D. The classification applies equally well to all those belonging to
the same class
The Act applies equally to all members of the class is evident from a
perusal thereof. That it may be unfair in its operation against a certain
number of non-Christians by reason of their degree of culture, is not an
argument against the equality of its application.
Ormoc Sugar Company v. Conejos
A perusal of the requisites instantly shows that the questioned ordinance
does not meet them, for it taxes only centrifugal sugar produced and
exported by the Ormoc Sugar Company, Inc. and none other. At the
time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc.,
it is true, was the only sugar central in the city of Ormoc. Still, the
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classication, to be reasonable, should be in terms applicable to future
conditions as well.
The taxing ordinance should not be singular and exclusive as to exclude
any subsequently established sugar central, of the same class as
plainti, from the coverage of the tax. As it is now, even if later a similar
company is set up, it cannot be subject to the tax because the ordinance
expressly points only to Ormoc Sugar Company, Inc. as the entity to be
levied upon.
Tiu v. CA
Petitioners challenged the constitutionality of EO 97-A for allegedly
being violative of their right to equal protection of the laws. Petitioners
contended that the provisions of EO 97-A conning the application of
R.A. 7227 which grants tax incentives within the secured area and
excluding the residents of the zone outside of the secured area is
discriminatory.
Substantial distinctions which make real differences
There are substantial dierences between the big investors who are being lured
to establish and operate their industries in the so-called "secured area" and the
present business operators outside the area. On the one hand, we are talking of
billion-peso investments and thousands of new jobs. On the other hand, definitely
none of such magnitude. In the rst, the economic impact will be national; in the
second, only local. Even more important, at this time the business activities outside
the "secured area" are not likely to have any impact in achieving the purpose of
the law, which is to turn the former military base to productive use for the benet
of the Philippine economy.
Germane to the purpose of the law
It was reasonable for the President to have delimited the application of some
incentives to the connes of the former Subic military base. It is this specic area
which the government intends to transform and develop from its status quo ante
as an abandoned naval facility into a self-sustaining industrial and commercial
zone. Why the seeming bias for big investors? Undeniably, they are the ones who
can pour huge investments to spur economic growth in the country and to
generate employment opportunities for the Filipinos, the ultimate goals of the
government for such conversion.
The law applies to both present and future conditions
The objective is to establish a "self-sustaining, industrial, commercial, nancial and
investment center" in the area. There will, therefore, be a long-term difference
between such investment center and the areas outside it.
Classification applies equally well to all those belonging to the same class
The classication applies equally to all the resident individuals and businesses
within the "secured area. The residents, being in like circumstances or contributing
directly to the achievement of the end purpose of the law, are not categorized
further. Instead, they are all similarly treated, both in privileges granted and in
obligations required.
NON-IMPAIRMENT OF OBLIGATIONS AND CONTRACTS
Article III, Section 10
No law impairing the obligation of contracts shall be passed.
General Rule: The power to tax is pursuant to a law and therefore the
obligation to pay taxes is imposed by law. Thus, the non-impairment
clause does not apply because it refers to obligations brought about by
contracts and not law.
Exception:
In cases of tax exemptions granted for a valuable consideration because
it takes the form and essence of a contract.
Tolentino v. Secretary of Finance
The non-impairment clause has never been thought as a limitation on
the exercise of the State's power of taxation, except where a tax
exemption has been granted for a valid consideration.
Rules to remember:
A. If the exemption was granted for a valuable consideration on the
basis of a contract it cannot be revoked by passing another law.
The non-impairment clause applies.
B. If the exemption is granted by virtue of a contract between a
private corporation and the government it cannot be revoked
unilaterally by the government. The non-impairment clause
applies.
C. If the basis of the tax exemption is a mere franchise granted by
Congress it can be unilaterally revoked by the government
MCIA v. Marcos
The exempting statutes are both granted unilaterally by Congress in the
exercise of taxing powers. Since taxation is the rule and tax exemption,
the exception, any tax exemption unilaterally granted can be withdrawn
at the pleasure of the taxing authority without violating the Constitution.
Cagayan Electric Power v. Commissioner
The Congress could impair petitioners legislative franchise by making it
liable for income tax. The Constitution provides that franchise is subject
to amendment, alteration or repeal by Congress when the public interest
so requires.
Christ Church v. Philadelphia
The exemption granted is in the nature of a unilateral tax exemption.
Since the exemption given is spontaneous on the part of the legislature
and no service or duty or other remunerative conditions have been
imposed on the taxpayers receiving the compensation, it may be
revoked at will by the legislature.
What constitutes an impairment of the obligation of contract is the
revocation of an exemption which is founded on a valuable consideration
because it takes the form and essence of a contract.
NON-INFRINGEMENT OF RELIGIOUS FREEDOM
Article III, Section 5
No law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof. The free exercise and enjoyment
of religious profession and worship, without discrimination or
preference, shall forever be allowed. No religious test shall be required
for the exercise of civil or political rights.
Non-establishment clause: No law shall be made respecting an
establishment of religion, or prohibiting the free exercise thereof.
Free exercise clause: The free exercise and enjoyment of religious
profession and worship, without discrimination or preference, shall
forever be allowed.
TN: The free exercise clause is the basis of tax exemptions.
American Bible Society v. City of Manila
The imposition of license fees on the distribution and sale of bibles and
other religious literature by a non-stock, non-profit missionary
organization not for purposes of profit, amounts to a condition or permit
for the exercise of their right, thus violating the constitutional guarantee
of the free exercise and enjoyment of religious profession and worship
which carries with it the right to disseminate religious beliefs and
information.
Tolentino v. Secretary of Finance
The free exercise of religion clause, however, does not prohibit imposing
a generally applicable sales tax on the sale of religious materials by
religious organizations. The sale of religious articles can be subject to
VAT, what cannot be taxed is the exercise of religious worship or activity.
The income of the priest from the exercise of a religious activity cannot
also be taxed.
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NO APPOPRIATION FOR RELIGIOUS PURPOSES
Article VI, Section 29
No money shall be paid out of the Treasury except in pursuance of an
appropriation made by law.
No public money or property shall be appropriated, applied, paid, or
employed, directly or indirectly, for the use, benefit, or support of any
sect, church, denomination, sectarian institution, or system of religion,
or of any priest, preacher, minister, other religious teacher, or dignitary
as such, except when such priest, preacher, minister, or dignitary is
assigned to the armed forces, or to any penal institution, or government
orphanage or leprosarium.
All money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If the
purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds
of the Government.
General rule: No appropriation is allowed in favor of any sect, church,
or any priest, minister, etc.
Exception: when such priest is assigned to the armed forces, penal
institution or government orphanage or leprosarium.
Q. Is the appropriation or budget given for the visit of the pope
in the Philippines valid or a violation of the separation of the
church and state?
It is valid. The Pope is a head of the State and being one, the
appropriation made by the government for the visit is justified. Also, the
visit has for itself a secular purpose which is for tourism. The benefit to
the Catholic Church is merely incidental.
NON-INFRINGEMENT OF THE FREEDOM OF THE PRESS
Article III, Section 4
No law shall be passed abridging the freedom of speech, of expression
or of the press.
Press freedom
There is curtailment of press freedom and freedom of thought and
expression if a tax is levied in order to suppress this basic right and
impose prior restraint.
Example: Imposing a very high tax which in effect curtails the freedom
of the press.
TN: But it does not mean that the press is exempted from tax. The press is subject
to tax but it should be reasonable and not oppressive nor arbitrary.
Hence, the sale of magazines or newspapers may be subject to tax.
What is not allowed is to impose tax on the exercise of an activity such
as when license fees are required before one sell magazines or
newspapers.
PRESIDENTS VETO POWER ON REVENUE BILLS
Article VI, Section 27 (2)
The President shall have the power to veto any particular item or items
in an appropriation, revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object.
General rule: The President has to approve or disapprove a bill in its
entirety.
Exceptions: (where partial or item veto is allowed)
A. Appropriation bill
B. Revenue bill
C. Tariff bill
CIR v. Manila Golf and Country Club
Whether the presidential veto referred to the entire section or merely to
the imposition of 20% tax on gross receipts of operators of restaurants,
bars, etc? The CTA opined that the President could not veto words or
phrases in a bill but only an entire item. Obviously, what the CTA meant
by "item" was an entire section.
We do not agree. The presidential veto referred merely to the inclusion
of hotels, motels and rest houses in the 20% caterer's tax bracket but
not to the whole section.
An "item" in a revenue bill does not refer to an entire section imposing
a particular kind of tax, but rather to the subject of the tax and the tax
rate. In the portion of a revenue bill which actually imposes a tax, a
section identifies the tax and enumerates the persons liable therefor
with the corresponding tax rate. To construe the word "item" as
referring to the whole section would tie the President's hand in choosing
either to approve the whole section at the expense of also approving a
provision therein which he deems unacceptable or veto the entire
section at the expense of foregoing the collection of the kind of tax
altogether.
SITUS OF TAXATION
SITUS OF TAXATION
Persons, properties or activities can only be taxed within the place of
the taxing authority or within its territorial jurisdiction. Within the
territorial jurisdiction, the taxing authority may determine the situs. Situs
of taxation literally means place of taxation.
Basic rule: The state where the subject to be taxed has a situs may
rightfully levy and collect the tax, and the situs is necessarily in the state
which has jurisdiction or which exercises dominion over the subject in
question.
TN: A Filipino citizen earning income abroad can still be a subject of tax in the
Philippines not because of geographical location but due to the jurial concept or
nexus or bond between the taxing authority and the taxpayer.
Q. Why is it important to know the situs or place of taxation?
1. To know if the taxing authority really has the authority to tax
2. Because there are exceptions or exemptions which only apply to
a specific locality
Q. What are the factors that determine situs?
1. Nature of the tax
2. Subject matter of the tax (person, property, act or activity)
3. Possible protection and benefit that may accrue both to the
government and the taxpayer
4. Citizenship of the taxpayer
5. Residence of the taxpayer
6. Source of income.
KINDS OF TAX AND THEIR SITUS
1. Poll or community tax residence of the taxpayer regardless of
citizenship.
2. Business tax place of business
3. Excise tax where the act is performed or the occupation is
pursued
4. Income tax source of income, citizenship, or residence
5. Transfer tax (donors or estate tax) residence, citizenship or
location of the property
6. Franchise tax the state which granted the franchise
7. Value added tax where the transaction is made. However, if
the property is not to be consumed in the Philippines, then it should
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not be taxed in the Philippines (cross border doctrine or destination Source of the income,
principle) Income tax
nationality or residence of the
taxpayer
8. Sales tax where the sale is consummated. Presumption: sale of
personal property Location of the property,
Donors tax
nationality or residence of the
9. Interest income residence of the borrower who pays the taxpayer
interest, irrespective of the place where the obligation was EXCISE TAX
contracted. Location of the property,
Estate tax
nationality or residence of the
10. Property tax could either be real or personal property tax. taxpayer

Where the transaction is made

A. Real property tax place where the real property is located (lex rei Cross-border doctrine or
sitae) destination principle if the
VAT
good is not to be consumed in
B. Personal property tax the Philippines, then it should
not be taxed in the Philippines
i. Tangible personal property where the property is physically
located although the owner resides in another jurisdiction Franchise tax
State which granted the
franchise
ii. Intangible personal property
GR: Domicile of the owner because movables follow the person. Where the sale is
consummated
XPNS: Sales tax
Presumption: Sale of personal
1. When the law provides for the situs of the subject of tax property
OTHERS
2. When the property has acquired a business situs in another
Business tax Place of business
jurisdiction
Residence of taxpayer,
Examples: Poll, capitation or
regardless of the source of
community tax
income or location of the
A. Franchise exercised in the Philippines even if the franchise owner or
property of the taxpayer
holder is not from the Philippines
B. Shares of stocks, obligations, bonds issued by domestic corporations
taxed in the Philippines DOUBLE TAXATION
C. Shares of stocks, obligations, bonds issued by foreign corporations
where 85% of its business is located in the Philippines taxed in the TWO KINDS OF DOUBLE TAXATION
Philippines
D. Shares or right in a partnership business or industry established in
the Philippines taxed in the Philippines even if the holders or owners DOUBLE TAXATION
thereof are not Filipino Means taxing twice for the same tax period the same thing or activity,
when it should be taxed but once, for the same purpose and with the
E. Shares, obligations, bonds issued by foreign corporations used which
acquired business situs when sanctioned in the furtherance of foreign same kind of character of tax.
corporation taxed in the Philippines
Two kinds of double taxation:
TN: Even if owners are not domiciled in the Philippines, they will still be taxed in
the Philippines, subject to the Reciprocity Rule (citizen of such country which 1. Strict sense (direct duplicate taxation)
grants exemption to the intangible personal properties of Filipinos in their country Double taxation in the objectionable or prohibited sense. It is
will also be exempted)
illegal for being oppressive and inequitable.
Summary of rules
A. The same property must be taxed twice when it should be
taxed once
Kind of Tax Situs
B. Both taxes must be imposed on the same property or subject
matter
C. For the same purpose
Place where the real property
Real property
is located
D. By the same State, Government, or taxing authority
E. Within the same territory, jurisdiction or taxing district
Place where property is F. During the same taxing period
Tangible personal
physically located although the G. Of the same kind or character of tax
property
owner resides in another
jurisdiction 2. Broad sense (Indirect duplicate taxation)
GR: Domicile of the owner
There is double taxation in the broad sense if any of the elements
PROPERTY TAX (movables follow the person) for direct duplicate taxation is absent. It extends to all cases in
which there are two or more pecuniary impositions, for example,
Intangible personal a tax upon the same property imposed by two different states.
XPNS:
property (e.g.
1. When the property has
credits, bills, stocks, TN: The Constitution does not prohibit double taxation in the broad sense.
acquired a business situs in
promissory notes)
another jurisdiction
TN: Double taxation in its strict sense is undoubtedly unconstitutional
2. When the law provides for but that in the broader sense is not necessarily so. Where double
the situs of the object taxation (in its strict sense) occurs, the taxpayer may seek relief under
the uniformity rule or the equal protection guarantee.
Where the act is performed or
Excise tax
the occupation is pursued

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Important principles
A. Only direct double taxation is not allowed because it amounts to
confiscation of property without due process of law. It violates
the due process clause.
B. You can question the validity of double taxation if there is violation
of the equal protection clause, or uniformity of taxation
C. Doubts as to whether double taxation has been imposed should
be resolved in favor of the taxpayer.
CONSTITUTIONALITY OF DOUBLE TAXATION
Q. Is double taxation constitutionally prohibited?
There is no constitutional prohibition against double taxation in the
Philippines. It is something not favored, but is permissible, provided
some other constitutional requirement is not thereby violated.
GR: It is not prohibited by the Constitution. Hence, it may not be
invoked as a defense against the validity of a tax law.
XPN: Though not prohibited, it is not favored. It should be avoided and
prevented whenever possible.
A. Doubts as to whether double taxation has been imposed should be
resolved in favor of the taxpayer.
B. Where double taxation in the strict sense occurs, the taxpayer may
seek relief under the uniformity rule or the equal protection
guarantee
Pepsi Cola v. Mun. of Tanauan
Double taxation, standing alone and not being forbidden by our
fundamental law, is not a valid defense against the legality of a tax
measure. But from it might emanate such defenses against taxation as
oppressiveness and inequality of the tax.
INSTANCES OF DOUBLE TAXATION
Instances of double taxation
1. A tax on mortgage as personal property when the mortgaged
property is also taxed at its full value as real estate
2. A tax upon a corporation for its property and upon its
shareholders for their shares
3. A tax upon a corporation for its capital stock as a whole and upon
the shareholders for their shares
4. A tax upon depositors in a bank for their deposits and a tax upon
the bank for the property in which such deposits are invested
5. An excise tax upon certain use of property and a property tax
upon the same property
6. A tax upon the same property imposed by two different states
Illustrative example
Tanya owns a beer house. She pays sales/business tax as well as the
local tax imposed by an ordinance on every bottle of beverage to be
sold. Is there double taxation? YES. There is indirect double taxation
because it is imposed by different taxing authorities and the purpose is
different, one is for the sales and the other is for the fact of selling.
Hence, it does not make the local ordinance invalid.
Domestic and International double taxation
A. Domestic double taxation arises when the taxes are imposed by
the local or the national government.
B. International double taxation imposition of comparable taxes in
two or more states on the same taxpayer with respect to the same
subject matter and for an identical period.
Allowed because they are imposed by different taxing
authorities (domestic and international)
Measures allowed by the government are tax refund or credit
but not to declare it invalid.
Example: Manny Pacquiao subject to income tax by US and Philippines
DECIDED CASES: ONLY INDIRECT DOUBLE TAXATION
A. Taxpayers with warehousing business although carried on in
relation to the operation of its sugar central, is a distinct and
separate taxable business different subject, although the same
owner.
TN: There can be no double taxation where the State merely imposes a tax
on every separate and distinct business in which a party is engaged in.
B. A license tax may be levied upon a business or occupation although
the land or the property used in connection therewith is subject to
property tax.
TN: License tax applies to the business, property tax is for the land
different subject, object or purpose although the burden is carried by one
entity.
C. Both a license fee and a tax may be imposed in the same business
or occupation for selling the same article.
TN: License fee is not a tax.
D. When every bottle or container of intoxicating beverages is subject
to local tax and at the same time the business of selling such
product is also subject to liquors license
TN: Different taxing authority and purpose.
E. A tax imposed in both the occupation of fishing and the fish pond.
TN: Different object and subject
F. A local ordinance imposing a tax in the storage of copra where it
appears that the finished products manufactured out of the copra
is also subject to VAT.
TN: Different subject matter and purpose
G. A lessor pays real estate tax, real estate dealers tax and income
tax on the rentals.
TN: Different kind and character. Real estate tax is a tax on the property,
dealers tax is a tax on the privilege to engage in business, income tax is a
tax on the privilege to earn income.
Modes of avoiding the occurrence of double taxation
(1) Allowing reciprocal exemption either by law or by treaty
(2) Allowance of tax credit for foreign taxes paid
(3) Allowance of deduction for foreign taxes paid
(4) Reduction of Philippine tax rate
MOST FAVORED NATION CLAUSE
MOST FAVORED NATION CLAUSE
A method of establishing equality of trading opportunity among states
by guaranteeing that if one country is given better trade terms by
another, then all other states must get the same terms.
Purpose of the most favored nation clause
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. It 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.
Deutsche bank case
Deutsche bank asked for a refund of taxes, believing that it made an
overpayment of the branch profit remittance tax and requested a
confirmation of its entitlement to the preferential tax rate of 10% under
the RP-Germany Tax Treaty. The CTA ruled that prior application for a
tax treaty relief is mandatory, and noncompliance with this prerequisite
is fatal to the taxpayer's availment of the preferential tax rate.
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Issue: Whether the failure to apply for a tax treaty relief will deprive
corporations of the benefit of a tax treaty.
Held: No. The ling of a tax treaty relief application is not a condition
precedent to the availment of a preferential tax rate.
A state that has contracted valid international obligations is bound to
make in its legislations those modications that may be necessary to
ensure the fulllment of the obligations undertaken. Thus, laws and
issuances must ensure that the reliefs granted under tax treaties are
accorded to the parties entitled thereto. The BIR must not impose
additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement.
The denial of the availment of tax relief for the failure of a taxpayer to
apply within the prescribed period under the administrative issuance
would impair the value of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely operate to conrm the
entitlement of the taxpayer to the relief.
CIR v. Johnson & Son, Inc.
FORMS OF ESCAPE FROM TAXATION
Q. What are the six basic forms of escape from taxation?
A. Shifting
B. Capitalization
C. Transformation
D. Evasion
E. Avoidance
F. Exemption
SHIFTING
SHIFTING
The process where the tax burden is transferred from the statutory
taxpayer to another without violation of law. Statutory taxpayer the
original taxpayer required under the law to pay the tax or to remit the
tax to the government.
TN: Applicable only to indirect taxes like business or percentage taxes. Direct taxes
cannot be shifted, i.e. income tax.
Impact of taxation
The point on which a tax is originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is the person who must pay
the tax to the government.
Incidence of taxation
That point on which the tax burden finally rests or settles down. It takes
place when shifting has been effected from the statutory taxpayer to
another.
TN: But there may be incidence without shifting, as in transformation. In case of
business taxes, incidence of taxation falls on the final consumer.
Relationship between impact, shifting and incidence of a tax
The impact is the imposition of the tax or the initial phenomenon.
Shifting is the transfer of the tax or the immediate process. Incidence is
the setting or coming to rest of the tax or the result.
Example: Impact in a sales tax is on the seller who shifts the burden to the
customer who finally bears the incidence of the tax.
THREE KINDS OF SHIFTING
A. Forward shifting When the burden of the tax is transferred
from a factor of production through the factors of distribution until
it finally settles on the ultimate purchaser or consumer.
(Manufacturer/producer wholesaler retailer consumer)
Example: VAT, percentage tax
B. Backward shifting When the burden of the tax is transferred
from the consumer or purchaser through the factors of distribution
to the factor of production.
(When the buyer haggles for a discount from the retailer)
Example: Consumer or purchaser may shift tax imposed on him to retailer
by purchasing only after the price is reduced, and from the latter to the
wholesaler, and finally to the manufacturer or producer.
C. Onward shifting When the tax is shifted two or more times
either forward or backward.
Example: A transfer from producer to wholesaler involves one shift; from
producer to wholesaler then to retailer, two shifts; if the tax is transferred
again to the consumer by the retailer, there are three shifts in all.
CAPITALIZATION
CAPITALIZATION
The reduction in the price of the taxed object equal to the capitalized
value of future taxes which the purchaser expects to be called upon to
pay. It occurs when the tax falls on an income-producing property, i.e.
commercial building.
The buyer naturally takes into account the taxes that he will be paying
on the property when he becomes the owner thereof in determining
whether the price is reasonable or not. The burden of the tax rests on
the present owner (seller) if he reduces the price because of the tax.
Example: Buying depreciable goods (e.g. 1M car, payable every year)
TRANSFORMATION
TRANSFORMATION
Method of escape in taxation whereby the manufacturer or producer
upon whom the tax has been imposed, fearing the loss of his market
should he add the tax to the price, pays the tax and endeavors to recoup
himself by improving his process of production thereby turning out his
units of products at a lower cost.
In such a case, the loss occasioned by the tax may be offset by the gains
resulting from the economics of production. The taxpayer escapes, not
by shifting but by transforming the tax into a gain through the medium
of production.
Example: Videoke the greater in number, the lesser the cost.
TAX AVOIDANCE
TAX AVOIDANCE
The exploitation by the taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property or income in order to
avoid or reduce tax liability. It is politely called tax minimization and is
not punishable by law.
Example: A person refrains from engaging in some activity or enjoying some
privilege in order to avoid the incidental taxation or to lower his tax bracket for a
taxable year.
Delphers Traders Corp. v. IAC
The Supreme Court upheld the estate planning scheme resorted to by
the Pacheco family in converting their property to shares of stock in a
corporation which they themselves owned and controlled. By virtue of
the deed of exchange, the Pacheco co-owners saved on inheritance
taxes. The SC said that the records do not point to anything wrong and
objectionable about the estate planning scheme resorted to. The legal
right of the 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.
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TAX EVASION
TAX EVASION
The use by the taxpayer of illegal or fraudulent means to defeat or
lessen the payment of a tax. It is also known as tax dodging. It is
punishable by law.
Example: Deliberate failure to report a taxable income or property; deliberate
reduction of income that has been received.
Elements of Tax Evasion
A. The end to be achieved.
Example: the payment of less than that known by the taxpayer to be legally
due, or in paying no tax when such is due.
B. An accompanying state of mind described as being evil, in bad
faith, willful or deliberate and not accidental.
C. A course of action (or failure of action) which is unlawful.
Q. Should fraud be proved by direct evidence?
No. Since fraud is a state of mind, it need not be proved by direct
evidence but may be inferred from the circumstances of the case. One
can only present circumstantial evidence or make use of presumptions
under tax laws.
Example: under declaration over 30% - fraud is presumed under the law
Republic v. Gonzales
The substantial under declaration of income in the income tax returns
of the taxpayer for four (4) consecutive years coupled with his
intentional overstatement of deductions justifies the finding of fraud.
Perez v. CTA and Collector
The failure of the taxpayer to declare for taxation purposes his true and
actual income derived from his business for two consecutive years has
been held as an indication of his fraudulent intent to cheat the
government of its due taxes.
CIR v. Toda
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.
Here, 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. Altonaga's 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 benets 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.
EXEMPTION FROM TAXATION
TAX EXEMPTION
TAX EXEMPTION
The grant of immunity to particular persons or corporations or to person
or corporations of a particular class from a tax which persons and
corporations generally within the same state or taxing district are
obliged to pay.
Important principles
A. It is an immunity or privilege
B. It is freedom from a financial charge or burden to which others are
subjected
C. Allowed only when there is a clear provision of the law.
D. Strictly construed against the taxpayer.
E. It is not necessarily discriminatory as long as there is a reasonable
foundation or rational basis.
Double nexus rule
Person claiming exemption must prove:
1. The law granting the exemption
2. You fall within the law or you qualify in the exemption
Taxation is the rule and exemption, the exception
Taxation is the rule and exemption, the exception, and therefore, he
who claims exemption must be able to justify his claim or right thereto,
by a grant expressed in terms too plain to be mistaken and too
categorical to be misinterpreted. If not expressly mentioned in the law,
it must at least be within its purview by clear legislative intent.
NATURE OF TAX EXEMPTION
NATURE OF TAX EXEMPTION
A. Mere personal privilege of the grantee cannot be assigned
or transferred without the consent of the Legislature. The
legislative consent to the transfer may be given either in the
original act granting the exemption or in a subsequent law
B. Generally revocable by the government
XPN: Unless founded on a contract which is protected from
impairment. But the contract must contain the essential elements
of other contracts.
XPN to XPN: A legislative franchise which is in the nature of a
contract. It may be repealed or amended pursuant to the
Constitution (see Sec. 11, Art. XII).
C. Implies a waiver on the part of the government of its right
to collect taxes due to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an express grant and
must be strictly construed.
D. Not necessarily discriminatory, provided it has reasonable
foundation or rational basis. Where, however, no valid distinction
exists, the exemption may be challenged as violative of the equal
protection guarantee or the uniformity rule.
Bar Question:
ABC Corp. was granted tax exemption by the government as an incentive for newly
established companies. It purchased materials by XYZ Corp. Normally, the sale is
subject to sales tax. XYZ Corp claims that since it sold the equipment to ABC Corp
which is tax exempt, it should not be liable to pay the sales tax. Is the claim
tenable?
No. Exemption from taxes is personal in nature and covers only taxes for which
the taxpayer-grantee is directly liable. The sales tax is a tax on the seller who is
not exempt from taxes. Since XYA is directly liable for the sales tax and no tax
exemption privilege is ever given to it, therefore, its claim that the sale is exempt
is not tenable. A tax exemption is construed in strictissimi juris and it cannot be
permitted to exit upon vague implications.
Bar Question:
Supposing XYZ Corp paid the sales tax. ABC Corp later found however that XYZ
merely shifted or passed on to ABC the amount of the sales tax by increasing the
purchase price. ABC Corp now claims for a refund from the BIR in an amount
corresponding to the tax passed on to it, since it is tax exempt. Is the claim of ABC
Corp meritorious?
No, the claim of ABC Corp is not meritorious. Although the tax was shifted to ABC
by the seller, what is paid by it is not a tax but a part of the cost it has assumed.
The taxpayer who can file a claim for refund is the person statutorily liable for the
payment of the tax. Since ABC Corp is not said taxpayer, it has no capacity to file
a claim for refund.
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NATURE OF THE POWER TO GRANT TAX EXEMPTION
NATURE OF THE POWER TO GRANT TAX EXEMPTION
National Government
The power to grant tax exemptions is an attribute of sovereignty for the
power to prescribe who or what persons or property shall be taxed
implies the power to prescribe who or what persons or property shall
not be taxed.
It is inherent in the exercise of the power to tax that the sovereign state
be free to select the subjects of taxation and to grant exemptions
therefrom. Unless restricted by the Constitution, the legislative power to
exempt is as broad as its power to tax.
Local Government
Municipal corporations are clothed with no inherent power to tax or to
grant tax exemptions. But the moment the power to impose a particular
tax is granted, they also have the power to grant exemption therefrom,
unless forbidden by some provision of the Constitution or the law.
The legislature may delegate is power to grant tax exemptions to the
same extend that it may exercise the power to exempt.
Basco v. PCGG
In a compromise agreement between the Philippine Government,
represented by the PCGG, and the Marcos heirs, the PCGG granted tax
exemptions to the assets which will be apportioned to the Marcos heirs.
The Supreme Court ruled that the PCGG has absolutely no power to
grant tax exemptions, even under the cover of its authority to
compromise ill-gotten wealth cases.
The grant of tax exemption is the exclusive prerogative of the Congress.
In fact, the Supreme Court even stated that Congress itself cannot grant
tax exemptions is in the case at bar because it will violate the equal
protection clause of the Constitution.
RATIONALE OF TAX EXEMPTION
RATIONALE OF TAX EXEMPTION
Such exemption will benefit the body of the people and not particular
individuals or private interest and that the public benefit is sufficient to
offset the monetary loss entailed in the grant of the exemption.
Its avowed purpose is some public benefit or interest which the
lawmaking body considers sufficient to offset the monetary loss entailed
in the grant of the exemption.
GROUNDS FOR TAX EXEMPTION
GROUNDS FOR TAX EXEMPTION
A. It may be based on contract.
TN: In such a case, the public which is represented by the government is
supposed to receive a full equivalent therefor, i.e. charter of a corporation
B. It may be based on some ground of public policy.
TN: to encourage new industries or to foster charitable institutions. Here,
the government need not receive any consideration in return for the tax
exemption
C. It may be created in a treaty on grounds of reciprocity or to lessen
the rigors of international or multiple taxation.
TN: Equity is NOT a ground for tax exemption. Exemption from tax is allowable
only if there is a clear provision. While equity cannot be used as a basis or
justification for tax exemption, a law may validly authorize the condonation of
taxes on equitable considerations.
KINDS OF TAX EXEMPTION
AS TO MANNER OF CREATION
A. Express or affirmative when certain persons, property or
transactions are, by express provision, exempted from all or
certain taxes.
TN: May be made by provisions of the Constitution, statutes, treaties,
ordinances, franchises, or contracts.
B. Implied exemption or exemption by omission when a tax
is levied on certain classes of persons, properties or transactions
without mentioning the other classes. Every tax statute, in a very
real sense, makes exemptions since all those not mentioned are
deemed exempted.
TN: The omission may be either accidental or intentional. Exemptions are
not presumed, but when public property is involved, exemption is the rule,
and taxation, the exception.
C. Contractual in the real sense of the term and where the non-
impairment clause of the Constitution can rightly be invoked, are
those agreed to by the taxing authority in contracts, such as those
contained in government bonds or debentures, lawfully entered
into by them under enabling laws in which the government, acting
in its private capacity, sheds its cloak of authority and waives its
governmental immunity.
TN: These contractual tax exemptions, however, are not to be confused
with tax exemptions granted under franchises. A franchise partakes the
nature of a grant which is beyond the purview of the non-impairment clause
of the Constitution.
AS TO SCOPE OR EXTENT
A. Total exemption when certain persons, property or
transactions are exempted, expressly or implied, from all taxes
entirely.
B. Partial exemption when certain persons, property or
transactions are exempted, expressly or implied, from certain
taxes in part.
CONSTRUCTION OF TAX EXEMPTION STATUTES
CONSTRUCTION OF TAX EXEMPTION STATUTES
General rule
A. In the construction of tax statutes, in case of doubt, exemptions
are not favored and are construed strictissimi juris against the
taxpayer.
B. The fundamental theory is that all taxable property should bear
its share in the cost and expenses of the government.
C. Taxation is the rule and exemption the exception, and therefore,
he who claims exemption must be able to justify his claim or right
thereto, by a grant expressed in terms too plain to be mistaken
and too categorical to be misinterpreted.
D. Claims for an exemption must be able to point out some provision
of law creating the right, and cannot be allowed to exist upon a
mere vague implication or inference.
E. Refunds are in the nature of exemption, and must be construed
strictly against the grantee/taxpayer.
Exceptions
A. When the law itself expressly provides for a liberal construction,
that is, in case of doubt, it shall be resolved in favor of exemption.
B. When the exemption is in favor of the government itself or its
agencies, or of religious, charitable, and educational institutions
because the general rule is that they are exempt from tax.
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C. When the exemption is granted under special circumstances to
special classes of persons.
D. If there is an express mention or if the taxpayer falls within the
purview of the exemption by clear legislative intent, the rule on
strict construction does not apply.
E. If exemption refers to public property (in case of public property,
the general rule is exemption and taxation is the exception)
Q. When will you apply the strict construction?
Only if there is doubt as to the interpretation of the law exempting the
person of the property. If there is no doubt, no need to apply the strict
construction.
Strict interpretation does not apply to the government and its
agencies
Maceda v. Macaraig
Petitioner cannot invoke the rule on strictissimi juris with respect to the
interpretation of statutes granting tax exemptions to the NPC. The rule
on strict interpretation does not apply in the case of exemptions in favor
of a political subdivision or instrumentality of the government.
Davao Gulf v. Commissioner
A tax cannot be imposed unless it is supported by the clear and express
language of a statute. On the other hand, once the tax is unquestionably
imposed, a claim for exemption from tax payments must be clearly
shown and based on language in the law too plain to be mistaken.
Since the partial refund authorized under Section 5, RA 1435 is in the
nature of a tax exemption, it must be construed strictissimi juris against
the grantee. Hence, petitioners claim for refund on the basis of the
specific taxes it actually paid must be expressly granted in a statute
stated in a language too clear to be mistaken.
TAX EXEMPTIONS ARE GENERALLY REVOCABLE
EXEMPTIONS GENERALLY REVOCABLE
General rule:
Tax exemptions are generally revocable by the government.
Exception:
If founded on a contract which is protected from impairment, it cannot
be revoked unilaterally. But the contract must contain the essential
elements of other contracts.
Exception to exception:
A legislative franchise which is in the nature of a contract. It may be
repealed or amended pursuant to the Constitution (Sec. 11, Art. XII).
RESTRICTIONS ON REVOCATION OF TAX EXEMPTION
A. Non-impairment clause Applies in contractual tax exemptions
or those agreed to by the taxing authority in contracts, such as
those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of
authority and waives its governmental immunity.
TN: Where the tax exemption is provided by law, the non-impairment clause
will not apply.
B. Adherence to form If the exemption is granted by the
Constitution, it can only be revoked through a Constitutional
amendment. It cannot be revoked by mere passage of a law.
C. Tax-exempting grant is in the form of a special law where
the grant is given through a special law and not by a general law,
even if the terms of the general act are broad enough to include
the intent to repeal or alter the special law, there would still be no
revocation.
TN: If you want to revoke the tax exemption granted by a special law,
another special law revoking the same must be passed. It cannot be done
by implied revocation.
TAX AMNESTY
TAX AMNESTY
A general pardon or intentional overlooking by the State of its authority
to impose penalties on persons otherwise guilty of evasion or violation
of a revenue or tax law.
TN: There is already a finding that the person has evaded the payment of tax or
violated a tax law.
Republic v. IAC
A tax amnesty partakes of an absolute forgiveness or waiver by the
Government of its right to collect what otherwise would be due it, and
in this sense, prejudicial thereto, particularly to give tax evaders, who
wish to relent and are willing to reform a chance to do so and become
a part of the new society with a clean slate.
TN: When we say absolute forgiveness, this is retrospective. It looks
back to your previous liabilities and if given a tax amnesty, it is as if you
did not incur those liabilities at all.
Tax amnesty not favored
A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. If granted, the terms of the amnesty, like that of a tax
exemption, must be construed strictly against the taxpayer and liberally
in favor of the taxing authority.
CIR v. Marubeni Corp.
For the right of taxation is inherent in government. The State cannot
strip itself of the most essential power of taxation by doubtful words. He
who claims an exemption (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It
cannot be allowed to exist upon a vague implication. If a doubt arises
as to the intent of the legislature, that doubt must be resolved in favor
of the state.
DISTINGUISHED FROM TAX EXEMPTION
Tax amnesty Tax exemption
Immunity from all criminal and Immunity from all
civil obligations arising from civil liability only.
non-payment of taxes.
A privilege, a freedom from a
A general pardon given
to all taxpayers charge or burden of which
others are subjected
It applies to past tax periods, It is generally prospective in
hence of retroactive application application
TAX REMISSION/TAX CONDONATION
TAX REMISSION OR CONDONATION
To desist from exacting, inflicting or enforcing something. The remission
of taxes due and payable to the exclusion of taxes already collected does
not constitute unfair discrimination. Such a set of taxes is a class by
itself and the law would be open to attack as class legislation only if all
taxpayers belonging to one class were not treated alike.
TN: Remission or condonation simply means forgiving the taxpayer out of
liberality. However, if the government is to remit or condone a tax, it must not be
applied to a specific person alone but to the entire persons or property belonging
to the same class. Otherwise, it will amount to class legislation.
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In the nature of a tax exemption
The condonation or remission of a tax liability is equivalent and is in the
nature of a tax exemption. Thus it should be sustained only when
expressly provided in the law.
NATURE, CONSTRUCTION AND APPLICATION OF TAX LAWS
NATURE OF INTERNAL REVENUE LAW
NATURE OF INTERNAL REVENUE LAW
Internal revenue laws are not political in nature. Tax laws are civil and
not penal in nature.
Not political in nature
Internal revenue laws are not political in nature. They are deemed
to be the laws of the occupied territory and not of the occupying
enemy. So even if we are occupied by another State, the taxation
laws will continue. It is as if there is no stoppage of the tax law.
Thus, our tax laws continued in force during the Japanese
occupation.
Hilado v. Collector
It is well-known that our internal revenue laws are not political in nature
and as such, continued in force during the period of enemy occupation
and in effect were actually enforced by the occupying government.
Income tax returns that were filed during that period and income tax
payments made were considered valid and legal. Such tax laws are
deemed to be the laws of the occupied territory and not of the occupying
enemy.
Civil and not penal in nature
Tax laws are civil and not penal in nature, although there are penalties
provided for their violation. The purpose of tax laws in imposing
penalties for delinquencies is to compel the timely payment of taxes or
to punish evasion or neglect of duty in respect thereof.
Republic v. Oasan
The war profits tax is not subject to the prohibition on ex post facto laws
because such a concept applies only to criminal or penal matters. Tax
laws are civil in nature.
CONSTRUCTION AND APPLICATION OF TAX LAWS
CONSTRUCTION OF TAX LAWS
No person or property is subject to taxation unless within the terms or
plain import of a taxing statute. Taxes, being burdens, they are not to
be presumed beyond what the statute expressly and clearly declares.
General rule:
In case of doubt, tax laws are to be construed strictly against the
government and liberally in favor of the taxpayer.
Exceptions:
A. Where the language of the statute is plain and there is no doubt
as to the legislative intent
B. Where the taxpayer claims exemption from taxation.
TN: In case of tax exemptions, the rule is strictly against the taxpayer and
liberally in favor of the government.
Important principles:
A. Generally prospective in operation
B. When the language is plain, rule on strict construction against the
government does not apply
C. Public purpose is always presumed
D. Provisions of the tax act are not to be extended by implication
E. Tax laws are special laws and therefore prevail over general laws.
APPLICATION OF TAX LAWS
General rule: Taw laws are prospective in operation because the
nature and amount of the tax could not be foreseen and understood by
the taxpayer at the time the transactions which the law seeks to tax was
completed.
Exception: While it is not favored, a statute may nevertheless operate
retroactively provided it is expressly declared or is clearly the legislative
intent.
Exception to the exception: A tax law should not be given retroactive
application when it would be so harsh and oppressive, for in such case,
the constitutional limitation of due process would be violated.
Question
BIR issued a ruling that printing companies are not covered by a new tax law.
Relying on this ruling, DEF Printers did not pay said tax. Subsequently however
the BIR reversed the ruling and issued a new one stating that the tax covers
printing companies. Could the BIR now assess DEF Printers for back taxes
corresponding to the years before the new ruling?
A. No. The reversal of a ruling shall not be given a retroactive application, if said
reversal will be prejudicial to the taxpayer. Therefore, the BIR cannot assess DEF
Printers for back taxes because it would be violative of the principle of non-
retroactivity of rulings and doing so would result in grave injustice to the taxpayer
who relied on the first ruling in good faith.
MANDATORY AND DIRECTORY PROVISIONS OF TAX LAWS
A. Directory provisions those designed merely for the information or
direction of officers or to secure methodical and systematic modes
of proceedings.
B. Mandatory provisions those intended for the security of the
citizens or which are designed to ensure equality of taxation or
certainty as to the nature and amount of each persons tax.
LEGISLATIVE APPROVAL BY RE-ENACTMENT
Where a statute is susceptible of the meaning placed upon it by a ruling
of the government agency charged with its enforcement and the
legislature thereafter re-enacts the provisions without substantial
change, such action is to some extent confirmatory that the ruling
carries out the legislative purpose.
TN: The legislature is presumed to have full knowledge of the existing revenue
regulations interpreting the provisions of law, and with its subsequent substantial
re-enactment, there is a presumption that the lawmakers have approved and
confirmed the rules in question as carrying out the legislative purpose.
RULES AND REGULATIONS
AUTHORITY OF THE SECRETARY OF FINANCE TO PROMULGATE
RULES AND REGULATIONS
The Secretary of Finance, upon recommendation of the CIR, shall
promulgate all needful rules and regulations for the effective
enforcement of the provisions of the NIRC.
TN: This is without prejudice to the power of the Commissioner of Internal
Revenue to make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws, including rulings on the classification of articles
for sales tax and similar purposes.
The power to create regulations doe snot
A. Promulgation: Secretary of Finance
B. Recommendation: Commissioner of Internal Revenue
C. Administrative rulings: Commissioner of Internal Revenue
REQUISITES FOR VALIDITY & EFFECTIVITY OF REGULATIONS
A. It must be issued under authority of law
B. It must be within the scope and purview of the law; not contrary
to law and the Constitution
C. It must be published in the OG or newspaper of general circulation
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TN: Interpretative rules or those merely internal in nature may simply be
posted in conspicuous places in the agency itself.
D. Where the regulations impose penal sanctions, the law itself must
declare as punishable the violation of the administrative rule or
regulation and should fix or define the penalty thereof.
Roxas v. Rafferty
The omission to follow mandatory provisions renders invalid the act or
proceeding to which it relates while the omission to follow directory
provisions does not involve such consequence.
Two kinds of administrative issuances
1. Legislative rules rules in the nature of subordinate legislation
designed to implement a primary legislation by providing the details
thereof. Before it is adopted, there must be a hearing under the AC
of 1987.
2. Interpretative rules are rules and regulations construing or
interpreting the provisions of a statute to be enforced and is are
binding on all concerned until they are changed. Designed to
provide guidelines to the law, which the administrative agency is in
charge of enforcing. They have the effect of law and are entitled
to great respect and have in their favor the presumption of legality.
Republic v. Phil Shell Petroleum
Tax regulations (issued by the CIR/DOF Secretary) whose purpose is to
enforce or implement existing law must:
(a) Be published in a newspaper of general circulation, and
(b) Filed with UP Law Center ONAR (per Chapter 2, Book VII of the
Admin Code of 1987 (EO 292) before they can become effective.
Such rules once established and found to be in consonance with the
general purposes and objects of the law have the force and effect of
law, and so they must be applied and enforced. They are, therefore, just
as binding as if the regulations had been written in the law itself.
NECESSITY AND FUNCTION OF REGULATIONS
Purpose of the Implementing rules and regulations:
1. To properly enforce and execute the laws
2. To clarify and explain the law
3. To carry into effect the laws general provisions by providing details
of administration and procedure
FORCE AND EFFECT OF REGULATIONS
Revenue Memorandum Circular 20-86 was issued to govern the drafting,
issuance and implementation of revenue tax issuances, including:
1. Revenue regulations
2. Revenue audit memorandum orders
3. Revenue memorandum circulars and orders
TN: Except when the law otherwise expressly provides, the aforesaid
revenue tax issuances shall not begin to be operative until after due
notice thereof may be fairly assumed.
Due notice of the said issuances may be fairly presumed only
after the following procedures have been taken:
1. Copies of the tax issuance have been sent through registered mail
to the following business and professional organizations:
a. Philippine Institute of Certified Public Accountants
b. Integrated bar of the Philippines
c. Philippine chamber of commerce and industry
d. American chamber of commerce
e. Federation of Filipino-Chinese chamber of commerce
f. Japanese chamber of commerce and industry in the
Philippines
2. However, other persons or entities may request a copy of the said
issuances
3. The BIR shall issue a press release covering the highlights and
features of the new tax issuance in any newspaper of general
circulation
4. Effectivity of date of enforcement of the new issuance shall take
place 30 days from the date the issuance has been sent to the
above-enumerated organizations
TN: IRR and administrative regulation are not the same. You have the law, then
you pass the IRR and from the IRR, it now depends on the Commissioner if he
wants to issue a revenue regulation. This revenue regulation however is not to
implement the whole IRR but specific provisions only.
BIR RULINGS
ADMINISTRATIVE RULINGS AND OPINIONS
Known as BIR rulings. Less general interpretation of tax laws being used
from time to time by the CIR. They are usually rendered on request of
taxpayers to clarify certain provisions of a tax law. These rulings may be
revoked by the Secretary of Finance if the latter finds them not in
accordance with law.
Q. How does it work?
If there is a provision in the tax law which is not clear, you can send a
clarification to the BIR. You just have to lay down all the facts and all
the details that you have and send it either to the CIR or RD and they
will address and clarify your concerns.
But when it comes to BIR and administrative rulings, it applies only to
the entity asking for it. So even if two companies have the same
conditions, as when Company A was declared by the BIR as tax exempt,
Company B with the same economy conditions as Company A cannot
presume that it is also tax exempt. Company B should likewise ask from
the BIR a ruling pertaining to its own company.
Power to revoke the rulings of his predecessor
The Commissioner may revoke, repeal or abrogate the acts or previous
rulings of his predecessors in office because the construction of the
statute by those administering it is not binding on their successors if,
thereafter, such successors are satisfied that a different construction of
the law should be given.
TN: Rulings in the form of opinions are also given by the Secretary of Justice who
is the chief legal officer of the Government.
Non-retroactivity of repeal of regulations or rulings and its
exceptions
GR: No retroactivity if the repeal, revocation, modification ore reversal
of regulations or rulings is prejudicial to the taxpayer.
XPNs:
1. Where the taxpayer deliberately misstates or omits material facts
from his return or in any document required of him by the BIR
2. Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based
3. Where the taxpayer acted in bad faith
ADMINISTRATIVE INTERPRETATION AND THE COURTS
ADMINISTRATIVE INTEPRETATION AND THE COURTS
The power to interpret the provisions of the Tax Code and other tax
laws is under the exclusive and original jurisdiction of the Commissioner
of Internal Revenue subject to review by the Secretary of Finance.
Different from the IRR
When it comes to administrative interpretation, rulings or opinions
are not binding to the courts. However, it is given great weight in
making the decision.
Commissioner v. CA
The authority of the Minister of Finance, in conjunction with the CIR, to
promulgate rules and regulations for the effective enforcement of
internal revenue rules cannot be controverted. Neither can it be disputed
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 28 | P a g e
TAXATION LAW I l PREMIDS l Atty. Amago l By: Tanya Ibanez

that such rules and regulations, as well as administrative opinions and

rulings, ordinarily should deserve weigh and respect by the courts.

Much more fundamental that either of the above however, is that all
such issuances must not override, but must remain consistent with the
law they seek to apply and implement. Administrative rules & regulations
are intended to carry out, and not to modify or supplant the law.

La Suerte v. CTA
When an administrative agency renders an opinion by means of a
circular or memorandum, it merely interprets existing law and no
publication is therefore necessary for its validity. Construction by an
executive branch of the govt of a particular law, although not binding
upon courts, must be given weight as the construction came from the
branch of the government which is called upon to implement the law.

DECISIONS OF THE SC AND CTA

DECISIONS OF THE SC AND CTA

Decisions of the Supreme Court applying or interpreting existing tax laws
are binding on all subordinate courts and have the force and effect of
law. As provided for in Article 8 of the Civil Code, they form part of the
law of the land. They constitute evidence of what the law means.

The same is also true with respect to decisions of the Court of Tax
Appeals. However, by the nature of its jurisdiction, the decisions of this
court are still appealable to the Supreme Court by a petition for review
on certiorari.

Important:
1. Follow the hierarchy of the courts
2. If it is a question pertaining to the constitutionality of a ruling or
IRR, raise it immediately before the regular courts
3. But if it pertains to questions on the tax payable computations,
question it first with the BIR (Administrative level) then appeal it to
the CIR (depends on the amount), then after it can be appealed
later to the Sec of Finance or CTA, and then after, thats the time
you can go to the SC.
4. But in the SC, it should only be purely questions of law

SOURCES OF TAX LAWS

SOURCES OF TAX LAWS

According to hierarchy:
A. Constitution
B. Legislations/Statutes
C. Administrative rules and regulations, rulings or opinions of tax
officials
D. Judicial decisions (Only the decisions of the Supreme Court)
E. Tax treaties or agreements

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