TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
Stages/aspects of a system of taxation [LAPR]
1. Levy or Imposition (Tax Legislation) –
This refers to the enactment of a law by
Congress authorizing the imposition of tax.
It further contemplates the determination of
the subject of taxation, purpose for which
the tax shall be levied, fixing the rate of
taxation and the rules of taxation in
general.
2. Assessment and Collection (Tax
Administration)
– This is the act of administration and
implementation of the tax law by executive through
its administrative agencies. The act of assessing
and collecting taxes is administrative in
character, and therefore can be delegated (J.
Dimaampao, 2015,).
3. Payment – The act of compliance by the
taxpayer, including such options, schemes
or remedies as may be legally available.
4. Refund – The recovery of any tax alleged to
have been erroneously or illegally assessed
or collected, or of any penalty claimed to
have been collected without authority, or of
any sum alleged to have been excessively,
or in any manner wrongfully collected.
NOTE: If what is delegated is tax legislation, the
delegation is invalid. If what is delegated is tax
administration, the delegation is valid. Then there is
no delegation to speak of, because tax
administration pertains to the executive or
administrative agencies.
LEVY
Kinds of rules relative to the imposition of tax
1. Legislative rule – subordinate legislation by the
Secretary of Finance.
2. Interpretative rule – issuance of guidelines and
procedures to enhance the administration of tax
laws by the Secretary of Finance.
Q: Taxes are assessed for the purpose of
generating revenue to be used for public needs.
Taxation itself is the power by which the State
raises revenue to defray the expenses of
government. A jurist said that a tax is what we
pay for civilization, in our jurisdiction, which of
the following statements may be erroneous:
1. Taxes are pecuniary in nature.
2. Taxes are enforced charges and contributions.
3. Taxes are imposed on persons and property
within the territorial jurisdiction of a State.
4. Taxes are levied by the executive branch of
the government.
5. Taxes are assessed according to a reasonable
rule of apportionment. (2004 Bar)
A: (4) Taxes are levied by the executive branch of
government. This statement is erroneous because
levy refers to the act of imposition by the legislature
which is done through the enactment of a tax law.
Levy is an exercise of the power to tax which is exclusively
legislative in nature and character. Clearly, taxes are not levied by
the executive branch of government (NPC v.
Albay, G.R. No. 87479, June 4, 1990).
ASSESSMENT AND COLLECTION
Assessment and Collection
Tax administration refers to the manner and procedure of
assessing and collecting or enforcing tax liabilities by the BIR.
Assessment and collection can be delegated, provided
that:
1. The tax law must designate which agency will collect; and
2. The circulars or regulations must be in accordance with
the tax measures imposed by Congress.
NOTE: Assessment and collection may be delegated but not levy
since it is exclusively conferred with the Congress.
Q: Is the approval of the court, sitting as probate or estate
settlement court, required in the enforcement of the estate
tax? (2005 Bar)
A: NO. The approval of the court, sitting in probate, is not a
mandatory requirement in the collection of estate tax. On the
contrary, under Section 94 of the NIRC, it is the probate or
settlement court which is forbidden to authorize the executor or
judicial administrator of the
decedent􀇯s estate, to deliver any distributive share to any party
interested in the estate, unless a certification from the
Commissioner of the Internal Revenue that the estate
tax has been paid is shown (Marcos II v. Court of Appeals , G.R.
No.120880, June 5, 1997).
Payment
Payment is the act of compliance by the taxpayer including such
options, schemes or remedies as may be legally available to him.
GR: Tax shall be paid by the person subject thereto at the time
the return is filed (Sec. 56[A][1], NIRC).
XPN: When the tax due is in excess of P2,000, the taxpayer other
than a corporation may elect to pay the tax in 2 equal
installments in which case, the first installment shall be paid at
the time the return is filed and the second installment, on or
before July 15 following the close of the calendar year (Sec.
56[A][2], NIRC).
NOTE: If any installment is not paid on or before the date fixed for
its payment, the whole amount of the tax unpaid becomes due
and payable, together with delinquency penalties.
A claim for tax refund may be based on the following:
[EPE]
1. Erroneously or illegally assessed or collected internal revenue
taxes
2. Penalties imposed without authority
3. Any sum alleged to have been Excessive or in any manner
wrongfully collected.
The claim for refund must be filed within 2 years from the date of
payment of the tax or penalty regardless of any supervening cause
that may arise after payment (Sec. 229,
NIRC).
In case of corporate dissolution, the 2 year prescriptive period
should be counted from the thirty (30) days from the approval of
the SEC of its plan for dissolution (BPI v.
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
CIR, G.R. No. 144653, Aug. 28, 2001).
Unutilized input VAT payments not otherwise used
for any internal revenue tax due the taxpayer must
be claimed within two years reckoned from the close
of the taxable quarter when the relevant sales were
made pertaining to the input VAT regardless of
whether said tax was paid or not (Sec. 112, NIRC)
(CIR v. Mirant Pagbilao
Corp., GR 172129, September 12, 2008).
NOTE: Thus, when a zero-rated VAT taxpayer pays
input VAT a year after the pertinent transaction,
said taxpayer only has a year to file a claim for
refund or tax credit of the unutilized creditable
input VAT (Dimaampao, 2011).
Systems of Taxation
1. Progressive – A tax rate which increases as the
tax base or bracket increases. E.g. Income tax,
Estate tax and Donor􀇯s tax
2. Regressive – The tax rate decreases as the tax
base or bracket increases.
3. Proportionate – A tax of a fixed percentage of
amounts of the base (value of the property, or
amount of gross receipts etc.) E.g. VAT and Other
Percentage taxes
As to Tax Imposed
Progressive taxation
Taxation is progressive when tax rate increases as
the income of the taxpayer increases.
Rationale of progressive taxation
It is built on the principle of the taxpayer􀇯s ability
to pay and in implementation of the social justice
principle that the more affluent should contribute
more to the community􀇯s benefit. To whom much is
given, much is required.
Q: Is VAT regressive?
A: YES. The principle of progressive taxation has no
relation with the VAT system inasmuch as the VAT
paid by the consumer or business for every goods
bought or
services enjoyed is the same regardless of income.
In other words, the VAT paid eats the same portion
of an income, whether big or small. The disparity
lies in the income earned by a person or profit
margin marked by a business, such that the higher
the income or profit margin, the smaller the portion
of the income or profit that is eaten by VAT. A
converso, the lower the income or profit margin, the
bigger the part that the VAT eats away. At the
end of the day, it is really the lower income group or
businesses with low-profit margins that is always
hardest hit (ABAKADA Guro v. Ermita, G.R. No.
168056, September1,
2005).
NOTE: Not regressive as defined in such a manner
that the tax rate decreases as the amount subject to
taxation increases.
Q: Does the Constitution prohibit regressive
taxes?
A: No, what the Constitution simply provides is that Congress
shall evolve a progressive system of taxation.
Meaning of 􀇲evolve􀇳 as used in the Constitution
The constitutional provision has been interpreted to mean simply
that "direct taxes are to be preferred and as much as possible,
indirect taxes should be minimized.􀇯
The mandate of Congress is not to prescribe but to evolve a
progressive tax system. This is a mere directive upon Congress,
not a justiciable right or a legally enforceable one. We cannot
avoid regressive taxes but only minimize them (Tolentino et.al. v.
Secretary of Finance, G.R. No. 115455, Oct. 30, 1995).
VAT is regressive
The principle of progressive taxation has no relation with the VAT
system inasmuch as the VAT paid by the consumer or business
for every goods bought or services enjoyed is the same regardless
of income. In other words,
the VAT paid eats the same portion of an income, whether big or
small. The disparity lies in the income earned by a person or
profit margin marked by a business, such that the higher the
income or profit margin, the smaller the
portion of the income or profit that is eaten by VAT. A converso,
the lower the income or profit margin, the bigger the part that the
VAT eats away. At the end of the day, it is really the lower income
group or businesses with low-profit margins that is always
hardest hit
(ABAKADA Guro v. Ermita, G.R. No. 168056, September 1, 2005).
Q: Does the Constitution prohibit regressive taxes?
A: No, what the Constitution simply provides is that Congress
shall evolve a progressive system of taxation.
Meaning of 􀇲evolve􀇳 as used in the Constitution
The constitutional provision has been interpreted to mean simply
that "direct taxes are to be preferred and as much as possible,
indirect taxes should be minimized.􀇯
The mandate of Congress is not to prescribe but to evolve a
progressive tax system. This is a mere directive upon Congress,
not a justiciable right or a legally enforceable one. We cannot
avoid regressive taxes but only minimize
them (Tolentino et.al. v. Secretary of Finance, G.R. No. 115455, Oct.
30, 1995).
Q: How is the regressive effect of VAT minimized?
A: The law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions while granting
exemptions to other
transactions. The transactions which are subject to VAT are those
which involve goods and services which are used or availed of
mainly by higher income groups.
Advantages in imposing VAT
1. Economic growth
2. Simplified tax administration
3. Promote honesty
4. Higher governmental revenues
VAT law is non-violative of the administrative feasibility
principle
The VAT law is principally aimed to rationalize the system of taxes
on goods and services. Thus, simplifying tax administration and
making the system more equitable to enable the country to attain
economic recovery
(Kapatiran ng Mga Naglilingkod sa Pamahalaan v. Tan,
G.R.No.81311, June 30, 1988).
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As to Treatment of Taxable Income to one tax rate.

Three (3) income tax systems
1. Global Tax System – system employed where the
tax system views indifferently the tax base and
generally treats in common all categories of taxable
income of the individual (Tan v. Del Rosario, Jr., 237
SCRA 324, 331).
2. Schedular Tax System – system employed where
the income tax treatment varies and is made to
depend on the kind or category of taxable income of
the taxpayer (Tan v. Del Rosario, Jr., 237 SCRA 324,
331).
3. Semi- schedular or semi- global tax system – all
compensation income, business or professional
income, capital gain, passive income, and other
income not subject to final tax are added together to
arrive at the gross income. After deducting the
allowable deductions and exemptions from the gross
income, the taxable income is subjected to one set
of
graduated tax rate (individual) or normal corporate
income tax rate (corporation) (Mamalateo, 2014).
Schedular Treatment vs. Global treatment (1994
Bar)
SCHEDULAR
Schedular Treatment Global treatment
Basic principles of a sound tax system (Canons of Taxation)
[FAT]
1. Fiscal adequacy
a. Revenue raised must be sufficient to meet government/public
expenditures and other
public needs (Chavez v. Ongpin, G.R. No. 76778, June 6, 1990).
Neither an excess nor
a deficiency of revenue vis-à-vis the needs of government would be
in keeping with the
principle (Vitug, 2000).
2. Administrative feasibility
a. The tax system should be capable of being effectively
administered and enforced with the
least inconvenience to the taxpayer (Diaz v. Secretary of Finance,
G.R. No. 193007, July 19, 2011).
NOTE: Non-observance of this canon, however, will not render a
tax imposition invalid 􀇯except to the extent of specific
constitutional or statutory limitations are impaired􀇯 􀇯Ibid.).
3. Theoretical justice
a. Must take into consideration the taxpayer􀇯s ability to pay
(Ability to Pay Theory).
b. Art. VI, Sec. 28(1), 1987 Constitution mandates that the rule on
taxation must be uniform and equitable and that the State must
evolve a progressive system of taxation.

Different tax rates Unitary or Distinctions of the basic principles of a sound tax system
single tax rate FISCAL ADEQUACY ADMINISTRATIVE FEASIBILITY
THEORETICAL JUSTICE
Meaning Sources of revenues must be adequate to meet
government expenditures and their variations.
Different categories of The enforcement should be effective and efficient.
taxable income Imposition must be based on the taxpayer􀇯s ability to pay
No need for Benefits
classification as No need to incur loans; no more budgetary deficit
all Conducive to economic growth and development; a simplified tax
taxpayers are system.
subjected Proportionate share in the burden of paying taxes.
to a single
rate Miscellaneous Concepts and Doctrines

Usually used in the income NATURE OF TAX LAWS

taxation of individuals
Applied to
corporations Internal revenue laws are not political in nature and as
such were continued in force during the period of enemy
(Business income, occupation and in effect were actually enforced by the
professional income,
occupation government. As a matter of fact, income tax returns
passive income, illegal
income) were filed during that period and income tax payments were
You cannot add all of them affected and considered valid and legal. Such tax laws are
together. deemed to be the laws of the occupied territory and not of the
(Business
occupying enemy. [Hilado vs. Collector of Internal Revenue.
income,
professiona GR No. L-9408. October 31, 1956]
l income,
passive
income, illegal
income) The prohibition against ex post facto laws applies only
All of them
to criminal or penal matters, and not to laws which concern civil
will be added
together matters or proceedings generally, or which affect or regulate
and be subjected civil or private rights. Hence, tax laws not being penal in
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
character, the rule against passage of ex post
facto laws cannot be invoked. [Republic vs. Vda.
De Fernandez. GR No. L-9141. September 25,
1956]
It is well settled that inheritance taxation
is governed by the statute in force at the time of
the death of the decedent. Of course, a tax
statute may be made retroactive in its operation.
Liability for taxes under retroactive legislation has
been "one of the incidents of social life." But
legislative intent that a tax statute should operate
retroactively should be perfectly clear.
Revenue laws, generally, which impose
taxes collected by the means ordinarily resorted to
for the collection of taxes are not classed as penal
laws, although there are authorities to the
contrary. Thus, Article 22 of the Revised Penal
Code is not applicable to the case of bar, and in
the absence of clear legislative intent, we cannot
give Act No. 3606 a retroactive effect. [Lorenzo
vs. Posadas, Jr. GR No. 43082. June 18, 1937
Republic vs. Vda. De Fernandez [G.R. No. L-9141. September 25, 1956.]
En Banc, Labrador (J): 7 concurring
Facts: Olimpio Fernandez and his wife Angelina Oasan had a net worth of
P8,600 on 8 December 1941. During the Japanese occupation the spouses
acquired several real properties, and at the time of his death on 11 February
1945 he had a net worth of P31,489. The Collector of Internal Revenue
assessed a war profits tax (pursuant to RA 55, War Profits Tax Law) on the
estate of the deceased at P7,614.60, which his administratrix refused to pay.
The case was brought to the Court of Tax Appeals which sustained the
validity and legality of the assessment. The administratrix has appealed the
decision to the Supreme Court.
The Supreme Court affirmed the judgment appealed, with costs against the
appellants, Angelina Oasan Vda de Fernandez, Priscilla O. Fernandez, and
Estela O. Fernandez..
Nature of the tax
The War Profit Tax, insofar as applicable to the estate of the
deceased Olimpio Fernandez, is both a property tax and a tax on income. It
is a property tax in relation to the properties that Fernandez had in
December 1941; and it is an income tax in relation to the properties which he
purchased during the Japanese occupation.
Rationale on the enactment of the War Profit Tax
The last Pacific war and the Japanese occupation of the Islands
have wrought divergent effects upon the different sectors of the population.
The quiet and the timid, who were afraid to go out of their homes or who
refused to have any dealings with the enemy, stopped from exercising their
callings or professions, losing their incomes; and they supported themselves
with properties they already owned, selling these from time to time to raise
funds with which to purchase their daily needs. These were reduced to
penury and want. But the bold and the daring, as well as those who were
callous to the criticism of being collaborators, engaged in trading in all forms
or sorts of commodities, from foodstuffs to war materials, earning fabulous
incomes and acquiring properties with their earnings. Those who were able
to retain their properties found themselves possessed of increased wealth
because inflation set in, the currency dropped in value and properties soared
in prices. It would have been unrealistic for the legislature to have ignored all
these facts and circumstances. After the war it could not, with justice to all
concerned, apportion the expenses of government equally on all the people
irrespective of the vicissitudes of war, equally on those who had their
properties decimated as on those who had become fabulously rich after the
war. Those who were fortunate to increase their wealth during the troubulous
period of the war were made to contribute a portion of their newly-acquired
wealth for the maintenance of the government and defray its expenses.
Those who in turn were reduced to penury or whose incomes suffered
reductions could not be compelled to share in the expenses to the same
extent as those who grew rich. This in effect is what the legislature did when
it enacted the War Profits Tax Law.
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ASPECT OF TAXATION - TAXES
Hilado vs. Collector
GR L-9408, 31 October 1956
En Banc, Bautista Angelo (J): 8 concur
Facts: Facts: Emilio Hilado filed his income tax return for
1951 with the treasurer of Bacolod City, claiming a
deductible item of P12,837.65 from his gross income
pursuant to General Circular V-123 issued by the Collector of
Internal Revenue. The Secretary of Finance, through the
Collector, issued General Circular V-139 which revoked and
declared void Circular V- 123; and laid down the rule[s] that
losses of property which occurred in World War II from fires,
storms, shipwreck or other casualty, or from robbery, theft, or
embezzlement are deductible in the year of actual loss or
destruction of said property. The deductions were
disallowed.
Issue: Whether Internal Revenue Laws were enforced
during the war and whether Hilado can claim compensation
for destruction of his property during the war.
Held: Philippines Internal Revenue Laws are not political in
nature and as such were continued in force during the period
of enemy occupation and in effect were actually enforced by
the occupation government. Such tax laws are deemed to be
laws of the occupied territory and not of the occupying
enemy. As of the end of 1945, there was no law which Hilado
could claim for the destruction of his properties during the
battle for the liberation of the Philippines. Under the
Philippine Rehabilitation Act of 1948, the payment of claims
by the War Damage Commission depended upon its
discretions non-payment of which does not give rise to any
enforceable right. Assuming that the loss (deductible item)
represents a portion of the 75% of his war damage claim, the
amount would be at most a proper deduction of his 1950
gross income (not on his 1951 gross income) as the last
installment and notice of discontinuation of payment by the
War Damage Commission was made in 1950.
Prospectivity of Tax Laws (Doctrine of
Prospective Application)
Doctrine of Prospectivity of tax laws
GR: Tax laws must only be imposed prospectively.
XPN: If the law expressly provides for retroactive
application. Retroactive application of revenue laws
may be allowed if it will not amount to denial of due
process. There is a violation of due process when
the tax law imposes harsh and oppressive tax (CIR
v. Acosta, G.R. No. 154068 August 3, 2007).
Ex post facto law as applied in taxation
The prohibition against ex post facto laws applies
only to criminal matters and not to laws which are
civil in nature.
NOTE: When it comes to civil penalties like fines
and forfeiture (except interest), tax laws may be
applied retroactively unless it produces harsh and
oppressive consequences which violate the
taxpayer􀇯s constitutional rights regarding equity
and due process. But criminal
penalties arising from tax violations may not be given retroactive
effect.
Q: In 1997, Mrs. Rocosta filed an amended return which
showed an overpayment of income tax for her 1996 income
report. She now claims a refund of taxes
withheld on her 1996 income as provided for in the 1997
NIRC. Should the 1997 tax reform retroactively apply?
A: NO. Tax laws are prospective in operation, unless the language
of the statute clearly provides otherwise. At the time Mrs. Rocosta
filed her amended return, the 1997
NIRC was not yet in effect. Hence, she has no reason at that time
to think that the filing of an amended return would constitute the
written claim for refund required by
applicable law (CIR v. Acosta, G.R. No. 154068 August 3, 2007).
Q: Due to an uncertainty whether or not a new tax law is
applicable to printing companies, DEF Printers submitted a
legal query to the BIR on that issue. The BIR issued a ruling
that printing companies are not covered by the new 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?
Reason briefly. (2004 Bar Question)
A: NO. The reversal of the 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
to grave injustice to the taxpayer who relied
on the first ruling in good faith (Sec. 246, NIRC; Commissioner v.
Burroughs, Ltd., G.R. No. L-66653, June 19, 1986).
• HYDRO RESOURCES V. COURT OF TAX APPEALS
ET AL.
GR 80276; December 21, 1990
FACTS Hydro Resources Contractors Corporation entered into
a contract of sale with the National Irrigation Authority (NIA)
for the construction of Magat River Multipurpose Project in
Isabella in August 1978. The contract provided that Hydro will
import parts, construction equipment and tools and taxes and
duties to be paid by NIA. Tools and equipment arrived during
1978 and 1979. NIA reneged on the contract. Therefore causing
the transfer its sale to Hydro in seperate dates in December 6,
1982 and March 24, 1983. Executive Order 860 took effect
during December 21, 1982 provided for 3% ad valorem tax on
importations and it specifically provided that it should have no
retroactive effect. During the contract of sale execution, Hydro
was assessed and paid the said 3% ad valorem tax worth P
281,591 under protest. The Hydro when filing for refund with
Customs Commissioner who indorsed the approval of the refund
but was denied by the Secretary of Finance and motion was
denied by the Court of Tax Appeals.
 TAXATION LAW 1 (REVIEWER)
ISSUE Whether or not should the Executive
Order 860 should have a retroactive effect. ASPECT OF TAXATION - TAXES
HELD The Court of Tax Appeals erred in applying
a retroactive effect for the Executive Order
therefore should not have been subject to the
additional 3% ad valorem tax. In general tax laws
are not retroactive in nature. Not only that
Executive Order 860 specifically provides that it is
not retroactive in nature, but also when the
conditional contract of sale was executed, its had a
suspensive condition contemplated in the Civil
Code (Article 1187) where it returned ownership to
the seller Hydro because NIA was not able to
comply with its part of the contract, it was deemed
executed as if during the constitution of the
obligation which was in 1978 and not in 1982.
‣CIR v. ACOSTA; G.R. No. 154068
FACTS:
Rosemary Acosta, an employee of Intel
Manufacturing Phils. Inc. assigned in a foreign
country filed on March 21, 1977 for a period of
January 1, 1996-December 31, 1996, a Joint
Individual Income Tax Return with her husband on
October 8, 1997, she filed an amended return
indicating an overpayment of P 358,274 due to the
income taxes withheld and paid by Intel.
 April 15, 1999: She filed a petition for review
with the CTA who dismissed her petition for
failing to file a written claim for refund required
under Sec. 230 of the old tax code. Also, the
omission of the date of filing the final
adjustment return deprived the court of its
jurisdiction over the subject matter of the case.
 CA: reversed the CTA holding that the filing of
an amended return indicating an overpayment
was sufficient compliance with the requirement
of a written claim for refund.
 Applying sec. 204 (c) of the 1997 NIRC, the
CIR sought reconsideration but was denied so
it elevated the matter with the SC.
ISSUES:
1. W/N the amended return is sufficient
compliance of written claim
2. W/N the 1997 tax reform can be applied
retrospectively
HELD: Granted.
1. NO. The requirements under Section 230 for refund claims
are as follows
 a. A written claim for refund or tax credit must be filed by the
taxpayer with the Commissioner;
 b. The claim for refund must be a categorical demand for
reimbursement;
 c. The claim for refund or tax credit must be filed, or the suit or
proceeding therefor must be commenced in court within 2
years from date of payment of the tax or penalty regardless of
any supervening cause
 It is intended to afford the CIR an opportunity to correct the
action of its subordinate officers and to be notified. Tax
refunds are in the nature of tax exemptions which are
construed strictissimi juris against the taxpayer and liberally in
favor of the government
 As tax refund involve a return of revenue from the government,
the claimant must show the specific provision of law as basis
of her right
2. NO. Tax laws are prospective in operation, unless the
language of the statute clearly provides otherwise.
Moreover, a party seeking an administrative remedy must
not merely initiate the prescribed administrative
procedure to obtain relief, but also pursue it to its
appropriate conclusion before seeking judicial intervention
in order to give the administrative agency an opportunity
to decide the matter itself correctly and prevent
unnecessary and premature resort to court action.
Revenue statutes are substantive laws and in no sense
must their application be equated with that of remedial
laws which must be faithfully and strictly implemented.
• Commissioner of Internal Revenue
vs. Reyes, 480 SCRA 382, G.R. No.
159694. January 27, 2006
• Panganiban, CJ.
• Facts:
• In 1993, Maria Tancino died leaving
behind an estate worth P32 million. In
1997, a tax audit was conducted on the
estate. Meanwhile, the National Internal
Revenue Code (NIRC) of 1997 was
passed. Eventually in 1998, the estate
was issued a final assessment notice
(FAN) demanding the estate to pay
P14.9 million in taxes inclusive of
surcharge and interest; the estate’s
liability was based on Section 229 of the
[old] Tax Code. Azucena Reyes, one of
the heirs, protested the FAN. The
Commissioner of Internal Revenue (CIR)
nevertheless issued a warrant of distraint
and/or levy. Reyes again protested the
warrant but in March 1999, she offered a
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
compromise and was willing to pay P1
million in taxes. Her offer was denied.
She continued to work on another
compromise but was eventually denied.
The case reached the Court of Tax
Appeals where Reyes was also denied. In
the Court of Appeals, Reyes received a
favorable judgment.
• Issue:
• Whether or not the formal assessment
notice is valid.
• Held:
• No. The NIRC of 1997 was already in
effect when the FAN was issued. Under
Section 228 of the NIRC, taxpayers shall
be informed in writing of the law and the
facts on which the assessment is made:
otherwise, the assessment shall be void.
In the case at bar, the FAN merely stated
the amount of liability to be shouldered by
the estate and the law upon which such
liability is based. However, the estate was
not informed in writing of the facts on
which the assessment of estate taxes had
been made. The estate was merely
informed of the findings of the CIR.
Section 228 of the NIRC being remedial
in nature can be applied retroactively
even though the tax investigation was
conducted prior to the law’s passage.
Consequently, the invalid FAN cannot be
a basis of a compromise, any proceeding
emanating from the invalid FAN is void
including the issuance of the warrant of
distraint and/or levy.
• Same; Same; Statutes; Statutory
Construction; Statutes that are
remedial, or that do not create new or
take away vested rights, do not fall
under the general rule against the
retroactive operation of statutes; RA
8424 does not state, either expressly
or by necessary implication, that
pending actions are excepted from the
operation of Section 228, or that
applying it to pending proceedings
would impair vested rights.—The
general rule is that statutes are
prospective. However, statutes that are
remedial, or that do not create new or
take away vested rights, do not fall under
the general rule against the retroactive
operation of statutes. Clearly, Section 228
provides for the procedure in case an
assessment is protested. The provision
does not create new or take away vested
rights. In both instances, it can surely be
applied retroactively. Moreover, RA 8424
does not state, either expressly or by
necessary implication, that pending
actions are excepted from the operation
of Section 228, or that applying it to
pending proceedings would impair vested
rights.
• Same; Same; Same; Same; A tax
regulation is promulgated by the
finance secretary to implement the
provisions of the Tax Code; The
absence of the regulation does not
automatically mean that the law itself
would become inoperative.—The non-
retroactive application of Revenue
Regulation (RR) No. 12-99 is of no
moment, considering that it merely
implements the law. A tax regulation is
promulgated by the finance secretary to
implement the provisions of the Tax
Code. While it is desirable for the
government authority or administrative
agency to have one immediately issued
after a law is passed, the absence of the
regulation does not automatically mean
that the law itself would become
inoperative.
• Same; Same; Although taxes are the
lifeblood of the government, their
assessment and collection should be
made in accordance with law as any
arbitrariness will negate the very
reason for government itself.—Even a
cursory review of the preliminary
assessment notice, as well as the
demand letter sent, reveals the lack of
basis for—not to mention the insufficiency
of—the gross figures and details of the
itemized deductions indicated in the
notice and the letter. This Court cannot
countenance an assessment based on
estimates that appear to have been
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
arbitrarily or capriciously arrived at.
Although taxes are the lifeblood of the
government, their assessment and
collection “should be made in accordance
with law as any arbitrariness will negate
the very reason for government itself.”
‣UMALI v. ESTANISLAO; G.R. No. 104307
• PANSACOLA VS COMMISSIONER OF INTERNAL REVENUE
• G.R. 159991 NOVEMBER 16, 2006
• PONENTE: QUISUMBING, J.
• CASE DIGEST BY: LUZADIO, LOURY MAE
• The following day, 28 May 2008, the Senate sent S.B.
• Facts: On April 13, 1998, petitioner Carmelino F. Pansacola
filed his income tax return for the taxable year 1997 that
reflected an overpayment of P5, 950. He claimed the
increased amounts of personal and additional exemptions
under Section 35 of the NIRC and thus prayed for a refund.
Both the Bureau of Internal Revenue and Court of Tax
Appeals denied his petition. His motion for reconsideration
was also denied. According to the tax court, “it would be
absurd for the law to allow the deduction from a taxpayer’s
gross income earned on a certain year of exemptions
availing on a different taxable year…” Petitioner, on the
other hand insists that the increased exemptions were
already available on April 15, 1998, the deadline for filing
income tax returns for taxable year 1997, because the NIRC
was already effective. He reasons that by making the said
law effective on the 1998 tax period would postpone the
availability of the increased exemptions and literally defer
the effectivity of the NIRC to January 1, 1999.
• Issue: Whether or not
the exemptions under Section
35 of the NIRC, which took effect on January 1,
1998, be availed of for taxable year 1997?
• Held: NO. Careful consideration of the NIRC showed that
there is nothing in the law which shows any intent to give
retroactive effect to Section 35. Analysis of the provisions of
the code showed that the law consider for the purpose of
determining the tax due from an individual taxpayer is his
status and qualified dependents at the close of the taxable
year and not at the time the return is filed and the tax due
thereon is paid. When petitioner filed his 1997 tax return,
the increased exemptions provided in Section 35 of the NIRC
were not yet available. In fact, it has not yet accrued as of
December 31, 1997. It must be noted that tax laws are
prospective in application unless the law itself expressly
provide for its retroactive effect. Moreover, personal and
additional exemptions are considered as deductions from
gross income. Deductions for income tax purposes partake
of the nature of tax exemptions, hence strictly construed
against the taxpayer and cannot be allowed unless granted
in the most explicit and categorical language too plain to be
mistaken. They cannot be extended by mere implication or
inference. And, where a provision of law speaks
categorically, the need for interpretation is obviated, no
plausible pretense being entertained to justify non-
compliance. All that has to be done is to apply it in every
case that falls within its terms
JAIME N. SORIANO v. SECRETARY OF FINANCE, GR
No. 184450, 2017-01-24
• Facts:
• On 19 May 2008, the Senate filed its Senate Committee
Report No. 53 on Senate Bill No. (S.B.) 2293. On 21
May 2008, former President Gloria M. Arroyo certified
the passage of the bill as urgent through a letter
addressed to then Senate President Manuel Villar. On
the same day, the bill was passed on second reading
IN the Senate and, on 27 May 2008, on third reading.
2293 to the House of Representatives for the latter's
concurrence.
• On 17 June 2008, R.A. 9504 entitled "An Act Amending
Sections 22, 24, 34, 35, 51, and 79 of Republic Act No.
8424, as Amended, Otherwise Known as the National
Internal Revenue Code of 1997," was approved and
signed into law by President Arroyo
• The following are the salient features of the new law:It
increased the basic personal exemption from P20,000
for a single individual, P25,000 for the head of the
family, and P32,000 for a married individual to P50,000
for each individual.It increased the additional exemption
for each dependent not exceeding four from P8,000 to
P25,000.It raised the Optional Standard Deduction
(OSD) for individual taxpayers from 10% of gross
income to 40% of the gross receipts or gross sales.It
introduced the OSD to corporate taxpayers at no more
than 40% of their gross income.It granted MWEs
exemption from payment of income tax on their
minimum wage, holiday pay, overtime pay, night shift
differential pay and hazard pay.[1]
• Accordingly, R.A. 9504 was published in the Manila
Bulletin and Malaya on 21 June 2008. On 6 July 2008,
the end of the 15-day period, the law took effect.
• Petitioners Jaime N. Soriano et al. primarily assail
Section 3 of RR 10-2008 providing for the prorated
application of the personal and additional exemptions
for taxable year 2008 to begin only effective 6 July 2008
for being contrary to Section 4 of Republic Act No.
9504.[2]Petitioners argue that the prorated application
of the personal and additional exemptions under RR
10-2008 is not "the legislative intendment in this
jurisdiction."[3] They stress that Congress has always
maintained a policy of "full taxable year treatment"[4] as
regards the application of tax exemption laws. They
allege further that R.A. 9504 did not provide for a
prorated application of the new set of personal and
additional exemptions.[5]
• Then Senator Manuel Roxas, as principal author of
R.A. 9504, also argues for a full taxable year treatment
of the income tax benefits of the new law. He relies on
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
what he says is clear legislative intent In his
"Explanatory Note of Senate Bill No. 103," he stresses
"the very spirit of enacting the subject tax exemption
law
• Petitioner Trade Union Congress of the Philippine
contends that the provisions of R.A. 9504 provide for
the application of the tax exemption for the full calendar
year 2008. It also espouses the interpretation that R.A.
9504 provides for the unqualified tax exemption of the
income of MWEs regardless of the other benefits they
receive.[14] In conclusion, it says that RR 10-2008,
which is only an implementing rule, amends the original
intent of R.A. 9504, which is the substantive law, and is
thus null and void.
• Petitioners Senator Francis Joseph Escudero, the Tax
Management Association of the Philippines, Inc., and
Ernesto Ebro allege that R.A. 9504 unconditionally
grants MWEs exemption from income tax on their
taxable income, as wel1 as increased personal and
additional exemptions for other individual taxpayers, for
the whole year 2008. They note that the assailed RR
10-2008 restricts the start of the exemptions to 6 July
2008 and provides that those MWEs who received
"other benefits" in excess of P30,000 are not exempt
from income taxation. Petitioners believe this RR is a
"patent nullity"[15] and therefore voi
• The Office of the Solicitor General (OSG) filed a
Consolidated Comment[16] and took the position that
the application of R.A. 9504 was intended to be
prospective, and not retroactive. This was supposedly
the general rule under the rules of statutory
construction: law will only be applied retroactively if it
clearly provides for retroactivity, which is not provided in
this instance
• The OSG further argues that the legislative intent of
non-retroactivity was effectively confirmed by the
"Conforme" of Senator Escudero, Chairperson of the
Senate Committee on Ways and Means, on the draft
revenue regulation that became RR 10-2008.
• Issues:
• First, whether the increased personal and additional
exemptions provided by R.A. 9504 should be applied to
the entire taxable year 2008 or prorated, considering
that R.A. 9504 took effect only on 6 July 2008.Second,
whether an MWE is exempt for the entire taxable year
2008 or from 6 July 2008 only.Third, whether Sections
1 and 3 of RR 10-2008 are consistent with the law in
providing that an MWE who receives other benefits in
excess of the statutory limit of P30,000[19] is no longer
entitled to the exemption provided by R.A. 9504.
• Ruling:
• the policy of full taxable year treatment is established,
not by the amendments introduced by R.A. 9504, but by
the provisions of the 1997 Tax Code, which adopted the
policy from as early as 1969.
• Principles:
• This Court ruled in the affirmative, considering that the
increased exemptions were already available on or
before 15 April 1992, the date for the filing of individual
income tax returns. Further, the law itself provided that
the new set of personal and additional exemptions
would be immediately available upon its effectivity.
While R.A. 7167 had not yet become effective during
calendar year 1991, the Court found that it was a piece
of social legislation that was in part intended to alleviate
the economic plight of the lower-income taxpayers. For
that purpose, the new law provided for adjustments "to
the poverty threshold level" prevailing at the time of the
enactment of the law
• T]he Court is of the considered view that Rep. Act 7167
should cover or extend to compensation income earned
or received during calendar year 1991
• In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece
of social legislation clearly intended to afford immediate
tax relief to individual taxpayers, particularly low-income
compensation earners. Indeed, if R.A. 9504 was to take
effect beginning taxable year 2009 or half of the year
2008 only, then the intent of Congress to address the
increase in the cost of living in 2008 would have been
negated.
• The NIRC is clear on these matters. The taxable
income of an individual taxpayer shall be computed on
the basis of the calendar year.[30] The taxpayer is
required to fi1e an income tax return on the 15th of April
of each year covering income of the preceding taxable
year.[31] The tax due thereon shall be paid at the time
the return is filed
• In the present case, the increased exemptions were
already available much earlier than the required time of
filing of the return on 15 April 2009. R.A. 9504 came
into law on 6 July 2008, more than nine months before
the deadline for the filing of the income tax return for
taxable year 2008. Hence, individual taxpayers were
entitled to claim the increased amounts for the entire
year 2008. This was true despite the fact that incomes
were already earned or received prior to the law's
effectivity on 6 July 2008.
• We find the facts of this case to be substantially
identical to those of Umali.First, both cases involve an
amendment to the prevailing tax code. The present
petitions call for the interpretation of the effective date
of the increase in personal and additional exemptions.
Otherwise stated, the present case deals with an
amendment (R.A. 9504) to the prevailing tax code (R.A.
8424 or the 1997 Tax Code). Like the present case,
Umali involved an amendment to the then prevailing tax
code - it interpreted the effective date of R.A. 7167, an
amendment to the 1977 NIRC, which also increased
personal and additional exemptions.Second, the
amending law in both cases reflects an intent to make
the new set of personal and additional exemptions
immediately available after the effectivity of the law. As
already pointed out, in Umali, R.A. 7167 involved social
legislation intended to adjust personal and additional
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
exemptions. The adjustment was made in keeping with
the poverty threshold level prevailing at the time.Third,
both cases involve social legislation intended to cure a
social evil - R.A. 7167 was meant to adjust personal
and additional exemptions in relation to the poverty
threshold level, while R.A. 9504 was geared towards
addressing the impact of the global increase in the price
of goods.Fourth, in both cases, it was clear that the
intent of the legislature was to hasten the enactment of
the law to make its beneficial relief immediately
available.
• CIR vs. Burroughs Ltd. [G.R. No. L-66653. June 19,
• 1986.]
• Second Division, Paras (J): 4 concurring
• Burroughs Limited will be prejudiced by the
Facts: Burroughs Limited is a foreign corporation
authorized to engage in trade or business in the
Philippines through a branch office located at De la Rosa
corner Esteban Streets, Legaspi Village, Makati, Metro
Manila. Sometime in March 1979, said branch office
applied with the Central Bank for authority to remit to its
parent company abroad, branch profit amounting to
P7,647,058.00. Thus, on 14 March 1979, it paid the 15%
branch profit remittance tax, pursuant to Sec. 24 (b) (2)
(ii) and remitted to its head office the amount of
P6,499,999.30. Claiming that the 15% profit remittance
tax should have been computed on the basis of the
amount actually remitted (P6,499,999.30) and not on the
amount before profit remittance tax (P7,647,058.00),
Burroughs Ltd. filed on 24 December 1980, a written
claim for the refund or tax credit of the amount of
P172,058. 90 representing alleged overpaid branch profit
remittance tax. On 24 February 1981, Burroughs Ltd. filed
with the Court of Tax Appeals, a petition for review (CTA
Case) 3204 for the recovery of the amount of
P172,058.81. On 27 June 1983, the tax court rendered its
Decision, ordering the Commission of Internal Revenue
to grant a tax credit in favor of Burroughs Ltd. the said
amount claimed; without pronouncement as to costs.
Unable to obtain a reconsideration from the decision, the
Commissioner filed the petition for certiorari before the
Supreme Court.
The Supreme Court affirmed the assailed decision of the
Court of Tax Appeals; without pronouncement as to
costs.
Memorandum Circular 8-82 (17 March 1982)
does not apply
What is applicable in the present case is still the
Revenue Ruling of 21 January 1980 because
Burroughs Limited paid the branch profit remittance tax in
question on 14 March 1979. Memorandum Circular 8- 82
dated 17 March 1982, which states that “considering that
the 15% branch profit remittance tax is imposed and
collected at source, necessarily the tax base should be
the amount actually applied for by the branch with the
Central Bank of the Philippines as profit to be remitted
abroad,” cannot be given retroactive effect in the light of
Section 327 of the National Internal Revenue Code.
Section 327 of the National Internal Revenue
Code
Section 327 (Non-retroactivity of rulings) of the
National Internal Revenue Code provides “any
revocation, modification, or reversal of any of the rules
and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars
promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification, or
reversal will be prejudicial to the taxpayer except in the
following cases (a) where the taxpayer deliberately
misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal
Revenue; (b) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based, or (c) where
the taxpayer acted in bad faith.” (ABS-CBN Broadcasting
Corp. v. CTA, 108 SCRA 151-152)
retroactive application of Memorandum
Circular
8-82
The prejudice that would result to Burroughs
Limited by a retroactive application of Memorandum
Circular 8-82 is beyond question for it would be deprived
of the substantial amount of P172,058.90. Insofar as the
enumerated exceptions are concerned, admittedly,
Burroughs Limited does not fall under any of them.
‣PBCOM v. CIR; G.R. No. 112024
FACTS:
Petitioner, Philippine Bank of Communications
(PBCom), a commercial banking corporation duly
organized under Philippine laws, filed its quarterly
income tax returns for the first and second
quarters of 1985, reported profits, and paid the
total income tax of P5,016,954.00 by applying
PBCom's tax credit memos for P3,401,701.00 and
P1,615,253.00, respectively. Subsequently,
however, PBCom suffered net loss of
P25,317,228.00, thereby showing no income tax
liability in its Annual Income Tax Returns for the
year-ended December 31, 1985. For the
succeeding year, ending December 31, 1986, the
petitioner likewise reported a net loss of
P14,129,602.00, and thus declared no tax payable
for the year.
But during these two years, PBCom earned rental
income from leased properties. The lessees
withheld and remitted to the BIR withholding
creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986. On August 7, 1987,
petitioner requested the Commissioner of Internal
Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of
taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a
claim for refund of creditable taxes withheld by
their lessees from property rentals in 1985 for
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent
Commissioner of Internal Revenue, petitioner
instituted a Petition for Review on November 18,
1988 before the Court of Tax Appeals (CTA). The
petition was docketed as CTA Case No. 4309
entitled: "Philippine Bank of Communications vs.
Commissioner of Internal Revenue."
The CTA decided in favor of the BIR on the ground
that the Petition was filed out of time as the same
was filed beyond the two-year reglementary
period. A motion for Reconsideration was denied
and the appeal to Court of Appeals was likewise
denied. Thus, this appeal to Supreme Court.
Issues:
a) Whether or not Revenue Regulations No. 7-85
which alters the reglementary period from two
(2) years to ten (10) years is valid.
b) Whether or not the petition for tax refund had
already prescribed.
Ruling:
a. RR 7-85 altering the 2-year prescriptive period
imposed by law to 10-year prescriptive period is
invalid.
Administrative issuances are merely
interpretations and not expansions of the
provisions of law, thus, in case of inconsistency,
the law prevails over them. Administrative
agencies have no legislative power.
“When the Acting Commissioner of Internal
Revenue issued RMC 7-85,
changing the prescriptive period of two years to
ten years on claims of excess quarterly income tax
payments, such circular created a clear
inconsistency with the provision of Sec. 230 of
1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.”
“It bears repeating that Revenue memorandum-
circulars are considered administrative rulings (in
the sense of more specific and less general
interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal
Revenue. It is widely accepted that the
interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is
entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive
and will be ignored if judicially found to be
erroneous. Thus, courts will not countenance
administrative issuances that override, instead of
remaining consistent and in harmony with, the law
they seek to apply and implement.”
“Further, fundamental is the rule that the State
cannot be put in estoppel by the mistakes or
errors of its officials or agents. As pointed out by
the respondent courts, the nullification of RMC No.
7-85 issued by the Acting Commissioner of
Internal Revenue is an administrative
interpretation which is not in harmony with Sec.
230 of 1977 NIRC, for being contrary to the
express provision of a statute. Hence, his
interpretation could not be given weight for to do
so would, in effect, amend the statute.”
b. By implication of the above, claim for refund had
already prescribed.
Since the petition had been filed beyond the
prescriptive period, the same has already
prescribed. The fact that the final adjusted return
show an excess tax credit does not automatically
entitle taxpayer claim for refund without any
express intent.
WHEREFORE, the petition is hereby DENIED. The
decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the petitioner.
Imprescriptibility of Taxes
Doctrine of Imprescriptibility
GR: Taxes are imprescriptible by reason that it is the
lifeblood of the government.
XPN: Tax laws may provide for statute of limitations. In
particular, the NIRC and LGC provide for the prescriptive
periods for assessment and collection.
Tax laws provide for statute of limitations in the collection of
taxes for the purpose of safeguarding taxpayers from any
unreasonable examination, investigation or assessment (CIR v.
B.F. Goodrich Phils, G.R. No. 104171, February 24, 1999).
NOTE: Although the NIRC provides for the limitation in the
assessment and collection of taxes imposed, such prescriptive
period will only be applicable to those taxes that were
returnable. The prescriptive period shall start from the time
the taxpayer files the tax return and declares his liability
(Collector of Internal Revenue vs. Bisaya Land Transportation Co.,
Inc., G.R. Nos. L-12100 & L- 11812, May 29, 1959)
Situs of Taxation
SITUS OF TAXATION
Meaning of situs of taxation
It is the place or authority that has the right to
impose and collect taxes (Commissioner v.
Marubeni, G.R. No. 137377, December 18, 2001).
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
CIR v. MARUBENI; G.R. No. 137377
• Facts:
• CIR assails the CA decision which affirmed CTA,
ordering CIR to desist from collecting the 1985
deficiency income, branch profit remittance and
contractor’s taxes from Marubeni Corp after
finding the latter to have properly availed of the
tax amnesty under EO 41 & 64, as amended.
• Marubeni, a Japanese corporation, engaged in
general import and export trading, financing and
construction, is duly registered in the Philippines
with Manila branch office. CIR examined the
Manila branch’s books of accounts for fiscal year
ending March 1985, and found that respondent
had undeclared income from contracts with NDC
and Philphos for construction of a wharf/port
complex and ammonia storage complex
respectively.
• On August 27, 1986, Marubeni received a letter
from CIR assessing it for several deficiency taxes.
CIR claims that the income respondent derived
were income from Philippine sources, hence
subject to internal revenue taxes. On Sept 1986,
respondent filed 2 petitions for review with CTA:
the first, questioned the deficiency income, branch
profit remittance and contractor’s tax assessments
and second questioned the deficiency commercial
broker’s assessment.
• On Aug 2, 1986, EO 41 declared a tax amnesty for
unpaid income taxes for 1981-85, and that
taxpayers who wished to avail this should on or
before Oct 31, 1986. Marubeni filed its tax amnesty
return on Oct 30, 1986.
• On Nov 17, 1986, EO 64 expanded EO 41’s scope
to include estate and donor’s taxes under Title 3
and business tax under Chap 2, Title 5 of NIRC,
extended the period of availment to Dec 15, 1986
and stated those who already availed amnesty
under EO 41 should file an amended return to
avail of the new benefits. Marubeni filed a
supplemental tax amnesty return on Dec 15, 1986.
• CTA found that Marubeni properly availed of the
tax amnesty and deemed cancelled the deficiency
taxes. CA affirmed on appeal.
• in the Philippines, and are therefore not
• Issue:
• W/N Marubeni is exempted from paying tax
•
• Held:
• Yes.
• 1. On date of effectivity
• CIR claims Marubeni is disqualified from the tax
amnesty because it falls under the exception in Sec
4b of EO 41:
• “Sec. 4. Exceptions.—The following taxpayers
may not avail themselves of the amnesty herein
granted: xxx b) Those with income tax cases
already filed in Court as of the effectivity hereof;”
• Petitioner argues that at the time respondent filed
for income tax amnesty on Oct 30, 1986, a case
had already been filed and was pending before the
CTA and Marubeni therefore fell under the
exception. However, the point of reference is the
date of effectivity of EO 41 and that the filing of
income tax cases must have been made before and
as of its effectivity.
• EO 41 took effect on Aug 22, 1986. The case
questioning the 1985 deficiency was filed with CTA
on Sept 26, 1986. When EO 41 became effective,
the case had not yet been filed. Marubeni does not
fall in the exception and is thus, not disqualified
from availing of the amnesty under EO 41 for taxes
on income and branch profit remittance.
• The difficulty herein is with respect to the
contractor’s tax assessment (business tax) and
respondent’s availment of the amnesty under EO
64, which expanded EO 41’s coverage. When EO
64 took effect on Nov 17, 1986, it did not provide
for exceptions to the coverage of the amnesty for
business, estate and donor’s taxes. Instead,
Section 8 said EO provided that:
• “Section 8. The provisions of Executive Orders
Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive
Order shall remain in full force and effect.”
• Due to the EO 64 amendment, Sec 4b cannot be
construed to refer to EO 41 and its date of
effectivity. The general rule is that an amendatory
act operates prospectively. It may not be given a
retroactive effect unless it is so provided expressly
or by necessary implication and no vested right or
obligations of contract are thereby impaired.
• 2. On situs of taxation
• Marubeni contends that assuming it did not
validly avail of the amnesty, it is still not liable for
the deficiency tax because the income from the
projects came from the “Offshore Portion” as
opposed to “Onshore Portion”. It claims all
materials and equipment in the contract
under the “Offshore Portion” were
manufactured and completed in Japan, not
subject to Philippine taxes.
• (BG: Marubeni won in the public bidding for
projects with government corporations NDC and
Philphos. In the contracts, the prices were broken
down into a Japanese Yen Portion (I and II) and
Philippine Pesos Portion and financed either by
OECF or by supplier’s credit. The Japanese Yen
Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the
Philippine Onshore Portion. Marubeni has already
paid the Onshore Portion, a fact that CIR does not
deny.)
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES

• CIR argues that since the two agreements are turn-

key, they call for the supply of both materials and
services to the client, they are contracts for a piece
of work and are indivisible. The situs of the two
projects is in the Philippines, and the materials
provided and services rendered were all done and
completed within the territorial jurisdiction of the
Philippines. Accordingly, respondent’s entire
receipts from the contracts, including its receipts
from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts
covering both labor and materials should be
subjected to contractor’s tax (a tax on the exercise
of a privilege of selling services or labor rather
than a sale on products).
• Marubeni, however, was able to sufficiently prove
in trial that not all its work was performed in the
Philippines because some of them were completed
in Japan (and in fact subcontracted) in accordance
with the provisions of the contracts. All services
for the design, fabrication, engineering and
manufacture of the materials and equipment
under Japanese Yen Portion I were made and
completed in Japan. These services were
rendered outside Philippines’ taxing
jurisdiction and are therefore not subject
to contractor’s tax.Petition denied.

Factors that determine the situs of taxation

[ReCiNS2]

1. Residence of the taxpayer

2. Citizenship of the taxpayer
3. Nature of the tax
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES

Subject matter of the tax 5. Source of income

SITUS OF INCOME TAX, PROPERTY TAXES, EXCISE TAX, BUSINESS TAX

OBJEC SITUS
T

INCOME TAX
Nationality – applied to RC, DC From sources of income derived within and without the Philippines
Place – applied to NRC, NRA, From sources of income derived within the Philippines
NRFC
Residence – applied to RA, RFC From sources of income derived within the Philippines
NOTE: The important factor that determines the source of income of personal services is place where the
services were actually rendered (CIR v. Baeir-Nickel, G.R. No. 153793, August 29, 2006). Thus, in the airline
business, the sale of tickets in the Philippines is considered as a source of income within the country
regardless of the absence of flight operations within Philippine territory (CIR v. Japan Air Lines, Inc., G.R. No.
60714, March 6, 1991).
PROPERTY
TAX
Real Property Location of the property (lex reisitae / lex situs)

Rationale:
1. The taxing authority has control because of the stationary and fixed
character of the property.
2. The place where the real property is situated gives protection to the
real property; hence the property or its owner should support the
government of that place.
Personal Property Tangible personal property
(Tangible and
Intangible) Where the property is physically located although the owner resides in
another jurisdiction (51 Am Jur. 467)

Rationale: The place where the tangible personal property is found gives
its protection.

Intangible personal property

GR: Situs of intangible personal property is the domicile of the owner

pursuant to the principle of the mobilia sequntur personam.

XPN:
1. When the property has acquired a business situs in another
jurisdiction;
2. When an express provision of the statute provide for anoth er rule, i.e.
Sec. 104
of the N)RC in case of donor’s and estate tax
EXC)SE TAX / DONOR’S TAX / ESTATE TAX
Nationality– applied to RC, NRC Taxed upon their properties wherever situated
Place – applied to NRA Taxed on properties situated within the Philippines

Residence – applied to RA Taxed upon their properties wherever situated

NOTE: Situs of taxation is the place where the privilege is exercised. In case of a franchise, which is a right or
privileges granted to it by the government, the situs of taxation is the place where the franchise holder
exercises its franchise regardless of the place where its services or products are delivered. Thus, in a franchise
of electric power distribution, the franchisee is liable within the jurisdiction it exercises its privilege (City of Iriga
v. Camarines Sur III Electric Cooperative, G.R. No. 192945, September 5, 2012).

NOTE: The Documentary Stamp Tax is in the nature of an excise tax because it is imposed upon the privilege,
opportunity or facility offered at exchanges for the transaction of the business (CIR v. Pilipinas Shell Petroleum
Corporation, G.R. No. 192398, September 29, 2014).
TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES

Place where the act/ business is performed or occupation is engaged in.
Sale of real property
Sale of personal property
VALUE ADDED TAX (VAT)
Doctrine of Mobilia Sequuntur Personam
Literally, it means “movable follows the person/owner”.
However, a tangible property may acquire situs
elsewhere provided it has a definite location there
with some degree of permanency.
Wells Fargo vs. Collector of Internal Revenue
GR 46720, 28 June 1940
First Division, Moran (J): 4 concur, 1 concur in result
TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
BUSINESS
TAX
Place where the property is located
1. Personal property produced within the Philippines and sold without,
or produced without and sold within – any gain or profit or income
shall be treated as derived partly from sources within and partly
from sources without.
2. Purchase of personal property within and its sale without, or
purchase of personal property without and its sale within – any
gain or profit or income shall be treated as derived entirely from
sources within the country in which it is sold.
3. Shares of stock in a domestic corporation – Gain, profit or income is
treated as derived entirely from sources within the Philippines,
regardless of where the said shares are sold (Reviewer in Taxation,
p.109, Mamalateo 2008)
NOTE: The situs of taxation for the sale personal property is not the
place where the contract was perfected, but the place of delivery. It has
been ruled that for a sale to be taxed in the Philippines it must be
consummated there; consummation is associated with the delivery of
the things subject matter of the contract (The Municipality of Jose
Panganiban v. The Shell Company of the Philippines, LTD., G.R. No. L-18349,
July 30, 1966).
Where the goods, property or services are destined, used or consumed
(Destination Principle/Cross Border Principle).
NOTE: Consumption of services means that successful completion of a
contractual duty, usually resulting in the performer’s release from any past or
future liability. However, unlike goods, services cannot be physically used in
or bound for a specific place where their destination is determined.
Instead there can only be a "predetermined end of a course" when
determining the service "location or position for legal purposes."
Thus, a multinational banks successfully completes its services upon
sending to its foreign client the drafts and bills that it has gathered from
service establishments here; thus, its services, having been performed
in the Philippines, are also consumed in the Philippines (CIR v.
American Express International, Inc., G.R. No. 152609, June 29, 2005).
Facts: Birdie Lillian Eye died on 16 September 1932, at Los
Angeles, California, the place of her alleged last residence and
domicile. Among the properties she left was her 1/2 conjugal
shares of stock in the Benguet Consolidated Mining Co., an
anonymous partnership (sociedad anonima), organized under
the laws of the Philippines. She left a will duly admitted to
probate in California where her estate was administered and
settled. Wells Fargo bank and Union Trust Co. was duly
appointed trustee of the trust by the said will. The Federal and
California State’s inheritance taxes due thereon have been duly
paid. The Collector of Internal Revenue in the Philippines,
however, sought to subject the shares of stock to inheritance
tax, to which Wells Fargo objected.
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES

Issue: Whether the shares of stock are subject to
Philippine inheritance tax considering that the decedent
was domiciled in California. 6.
obligations or bonds have acquired a business Situs in
the Philippines;
Shares or rights in any partnership, business or
industry Established in the Philippines (Sec. 104,
NIRC)

Held: Originally, the settled law in the United States is that

intangibles have only one situs for the purpose of
inheritance tax, and such situs is in the domicile of the
decedent at the time of his or her death. But the rule has
been relaxed. The maxim “mobila sequuntur personam,”
upon which the rule rests, has been decried as a mere
“fiction of law having its origin in considerations of general
convenience and public policy, and cannot be applied to
limit or control teh right of the State to tax property within its
jurisdiction” and must “yield to established fact of legal
ownership, actual presence and control elsewhere, and
cannot be applied if to do so whould result in inescapable
and patent injustice.” The relaxation of the original rule
rests on either of two fundamental considerations: (1) upon
the recognition of the inherent power of each government to
tax persons, properties, and rights within its jurisdiction and
enjoying, thus, the protection of its laws; and (2) upon the
principle that as to intangibles, a single location in space is
hardly possible, considering the multiple, distinct
relationships which may be entered into with respect
thereto.

Herein, the actual situs of the shares of stock is in the

Philippines, the corporation being domiciled therein. The
certificates of stock remained in the Philippines up to the
time when the deceased died in California, and they were in
possession of one Syrena McKee, secretary of the
corporation, to whom they have been delivered and
indorsed in blank. McKee had the legal title to the
certificates of stock held in trust for the true owner thereof.
The owner residing in California has extended here her
activities with respect to her intangibles so as to avail
hereself of the protection and benefit of Philippine laws.
Accordingly, the jurisdiction of the Philippine Government to
tax must be upheld.

Enumerate the intangible properties with situs

in the Philippines for purposes of estate and donor’s taxes:

[Fran-Sha4](Organized-Established-85-Foreign
Situs)

1. Franchise which must be exercised in the

Philippines;
2. Shares, obligations or bonds issued by any
corporation or sociedad anonima
3. Organized or constituted in the Philippines
in accordance with its laws;
4. Shares, obligations or bonds by any foreign
corporation 85% of its business is located
in the Philippines;
5. Shares, obligations or bonds issued by any
Foreign corporation if such shares,
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES

the place of
dispatch or
NOTE: These are considered
receipt of
located in the Philippines,
electronic
regardless of the residence of the
data message
donor or decedent. EXCEPT where
or document.
the foreign country grants
Only one
exemption or does not impose taxes
place
on intangible properties to Filipino
of business
citizens.
More than one Place which has closest
place of relationship to the
Application of the doctrine of
business, with underlying transaction
mobilia sequuntur personam underlying
not mandatory in all cases transaction
More than one Principal place of business
place of
Such doctrine has been decreed as business, without underlying transaction
a mere "fiction of law having its No place of If originator or addressee is
origin in considerations of general business a natural person – Habitual
convenience and public policy, and residence.
cannot be applied to limit or control
the right of the State to tax If body corporate – usual place of
property within its jurisdiction," residence (place where it is
and must "yield to established fact incorporated or otherwise
of legal ownership, actual presence legally
and control elsewhere, and cannot constituted).
be applied if to do so would result
in inescapable and patent injustice"
(Wells Fargo Bank and Union Trust v.
Collector, G.R. No. L-46720, June 28, NOTE: Section 23 only creates a rebuttable
1940). presumption and applies even if the originator or
addressee has used a laptop or other portable
Situs of taxation in electronic transactions device to transmit or receive his electronic data
message or electronic document.
As provided for under Section 23 of
the E-Commerce Act (R.A. 8792), an If the income or property has acquired multiple
electronic data message or situs, it is possible that certain properties be
electronic document is deemed to subject to tax in several taxing jurisdictions.
be dispatched at the place where
the originator has its place of Remedies available against multiplicity of situs
business and received at the place
where the addressee has its place of Tax laws and treaties with other States may:
business. This rule shall also apply 1. Exempt foreign nationals from local taxation
to determine the tax situs of such and local nationals from foreign taxation
transaction. under the principle of reciprocity;
2. Credit foreign taxes paid from local taxes due;
3. Allow foreign taxes as deduction from gross
income; or
FACTUAL PLACE OF DISPATCH 4. Reduce the Philippine income tax rate
SITUAT (ORIGINATOR) OR
ION: RECEIPT
ORIGI (ADDRESSEE)
NATOR
OR
ADDRE
SSEE
HAS:
Unless Place of business
otherwise
agreed upon
by the parties,
the following
rules shall
apply in
determining
TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
rule shall also apply to determine the tax situs of such taxation and local nationals from
transaction. foreign taxation under the principle of
reciprocity;
6. Credit foreign taxes paid from local taxes
due;
FACTUAL PLACE OF 7. Allow foreign taxes as deduction from
SITUATION: DISPATCH gross income; or
ORIGINATOR (ORIGINATOR) 8. Reduce the Philippine income tax rate.
OR ADDRESSEE OR RECEIPT
HAS: (ADDRESSEE)
Unless otherwise agreed Place of business
upon by the parties, the
Double Taxation
following rules shall
apply in determining Two Types of Double Taxation (Duplicate
the place of dispatch or Taxation)
receipt of electronic
data message or
document. Only one A. Direct (Strict sense)
place
of business It constitutes taxation in its objectionable or
More than one place of Place which has prohibited sense.
business, with closest relationship
underlying to
transaction the Elements of Direct Double Taxation:
underlying
transaction 1. The same property is taxed twice when
More than one place of Principal place it should be taxed only once; and
business, of 2. Both taxes are imposed
witho business a. on the same subject matter,
ut underlying
b. for the same purpose,
transaction
c. by the same taxing authority,
No place of business If originator or d. within the same jurisdiction,
addressee is a e. during the same taxing period; and
natural person – f. the taxes must be of the same
Habitual residence.
kind or character (City of
Manila v. Coca Cola Bottlers
If body corporate –
Philippines , G.R. No. 181845,
usual place of
residence (place August 4, 2009)
where it is
incorporated NOTE: All the elements must be
or present in order to apply double
otherwise taxation in its strict sense.
legall
y Q: The City of Manila assessed and
constituted). collected taxes from the individual
petitioners pursuant to Section 15
(Tax on Wholesalers, Distributors,
NOTE: Section 23 only creates a
or Dealers) and Section 17 (Tax on
rebuttable presumption and applies even if
Retailers) of the Revenue Code of
the originator or addressee has used a
Manila (Ordinance No. 7794). At
laptop or other portable device to transmit
the same time, the City of Manila
or receive his electronic data message or
imposed additional taxes upon the
electronic document.
petitioners pursuant to Section 21
of the Revenue Code of Manila, as a
If the income or property has acquired condition for the renewal of their
multiple situs, it is possible that certain respective business licenses for the
properties be subject to tax in several year 1999. Is there double taxation?
taxing jurisdictions.
A: YES. All the elements of double
Remedies available against multiplicity taxation and the taxes collected
of situs pursuant thereto must be refunded.
Firstly, because Section 21 of the
Tax laws and treaties with other States
Revenue Code of Manila imposed the
may:
tax on a person who sold goods and
5. Exempt foreign nationals from local
services in the course of trade or
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
business based on a certain
percentage of his gross sales or
receipts in the preceding calendar
year, while Section 15 and Section
17 likewise imposed the tax on a
person who sold goods and services
in the course of trade or business
but only identified such person with
particularity, namely, the
wholesaler, distributor or dealer
(Section 15), and the retailer
(Section 17). All the taxes, being
imposed on the privilege of doing
business in the City of Manila in
order to make the taxpayers
contribute to the city’s revenues, were
imposed on the same subject
matter and for the same purpose.
Secondly, the taxes were imposed
by the same taxing authority (the
City of Manila) and within the same
jurisdiction in the same taxing
period (i.e., per calendar year).
Thirdly, the taxes were all in the
nature of local business taxes.
(Nursery Care Corp. et. al, v. City of
Manila, G.R. No. 180651, July 30,
2014)
B. Indirect (Broad sense)
It is a permissible double taxation. It
is indirect when some elements of
direct double taxation are absent.
This is allowed if the taxes are of
different nature or character,
imposed by different taxing
authorities. It has been held that a
real estate tax and the tenement
tax imposed by local ordinance
although imposed by the same
taxing authority are not of the same
kind or character (Villanueva v. Iloilo
City, 26 SCRA 578).
Q: Differentiate between double
taxation in the strict sense and in
a broad sense and give an
example of each. (2015 Bar)
A: Double taxation in the strict sense
pertains to the direct double
taxation. This means that the
taxpayer is taxed twice by the same
taxing authority, within the same
taxing jurisdiction, for the same
property and same purpose. On the
other hand, double taxation in broad
sense pertains to indirect double
taxation. This extends to all cases in
which there is a burden of two or
more impositions. It is the double
taxation other than those covered by
direct double taxation.
Q: Under the Tax Code, the earnings of
banks from "passive" income are subject to
a twenty percent final withholding tax
(20% FWT). This tax is withheld at source
and is thus not actually and physically
received by the banks, because it is paid
directly to the government by the entities
from which the banks derived the income.
Apart from the 20% FWT, banks are also
subject to a five percent gross receipts tax
(5% GRT) which is imposed by the Tax
Code on their gross receipts, including
the "passive" income. Is there double taxation
on the banks’ “passive” income?
A: Subjecting interest income to a 20% Final
Withholding Tax and including it in the
computation of the 5% Gross Receipts Tax
is not double taxation. Firstly, the taxes
herein are imposed on two different subject
matters as FWT is the passive income
generated in the form of interest on
deposits and yield on deposit substitutes,
while the subject matter of the GRT is the
privilege of engaging in the business of
banking.
Secondly, although both taxes are national in
scope because they are imposed by the same
taxing authority, which is the national
government under the Tax Code, and operate
within the same Philippine jurisdiction for the
same purpose of raising revenues, the taxing
periods they affect are different The FWT is
deducted and withheld as soon as the income
is earned, and is paid after every calendar
quarter in which it is earned. On the other
hand, the GRT is neither deducted nor
withheld, but is paid only after every taxable
quarter in which it is earned.
Third, these two taxes are of different kinds or
characters as the FWT is an income tax subject
to withholding, while the GRT is a percentage
tax not subject to withholding. (CIR v. Solidbank
Corporation, G.R. No. 148191, November 25, 2003).
Q: The City of Ormoc issued an ordinance
requiring a tax of P5.00 for every thousand
board feet of lumber sold at Ormoc City.
Dr. Serafina assails the said ordinance as
null and void as the Charter of Ormoc City
authorizes the same to "regulate," but not
to "tax" lumber yards; and the ordinance in
question imposes, in effect, double
taxation, because the business of lumber
yard is already regulated under said
Charter and the sale of lumber is "a mere
incident to the business of lumber yard."
Is the said ordinance amount to double
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
taxation? Q: Compania Tabacos, a duly licensed
first class wholesale and retail liquor
A: NO. Regulation and taxation are two dealer paid the City of Manila the fixed
different things, the first being an exercise license fees prescribed by Ordinance No.
of police power, whereas the latter involves 3358; also, as a wholesale and retail
the exercise of the power of taxation. While dealer of general merchandise, it also
R.A. 2264 provides that no city may impose paid the sales taxes required by
taxes on forest products and although Ordinance No. 3634. For the third
lumber is a forest product, the tax in quarter of 1954, it included its liquor
question is imposed not on the lumber but sale in its sales of general merchandise.
upon its sale; thus, there is no double It now filed a tax refund on the theory
taxation and even if there was, it is not that it should not pay the municipal
prohibited (Serafica v. City Treasurer of sales tax on the sale of liquor as it
Ormoc, G.R. No. L24813, April 28, 1968). already paid the fixed licensed fee on
the same. Is the contention of
Compania Tabacos correct?

A: NO. Both a license fee and a tax may be

imposed on the same business or
occupation, or for selling the same article.
This is not being in violation of the rule
against double taxation. The license fees on
Ordinance No. 3358 is for the privilege to
engage in the business of selling liquor or
alcoholic beverages, which is imposed to
regulate the sale of intoxicating liquors. On
the other hand, Ordinance No. 3634
imposes taxes on the sales of general
merchandise as revenue measures.
(Compania General De Tabacos De Filipinas v.
City of Manila, 8 SCRA 367, June 29, 1963).

Q: Under the R.A. 103511 or the Sin

Tax Law, stemmed leaf tobacco, a
partially prepared tobacco, is subject to
an excise tax for each kilo thereof. On
the other hand, cigars and cigarettes, of
which stemmed leaf tobacco is a raw
material, are also subjected to specific
tax under Section 142 of the 1997
NIRC. Is there double taxation in
prohibited sense when excise specific
tax is imposed on stemmed leaf
tobacco and again on the finished
product of which stemmed leaf tobacco
is a raw material?

A: NONE. There is no constitutional

prohibition against double taxation in the
Philippines as the State has exclusively
reserved the same for its own prerogative.
Double taxation becomes obnoxious only
where the taxpayer is taxed twice for the
benefit of the same governmental entity or
by the same jurisdiction for the same
purpose, but not in a case where one tax is
imposed by the State and the other by the
city or municipality.

Excise taxes are essentially taxes on

property because they are levied on
certain specified goods or articles
manufactured or produced in the
Philippines for domestic sale or
consumption or for any other disposition,
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
and on goods imported. In this case,
there is no double taxation in the
prohibited sense despite the fact that
they are paying the specific tax on the
raw material and on the finished
product in which the raw material was
a part, because the specific tax is
imposed by explicit provisions of the
Tax Code on two different articles or
products: (1) on the stemmed leaf
tobacco; and
(2) on cigar or cigarette (La Suerte Cigar
& Cigarette Factory v. CA, G.R. No. 125346,
G.R. Nos. 136328-29, G.R. No. 144942, G.R.
No. 148605, G.R. No. 158197, G.R. No.
165499, November 11, 2014).
Kinds of double taxation
1. As to validity –
a. Direct Double Taxation (Obnoxious) -
Double taxation in the objectionable or
prohibited sense since it violates the
equal protection clause of the
Constitution.
b. Indirect Double Taxation - Not repugnant to
the Constitution.
i. This is allowed if the taxes are of
different nature or character
imposed by different taxing
authorities.
ii. Generally, it extends to all cases when
one or more elements of direct
taxation are not present.
2. As to scope –
a. Domestic Double Taxation - When the taxes
are imposed by the local and national
government within the same State.
b. International Double Taxation – refers to
the imposition of comparable taxes in two
or more States on the same taxpayer in
respect of the same subject matter and
for identical periods (CIR v. SC Johnson
and Son, Inc., G.R. No. 127105, June 25,
1999).
• Pepsi-Cola Bottling Company of the Philippines,
Inc. v. Municipality of Tanauan
G.R. No. L-31156; February 27, 1976
Facts: In February 1963, plaintiff commenced a
complaint seeking to declare Section 2 of R.A. 2264 (Local
Autonomy Act) unconstitutional as an undue delegation of
taxing power and to declare Ordinance Nos. 23 and 27
issued by the Municipality of Tanauan, Leyte as null and
void.
Municipal Ordinance No. 23 levies and collects from soft
drinks producers and manufacturers one-sixteenth (1/16)
of a centavo for every bottle of soft drink corked. On the
other hand, Municipal Ordinance No. 27 levies and
collects on soft drinks produced or manufactured within
the territorial jurisdiction of the municipality a tax of one
centavo (P0.01) on each gallon of volume capacity. The tax
imposed in both Ordinances Nos. 23 and 27 is denominated
as "municipal production tax.”
Issues: (1) Is Section 2 of R.A. 2264 an undue delegation of
the power of taxation? (2) Do Ordinance Nos. 23 and 24
constitute double taxation and impose percentage or specific
taxes?
Held: (1) NO. The power of taxation is purely legislative and
cannot be delegated to the executive or judicial department
of the government without infringing upon the theory of
separation of powers. But as an exception, the theory does
not apply to municipal corporations. Legislative powers may
be delegated to local governments in respect of matters of
local concern. (2) NO. The Municipality of Tanauan
discovered that manufacturers could increase the volume
contents of each bottle and still pay the same tax rate since
tax is imposed on every bottle corked. To combat this
scheme, Municipal Ordinance No. 27 was enacted. As such, it
was a repeal of Municipal Ordinance No. 23. In the
stipulation of facts, the parties admitted that the Municipal
Treasurer was enforcing Municipal Ordinance No. 27 only.
Hence, there was no case of double taxation.
•
EUSEBIO VILLANUEVA, ET AL., vs. CITY OF ILOILO
• G.R. No. L-26521 December 28, 1968
• CASTRO, J.:
•
• DOCTRINE:
• 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,
such as the requirement that taxes must be uniform.
•
• KEYWORD(S):
• Municipal Ordinance, License Tax, Real-Estate Tax,
Tenement Tax, Double Taxation
•
• FACTS:
• The municipal board of Iloilo City enacted Ordinance 86,
imposing license tax fees as follows: (1) tenement house
(casa de vecindad), P25.00 annually; (2) tenement house,
partly or wholly engaged in or dedicated to business in the
streets of J.M. Basa, Iznart and Aldeguer, P24.00 per
apartment; (3) tenement house, partly or wholly engaged
in business in any other streets, P12.00 per apartment.
The validity and constitutionality of this ordinance were
challenged by the spouses Villanueva, owners of four
tenement houses containing 34 apartments. The Court, in
City of Iloilo vs. Remedios Sian Villanueva and Eusebio
Villanueva, declared the ordinance ultra vires, "it not
appearing that the power to tax owners of tenement
houses is one among those clearly and expressly granted
to the City of Iloilo by its Charter."
•
• Later, the municipal board of Iloilo City, believing,
obviously, that with the passage of Republic Act 2264,
otherwise known as the Local Autonomy Act, it had
acquired the authority or power to enact an ordinance (AN
ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
PERSONS ENGAGED IN THE BUSINESS OF • In order to constitute double taxation in the
OPERATING TENEMENT HOUSES) similar to that objectionable or prohibited sense the same property
previously declared by this Court as ultra vires, enacted must be taxed twice when it should be taxed but once;
Ordinance 11, series of 1960. both taxes must be imposed on the same property or
• subject-matter, for the same purpose, by the same
• In Iloilo City, the spouses Villanueva are owners of five State, Government, or taxing authority, within the same
tenement houses, aggregately containing 43 jurisdiction or taxing district, during the same taxing
apartments, while the other appellees and the same period, and they must be the same kind or character of
Remedios S. Villanueva are owners of ten apartments. tax. It has been shown that a real estate tax and the
Each of the appellees' apartments has a door leading to tenement tax imposed by the ordinance, although
a street and is rented by either a Filipino or Chinese imposed by the same taxing authority, are not of the
merchant. The first floor is utilized as a store, while the same kind or character.
second floor is used as a dwelling of the owner of the •
store. • At all events, there is no constitutional prohibition
• against double taxation in the Philippines. It is
• By virtue of the ordinance in question, the appellant something NOT FAVORED, BUT is PERMISSIBLE,
City collected from spouses Villanueva, for the PROVIDED some other constitutional requirement is
years 1960-1964, the sum of P5,824.30, and from not thereby violated, such as the requirement that taxes
the appellees Pio Sian Melliza, Teresita S. must be uniform.
Topacio, and Remedios S. Villanueva, for the •
years 1960-1964, the sum of P1,317.00. Eusebio ERICSSON v. CITY OF PASIG; G.R. No. 176667
Villanueva has likewise been paying real estate
•
taxes on his property.
• • CIR v Solidbank Corporation (G.R. No. 148191)
• The plaintiffs-appellees filed a complaint, and an •
amended complaint, respectively, against the City of • FACTS:
Iloilo, in the aforementioned court, praying that Solid Bank declared gross receipts included the amount from
Ordinance 11, series of 1960, be declared "invalid for passive income which was already subjected to 20% final
being beyond the powers of the Municipal Council of withholding tax (FWT). CTA affirmed that the 20% FWT
the City of Iloilo to enact, and unconstitutional for being should not form part of its taxable gross receipts for purpose
violative of the rule as to uniformity of taxation and for of computing the gross receipts tax on such basis; Solid Bank
depriving said plaintiffs of the equal protection clause of filed a request for refund. CTA ordered the refund while CA
the Constitution," and that the City be ordered to refund
held that indeed, the 20% FWT on a bank’s interest income
the amounts collected from them under the said
does not form part of the taxable gross receipts in
ordinance.
computing the 5% Gross Receipt tax (GRT) because the FWT
• was not actually received by the bank, but was directly
• The lower court rendered judgment declaring the remitted to the government.
ordinance illegal on the grounds that (a) "Republic Act
• ISSUE:
2264 does not empower cities to impose apartment
Whether or not the 20% FWT on a bank’s interest income
taxes," (b) the same is "oppressive and unreasonable,"
forms part of the taxable gross receipts in computing the 5%
for the reason that it penalizes owners of tenement
houses who fail to pay the tax, (c) it constitutes not only gross receipts tax? And whether there is a double taxation?
double taxation, but treble at that and (d) it violates the • RULING:
rule of uniformity of taxation. • Yes. The amount of interest income, withheld in payment of
• the 20% Final Withholding Tax (FWT), forms part of gross
• ISSUE: receipts in computing for the GRT on banks.
• Is the contention of the plaintiffs-appellees on double •
taxation tenable? • Although the 20% FWT on respondent’s interest income was
• not actually received by respondent because it was remitted
• RULING: directly to the government the fact that the amount
redounded to the bank’s benefit makes it part of the taxable
• NO. The contention that the plaintiffs-appellees are
doubly taxed because they are paying the real estate gross receipts in computing the 5% GRT.
taxes and the tenement tax imposed by the ordinance •
in question, is also devoid of merit. It is a well-settled
rule that a license tax may be levied upon a business or
• The argument that there is double taxation cannot be
occupation although the land or property used in sustained, as the two taxes are different. The one is a
connection therewith is subject to property tax. The business tax which is not subject to withholding while the
State may collect an ad valorem tax on property used in other is an income tax subject to withholding.
a calling, and at the same time impose a license tax on •
that calling, the imposition of the latter kind of tax being In China Banking vs. CA, the Court ruled that the amount of
in no sense a double tax.
interest income withheld in payment of 20% FWT forms part
• of the gross receipts in computing for the GRT on banks. A
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
percentage tax is a national tax measured by a certain CTA, in Asian Bank Corporation v.
percentage of the gross selling price or gross value in money Commissioner of Internal Revenue
of goods sold, bartered or imported; or of the gross receipts (ASIAN BANK case), ruled that the
or earnings derived by any person engaged in the sale of basis in computing the 5% GRT is the
services. It is not subject to withholding. An income tax is
gross receipts minus the 20% FWT.
national tax imposed on the net or the gross income realized
in a taxable year. Based on this ruling, Citytrust claimed
for tax, seeking to be reimbursed of
•
the 5% GRT it paid on the portion of
• It is subject to withholding. In a withholding tax system, the
20% FWT or the amount of
payee is the taxpayer, the person on whom tax is reposed,
the payer, a separate entity, acts as no more than an agent P326,007.01. The Court of tax
of the government for the collection of taxes. Possession is Appeals held that monies or receipts
acquired by the payer as the withholding agent of the that do not redound to the benefit of
government because the taxpayer ratifies the very act of the taxpayer are not part of its gross
possession for the government. There is constructive receipts for the purpose of computing
receipt, of such income and is included as part of the tax its taxable gross receipts. The 20%
base. final tax on the passive income was
• already deducted and withheld by
• various withholding agents. Hence,
COMMISSIONER OF INTERNAL REVENUE vs. the actual or the exact amount
CITYTRUST INVESTMENT PHILS., INC. G.R. No. received, as its passive income in the
139786, September 27, 2006 ASIANBANK year 1994, was less the 20% final tax
CORPORATION vs. COMMISSIONER OF INTERNAL already withheld by various
REVENUE, G.R. No. 140857, September 27, 2006 withholding agents. To include it
again would tantamount to double
Under the ordinary basic methods of taxation G.R. No. 140857 Asianbank
handling accounts, the term gross is a domestic corporation also
receipts, in the absence of any engaged in banking business. It
statutory definition of the term, must remitted to the BIR 5% GRT on its
be taken to include the whole total total gross receipts. It filed a claim for
gross receipts without any deductions refund for the overpaid GRT based
The legislative intent to apply the on the Asian bank case. The Court of
term in its plain and ordinary meaning Tax Appeals allowed refund in the
may be surmised from a historical reduced amount of P1,345,743.01,
perspective of the levy on gross but later reversed by the Court of
receipts. From the time the GRT on Appeals According to the Court of
banks was first imposed in 1946 Appeals, it is true that Revenue
under Republic Act No. 39 the Regulation No. 12-80 provides that
legislature has not established a the gross receipts tax on banks and
definition of the term "gross receipts." other financial institutions should be
Under Revenue Regulations No. 12- based on all items of income actually
80 and No. 17-84, as well as several received. Actual receipt here is used
numbered rulings, the BIR has in opposition to mere accrual. But
consistently ruled that the term "gross receipt may be actual or constructive.
receipts" does not admit of any The 20% final tax withheld from
deduction. This interpretation has interest income of banks and other
remained unchanged throughout the similar institutions is not income that
various re- enactments of the present they have not received; it is simply
Section 121 of the Tax Code. Facts withheld from them and paid to the
G.R. No. 139786 Citytrust is a government, for their benefit.
domestic corporation engaged in PETITIONER’S ARGUMENT:
quasi-banking activities. In 1994, Commissioner’s Arguments: First,
Citytrust reported the amount of there is no law which excludes the
P110,788,542.30 as its total gross 20% FWT from the taxable gross
receipts and paid the amount of receipts for the purpose of computing
P5,539,427.11 corresponding to its the 5% GRT; Second, the imposition
5% GRT. On January 30, 1996, the of the 20% FWT on the bank's
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
passive income and the 5% GRT on
its taxable gross receipts, which
include the bank's passive income,
does not constitute double taxation;
Third, the ruling by this Court in
Manila Jockey Club, cited in the
ASIAN BANK case, is not applicable;
and Fourth, in the computation of the
5% GRT, the passive income need
not be actually received in order to
form part of the taxable gross
receipts.
RESPONDENT’S ARGUMENT: First,
Section 4(e) of Revenue Regulations
No. 12-80 dated November 7, 1980
provides that the rates of taxes on the
gross receipts of financial institutions
shall be based only on all items of
income actually received; Second,
Court's ruling in Manila Jockey Club
is applicable.
Issue 2. Whether or not there is double taxation.
NO. The 20% FWT and 5% GRT does not constitute
double taxation. Double taxation means taxing for the
same tax period the same thing or activity twice,
when it should be taxed but once, for the same
purpose and with the same kind of character of tax.
This is not the situation in the case at bar. The GRT
is a percentage tax under Title V of the Tax Code
([Section 121], Other Percentage Taxes), while the
FWT is an income tax under Title II of the Code (Tax
on Income). The two concepts are different from each
other. In the Solidbank Case, a percentage tax is a
national tax measured by a certain percentage of the
gross selling price or gross value in money of goods
sold, bartered or imported; or of the gross receipts or
earnings derived by any person engaged in the sale
of services. It is not subject to withholding. An income
tax, on the other hand, is a national tax imposed on
the net or the gross income realized in a taxable
year. It is subject to withholding. Tax Code imposes
two different kinds of taxes.
• estate dealer’s tax based on rental
C. Constitutionality of double taxation
There is no Constitutional prohibition against
double taxation in the broad sense. However,
direct double taxation is unconstitutional as it results
in violation of the equal protection clause and
uniformity clauses of the Constitution.
Q: Matrix Life Insurance Company is a foreign
corporation that registered and licensed to engage
in life insurance business in the Philippines. It
issued a number of life insurance policies in the
Philippines that contain a non-forfeiture clause,
wherein in case of non-payment of premium, the
company automatically creates a lien on the
unpaid premiums against the cash surrender
value of the insurance. The Collector of Internal
Revenue regarded these automatic premium loan
clauses as collections of premiums and
consequently assessed taxes on it. Matrix
Company objected and contended that there is
double taxation since taxes had already been
collected on the cash value that resulted from
the previously collected premiums. Is there
double taxation?
A: There is no constitutional prohibition against
double taxation. The trouble with the argument is that
it assumes all advances are necessarily repaid from
the cash value. That is true in some cases. In others
the insured subsequently remits the money to repay
the advance and to keep unimpaired the cash reserve of
his policy. Besides, the premiums paid and on which
taxes had already been collected, were those for the
previous years. The tax demanded is on the premium
for the latest year or when the non-forfeiture clause
was applied (Manufacturers Life v. Meer, 89 Phil 210,
June 29, 1951).
D. Modes of eliminating double taxation
Local legislation and tax treaties may provide for:
1. Tax credit – an amount subtracted from taxpayer’s
tax liability in order to arrive
at the net tax due.
2. Tax deduction (Vanishing
Deduction) – an amount
subtracted from the gross
amount on which a tax is
calculated.
3. Tax exemption – a grant of
immunity to particular persons
or entities from the obligation to
pay taxes.
4. Imposition of a rate lower than the
normal domestic rate
Q: X, a lessor of a property, pays real
estate tax on the premises, a real
receipts and income tax on the
rentals. He claims that this is
double taxation. Decide. (1996 Bar)
A: There is no double taxation. The real
estate tax is a tax on property; the real
estate dealer’s tax is a tax on the privilege
to engage in business; while the
income tax is a tax on the privilege to
earn an income. These taxes are
imposed by different taxing
authorities and are essentially of
different kind and character

(Villanueva v. Iloilo, GR L-26521, Dec.
28, 1968).
Q: BB Municipality has an
ordinance which requires that all
stores, restaurants, and other
establishments selling liquor
should pay an annual fee of
P20,000.00. Subsequently, the
municipal board proposed an
ordinance imposing a sales tax
equivalent to 5% of the amount
paid for the purchase or
consumption of liquor in stores,
restaurants and other
establishments. The municipal
mayor, CC, refused to sign the
ordinance on the ground that it
would constitute double taxation.
Is the refusal of the mayor
justified? Reason briefly (2004
Bar)
A: NO. The impositions are of
different nature and character. The
fixed annual fee is in the nature of a
license fee imposed through the
exercise of police power, while the
5% tax on purchase
consumption is a local tax imposed
through the exercise of taxing
powers. Both license fee and tax may
be imposed on the same business or
occupation, or for selling the same
article and this is not in violation of
the rule against double taxation
(Compania General de Tabacos de
Filipinas v. City of Manila, G.R. No. L-
16619, June 29, 1963).
Q: Upon the passage of the Local
Autonomy Act (RA 2264), the
City of Iloilo Board passed an
ordinance imposing municipal
license tax on persons engaged in
the business of operating
tenement houses. Is the
ordinance unconstitutional on
the ground of double taxation
since there is payment of both real
estate tax and the tenement tax?
A: NO. It is a well-settled rule that
a license tax may be levied upon a
business or occupation although the
land or property used in connection
therewith is subject to property tax.
The State may collect an ad valorem
tax on property used in a calling,
and at the same time impose a
license tax on that calling, the
imposition of the latter kind of tax
being in no sense a double tax. The
two taxes are not the same kind
or character (Villanueva v. Iloilo,
TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
GR L- 26521, December 28,1968).
Q: SC Johnson and Son, Inc., is a domestic
corporation entered into an agreement
with SC Johnson and Son- USA, a non-
resident foreign corporation, pursuant to
which SC Johnson Philippines was granted
the right to use the trademark, patents and
technology owned by the SC Johnson and
Son-USA for the use of trademark and
technology. SC Johnson and Son, Inc. was
obliged to pay SC Johnson and Son-USA
royalties and subjected the same to 25%
withholding tax on royalty payments.
a. Will the royalty payments be subject
to 10% withholding tax pursuant to
the most favored nation clause as
claimed by SC Johnson Philippines?
b. What is international juridical double
taxation?
c. What are the reliefs for international
juridical double taxation?
A:
a. NO, since the RP-US Tax Treaty does not
give a matching credit of 20% for the taxes paid to
or the Philippines on royalties as allowed under the
RP- West Germany Tax Treaty, respondent cannot
be deemed entitled to the 10% rate granted under
the latter treaty for the reason that there is no
payment of taxes on royalties under similar
circumstances.
Both Art. 13 of the RP-US Tax Treaty and Art. 12(2) of
the RP-West Germany Tax Treaty speak of tax on
royalties for the use of trademark, patents, and
technology. The entitlement of the 10% rate by US
firms despite the absence of matching credit (20%
for royalties) would derogate from the design behind
the most favored nation clause to grant equality of
international treatment since the tax burden laid
upon the income of the investor is not the same in the
two countries. The similarity in the circumstances of
payment of taxes is a condition for the enjoyment of
the most favored nation treatment precisely to
underscore the need for equality of treatment.
The RP-US Tax Treaty is just one of a number of
bilateral treaties which the Philippines have entered
into for the avoidance of double taxation. The
purpose of these international agreements is to
reconcile the national fiscal legislation of the
contracting parties in order to help the taxpayer
avoid international juridical double taxation (CIR v.
SC Johnson and Son, Inc., G.R. No. 127105, June 25,
1999).
b. In this case, there is international juridical
double taxation, which is the imposition of
comparable taxes in two or more states on the
same taxpayer in respect of the same subject
matter and for identical periods. Double taxation
usually takes place when a person is resident of a
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
contracting state and derives income from, or c. In order to eliminate double
owns capital in the other contracting state taxation, a tax treaty resorts to
and both states impose tax on that income or several methods. First, it sets out
capital. (CIR v. SC Johnson and Son, Inc., G.R. No.
the respective rights to tax of the state
127105, June 25, 1999). of source or situs and of the state of
residence with regard to certain
classes of income or capital. In some
cases, an exclusive right to tax is
conferred on one of the contracting
states; however, for other items of
income or capital, both states are
given the right to tax, although the
amount of tax that may be imposed by
the state of source is limited.

The second method for the

elimination of double taxation applies
whenever the state of source is given a
full or limited right to tax together
with the state of residence. In this case,
the treaties make it incumbent upon
the state of residence to allow relief in
order to avoid double taxation. There
are two methods of relief- the
exemption method and the credit
method. In the exemption method,
the income or capital which is taxable
in the state of source or situs is
exempted in the state of residence,
although in some instances it may be
taken into account in determining the
rate of tax applicable to the taxpayers
remaining income or capital. On the
other hand, in the credit method,
although the income or capital which
is taxed in the state of source is still
taxable in the state of residence, the
tax paid in the former is credited
against the tax levied in the latter.
The basic difference between the two
methods is that in the exemption
method, the focus is on the income or
capital itself, whereas the credit
method focuses upon the tax (CIR v.
SC Johnson and Son, Inc., G.R. No.
127105, June 25, 1999)..

a. Methods of Relief from Double Taxation

1. Exemption Method
1. Credit Method
2. Deduction Method
3. Reduction Method
(i) Statute
(ii) Treaty

• RR No. 1-2010
Most-Favored Nation Clause
Purpose of the Most-Favored Nation clause

The most favored nation clause in a

bilateral tax treaty is meant to ensure that
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
the treaty partner will always enjoy the
same privileges as that another party
which is granted more favorable
treatment. This is an important clause
in treaties, especially with the passage of
time. It is to grant to the contracting
parties treatment not less favorable
than that which has been or may be
granted to the “most favored” among other
countries. )t is intended to establish the
principle of equality of international
treatment by providing that the citizens
or subjects of the contracting nations to
enjoy the privileges accorded by either
party to those of the most favored
nation. The essence of the principle is
to allow the taxpayer in one State to
avail of more liberal provisions granted
in another tax treaty to which the
country of residence of such taxpayer is
also a party provided that the subject
matter of taxation is the same as that in
the tax treaty under which the taxpayer
is liable.
• COMMISSIONER OF INTERNAL REVENUE vs.
S.C. JOHNSON AND SON, INC., and COURT OF
APPEALS
309 SCRA 87 ; June 25, 1999
Topic: Double Taxation
Facts: SC. JOHNSON AND SON, INC., a domestic
corporation organized and operating under the Philippine
laws, entered into a license agreement with SC Johnson
and Son, United States of America (USA), a non-resident
foreign corporation was granted the right to use the
trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute
the products. License Agreement was duly registered with
the Technology Transfer Board of the Bureau of Patents,
Trade Marks and Technology Transfer under Certificate of
Registration No. 8064. SC. JOHNSON AND SON, INC
was obliged to pay SC Johnson and Son, USA royalties
based on a percentage of net sales and subjected the same
to 25% withholding tax on royalty payments which
[respondent] paid from July 1992 to May 1993.
Respondent filed with the International Tax Affairs
Division (ITAD) of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that Since the
agreement was approved by the Technology Transfer
Board, the preferential tax rate of 10% should apply hence
royalties paid by the [respondent] to SC Johnson and Son,
USA is only subject to 10% withholding tax pursuant to
the most-favored nation clause of the RP-US Tax Treaty.
The Commissioner did not act on said claim for refund.
Respondent filed a petition for review before the CTA to
claim a refund of the overpaid withholding tax on royalty
payments. CTA decided for Respondent and ordered CIR
to issue a tax credit certificate in the amount of
P963,266.00 representing overpaid withholding tax on
royalty payments, beginning July, 1992 to May, 1993. CIR
filed a petition for review with CA. CA upheld CTA.
CIR contends that under RP-US Tax Treaty, which is known
as the "most favored nation" clause, the lowest rate of the
Philippine tax at 10% may be imposed on royalties derived
by a resident of the United States from sources within the
Philippines only if the circumstances of the resident of the
United States are similar to those of the resident of West
Germany. Since the RP-US Tax Treaty contains no
"matching credit" provision as that provided in RP-West
Germany Tax Treaty, the tax on royalties under the RP-US
Tax Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Also
petitioner argues that since S.C. Johnson's invocation of the
"most favored nation" clause is in the nature of a claim for
exemption from the application of the regular tax rate of
25% for royalties, the provisions of the treaty must be
construed strictly against it.
Respondent countered that the "most favored nation" clause
under the RP-US Tax Treaty refers to royalties paid under
similar circumstances as those royalties subject to tax in
other treaties; that the phrase "paid under similar
circumstances" does not refer to payment of the tax but to
the subject matter of the tax, that is, royalties, because the
"most favored nation" clause is intended to allow the
taxpayer in one state to avail of more liberal provisions
contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to
the basic condition that the subject matter of taxation in that
other tax treaty is the same as that in the original tax treaty
under which the taxpayer is liable; thus, the RP-US Tax
Treaty speaks of "royalties of the same kind paid under
similar circumstances".
Issue: WON SC Johnson can refund.
Ruling: NO. The tax rates on royalties and the
circumstances of payment thereof are the same for all
the recipients of such royalties and there is no disparity
based on nationality in the circumstances of such
payment. 6 On the other hand, a cursory reading of the
various tax treaties will show that there is no similarity
in the provisions on relief from or avoidance of double
taxation 7 as this is a matter of negotiation between the
contracting parties. This dissimilarity is true
particularly in the treaties between the Philippines and
the United States and between the Philippines and West
Germany.
The RP-US Tax Treaty is just one of a number of
bilateral treaties which the Philippines has entered into
for the avoidance of double taxation. 9 The purpose of
these international agreements is to reconcile the
national fiscal legislations of the contracting parties in
order to help the taxpayer avoid simultaneous taxation
in two different jurisdictions. 10 More precisely, the tax
conventions are drafted with a view towards the
elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes
in two or more states on the same taxpayer in respect of
the same subject matter and for identical periods. 11 The
apparent rationale for doing away with double taxation
is of encourage the free flow of goods and services and
the movement of capital, technology and persons
between countries, conditions deemed vital in creating
robust and dynamic economies.
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
Double taxation usually takes place when a person is some form of tax relief, whether this be in the form of a
resident of a contracting state and derives income from, or tax credit or exemption. 24 Otherwise, the tax which could
owns capital in, the other contracting state and both states have been collected by the Philippine government will
impose tax on that income or capital. In order to eliminate simply be collected by another state, defeating the object
double taxation, a tax treaty resorts to several methods. of the tax treaty since the tax burden imposed upon the
First, it sets out the respective rights to tax of the state of investor would remain unrelieved. If the state of residence
source or situs and of the state of residence with regard to does not grant some form of tax relief to the investor, no
certain classes of income or capital. In some cases, an benefit would redound to the Philippines, i.e., increased
exclusive right to tax is conferred on one of the investment resulting from a favorable tax regime, should
contracting states; however, for other items of income or it impose a lower tax rate on the royalty earnings of the
capital, both states are given the right to tax, although the investor, and it would be better to impose the regular rate
amount of tax that may be imposed by the state of source rather than lose much-needed revenues to another
is limited. country.

Double taxation usually takes place when a person is The entitlement of the 10% rate by U.S. firms despite the
resident of a contracting state and derives income from, or absence of a matching credit (20% for royalties) would
owns capital in, the other contracting state and both states derogate from the design behind the most grant equality
impose tax on that income or capital. In order to eliminate of international treatment since the tax burden laid upon
double taxation, a tax treaty resorts to several methods. the income of the investor is not the same in the two
First, it sets out the respective rights to tax of the state of countries. The similarity in the circumstances of payment
source or situs and of the state of residence with regard to of taxes is a condition for the enjoyment of most favored
certain classes of income or capital. In some cases, an nation treatment precisely to underscore the need for
exclusive right to tax is conferred on one of the equality of treatment.
contracting states; however, for other items of income or
capital, both states are given the right to tax, although the Respondent cannot be deemed entitled to the 10 percent
amount of tax that may be imposed by the state of source rate granted under the RP-West Germany Tax Treaty for
is limited. On the other hand, in the credit method, the reason that there is no payment of taxes on royalties
although the income or capital which is taxed in the state under similar circumstances in RP-US treaty.
of source is still taxable in the state of residence, the tax
paid in the former is credited against the tax levied in the
latter. The basic difference between the two methods is
Impact of Taxation and Incidence of Taxation
that in the exemption method, the focus is on the income
or capital itself, whereas the credit method focuses upon
Meaning of impact and incidence of taxation
the tax. 15
Impact of Taxation Incidence of
The phrase "royalties paid under similar circumstances" Taxation
in the most favored nation clause of the US-RP Tax Treaty It refers to the It is the economic
necessarily contemplated "circumstances that are tax- statutory cost of tax. It is also
related". liability to pay the known as burden of
tax. It
falls on the person taxation.
In the case at bar, the state of source is the Philippines
because the royalties are paid for the right to use property originally assessed
with a
or rights, i.e. trademarks, patents and technology, located It is the payment of
particular tax.
within the Philippines. 17 The United States is the state of tax.(Burden)
residence since the taxpayer, S. C. Johnson and Son, U. S. It is the imposition of
A., is based there. Under the RP-US Tax Treaty, the state tax.
of residence and the state of source are both permitted to (Liability)
tax the royalties, with a restraint on the tax that may be
collected by the state of source. It is on the seller It is on the final
upon
whom the tax has been consumer, the place at
the concessional tax rate of 10 percent provided for in the imposed. which the tax comes
RP-Germany Tax Treaty should apply only if the taxes to
imposed upon royalties in the RP-US Tax Treaty and in rest.
the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent
must prove that the RP-US Tax Treaty grants similar tax
reliefs to residents of the United States in respect of the
taxes imposable upon royalties earned from sources
within the Philippines as those allowed to their German COMPENSATION AND SET-OFF
counterparts under the RP-Germany Tax Treaty. The RP-
US and the RP-West Germany Tax Treaties do not contain Compensation or set-off shall take place
similar provisions on tax crediting. when two persons, in their own right, are
creditors and debtors of each other (Article
If the rates of tax are lowered by the state of source, in this 1278, Civil Code).
case, by the Philippines, there should be a concomitant
commitment on the part of the state of residence to grant
Rules governing compensation or set-off
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
as applied in taxation whether express or implied. Inasmuch as
taxes are not debts, it follows that the two
GR: No set-off is admissible against the obligations are not susceptible to set-off or
demands for taxes levied for general or legal compensation. Hence, no set-off or
local governmental purposes. compensation between the two different
classes of obligations is allowed (Francia v.
NOTE: The prevalent rule in our Intermediate Appellate Court, 162 SCRA 753,
jurisdiction disfavors set-off or legal 1988).
compensation of tax obligations for the
following reasons: (1) taxes are of a distinct NOTE: It is only when the local tax
kind, essence and nature, and these assessment and the final judgment are both
impositions cannot be so classed in merely overdue, demandable, as well
the same category as ordinary obligations;
(2) the applicable laws and principles
governing each are peculiar, not
necessarily common to each and (3) public
policy is better subserved if the integrity
and independence of taxes be maintained
(lifeblood doctrine). The collection of a tax
cannot await the results of a lawsuit against
the government (Republic v. Mambulao
Lumber Company, 4 SCRA 622, 1962;
Francia v. IAC, A.M. No. 3180,
Francia v. Intermediate Appellate Court and
Fernandez , G.R. No. L-67649, 28 June
1988 June 29, 1988,

Caltex Philippines, Inc. v. Commission on

Audit, et al., G.R.

No. 92585, 8 May 1992).

XPN: Where both the claims of the

government and the taxpayer against each
other have already become due,
demandable, and fully liquidated,
compensation takes place by operation of
law and both obligations are extinguished
to their concurrent amounts. In the case of
the taxpayer’s claim against the
government, the government must have
appropriated the amount thereto (Domingo
v. Garlitos, G.R. No. L-18994, June 29, 1963).

Q: Can an assessment for a local tax be

the subject of set-off or compensation
against a final judgment for a sum of
money obtained by a taxpayer against
the local government that made the
assessment? (2005 Bar)

A: NO. Taxes and debts are of different

nature and character. Taxes cannot be
subject to compensation for the simple
reason that the Government and the
taxpayers are not creditors and debtors of
each other, debts are due to the
Government in its corporate capacity,
while taxes are due to the Government in
its sovereign capacity (South African
Airways v. CIR, 612 SCRA 665, 2010).
The taxes assessed or the obligation of the
taxpayer arising from law, while the
money judgment against the government
is an obligation, arising from contract,
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
fully liquidated may set-off or
compensation be allowed. (Domingo v.
Garlitos, 8 SCRA 443, 1963).
Doctrine of Equitable Recoupment
It is a principle which allows a
taxpayer, whose claim for refund has
been barred due to prescription, to
recover said tax by setting off the
prescribed refund against a tax that
may be due and collectible from him.
Under this doctrine, the taxpayer is
allowed to credit such refund to his
existing tax liability.
NOTE: The Supreme Court, rejected
this doctrine in Collector v. UST (G.R. No.
L-11274, Nov. 28, 1958), since it may
work to tempt both parties to delay and
neglect their respective pursuits of
legal action within the period set by
law.
Republic vs. Mambulao Lumber [G.R. No. L-17725.
February 28, 1962.]
En Banc, Barrera (J): 10 concurring
Facts: In a case filed by the Republic against the Mambulao
Lumber Company before the CFI Manila (Civil Case 34100),
the company admitted that they have a liability of P587.37 in
favor of the government for forest charges covering the
period from 10 September 1952 to 24 May 1953, which
liability is covered by a bond executed by General Insurance
& Surety Corporation for Mambulao Lumber Company,
jointly and severally in character, on 29 July 1953, in favor
of the Republic. It also admitted liability in the sum of
P286.70 in favor of the Republic, covered by a bond dated
27 November 1953; and another amount of P3,928.30,
covered by a bond dated 20 July 1954. These three
liabilities aggregate to P4,802.37. As a defense, the
company claimed to have paid to the Republic of the
Philippines P8,200.52 for “reforestation charges” for the
period commencing from 21 July 1948 to 29 December
1956; and another P927.08 as “reforestation charges” for
the period commencing from 30 April 1947 to 24 June 1948.
These reforestation charges were paid to the Republic in
pursuance of Section 1 of RA 115 which provides that there
shall be collected, in addition to the regular forest charges
provided under Section 264 of Commonwealth Act 466
known as the National Internal Revenue Code, the amount
of P0.50 on each cubic meter of timber cut out and removed
from any public forest for commercial purposes. The amount
collected shall be expended by the director of forestry, with
the approval of the secretary of agriculture and commerce,
for reforestation and afforestation of water sheds, denuded
areas and other public forest lands, which upon
investigation, are found needing reforestation or
afforestation. The total amount of the reforestation charges
paid by Mambulao Lumber Company is P9,127.50, and it is
its contention since the Republic has not made use of those
reforestation charges collected from it for reforesting the
denuded area of the land covered by its license, the
Republic should refund said amount, or, if it cannot be
refunded, at least it should be compensated with what the
company owed the Republic for reforestation charges. In
line with this thought, the company wrote the Director of
Forestry, on 21 February 1957, a letter where it requested
that its account with the bureau be credited with all the
reforestation charges that it have imposed on them from 1
July 1947 to 14 June 1956, amounting to around P2,988.62.
“ This letter was answered by the Director of Forestry on 12
March 1957, in which the Director quoted an opinion of the
Secretary of Justice, to the effect that he has no discretion
to extend the time for paying the reforestation charges and
also explained why not all denuded areas are being
reforested. The trial court ordered the company to pay the
Republic the sum of P4,802.37 with 6% interest thereon
from the date of the filing of the complaint until fully paid,
plus costs. The lumber company interposed the appeal.
The Supreme Court affirmed the judgment of the trial court
appealed from in all respects, with costs against the lumber
company.
Internal Revenue Taxes cannot be the subject of
set-off or compensation
Internal revenue taxes, such as forest charges,
can not be the subject of set-off or compensation. A claim
for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off under the statutes of set-off,
which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the
state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or
transaction sued on (80 C.J.S. 73-74.).”
Rationale for the rule that tax cannot be subject of
set-off: Tax not in the nature of contracts
Based on grounds of public policy, no set-off is
admissible against demands for taxes levied for general or
local governmental purposes. The reason on which the
general rule is based, is that taxes are not in the nature of
contracts between the party and party but grow out of a duty
to, and are the positive acts of the government, to the
making and enforcing of which, the personal consent of
individual taxpayers is not required. If the taxpayer can
properly refuse to pay his tax when called upon by the
Collector, because he has a claim against the governmental
body which is not included in the tax levy, it is plain that
some legitimate and necessary expenditure must be
curtailed. If the taxpayer’s claim is disputed, the collection of
the tax must await and abide the result of a lawsuit, and
meanwhile the financial affairs of the government will be
thrown into great confusion.” (47 Am. Jur. 766-767.)
PHILEX MINING CORP. v. CIR
GR No. 125704, August 28, 1998
294 SCRA 687
•
• FACTS: Petitioner Philex Mining Corp. assails the decision of
the Court of Appeals affirming the Court of Tax
• Appeals decision ordering it to pay the amount of P110.7 M as
excise tax liability for the period from the 2nd
• quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
interest from 1994 until fully paid pursuant to
• Sections 248 and 249 of the Tax Code of 1977. Philex protested
the demand for payment of the tax liabilities
• stating that it has pending claims for VAT input credit/refund
for the taxes it paid for the years 1989 to 1991 in
• the amount of P120 M plus interest. Therefore these claims for
tax credit/refund should be applied against the
• tax liabilities.
• The error made by a tax official in the assessment of his
• ISSUE: Can there be an off-setting between the tax liabilities
vis-a-vis claims of tax refund of the petitioner?
• his tax liability, for taxes are fixed by law and the
• HELD: No. Philex's claim is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the
• government and so should be collected without unnecessary
hindrance. Evidently, to countenance Philex's
• whimsical reason would render ineffective our tax collection
system. Too simplistic, it finds no support in law or in
• jurisprudence.
To be sure, Philex cannot be allowed to refuse the payment of
its tax liabilities on the ground that it has a
• pending tax claim for refund or credit against the government
which has not yet been granted.Taxes cannot be
• subject to compensation for the simple reason that the
government and the taxpayer are not creditors and
• debtors of each other. There is a material distinction between a
tax and debt. Debts are due to the Government
• in its corporate capacity, while taxes are due to the Government
in its sovereign capacity. xxx There can be no
• off-setting of taxes against the claims that the taxpayer may
have against the government. A person cannot
• refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of
a lawsuit against the government.
Domingo vs. Garlitos
GR L-18993, 29 June 1963
En Banc, Labrador (J): 8 concur,
1 concur in result, 1 took no part
Facts: InDomingo vs. Moscoso (106 PHIL 1138), the
Supreme Court declared as final and executory the order of
the Court of First Instance of Leyte for the payment of estate
and inheritance taxes, charges and penalties amounting to
P40,058.55 by the Estate of the late Walter Scott Price. The
petition for execution filed by the fiscal, however, was
denied by the lower court. The Court held that the execution
is unjustified as the Government itself is indebted to the
Estate for 262,200; and ordered the amount of inheritance
taxes be deducted from the Government’s indebtedness to
the Estate.
Issue: Whether a tax and a debt may be compensated.
Held: The court having jurisdiction of the Estate had found
that the claim of the Estate against the Government has
been recognized and an amount of P262,200 has already
been appropriated by a corresponding law (RA 2700).
Under the circumstances, both the claim of the Government
for inheritance taxes and the claim of the intestate for
services rendered have already become overdue and
demandable as well as fully liquidated. Compensation,
therefore, takes place by operation of law, in accordance
with Article 1279 and 1290 of the Civil Code, and both debts
are extinguished to the concurrent amount.
Principle of estoppel
tax liabilities does not have the effect of relieving the
taxpayer from the obligation to pay the full amount of
government is never stopped to collect the legitimate
taxes because of errors committed by its agents
(Commissioner v. Atlas Consolidated Mining Co., 102
SCRA 246).
NOTE: Like other principles, the principle
of estoppels also admits of exceptions in the
interest of justice and fair play.
• CIR v. CTA
• G.R. No. 106611, July 21, 1994
• Regalado, J.:
•
• DOCTRINE:
• It is a long and firmly settled rule of law that the
Government is not bound by the errors committed by its
agents.
•
• FACTS:
• Private respondent Citytrust Banking Corporation filed a
claim for refund with the BIR. In order to interrupt the
running of the prescriptive period, Citytrust filed a petition
with the CTA, claiming refund of its income tax
overpayments from 1983 to 1985. In its answers, the
Solicitor General asserted that mere averment that
Citytrust incurred a net loss in 1985 does not ipso
facto merit a refund; that the amounts claimed by Citytrust
as 1983 income tax overpayment, taxes withheld on
proceeds of government securities investments, as well
as on rental income, respectively, are not properly
documented; and that assuming arguendo that petitioner
is entitled to refund, the right to claim the same has
prescribed. Thereafter, the case was submitted for
decision based solely on the pleadings and evidence
submitted by herein private respondent Citytrust. Herein
petitioner could not present any evidence by reason of the
repeated failure of the Tax Credit/Refund Division of the
BIR to transmit the records of the case, as well as the
investigation report thereon, to the Solicitor General. The
CTA ordered the refund claimed by Citytrust and said
judgment was affirmed by the CA. Consequently,
petitioner filed the instant petition arguing that respondent
court erred in affirming the grant of the claim for refund of
Citytrust.
•
• ISSUE:
• Is the Government bound by the order of refund?
•
• HELD:
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
• NO. It is a long and firmly settled rule of law that the arising out of a violation of the
Government is not bound by the errors committed by its provisions of the Tax Code becomes a
agents. In the performance of its governmental functions, bar to such criminal action (People v.
the State cannot be estopped by the neglect of its agent Magdaluyo, G.R. No. L-16235, Apr. 20,
and officers. Although the Government may generally be 1965).
estopped through the affirmative acts of public officers
acting within their authority, their neglect or omission of
public duties as exemplified in this case will not and
should not produce that effect. Nowhere is the aforestated
rule more true than in the field of taxation. It is axiomatic
that the Government cannot and must not be estopped Extent of Commissioner’s Power to
particularly in matters involving taxes. Taxes are the Compromise
lifeblood of the nation through which the government Criminal violations
agencies continue to operate and with which the State
effects its functions for the welfare of its constituents. The
errors of certain administrative officers should never be a. Before the complaint is filed with the
allowed to jeopardize the Government's financial Prosecutor’s Office – full discretion
position, especially in the case at bar where the amount to compromise except those
involves millions of pesos the collection whereof, if involving fraud;
justified, stands to be prejudiced just because of b. After the complaint is filed with the
bureaucratic lethargy. Prosecutor’s Office but before the
information is filed with the court –
can still compromise provided
that the prosecutor gives his
consent;
c. After the information is filed with the
COMPROMISE court – no longer permitted to
compromise with or without the
consent of the Prosecutor (People v.
It is an agreement between two or more Magdaluyo, G.R. No. L-1595, April.
persons who, amicably settle their 20, 1961).
differences on such terms and
conditions as they may agree on to 2. Civil cases – Before litigation or at any
avoid any lawsuit between them. It stage of the litigation, even during
implies the mutual agreement by the appeal, although legal propriety
parties in regard to the thing or subject demands that prior leave of court
matter which is to be compromised. should be obtained

Court cannot compel the CIR to

compromise in cases when such is
allowed, in order to assure that no
improper compromise is made to the
prejudice of the Government.

Q: When must

compromise be made?

A:
1. Criminal cases – It must be entered into
prior to the
institution of the corresponding
criminal action arising out of a
violation of the provisions of the Tax
Code. A compromise can never be
entered into after final judgment
because by virtue of such final
judgment the Government had
already acquired a vested right.
(Roviro v. Amparo, G.R. No. L- 5482,
May 5, 1982)

NOTE: A compromise validly

entered into between the CIR and
the taxpayer prior to the institution of
the corresponding criminal action
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 TAXATION LAW 1 (REVIEWER)
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Requisites for Compromise
1. Tax liability of the taxpayer;
2. An offer of the taxpayer of an amount to be
paid by him; and
3. The acceptance (the CIR or the taxpayer) of the
offer in the settlement of the claim
NOTE: If an offer of compromise is rejected by the
taxpayer the CIR should file a criminal action if he
believes that the taxpayer is criminally liable for
violation of the tax law as the only way to enforce a
penalty. A penalty can be imposed only on a
finding of criminal liability (CIR v. Abad G.R. No. L-
19627, June 27, 1968).
CASES WHICH MAY BE COMPROMISED
(1998, 2002, 2005 Bar)
[DANC3]
1. Delinquent accounts
2. Cases under Administrative protest after
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the RO,
RDO, Legal Service, Large Taxpayer Service,
Collection Service, Enforcement Service, and
other offices in the National Office
3. Cases covered by pre-assessment notices but
taxpayer is Not agreeable to the findings of the
audit office as confirmed by the review office
4. Civil tax cases disputed before the courts
5. Collection cases filed in courts
6. Criminal violations except:
a. Those already filed in courts; and
b. Those involving criminal tax fraud (Sec.3,
R.R. 30-2002).
Cases which cannot be compromised [F3EW-
CD]
1. Criminal tax Fraud cases, confirmed as such
by the CIR or his duly authorized
representative.
2. Cases where Final reports of reinvestigation
or reconsideration have been issued resulting
to reduction in the original assessment and
the taxpayer is agreeable to such decision by
signing the required agreement form for the
purpose.
3. Cases which become Final and executory after
final judgment of a court, where compromise is
requested on the ground of doubtful validity of
the assessment.
4. Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer.
5. Withholding tax cases, unless the applicant –
taxpayer invokes provisions of law that cast
doubt on the taxpayer’s obligation to withhold.
6. Criminal violations already filed in courts.
7. Delinquent accounts with duly approved
schedule of installment payments (Sec.3,
R.R. 30-2002).
NOTE: The CTA may issue an injunction to prevent the
government from collecting taxes under a compromise
agreement when such would be prejudicial to the
government.
Q: Does the Court of Appeals have the power to
review compromise agreements forged by the
Commissioner of Internal Revenue and a
taxpayer? Explain. (2010 Bar)
A: As a general rule, the Court of Appeals does not
have the power to review compromise agreements
made between the Commissioner of Internal
Revenue and the tax payer considering that the
Commissioner is vested with the authority to
compromise and such authority is exercised
according to his discretion. Such authority
should be exercised in accordance with the CIR
discretion and courts have no power, as a general
rule, to compel him to exercise such discretion one
way or another. If the CIR abuses his discretion by
not following the parameters set by law, the CTA,
not the CA, may correct such abuse if the matter is
appealed to it. In case of arbitrary or capricious
exercise by the CIR of the power to compromise,
the compromise can be attacked and reversed
through judicial process. It must be noted
however, that a compromise is considered as other
matters arising under the NIRC which vests the
CTA with jurisdiction and since the decision of the
CTA is appealable to the Supreme Court, the Court
of Appeals is devoid of any power to review a
compromise settlement forged by the CIR.
ESCAPE FROM TAXATION
TAX AVOIDANCE
Tax avoidance or Tax Minimization is a scheme where the
taxpayer uses legally permissible alternative method of
assessing taxable property or income, in order to avoid or reduce
tax liability.
It is a tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arm’s –
length (CIR v. The Estate of Benigno Toda Jr., G.R. No. 30554,
Febrruary 28, 2004).
TAX EVASION
Tax evasion or Tax Dodging is a scheme where the taxpayer
uses illegal or fraudulent means to defeat or lessen payment of a
tax.
It is a scheme used outside of those lawful means and when availed
of, it usually subjects the taxpayer to further or additional civil or
criminal liabilities (CIR v. The Estate of Benigno Toda Jr. G.R. No.
30554, Feb. 28, 2004).
Elements to be considered in determining that there is tax
evasion [USE]
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES

1. Course of action is Unlawful.
2. Accompanying State of mind which is
described as being evil, in bad faith, willful or
deliberate and not accidental; and
3. End to be achieved, i.e., payment of less
than that known by the taxpayer to be legally
due, or non- payment of tax when it is shown
that the tax is due;
Q: On August 31, 2014, Haelton Corporation (HC), thru
its authorized representative Ms. Pares, sold a 16-
storey commercial building known as Haeltown Building
to Mr. Belly for P100 million. Mr. Belly, in turn, sold the
same property on the same day to Bell Gates, Inc. (BGI)
for P200 million. These two (2) transactions were
evidenced by two (2) separate Deeds of Absolute Sale
notarized on the same day by the same notary public.

Investigations by the Bureau of Internal Revenue (BIR)

Distinguish tax avoidance from tax evasion showed that:

(1) the Deed of Absolute Sale between Mr. Belly and BGI
TAX AVOIDANCE TAX EVASION was notarized ahead of the sale between HC and Mr.
Belly; (2) as early as May 17, 2014, HC received P40
Validity Legal and not
Illegal and subject million from BGI, and not from Mr. Belly; (3) the said
subject to criminal
to criminal penalty payment of P40 million was recorded by BGI in its books
penalty
as of June 30, 2014 as investment in Haeltown Building;
Effect Almost always
Minimization of and (4) the substantial portion of P40 million was
results in absence
taxes withdrawn by Ms. Pares through the declaration of cash
of tax payment.
dividends to all its stockholders.

Evidence that may be used to prove tax
evasion
1. Failure of taxpayer to declare for taxation
purposes his true and actual income derived
from business for two (2) consecutive years
(Republic v. Gonzales, G.R. No. L-17744,
April 30, 1965);
2. Substantial under declaration of income in
the income tax return for four (4)
consecutive years coupled by intentional
overstatement of deductions (Perez v. CTA,
G.R. No. L-10507, May 30, 1958).
Based on the foregoing, the BIR sent Haeltown
Corporation a Notice of Assessment for deficiency
income tax arising from an alleged simulated sale of
the aforesaid commercial building to escape the higher
corporate income tax rate of thirty percent (30%).
What is the liability of Haeltown Corporation, if any?
(2014 Bar)
A: The tax planning scheme adopted by Haeltown
Corporation constitutes tax evasion. According to CIR v.
Estate of Benigno Toda (G.R. No. 147188, September 14,
2004), a transaction where a taxpayer made it appear that
there were two sales of the property was considered “tainted
with fraud.” The sole purpose of acquiring and transferring title of the
property on the same day was to create a tax shelter. The
sale to Mr. Belly (which is subject to individual capital gains
tax) was to mislead the BIR and avoid the higher corporate
income tax.

Q: CIC entered into an alleged simulated sale of a 16-

storey commercial building. CIC authorized Benigno
Toda, Jr., its President to sell the Cibeles Building and the
two parcels of land on which the building stands. Toda
purportedly sold the property for P100 million to
Altonaga, who, in turn, sold the same property on the
same day to Royal Match Inc. (RMI) for P200 million
evidenced by Deeds of Absolute Sale notarized on the
same day by the same notary public. For the sale of the
property to RMI, Altonaga paid capital gains tax in the
amount of P10 million. The BIR sent an assessed
deficiency income tax arising from the sale alleging that
CIC evaded the payment of higher corporate income tax
of 35% with regard to the resulting gain. Is the scheme
perpetuated by Toda a case of tax evasion or tax
avoidance?

A: It is a tax evasion scheme. 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 (one way of tax avoidance). Such scheme is tainted
with fraud.
 TAXATION LAW 1 (REVIEWER)
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• Willful Blindness Doctrine - People v. Gloria Kintanar (CTA
EB Crim. No. 006, Dec. 3, 2010)
• The Supreme Court recently introduced the "Doctrine of Willful
Blindness" in a landmark tax evasion case decided in year 2012.
Under this doctrine, the taxpayer’s deliberate refusal or
avoidance to verify the contents of his or her ITR and other
documents constitutes "willful blindness" on his or her part. It is
by reason of this doctrine that taxpayers cannot simply invoke
reliance on mere representations of their accountants or
authorized representatives in order to avoid liability for failure to
pay the correct taxes.
As they say, "ignorance of the law excuses no one from
compliance therewith." In order to be liable, it is enough that the
taxpayer knows his or her obligation to file the required return
and he has failed to comply thereto in the manner required by
law.
Evidently, it is imperative for individual taxpayers like
professionals to be knowledgeable with their tax obligations, to
be compliant with tax rules and regulations, and to be
responsible for all information reported in his or her ITR.
And as previously mentioned, the "Doctrine of Willful Blindness"
is already part of our jurisprudence, and it can be used as a
precedent for future tax evasion cases.
MERE RELIANCE on another person in preparing, filing and
paying income taxes is not a justification for failure to file the right
information on income taxes.
In People v. Gloria Kintanar (CTA EB Crim. No. 006, Dec. 3,
2010), Ms. Kintanar was charged with failure to make or file her
income tax returns (ITR), violating Section 255 of the 1997
National Internal Revenue Code (NIRC), as amended. She
claimed that she did not actively participate in the filing of her joint
ITR with her husband since she entrusted such duty to the latter
who, in turn, hired an accountant to perform their tax
responsibilities. She testified that she did not know how much her
tax obligation was; nor did she bother to inquire or determine the
facts surrounding the filing of her ITRs. Despite several notices
and subpoena received by the accused, only an unsupported
protest letter made by her husband was filed with the Bureau of
Internal Revenue (BIR). The Court of Tax Appeals (CTA) En Banc
found her neglect or omission tantamount to “deliberate ignorance”
or “conscious avoidance”. As an experienced businesswoman, her
reliance on her husband to file the required ITR without ensuring
its full compliance showed clear indication of deliberate lack of
concern on her part to perform her tax obligations. This ruling was
sustained by the Supreme Court (SC) in 2012.
Based on the foregoing, the willful blindness doctrine was applied
by the CTA, as sustained by SC on cases where there is a natural
presumption that the taxpayer knows his/her tax obligations under
the law considering the factual circumstances of the case, such as
being a businesswoman or official of a company. This case set a
precedent that mere reliance on a representative or agent (i.e.,
accountant or husband) is not a valid ground to justify any
noncompliance in tax obligations. The taxpayer must inquire,
check and validate whether or not his/her representative or agent
has complied with the taxpayer’s tax responsibilities.
However, in the recent case of People v. Judy Ann Santos (CTA
Crim. Case no. 012, Jan. 16, 2013), the CTA Division seemed to
have a change of heart and acquitted Ms. Santos despite having
almost the same circumstances as that of the case of Ms.
Kintanar. In this case, Ms. Santos was accused of failure to supply
correct and accurate information in her ITR. She claimed that by
virtue of trust, respect and confidence, she has entrusted her
professional, financial and tax responsibilities to her manager since
she was 12 years old. She participated and maintained her
intention to settle the case, and thus provided all the documents
needed as well as payment of her taxes. The element of willfulness
was not established and the CTA found her to be merely negligent.
The CTA also noted the intention of Ms. Santos to settle the case,
which negates any motive to commit fraud. This was affirmed by
the SC in its resolution issued April 2013.
THE DIFFERENCES
“Willful blindness” is defined in Black’s Law Dictionary as
“deliberate avoidance of knowledge of a crime, especially by failing
to make a reasonable inquiry about suspected wrongdoing, despite
being aware that it is highly probable.” A “willful act” is described
as one done intentionally, knowingly and purposely, without
justifiable excuse.
“Willful” in tax crimes means voluntary, intentional violation of a
known legal duty, and bad faith or bad purpose need not be
shown. It is a state of mind that may be inferred from the
circumstances of the case; thus, proof of willfulness may be, and
usually is, shown by circumstantial evidence alone. Therefore, to
convict the accused for willful failure to file ITR or submit accurate
information, it must be shown that the accused was (1) aware of
his/her obligation to file annual ITR or submit accurate information,
but that (2) he/she, or his/her supposed agent, nevertheless
voluntarily, knowingly and intentionally failed to file the required ret
urns or submit accurate information. Bad faith or intent to defraud
need not be shown.
As can be observed in the first case, the accused knew that she
had to timely file and supply correct and accurate information of
the joint ITR with the BIR in relation to the profession or the
position she holds. The knowledge was presumed based on the
fact that Ms. Kintanar is an “experienced” businesswoman, having
been an independent distributor of a product for several years.
However, despite this knowledge, the CTA found that she
voluntarily, knowingly and intentionally failed to fulfill her tax
responsibilities by not participating in the filing of the ITR and
ensuring that everything was filed correctly and accurately. As
compared with the Santos case, which the SC affirmed, the
element of “voluntarily, knowingly and intentionally” was taken
differently by the CTA in consideration of the facts of the case. Ms.
Santos fully entrusted her tax obligations and finances to her
manager since she was a child. It can be said that she is not an
“experienced” manager of her finances and taxes since she never
handled such task, as compared with the situation of Ms. Kintanar,
who is considered an experienced businesswoman who manages
her business as well as her financial and tax responsibilities --
which is expected of somebody in her position (i.e., president
and/or businessperson).
The concept of willful blindness doctrine is new in Philippine
jurisprudence. The application of this doctrine by the CTA in the
said cases was guided by the appreciation of the facts and the
pieces of evidence produced by the prosecution and accused to
prove the non-existence of willfulness. However, defined and clear
standards in its application must be done as guidance for future
application. This is necessary to avoid arbitrary application and to
encourage proper use of the doctrine by both parties in the case.
PEOPLE v. SANTOS; CTA Crim. Case No. 012
TAX AVOIDANCE
‣HENG TONG TEXTILES v. CIR;
G.R. No. L-19737
• Tax avoidance is not forbidden in our jurisdiction. An
attempt to minimize one's tax does not necessarily
constitute fraud. It is a settled principle that a taxpayer
may diminish his liability by any means which the law
permits. The intention to minimize taxes must be
proved to exist by clear and convincing evidence
amounting to more than mere preponderance and
cannot be justified by mere speculation. This is because
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
fraud is never lightly presumed. (See also CIR vs. Court
of Appeals. GR No. 117982. February 6, 1997) [Heng
Tong Textiles Co., Inc. vs. CIR. GR No. L-19737.
August 26, 1968]
Heng Tong Textiles Co., Inc. vs. CIR
G.R. No. L-19737. August 26, 1968.
FACTS: In 1952 the Collector of Internal Revenue
assessed against the petitioner deficiency sales
taxes and surcharges for the year 1949 and the
first four months of 1950 in the aggregate sum of
P89,123.58. The assessment was appealed to the
Board of Tax Appeals, whence the case was
transferred to the Court of Tax Appeals upon its
organization in 1954, and there was affirmed in its
decision dated February 28, 1952. The deficiency
taxes in question were assessed on importations of
textiles from abroad. The goods were withdrawn
from Customs by Pan- Asiatic Commercial Co.,
Inc., which paid, in the name of the petitioner, the
corresponding advance sales tax under section
183(b) of the Internal Revenue Code. The
assessment for the deficiency was made against
the petitioner, Heng Tong Textiles Co., Inc. on the
ground that it was the real importer of the goods
and did not pay the taxes due on the basis of the
gross selling prices thereof.
ISSUE:
Whether or not petitioner was guilty of fraud so as
to warrant the imposition of a penalty of 50% on
the deficiency.
RULING:
Petitioner excepts to the conclusion of the Court of
Tax Appeals and avers that the importation papers
were placed in the name of the petitioner only for
purposes of accommodation, that is, to introduce
the petitioner to textile suppliers abroad; and that
the petitioner was not in a financial position to
make the importations in question. These
circumstances show nothing but a private
arrangement between the petitioner and Pan-
Asiatic Commercial, which in no way affected the
role of the petitioner as the importer.
The arrangement resorted to does not by itself
alone justify the penalty imposed. Section 183(a),
paragraph 3, of the Internal Revenue Code, as
amended by Republic Act No. 253, speaks of willful
neglect to file the return or wilful making of a false
or fraudulent return. An attempt to minimize one's
tax does not necessarily constitute fraud. It is a
settled principle that a taxpayer may diminish his
liability by any means which the law permits.
‣CIR v. ESTATE OF TODA; G.R.
No. 30554
Estate of Benigno Toda Jr.
G.R. No. 147188. September 14, 2004
DAVIDE, JR., C.J.
Lessons Applicable: Tax evasion v. Tax avoidance
Laws Applicable:
FACTS:
 March 2, 1989: Cibeles Insurance Corp. (CIC)
authorized Benigno P. Toda Jr., President and Owner
of 99.991% of outstanding capital stock, to sell the
Cibeles Building and 2 parcels of land which he sold to
Rafael A. Altonaga on August 30, 1987 for P 100M
who then sold it on the same day to Royal Match Inc.
for P 200M.
 CIC included gains from sale of real property of P
75,728.021 in its annual income tax return while
Altonaga paid a 5% capital gains tax of P 10M
 July 12, 1990: Toda sold his shares to Le Hun T. Choa
for P 12.5M evidenced by a deed of ale of shares of
stock which provides that the buyer is free from all
income tax liabilities for 1987, 1988 and 1989.
 Toda Jr. died 3 years later.
 March 29, 1994: BIR sent an assessment notice and
demand letter to CIC for deficiency of income tax of P
79,099, 999.22
 January 27, 1995: BIR sent the same to the estate of
Toda Jr.
 Estate filed a protest which was dismissed - fraudulent
sale to evade the 35% corporate income tax for the
additional gain of P 100M and that there is in fact only
1 sale.
 Since it is falsity or fraud, the prescription period is 10
years from the discovery of the falsity or fraud as
prescribed under Sec. 223 (a) of the NIRC
 CTA: No proof of fraudulent transaction so the
applicable period is 3 years after the last day
prescribed by law for filing the return
 CA: affirmed
 CIR appealed
ISSUE: W/N there is falsity or fraud resulting to tax evasion
rather than tax avoidance so the period for assessment has
not prescribed.
HELD: YES. Estate shall be liable since NOT yet
prescribed.
 Tax avoidance and tax evasion are the two most
common ways used by taxpayers in escaping from
taxation. ax avoidance is the tax saving device within
the means sanctioned by law. This method should be
used by the taxpayer in good faith and at arms length.
Tax evasion, on the other hand, is a scheme used
outside of those lawful means and when availed of, it
usually subjects the taxpayer to further or additional
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civil or criminal liabilities.
 Tax evasion connotes the integration of three factors:
 (1) the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax is
due
 (2) an accompanying state of mind which is described
as being evil, in bad faith, willfull,or deliberate and not
accidental; and
 (3) a course of action or failure of action which is
unlawful.
 All are present in this case. The trial balance showed
that RMI debited P 40M as "other-inv. Cibeles
Building" that indicates RMI Paid CIC (NOT Altonaga)
 Fraud in its general sense, is deemed to comprise
anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of
legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by
which an undue and unconscionable advantage is
taken of another.
 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.
 Generally, a sale of or exchange of assets will have an
income tax incidence only when it is consummated but
such tax incidence depends upon the substance of the
transaction rather them mere formalities.
REPUBLIC v. GONZALES; G.R. No. L-17744
Perez vs CTA GR L-10507 – May 30, 1958
Facts:
Petitioner was assessed by the Collector with deficiency tax due
to its increase in net worth. In making the deficiency assessments,
the Collector employed what is known as the "net worth"
technique and started by determining the opening net worth of
petitioner at the start of the year 1947 which he fixed at P936.72.
The Court of Tax Appeals declared the "net worth" method of
determining understated income to have been validly and
properly applied; found that the consistent underdeclaration of
income, unexplained acquisition of properties, and the fact of
petitioner's having claimed fictitious losses evidenced fraudulent
intent, and ordered him to pay deficiency income taxes and
surcharges in the sum of P241,547.77.
Issue:
1. (1) Whether the Collector of Internal Revenue is
empowered by law toinvestigate appellant's (petitioner)
income tax returns for 1947, 1948, and1949 and to
enforce collection of the alleged deficiency income
taxes for saidyears by summary proceedings of distraint
and levy more than three yearsafter the income tax
returns covering them were filed
2. (2) Whether the use ofthe "net worth" method by the
respondent in computing appellant's netincome is valid
Ruling:
1. (1) No. Reiteratirg a long line of decisions to the effect
that thethree-year prescriptive period under section 51
(d) of the National InternalRevenue Code constituted a
limitation to the right of the government to enforce the
collection of income taxes by summary proceedings of
distraintand levy, though, it could proceed to recover
the taxes due by the institutionof the corresponding
civil action. Nevertheless, the appealof the taxpayer
vested jurisdiction on the Court of Tax Appeals to
reviewand determine his tax liability for the aforesaid
period.
2. (2) Yes. This method of proving unreported income,
according to the Court of TaxAppeals, is based upon
the general theory that money and other assets inexcess
of liabilities of a taxpayer (after an accurate and proper
adjustment ofnon- deductible items) not accounted for
by his income tax returns, leads tothe inference that
part of his income has not been reported (p. 6, B.T.A.
189).There is no question that the application of the
"net worth" method ofdetermining the taxable income
of a taxpayer has been an accepted practice.
In fine, we hold:
That section 38 of our National Internal Revenue Code
authorizes the application of the Net Worth Method in
this jurisdiction (Baiter, Fraud Under Fed.Tax Law,
sec. 224; Vol. 2, 1951 CCH 386. Oil, Byer Net Worth
Technique for Determining Income, supra: Holland vs.
U.S., supra; Estate of Bartley, 22 U.S.Tax Ct. lep.
1230; Hurley, 22 U. S. Tax Ct. Rep. 1264; S B.T.A.
169).
That no civil cases, the Government need not prove the
specific source of income (this is reasonable on the
basic assumption that most assets are derived from a
taxable source and that when this is not true the
taxpayer is in a position to explain the discrepancy,
{see Holland case, supra);
That the determination of the tax deficiency by the
Government has prima facie validity and the burden
rests upon the taxpayer to overcome this presumption
and to show to the satisfaction of the Tax Court that the
determination was not correct (Archer vs.
Commissioner, supra; Thomas vs. Commissioner,
supra; Laughinghouse vs. Commissioner, sutra:
William Lias, 24 T.C. No. 23,May 26, 1955, Virginia
Law Review, 41 p. 7; Halle, 7 T.C. 245, aff'd 175 F. 2d
500, 339 U.S. 949; Byer, "Net Worth Technique for
Determining Income").
And finally, that no sufficient grounds exist to warrant
a reversal of the findings of fraud of the lower court as
being "clearly erroneous"; on the contrary, we find
them supported by reason.
SHIFTING OF TAX BURDEN
Shifting is the transfer of the burden of tax by the original payer or the
one on whom the tax was assessed or imposed to another or
someone else without violating the law.
Examples of taxes when shifting may apply are VAT, percentage tax,
excise tax on excisable articles, ad valorem tax that oil companies pays
to BIR upon removal of petroleum products from its refinery.
Ways of shifting the tax burden
1. Forward shifting – When the burden of tax is transferred from a
factor of production through the factors of distribution until it finally
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settles on the ultimate purchaser or consumer.
2. Backward shifting – When the burden is transferred
from the consumer through the factors of distribution
to the factors ofproduction.
3. Onward shifting – When the tax is shifted two or
more times either forward or backward.
NOTE: Only indirect taxes may be shifted. In case of direct
taxes, the shifting of burden can only be made via
contractual provision.
Q: Acetylene Company is corporation engaged in the
manufacture and sale of oxygen and acetylene gases.
It made various sales of its products to the National
Power Corporation (NPC), an agency of the Philippine
Government, and to the Voice of America (VOA) an
agency of the United States Government.
Consequently, the Commission of
Internal Revenue assessed against it the
deficiency sales tax and surcharges pursuant
to percentage tax on sales. Acetylene
Company denied liability for the payment of
the tax on the ground that both the NPC and
the VOA because are exempt from taxation. It
contended that the immunity thus given to
the NPC or VOA would be impaired by the
imposition of a tax on sales made to it
because while the tax is paid by the
manufacturer or producer, the tax is
ultimately shifted by the latter to the
former. Is Acetylene Company exempt from
percentage tax on its sale to tax-exempt
entities?
A: NO. Sales tax is a tax on the
producer or the manufacturer and not
on the purchaser. Accordingly its levy
on the sales made to tax-exempt entities
like the NPC is permissible. The
economic burden of the tax finally
falls on the purchaser; when it does
the tax becomes a part of the price
which the purchaser must pay. It does
not matter that an additional amount is
billed as tax to the purchaser. The method of listing the
price and the tax separately and defining taxable gross
receipts as the amount received less the amount of the
tax added, merely avoids payment by the seller of a tax
on the amount of the tax (Philippine Acetylene Co., Inc., v.
CIR, G.R. No. L19707, August 17, 1967).
Meaning of impact and incidence of taxation
Impact of Taxation Incidence of Taxation
It refers to the statutory It is the economic cost of
liability to pay the tax. It tax. It is also known as
falls on the person burden of taxation.
originally assessed with a
particular tax.
It is the imposition of tax. It is the payment of
tax.(Burden)
(Liability)
It is on the seller upon It is on the final
whom the tax has been consumer, the place at
imposed. which the tax comes to
rest.
NOTE: The amount of tax paid may be shifted from seller
to buyer. What is transferred is not the liability for tax,
but the tax burden or incidence. Where the burden of the
tax is shifted to the purchaser, the amount passed on to it
is no longer a tax but becomes an added cost on the goods
purchased, which constitutes a part of the purchase price.
How to determine if a tax is direct or indirect
It is direct taxes when the impact or liability for the
payment of tax as well as incidence or burden of tax of the
tax falls on the same person. On the other hand, it is
indirect taxes when the impact or liability for the
payment of tax falls on one person but the incidence or
burden thereof can be shifted or passed to another.
NOTE: In indirect taxation, a distinction is made between
the liability for the tax and burden of the tax: The seller
who is liable for the VAT may shift or pass on the amount
of VAT it paid on goods, properties or services to the
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buyer. In such a case, what is transferred is not the
seller's liability but merely the burden of the VAT
(Diaz v. The Secretary of Finance, G.R. No.
193007, July 19, 2011) . The proper party to
question or seek a refund of an indirect tax is the
statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he
shifts the burden thereof to another (Silkair v.
CIR, G.R. No. 166482, January 25, 2012).
Principles governing tax exemptions
government itself or its agencies. The burden is
upon the claimant to establish right to
exemption beyond reasonable doubt.
NOTE: Taxation is the rule and exemption
is the exception (FELS Energy Inc. v.
Province of Batangas, 516 SCRA 186).

1. Tax exemptions are highly disfavored in law.

EXEMPTION FROM TAXATION 2. Tax exemptions are personal and non-transferable.
3. He who claims an exemption must justify
MEANING OF EXEMPTION FROM that the legislature intended to exempt him
TAXATION by words too plain to be mistaken. He must
convincingly prove that he is exempted.
4. It must be strictly construed against the taxpayer.
It is the grant of immunity,
express or implied, to particular NOTE: Deductions for income tax purposes
persons or corporations, from a partake of the nature of tax exemptions,
tax upon property or an excise tax hence, they are also be strictly construed
which persons or corporations against the taxpayer.
generally within the same taxing
districts are obliged to pay.

It is the legislature, unless limited

by a provision of the state
constitution, which has full power
to exempt any person or
corporation or class of property
from taxation, its power to exempt
being as broad as its power to tax.
Other than Congress, the
Constitution may itself provide for
specific tax exemptions, or local
governments may pass ordinances
on exemption only from local taxes
(John Hay Peoples Alternative
Coalition et al. v. Lim et. al., G. R. No.
119775, October 24, 2003).

NATURE OF TAX EXEMPTION

1. Personal in nature and covers

only taxes for which the
grantee is directly liable.

NOTE: It cannot be
transferred or assigned by
the person to whom it is given
without the consent of the
State.

2. Strictly construed against the taxpayer.

3. Implies a waiver on the part of
the government of its right to
collect what otherwise would
be due.
4. Exemptions are not
presumed. But the strict
interpretation does not apply
in the case of exemptions
running to the benefit of the
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5. Constitutional grants of tax exemptions are
self- executing.
6. Tax exemption is generally revocable. Unless
founded on contracts which are protected by
the Non- impairment clause.
7. In order to be irrevocable, the tax exemption
must be founded on a contract or granted
by the Constitution.
8. The congressional power to grant an
exemption necessarily carries with it the
consequent power to revoke the same.
NOTE: Since the power to tax includes the
power to exempt thereof which is essentially
a legislative prerogative, it follows that a
municipal mayor who is an executive officer
may not unilaterally withdraw such an
expression of a policy thru the enactment of a
tax (Philippine Petroleum Corporation v. Mun. of
Pililla, G.R. No. 90776, June 3, 1991).
9. Revocations are constitutional even though
the corporate do not have to perform a
reciprocal duty for them to avail of tax
exemptions.
Not all refunds are in the nature of a tax
exemption
A tax refund may only be considered as a tax
exemption when it is based either on a tax-
exemption statute or a tax-refund statute. Tax
refunds or tax credits are not founded principally
on legislative grace, but on the legal principle of
quasi-contracts against a person’s unjust
enrichment at the expense of another.
NOTE: The erroneous payment of tax as a basis
for a claim of refund may be considered as a case
of solutio indebiti, which the government is not
exempt from its
application and has the duty to refund without
any unreasonable delay what it has erroneously
collected.
Q: Shelly Oil Company filed for a tax refund
for the excise tax on petroleum products sold
to international carriers under Sec. 135 (a) of
1997 NIRC. The CTA ruled otherwise and
ruled that the exemption from excise tax
payment on petroleum products under Sec.
135 (a) is conferred on international carriers
who purchased the same for their use or
consumption outside the Philippines. The
excise tax attaches to the petroleum products
and is direct liability of the manufacturer.
Shelly Oil contends that the ruling effectively
requires local petroleum manufacturers to
absorb the tax burden in the sale of its products
to international carriers, and it places them at
a competitive disadvantage since foreign oil
producers, particularly those whose
governments with which we have entered into
bilateral service agreements, are not subject
to excise tax for the same transaction. Is the
CTA correct?
A: NO. Section 135(a) of NIRC is concerned with
the exemption of the article itself and not the
ostensible exemption of the international carrier-
buyer. It also embodies compliance to the
Chicago Convention and other international
agreements under the basic international law
principle of pacta sunt servanda. Also, failure to
grant tax exemption would not only risk
retaliatory action under several bilateral
agreements with various countries; but also encourage
“tankering” wherein carriers fill their aircraft as
full as possible whenever they landed outside the
EU to avoid paying tax, which would be detrimental to
the State’s economic and tourism growth (CIR v.
Pilipinas Shell Petroleum Corporation, G.R. No.
188496, February 19, 2014).

KINDS OF TAX EXEMPTION

As to basis

1. Constitutional – Immunities from taxation which originate from the Constitution.

2. Statutory – Those which emanate from legislation.
3. Contractual – Agreed to by the taxing authority in contracts lawfully entered into by them under
enabling laws.
4. Implied - When particular persons, properties or excises are deemed exempt as they fall outside the
scope of the taxing provision.

NOTE: It bears repeating that the law looks with disfavor on tax exemptions and he who would seek to be
thus privileged must justify it by words too plain to be mistaken and too categorical to be
misinterpreted (Western Minolco Corporation v. CIR, G.R. No. L-61632, August 16, 1983).

5. Treaty
6. Licensing ordinance
As to extent
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1. Total – Connotes absolute immunity.

2. Partial – One where a collection of a part of the tax is dispensed with.

As to object

1. Personal – Granted directly in favor of certain persons.

2. Impersonal – Granted directly in favor of a certain class of property.
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These exemptions must not be confused with tax exemptions granted under franchises which are not contracts
within the purview of the non-impairment clause of the constitution (Cagayan Electric Co. v. Commissioner, G.R. No. L-
601026, September 25, 1985).

NOTE: Contractual tax exemptions may not be unilaterally so revoked by the taxing authority without thereby
violating the non-impairment clause of the Constitution (Vitug, 2000). Nevertheless, since taxation is the rule and
exemption therefrom is the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The
only exception to this rule is where the exemption was granted to private parties based on material consideration of a
mutual nature, which then becomes contractual and is thus covered by the non- impairment clause of the
Constitution (MCIAA v. Marcos,
G.R. No. 120082 September 11, 1996).

RATIONALE/GROUNDS FOR EXEMPTION

The inherent power of the State to impose taxes naturally carries with it the power to grant tax exemptions.

The rationale or grounds for tax exemption are the same as the non-revenue/ special or regulatory purposes of
taxation:

a. Sumptuary or regulatory purpose. The sumptuary purpose of tax exemption is to promote the general welfare and
to protect the health, safety or morals of inhabitants.
b. Tax exemptions made the implement of the state’s
police power.
c. Compensatory purpose. The compensatory purpose of tax exemption is to implement the social justice provisions of
the Constitution through the progressive system of taxation, which would result to equal distribution of wealth
etc. (Domondon, 2009)

NOTE: There is no tax exemption based solely on the ground of equity (Davao Gulf v. CIR, 293 SCRA 76).

Q: The BTC Power Corporation (BTC) entered in a Build-Operate-Transfer (BOT) agreement with National Power
Corporation (NPC), a tax-exempt entity as provided by its Charter under a special law. The BOT Agreement
provided that NPC shall be responsible for the payment of all taxes imposed on the power station except income
& permit fees. Later on, the City Treasurer demanded payment of business taxes and penalties. BTC contended
that NPC should be liable for such taxes and penalties, as provided for in their BOT agreement. NPC, however,
contends that it’s a tax-exempt entity. Is NPC correct?

A: No. The 1991 Local Government Code repealed NPC's exemption from all taxes under its Charter. It removed the
blanket exclusion of government instrumentalities from local taxation as it expressed a general repeal of all statutes
granting exemptions from local taxes. Considered as the most revolutionary piece of legislation
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on local autonomy, the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax
base of LGUs to include taxes which were prohibited by previous laws.

In recent years, the increasing social challenges of the times expanded the scope of state activity, and
taxation has become a tool to realize social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare and similar objectives. Taxation
assumes even greater significance with the ratification of the 1987 Constitution (Batangas Power
Corporation v. Batangas City, G.R. No. 152675, April 28, 2004).

REVOCATION OF TAX EXEMPTION

Rule on revocation of tax exemption

Since taxation is the rule and exemption is the exception, the exemption may thus be withdrawn at the
pleasure of the taxing authority (Mactan Cebu International Airport Authority v. Marcos et al, 261 SCRA
667).

By granting exemptions, the State does not forever waive the exercise of its sovereign prerogative. Thus, in
withdrawing the exemption of the press (media) from VAT, the law merely subjects the same to the
same tax burden to which other businesses have long ago been subject. It is not discriminatory as the
exemptions are granted for a purpose, in some cases, to encourage agricultural production and, in
other cases, for the personal benefit of the end-user rather than for profit (Tolentino v. Sec. of Finance, G.R.
No. 115455, October 30, 1995).

Restrictions on revocation of tax exemptions

1. Non-impairment clause.
2. A municipal franchise once granted as a contract cannot be altered or amended except by actual
consent of the parties concerned.
3. Adherence to form. If the exemption is granted by the Constitution, its revocation may be affected
through constitutional amendment only.
4. Where the tax exemption grant is in the form of a special law and not by a general law even if the terms
of the general act are broad enough to include the codes in the general law unless there is manifest
intent to repeal or alter the special law (Commissioner of Internal Revenue v. Court of Appeals, 207 SCRA
487).

NOTE: Withdrawal of tax exemption is not to be construed as prohibiting future grants of tax
exemptions (Domondon, 2009). The erroneous application and enforcement of the law by public
officers do not preclude subsequent correct application of the statute, and the government is never
estopped by the mistake or error on the part of its agents (Philippine Basketball Association v. CA, 337
SCRA 358, August 8, 2000).

Luzon Stevedoring vs. CTA [G.R. No. L-30232. July 29, 1988.]
Second Division, Paras (J): 4 concurring

Facts: Luzon Stevedoring Corp., in 1961 and 1962, imported various engine parts and other equipment for the repair and
maintenance of its tugboats for which it paid the assessed compensating tax under protest. Unable to secure a tax refund from
the Commissioner of Internal Revenue, on 2 January 1964, it filed a Petition for Review with the Court of Tax Appeals (CTA
Case 1484), praying among others, that it be granted the refund of the amount of P33,442.13. The Court of Tax Appeals,
however, in a Decision dated 21 October 1969, denied the various claims for tax refund (finding said claims without sufficient
legal justification); with costs against the corporation. On 24 January 1969, the Corporation filed a Motion for Reconsideration,
but the same was denied in a Resolution dated 20 February 1969. Hence, the petition for review. The Supreme Court, in a
Resolution dated 13 March 1969, gave due course to the petition.
The Supreme Court dismissed the petition, and affirmed the decision of the Court of Tax Appeals.

Section 190 (Compensating tax) of the National Internal Revenue Code, as amended by RA
3176
Said law provides: “…and Provided further, That the tax imposed in this section shall not apply to articles to be used
by the importer himself in the manufacture or preparation of articles subject to specific tax or those for consignment abroad and
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are to form part thereof or to articles to be used by the importer himself as passenger and/or cargo vessel, whether coastwise
or ocean-going, including engines and spare parts of said vessel. . .”

Power of taxation a high prerogative of sovereignty; Relinquishment or reduction not presumed; Tax exemption
strictly construed against taxpayer
“As the power of taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any
reduction or dimunition thereof with respect to its mode or its rate, must be strictly construed, and the same must be coached in
clear and unmistakable terms in order that it may be applied.” (84 C.J.S. pp. 659-800), More specifically stated, any claim for
exemption from the tax statute should be strictly construed against the taxpayer (Acting Commissioner of Customs v. Manila
Electric Co. et al., 69 SCRA 469 [1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142
[1975]).

When law is clear, application and not interpretation of law is required

The corporation’s tugboats do not fall under the categories of passenger and/or cargo vessels. It is a
cardinal principle of statutory construction that where a provision of law speaks categorically, the need for interpretation is
obviated, no plausible pretense being entertained to justify non-compliance. All that has to be done is to apply it in every case
that falls within its terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v.
DBP, L-26419,35 SCRA 270 [1970]).

• CIR and Commissioner of Customs vs. Botelho Shipping Corp. & General Shipping Co., Inc.
G.R. Nos. L-21633-34 June 29, 1967

FACTS: Reparations Commission of the Philippines sold to Botelho the vessel "M/S Maria Rosello" for the amount of
P6,798,888.88. The former likewise sold to General Shipping the vessel "M/S General Lim" at the price of P6,951,666.66. Upon
arrival at the port of Manila, the Bureau of Customs placed the same under custody and refused to give due course [to
applications for registration], unless the aforementioned sums of P483,433 and P494,824 be paid as compensating tax. The
buyers subsequently filed with the CTA their respective petitions for review. Pending the case, Republic Act No. 3079 amended
Republic Act No. 1789 — the Original Reparations Act, under which the aforementioned contracts with the Buyers had been
executed — by exempting buyers of reparations goods acquired from the Commission, from liability for the compensating tax.

Invoking [section 20 of the RA 3079], the Buyers applied, for the renovation of their utilizations contracts with the Commission,
which granted the application, and, then, filed with the Tax Court, their supplemental petitions for review. The CTA ruled in
favor of the buyers.

[On appeal, the CIR and COC maintain that such proviso should not be applied retroactively], upon the ground that a tax
exemption must be clear and explicit; that there is no express provision for the retroactivity of the exemption, established by
Republic Act No. 3079, from the compensating tax; that the favorable provisions, which are referred to in section 20 thereof,
cannot include the exemption from compensating tax; and, that Congress could not have intended any retroactive exemption,
considering that the result thereof would be prejudicial to the Government.

ISSUE: Whether or not the tax exemption can be applied retroactively

HELD: YES. The inherent weakness of the last ground becomes manifest when we consider that, if true, there could be no tax
exemption of any kind whatsoever, even if Congress should wish to create one, because every such exemption implies a waiver
of the right to collect what otherwise would be due to the Government, and, in this sense, is prejudicial thereto. It may not be
amiss to add that no tax exemption — like any other legal exemption or exception — is given without any reason therefor. In
much the same way as other statutory commands, its avowed purpose is some public benefit or interest, which the law-making
body considers sufficient to offset the monetary loss entitled in the grant of the exemption. Indeed, section 20 of Republic Act
No. 3079 exacts a valuable consideration for the retroactivity of its favorable provisions, namely, the voluntary assumption, by
the end-user who bought reparations goods prior to June 17, 1961 of "all the new obligations provided for in" said Act.

Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating tax, not particular persons,
but persons belonging to a particular class. Indeed, appellants do not assail the constitutionality of said section 14, insofar as it
grants exemptions to end-users who, after the approval of Republic Act No. 3079, on June 17, 1961, purchased reparations
goods procured by the Commission. From the viewpoint of Constitutional Law, especially the equal protection clause, there is
no difference between the grant of exemption to said end-users, and the extension of the grant to those whose contracts of
purchase and sale mere made before said date, under Republic Act No. 1789.

•• Meralco vs. Vera

•• GR L-29987, 22 October 1975
• First Division, Munoz Palma (J): 4 concur, 1 took no part
•
• Facts: Meralco is the holder of a franchise to construct, maintain, and operate an electric light, heat , and power system in
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the City of Manila and its suburbs. In 1962 and 1963, Meralco imported and received from abroad copper wires,
transformers, and insulators for use in the operation of its business. The Collector of Customs, as deputy of the
Commissioner of Internal Revenue, levied and collected a compensating tax. Meralco claimed for refund for the said yeares,
but such claims were either not acted upon or denied by the Commissioner.
•
• Issue: Whether Meralco is exempt from payment of a compensating tax on poles, wires, transformers and insulators
imported by it for use in the operation of its electric light, heat, and power system.
•
• Held: Meralco is not exempt from paying the compensationg tax provided for in Section 190 of the Tax Code, the prupose of
which is to “place casual importers, who are not merchants on equal forring with established merchants who pay sales tax on
articles imported by them.” Meralco’s claim for exemption from payment of the compensating tax is not clear or expressed,
contrary to the rule that “exemptions from taxation are highly disfavored in law, and he who claims exemption must be able to
justify his claim by the clearest grant of organic or statute law.” Tax exemptiion are strictly construed against the taxpayer,
they being highly disfavored and may almost be said to be “odious to the law.” When exemption is claimed, it must be shown
indubitably to exist, for every presumption is against it, and a well-founded doubt is fatal to the claim.

• G.R. No. 155491 July 21, 2009

• SMART COMMUNICATIONS, INC., Petitioner,
vs.
THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE, and the SANGGUNIANG PANLUNSOD OF DAVAO
CITY, Respondents.
• FACTS:
• 1. On February 18, 2002, Smart filed a special civil action for declaratory relief3 for the ascertainment of its rights and obligations under
the Tax Code of the City of Davao (DAVAO).
• 2. The tax being imposed is a tax on businesses enjoying a franchise, at the rate of seventy-five percent of one percent of the gross
annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City.
• 3. Among the objections raised by Smart were:
• a. The issuance of its franchise under RA No. 7294, which is subsequent to RA 7160 (Local Government Code) shows the clear
legislative intent to exempt it from the provisions of RA 7160
• b. Sec. 137 of the LGC is meant to apply to exemptions already existing at the time of its effectivity and not to future exemption
• c. The power of the City of Davao to impose a franchise tax is subject to statutory limitation such as the “in lieu of all taxes”
clause found in RA 7294
• d. The imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against
impairment of contract.
• 4. Davao, however, invoked the power granted by the Constitution to local government units (LGU) to create their own sources of
revenue.
• 5. The RTC held a decision in favor of Davao stating that the ambiguity in RA 7294 regarding “in lieu of all taxes” must be resolved
against the taxpayer. Tax exemptions are construed in strictly against the taxpayer and liberally in favor of the taxing authority.
• 6. The RTC also held that there was no violation of the non-impairment clause of the Constitution since the power to tax is based not
merely on a valid delegation of legislative power but on the direct authority granted to it by the fundamental law. It added that while
such power may be subject to restrictions or conditions imposed by Congress, any such legislative limitation must be consistent with the
basic policy of local autonomy.
• ISSUES: Whether Smart is liable to pay the franchise tax imposed by the City of Davao- YES
• HELD:
• 1. Smart alleges that the “in lieu of all taxes” clause of its franchise exempts it from all taxes, both local and national, except the
national franchise tax (now VAT), income tax and real property tax. The uncertainty in the “in lieu of all taxes” clause in RA No. 7294 on
whether Smart is exempted from both local and national franchise tax must be construed strictly against Smart which claims exemption.
Smart has the burden of providing that, aside from the imposed 3% franchise tax, Congress intended it to be exempt from all kinds of
franchise taxes-whether local or national. Smart, failed in this regard.
• 2. Tax exemptions can only be given force if they are clear and categorical. If Congress intended Smart to be exempted from municipal
and provincial taxes, it could have used the same language as the Clavecilla franchise which stated: “in lieu of any and all taxes of any
kind, nature or description levied, established ot collected by any authority whatsoever, municipal, provincial or national, from which
the grantee is hereby expressly exempted. The interpretation of the franchise granted to Smart is that it refers only to national and not
to local taxes.
• 3. Smart also claims that the clause “in lieu of all taxes” is in the nature of a tax exclusion and not a tax exemption. The distinction
between the two:
• Tax Exemption- This means that the taxpayer does not pay any tax at all. An exemption is an immunity or privilege, it is the freedom
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from a charge or burden to which others are subjected.

• Tax Exclusion- The removal of otherwise taxable items from the reach of taxation e.g exclusions from gross income and allowable
deductions. An exclusion is also an immunity or privilege which frees a taxpayer from a charge to which others are subjected. The rule
that a tax exemption should be applied strictly against the taxpayer and liberally in favor of the government applies equally to tax
exclusion.
• Smart pays VAT, income tax and real property tax. Thus, what it enjoys it more accurately a tax exclusion.
• 4. Smart posits that the franchise of GLOBE contains a provision exempting it from municipal or local franchise tax, and that Smart
should like benefit by these. In granting the franchise of GLOBE under RA No. 7925, Congress did not intend it to operate as a blanket
tax exemption to all telecommunications entities. GLOBE pays only 1.5% of its gross receipts in lieu of any and all taxes of any kind,
nature or description levies, established or collected by any authority whatsoever, municipal, provincial or national. This grant to GLOBE
is clear and categorical. No such provision is found in the franchise of Smart, the kind of tax from which it is exempted is not clearly
specified.
• 5. If the contention of Smart is to be followed. The Government will be burdened of having to keep track of all granted
telecommunications franchises, lest some companies be treated unequally. It is different if Congress enacts a law specifically granting
uniform advantages, favor, privilege, exemption or immunity to all telecommunication entities.
• 6. Smart likewise claims a violation of the non-impairment clause since the franchise is in the nature of the contract between the
government and Smart. Smart’s franchise was granted with the express condition that it is subject to amendment, alteration or repeal.
As held in Tolentino vs. Secretary of Finance:
• “Existing laws are read into contracts in order to fix obligations as between parties, the reservation of essential attributes of
sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment
presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society.
• In truth, the Contract Clause was never been though as a limitation on the exercise of the State’s power of taxation save only
where a tax exemption has been granted for a valid consideration xxx.”
• Dispositive: Wherefore, the instant petition is denied for lack of merit. Costs against petitioner.

‣MACEDA v. MACARAIG; G.R. No. 88291

MACEDA vs. MACARAIG, JR.
197 SCRA 771
GR No. 88291 May 31, 1991
"A taxpayer may question the legality of a law or regulation when it involves illegal expenditure of public money."

FACTS: Senator Ernesto Maceda sought to nullify certain decisions, orders, rulings, and resolutions of respondents Executive Secretary,
Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs and the Fiscal Incentives Review Board FIRB for
exempting the National Power Corporation (NPC) from indirect tax and duties. RA 358, RA 6395 and PD 380 expressly grant NPC
exemptions from all taxes whether direct or indirect. In 1984, however, PD 1931 and EO 93 withdrew all tax exemptions granted to all
GOCCs including the NPC but granted the President and/or the Secretary of Finance by recommendation of the FIRB the power to restore
certain tax exemptions. Pursuant to the latter law, FIRB issued a resolution restoring the tax and duty exemption privileges of the NPC. The
actions of the respondents were thus questioned by the petitioner by this petition for certiorari, prohibition and mandamus with prayer for a
writ of preliminary injunction and/or restraining order. To which public respondents argued, among others, that petitioner does not have the
standing to challenge the questioned orders and resolution because he was not in any way affected by such grant of tax exemptions.

ISSUE: Has a taxpayer the capacity to question the legality of the resolution issued by the FIRB restoring the tax exemptions?

HELD: Yes. In this petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-elected Senator of the
Philippines." Public respondent argues that petitioner must show that he has sustained direct injury as a result of the action and that it is not
sufficient for him to have a mere general interest common to all members of the public. The Court however agrees with the petitioner that as
a taxpayer he may file the instant petition following the ruling in Lozada when it involves illegal expenditure of public money. The petition
questions the legality of the tax refund to NPC by way of tax credit certificates and the use of said assigned tax credits by respondent oil
companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.

•
MANILA INTERNATIONAL AIRPORT AUTHORITY v. CA, GR NO. 155650, 2006-07-20

• Facts:

• Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International Airport (NAIA)
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• As operator of the international airport, MIAA administers the land, improvements and equipment within the NAIA Complex.
The MIAA Charter transferred to MIAA approximately 600 hectares of land,... The MIAA Charter further provides that no
portion of the land transferred to MIAA shall be disposed of through sale or any other mode unless specifically approved by
the President of the

• Philippines.

• The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real estate tax granted to MIAA
under Section 21 of the MIAA Charter. Thus, MIAA negotiated with... respondent City of Parañaque to pay the real estate tax
imposed by the City. MIAA then paid some of the real estate tax already due.

• MIAA received Final Notices of Real Estate Tax Delinquency from the City of Parañaque

• The Mayor of the City of Parañaque threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to
pay the... real estate tax delinquency.

• MIAA filed with the Court of Appeals an original petition for prohibition and injunction

• The petition sought to restrain the City of Parañaque from imposing real estate tax on, levying... against, and auctioning for
public sale the Airport Lands and Buildings.

• Court of Appeals dismissed the petition because MIAA filed it beyond the 60-day reglementary period.

• Court of Appeals also denied... motion for reconsideration... the present petition for review.

• MIAA insists that it is... exempt from real estate tax under Section 234 of the Local Government Code because the Airport
Lands and Buildings are owned by... the Republic.

• To justify the exemption, MIAA invokes the principle that the government cannot tax itself.

• Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax exemption privileges of
"government-owned and-controlled corporations" upon the effectivity of the Local Government Code.

• Issues:

• whether the Airport Lands and Buildings of MIAA are exempt from real estate tax under existing laws.

• Ruling:

• We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local governments.

• First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus
exempt from local taxation. Second, the real properties of MIAA are owned by the Republic of the Philippines and thus...
exempt from real estate tax.

• There is no dispute that a government-owned or controlled corporation is not exempt from real estate tax. However, MIAA is
not a government-owned or controlled corporation.

• Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-owned or controlled
corporation.

• MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. MIAA is
like any other government instrumentality, the only difference is that MIAA is vested with corporate powers.

• When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation.
Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government
instrumentality exercising not only... governmental but also corporate powers. Thus, MIAA exercises the governmental
powers of eminent domain,... police authority... and the levying of fees and charges.

• At the same time, MIAA exercises "all the... powers of a corporation under the Corporation Law, insofar as these powers are
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not inconsistent with the provisions of this Executive Order."

• When local governments invoke the power to tax on national government instrumentalities, such power is construed strictly
against local governments. The rule is that a tax is never presumed and there must be clear language in the law imposing the
tax. Any doubt whether a person,... article or activity is taxable is resolved against taxation. This rule applies with greater
force when local governments seek to tax national government instrumentalities.

• Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption. However, when
Congress grants an exemption to a national government instrumentality from local taxation, such exemption is construed
liberally in favor of the national... government instrumentality.

• There must be express language in the law empowering local governments to tax national government instrumentalities. Any
doubt whether such power exists is resolved against local... governments.

Tax Condonation or Remission

Juan Luna Subdivision vs. Sarmiento

GR L-3538, 28 May 1952
En Banc, Tuason (J): 7 concur

Facts: Juan Luna Subdivision is a local corporation which issued a check to the City Treasurer of Manila for amount to be applied to its
land tax for the second semester of 1941. The records of the City Treasurer do not show what was done with the check (It appears that
it was deposited with the Philippine National Bank [PNB]). After liberation (WWII), the City Treasurer refused to refund the corporation’s
deposit or apply it to such future taxes as might be found due, while the Philippine Trust Co (to which the check was presented) was
unwilling to reverse its debit entry against Juan Luna Subd. Said amount is also subject of another
disagreement between the corporation and the City Treasure, with the corporation claiming that the wholeamount of the check for the
taxes for the last semester of 1941 have been remitted by Commonwealth Act 703 (1945).

Issue: Whether the provision allowing the remission covers taxes paid before the enactment of Commonwealth Act 703, or taxes which
were still unpaid.

Held: The law is clear that it applies to “taxes and penalties due and payable,” i.e. taxes owed or owing. The remission of taxes due and
payable to the exclusion og taxes already collected does not constitute unfair discrimination. Each 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. Herein, they are
not. The taxpayers who paid their taxes before liberation and those who had not were not on the same footing on the need of material
relief. Taxpayers who had been in arrears in their obligation whould have to satisfy their liability with genuine currency, while the taxes
paid during the occupation had been satisfied in Japanese War Notes, many of them at a time when those notes were well-nigh
worthless. To refund those taxes with restored currency would be unduly enrich many of the payers at a greater expense to the people
at large.

Surigao Consolidated Mining vs. Collector

GR L-14878, 26 December 1963
En Banc, Ragala (J): 10 concur

Facts: Before the outbreak of the War, the Surigao Consolidated Mining Co. was operating its mining concessions in Mainit, Surigao.
Due to the interruption of communications at the outbreak of the war, the
company lost contact with its mines and never received the production reports for the 4 th quarter of 1941. To avoid incurring any tax
liability or penalty, it deposited of check payable to and indorsed in favor of the City Treasurer, in payment of ad valorem taxes for the
said period. After the war, the company filed its ad valorem tax for the said period pursuant to Commonwealth Act 772. Its return was
revised, until eventually the company claimed a refund of P17,158.01. The collector of Internal Revenue denied the request for refund.

Issue: Whether Surigao Consolidated may recover its tax payment in light of the condonation made under a subsequent law, RA 81.

Held: RA 81, Section 1(d) provided that “all unpaid royalties, ad valorem or specific taxes on all minerals mined from mining claims or
concessions existing an din force on 1 January 1942, and which minerals were lost by reason of war, of circumstance arising therefrom
are condoned…” The provision refers to the condonation of unpaid taxes only. The condonation of a tax liability is equivalent and is in
the nature of tax exemption. Being so, it should be sustained only when expressed in explicit terms, and it cannot be extended beyond
the plain meaning of those terms. He who claims an exemption from his share of the common burden of taxation must justify his claim
by showing t hat the Legislature intended to exempt him. The company failed to show any portion of the law that explicitly provided for a
refund of those taxpayers who had paid their taxes on the items.
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Tax Refund
• DAVAO GULF LUMBER CORP v. CIR
GR No. 117359, July 23, 1998
293 SCRA 77
•
• FACTS: Republic Act No. 1435 entitles miners and forest concessioners to the refund of 25% of the specific taxes paid by the oil companies,
which were eventually passed on to the user--the petitioner in this case--in the purchase price of the oil products. Petitioner filed before respondent
Commissioner of Internal Revenue (CIR) a claim for refund in the amount representing 25% of the specific taxes actually paid on the above-
mentioned fuels and oils that were used by petitioner in its operations. However petitioner asserts that equity and justice demands that the refund
should be based on the increased rates of specific taxes which it actually paid, as prescribed in Sections 153 and 156 of the NIRC. Public
respondent, on the other hand, contends that it should be based on specific taxes deemed paid under Sections 1 and 2 of RA 1435.
•
• ISSUE: Should the petitioner be entitled under Republic Act No. 1435 to the refund of 25% of the amount of specific taxes it actually paid on
various refined and manufactured mineral oils and other oil products, and not on the taxes deemed paid and passed on to them, as end-users, by the
oil companies?
•
• HELD: No. According to an eminent authority on taxation, "there is no tax exemption solely on the ground of equity." Thus, the tax refund should
be based on the taxes deemed paid. Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the
grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language
of the law; it cannot be merely implied therefrom.

Tax Assumption
MITSUBISHI – MANILA vs CIR
Mitsubishi Corporation - Manila Branch Vs. Commissioner of Internal Revenue
G.R. No. 175722
June 5, 2017

Facts:

On June 11, 1987, the governments of Japan and the Philippines executed an Exchange of Notes, whereby the former agreed to extend
a loan amounting to Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000) to the latter through the then Overseas
Economic Cooperation Fund (OECF, now Japan Bank for International Cooperation) for the implementation of the Calaca II Coal-Fired
Thermal Power Plant Project (Project). In Paragraph 5 (2) of the Exchange of Notes, the Philippine Government, by itself or through its
executing agency, undertook to assume all taxes imposed by the Philippines on Japanese contractors engaged in the Project.

Consequently, the OECF and the Philippine Government entered into Loan Agreement No. PH-P768 dated September 25, 1987 for
Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000). Due to the need for additional funding for the Project, they also
executed Loan Agreement No. PH-P1419 dated December 20, 1994 for Five Billion Five Hundred Thirteen Million Japanese Yen
(¥5,513,000,000). Meanwhile, on June 21, 1991, the National Power Corporation (NPC), as the executing government agency, entered
into a contract with Mitsubishi Corporation (i.e., petitioner's head office in Japan) for the engineering, supply, construction, installation,
testing, and commissioning of a steam generator, auxiliaries, and associated civil works for the Project (Contract). The Contract's
foreign currency portion was funded by the OECF loans. In line with the Exchange of Notes, Article VIII (B) (1) of the Contract indicated
NPC's undertaking to pay any and all forms of taxes that are directly imposable under the Contract.

Petitioner completed the project on December 2, 1995, but it was only accepted by NPC on January 31, 1998 through a Certificate of
Completion and Final Acceptance. On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year that ended on March 31,
1998 with the Bureau of Internal Revenue (BIR). Petitioner included in its income tax due the amount of P 44,288,712.00, representing
income from the OECF-funded portion of the Project. On the same day, petitioner also filed its Monthly Remittance Return of Income
Taxes Withheld and remitted P 8,324,100.00 as BPRT for branch profits remitted to its head office in Japan out of its income for the
fiscal year that ended on March 31, 1998.
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In a Decision dated December 17, 2003, the CTA Division granted the petition and ordered the CIR to refund to petitioner the amounts it
erroneously paid as income tax and BPRT. It held that based on the Exchange of Notes, the Philippine Government, through the NPC
as its executing agency, bound itself to assume or shoulder petitioner's tax obligations. Therefore, petitioner's payments of income tax
and BPRT to the CIR, when such payments should have been made by the NPC, undoubtedly constitute erroneous payments under
Section 229 of the NIRC.

The CIR moved for reconsideration but was denied in a Resolution dated April 23, 2004; thus, the CIR elevated the matter to the CTA
En Banc. In a Decision dated May 24, 2006, the CTA En Banc reversed the CTA Division's rulings and declared that petitioner is not
entitled to a refund of the taxes it paid to the CIR. Petitioner sought reconsideration, but the CTA En Banc denied the motion in a
Resolution dated December 4, 2006.

Issues:

Whether or not Mitsubishi Corporation – Manila Branch is entitled to a refund. Whether or not the Bureau of Internal Revenue should be
the authorized government agency where the tax refund be claimed.

Held:

Yes, the petitioner is entitled to a refund. The CIR subsequently affirmed petitioner's non-liability for taxes and entitlement to tax refunds
by issuing Revenue Memorandum Order (RMO) No. 24-200547 addressed to specified BIR offices. The RMO provides: Pursuant to the
provisions of RMC No. 32-99 as amended by RMC No. 42-99, Japanese contractors and nationals engaged in OECF funded projects in
the Philippines shall not be required to shoulder the fiscal levies or taxes associated with the project. Therefore, the concerned
Japanese contractors are entitled to claim for the refund of all taxes paid and shouldered by them relative to the conduct of the Project.
Also, considering that petitioner paid the subject taxes in the aggregate amount of P 52,612,812.00, which it was not required to pay,
the BIR erroneously collected such amount.

On another issue, yes, the Bureau of Internal Revenue should be the authorized government agency where the tax refund be claimed.
The Supreme Court held that in Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund taxes which are
erroneously collected by the government. The authority of the CIR to refund erroneously collected taxes is likewise reflected in Section
229 of the NIRC.

In this case, it is fairly apparent that the subject taxes in the amount of P 52,612,812.00 was erroneously collected from petitioner,
considering that the obligation to pay the same had already been assumed by the Philippine Government by virtue of its Exchange of
Notes with the Japanese Government. Case law explains that an exchange of notes is considered as an executive agreement, which is
binding on the State even without Senate concurrence.

Hence, the petition is GRANTED. The Decision dated May 24, 2006 and the Resolution dated December 4, 2006 of the Court of Tax
Appeals (CTA) En Banc are REVERSED and SET ASIDE. The Decision dated December 17, 2003 of the CTA is REINSTATED.

Tax Amnesty

REPUBLIC OF THE PHILIPPINES, petitioner,

vs.

INTERMEDIATE APPELLATE COURT and SPOUSES ANTONIO and CLARA PASTOR, respondents.

Roberto L. Bautista for private respondents.

Ponente: GRIÑO-AQUINO

FACTS:

Republic of the Philippines, through the Bureau of Internal Revenue, commenced an action in the Court of First Instance (now Regional

Trial Court), to collect from the spouses Antonio Pastor and Clara Reyes-Pastor deficiency income taxes for the years 1955 to 1959 with

surcharge and monthly interest, and costs. The Pastors filed a motion to dismiss the complaint, but the motion was denied. They filed an

answer admitting there was an assessment against them for income tax deficiency but denying liability therefor. They contended that

they had availed of the tax amnesty under P.D.’s Nos. 23, 213 and 370 and had paid the corresponding amnesty taxes amounting of
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their reported untaxed income under P.D. 23, and a final payment on October 26, 1973 under P.D. 370 evidenced by the Government’s

Official Receipt. The trial court held that the respondents had settled their income tax deficiency for the years 1955 to 1959, not under

P.D. 23 or P.D. 370, but under P.D. 213.

The Government appealed to the Intermediate Appellant Court, alleging that the private respondents were not qualified to avail of the

tax amnesty under P.D. 213 for the benefits of that decree are available only to persons who had no pending assessment for unpaid

taxes, as provided in Revenue Regulations Nos. 8-72 and 7-73. Since the Pastors did in fact have a pending assessment against them,

they were precluded from availing of the amnesty granted in P.D.’s Nos. 23 and 213. The Government further argued that “tax

exemptions should be interpreted strictissimi juris against the taxpayer. The Intermediate Appellate Court (now Court of Appeals)

rendered a decision dismissing the Government’s appeal and holding that the payment of deficiency income taxes by the Pastors under

PD. No. 213, and the acceptance thereof by the Government, operated to divest the latter of its right to further recover deficiency

income taxes from the private respondents pursuant to the existing deficiency tax assessment against them.

ISSUE:

Whether or not the tax amnesty payments made by the private respondents bar an action for recovery of deficient income taxes under

P.D.’s Nos. 23, 213 and 370.

HELD:

YES. Petition for review is denied.

RATIO:

[T]he Government is estopped from collecting the difference between the deficiency tax assessment and the amount already paid by

them as amnesty tax. The finding of the appellate court that the deficiency income taxes were paid by the Pastors, and accepted by the

Government, under P.D. 213, granting amnesty to persons who are required by law to file income tax returns but who failed to do so, is

entitled to the highest respect and may not be disturbed except under exceptional circumstances

The rule is that in case of doubt, tax statutes are to be construed strictly against the Government and liberally in favor of the

taxpayer strictisimi juris for taxes, being burdens, are not to be presumed beyond what the applicable statute (in this case P.D. 213)

expressly and clearly declares.

‣CIR v. CA; G.R. No. 108576

Facts: Sometime in the 1930’s, Don Andres Soriano, a citizen and resident of the United States, formed the
corporation “A. Soriano Y Cia”, predecessor of ANSCOR with a 1,000,000.00 capitalization divided into 10,000
common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres,
who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally
issued.

On September 12, 1945, ANSCOR’s authorized capital stock was increased to P2,500,000.00 divided into 25,000
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common shares with the same par value. Of the additional 15,000 shares, only 10,000 was issued which were all
subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to
subscribe to the new issues. This increased his subscription to 14,963 common shares. A month later, Don Andres
transferred 1,250 shares each to his two sons, Jose and Andres Jr., as their initial investments in ANSCOR. Both sons
are foreigners.

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and
December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a
total shareholdings of 185,154 shares. 50,495 of which are original issues and the balance of 134,659 shares as stock
dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to his wife,
Doña Carmen Soriano, as her conjugal share. The offer half formed part of his estate.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M. In
the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively received by the
Don Andres estate and Doña Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867
and 138,864 common shares each.

On December 28, 1967, Doña Carmen requested a ruling from the United States Internal Revenue Service (IRS),
inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme. By January
2, 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000 common and 150,000 preferred
shares.

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax
avoidance. Consequently, on March 31, 1968 Doña Carmen exchanged her whole 138,864 common shares for
138,860 of the preferred shares. The estate of Don Andres in turn exchanged 11,140 of its common shares for the
remaining 11,140 preferred shares.

In 1973, after examining ANSCOR’s books of account and record Revenue examiners issued a report proposing that
ANSCOR be assessed for deficiency withholding tax-at-source, for the year 1968 and the 2nd quarter of 1969 based
on the transaction of exchange and redemption of stocks. BIR made the corresponding assessments. ANSCOR’s
subsequent protest on the assessments was denied in 1983 by petitioner. ANSCOR filed a petition for review with the
CTA, the Tax Court reversed petitioners ruling. CA affirmed the ruling of the CTA. Hence this position.

Issue: Whether or not a person assessed for deficiency withholding tax under Sec. 53 and 54 of the Tax Code is
being held liable in its capacity as a withholding agent.

Held: An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for
deficiency withholding tax, as such, it is being held liable in its capacity as a withholding agent and not in its
personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be deemed a taxpayer for it to
avail of a tax amnesty under a Presidential decree that condones “the collection of all internal revenue taxes including
the increments or penalties on account of non-payment as well as all civil, criminal, or administrative liabilities arising
from or incident to voluntary disclosures under the NIRC of previously untaxed income and/or wealth realized here or
abroad by any taxpayer, natural or juridical.” The Court explains: “The withholding agent is not a taxpayer, he is a
mere tax collector. Under the withholding system, however, the agent-payer becomes a payee by fiction of law. His
liability is direct and independent from the taxpayer, because the income tax is still imposed and due from the latter.
The agent is not liable for the tax as no wealth flowed into him, he earned no income.”

REPUBLIC v. IAC; G.R. No. L-69344

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TAXPAYER’S SU)T

It is a case where the act complained of directly involves the illegal disbursement of public funds collected through
taxation.

In the recent case of Abaya v. Ebdane (515 SCRA 720, 757- 758), the Supreme Court stressed that the prevailing doctrine
in the taxpayer’s suits is:

1. To allow the taxpayers to question contracts entered into by the National Government or government owned and
controlled corporations allegedly in contravention of law.
2. To allow the taxpayer to sue when there is a claim that public funds are illegally disbursed or public money is
being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an
invalid or unconstitutional law.
3. Significantly, a taxpayer need not be a party to the contract to challenge its validity.

TAXPAYER’S SU)T D)ST)NGU)S(ED FROM C)T)ZENS

SUIT

TAXPAYER’S C)T)ZEN’S
SUIT SUIT
Definition The act In matter
complained of of
directly mere public
involves the right,
illega th
l disbursement e people are
of public funds. the real
parties. It is
at least the
right, if not
of the duty
of every
citizen, to
institute
in
protection of
the
genera
l public
Plaintiff The PF is The PF is but
affected by a mere
th instrument of
e public
expenditure of concern
the public
funds.

Requisites of a Taxpayer’s suit, for the taxpayer to

establish locus standi.

1. Public funds are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed; and
2. Petitioner is directly affected by the alleged ultra vires act (Anti-Graft League v. San Juan, 260 SCRA 251).

Q: Through E.O. No. 30, the President created a trust for the benefit of the Filipino People under the name and
style of the CCP. The trust was to undertake the construction of a national theater and music hall to awaken the
nation’s consciousness on cultural heritage and to promote, preserve and enhance the same. Pursuant thereto,
CCP’s Board of Trustees received foreign donations and financial
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commitments. Petitioner, however, claims that in issuing E.O. No. 30, there was an encroachment
by the President on the legislative’s prerogative to enact laws. The trial court dismissed the petition on
the ground that Gonzales did not have the personality to question the issuance of EO No. 30 since
the funds administered by the CCP came from donations, without a single centavo raised by
taxation. Does the petitioner have the personality to question the validity of EO No. 30 based on a
taxpayer’s suit?

A: NO. Gonzales did not meet the requisite burden to warrant the reversal of the trial court’s decision. )t was
pointed out therein that one valid reason why such an outcome was unavoidable was that the funds
administered by the Center came from donations and contributions and not from taxation. Accordingly,
there was the absence of the pecuniary requisite or monetary interest. The stand of the lower court finds
support in judicial precedents. This is not to retreat from the liberal approach followed in the earlier case
of Pascual v. Secretary of Public Works, foreshadowed by People v. Vera, where the doctrine was exhaustively
discussed. It is only to clarify that the Petitioner, judged by orthodox legal learning, has not satisfied an
element for a taxpayer’s suit (Gonzales v. Marcos, G.R. No. L-31685, July 31, 1975).

Q: On 1982, the COA issued Circular No. 82-195, lifting the system of pre-audit of government
financial transactions. After the change in administration due to the 1986 revolution, grave
irregularities and anomalies in the government’s financial transactions were uncovered. Hence, on
March 1986, the COA issued Circular No. 86-257, which reinstated the pre- audit of selected
government transactions. With the normalization of the political system and the stabilization of
government operations, the COA saw it fit to issue Circular No. 89-299, which again lifted the pre-
audit of government transactions of national government agencies (NGAs) and government-owned
or -controlled corporations (GOCCs). Petitioner filed this Petition for Certiorari under Rule 65,
alleging that the pre-audit duty on the part of the COA cannot be lifted by a mere circular,
considering that pre- audit is a constitutional mandate enshrined in Section 2 of Article IX-D of the
1987 Constitution. He further claims that, because of the lack of pre-audit by COA, serious
irregularities in government transactions have been committed. The petition has been filed as
taxpayer’s suit. )s he entitled to the extraordinary writ of certiorari?

A: YES. A taxpayer is deemed to have the standing to raise a constitutional issue when it is established that
public funds from taxation have been disbursed in alleged contravention of the law or the Constitution.
Petitioner claims that the issuance of Circular No. 89-299 has led to the dissipation of public funds
through numerous irregularities in government financial transactions. These transactions have allegedly
been left unchecked b y the lifting of the pre-audit performed by COA, which, petitioner argues, is its
Constitutional duty. Thus, petitioner has standing to file this suit as a taxpayer, since he would be
adversely affected by the illegal use of public money. (Dela Llana v. COA, 665 SCRA 176 [2012]

MAMBA, ET AL. VS. LARA, ET AL.

G.R. No. 165109, December 14,2009

Doctrine:

Decision to entertain a taxpayer’s suit is discretionary upon the Court. When the issue hinges on the illegal disbursement of public funds, a
liberal approach should be preferred as it is more in keeping with truth and justice.

Facts:

The Sangguniang Panlalawigan of Cagayan passed a resolution authorizing Governor Edgar R. Lara to engage the services of and appoint
Preferred Ventures Corporation as financial advisor or consultant for the issuance and flotation of bonds to fund the priority projects of the governor
without cost and commitment. It also ratified the Memorandum of Agreement (MOA) entered into by Gov. Lara and Preferred Ventures Corporation
which provides that the provincial government of Cagayan shall pay Preferred Ventures Corporation a one-time fee of 3% of the amount of bonds floated.
In addition, the Sangguniang Panlalawigan, authorized Gov. Lara to negotiate, sign and execute contracts or agreements pertinent to the flotation of the
bonds of the provincial government in an amount not to exceed P500 million for the construction and improvement of his priority projects, including the
construction of the New Cagayan Town Center, to be approved by the Sangguniang Panlalawigan. Subsequently, Lara issued the Notice of Award to Asset
Builders Corporation, giving to the latter the planning, design, construction and site development of the town center project.

Petitioners Manuel N. Mamba, Raymund P. Guzman and Leonides N. Fausto filed a Petition for Annulment of Contracts and Injunction with prayer for a
Temporary Restraining Order/Writ of Preliminary Injunction against the respondents (Gov. Lara et al.). The RTC, however, dismissed their petition on
the grounds that the (1) petitioners have no locus standi to file a case as they are not party to the contract and (2) that the controversy is in the nature of a
political question, thus, the court can’t take cognizance of it.
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Issues:

 Whether or not the petitioners have locus standi to sue as taxpayers

 Whether or not the controversy is in the nature of a political question

Ruling:

 Yes, the petitioners have legal standing to sue as taxpayers.

 No, the controversy is not a political question but a justiciable one.

Ratio Decidendi:

 A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money is being deflected to any
improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law.

For a taxpayer’s suit to prosper, two requisites must be met: (1) public funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly affected by the alleged act.

In the case at bar, although the construction of the town center would be primarily sourced from the proceeds of the bonds, which respondents insist are
not taxpayers’ money, a government support in the amount of P187 million would still be spent for paying the interest of the bonds. The governor
requested the Sangguniang Panlalawigan to appropriate an amount of P25 million for the interest of the bond. So clearly, the first requisite has been met.

As to the second requisite, the Supreme Court explained that the court, in recent cases, has relaxed the stringent direct injury test bearing in mind that
locus standi is a procedural technicality. By invoking transcendental importance, paramount public interest, or far-reaching implications, ordinary
citizens and taxpayers were allowed to sue even if they failed to show direct injury. In cases where serious legal issues were raised or where public
expenditures of millions of pesos were involved, the court did not hesitate to give standing to taxpayers.

It argued that, to protect the interest of the people and to prevent taxes from being squandered or wasted under the guise of government projects, a
liberal approach must be adopted in determining locus standi in public suits.

A political question is a question of policy, which is to be decided by the people in their sovereign capacity or by the legislative or the executive branch of
the government to which full discretionary authority has been delegated. A justiciable question on the other hand, calls upon the duty of the courts to
settle actual controversies wherein there are rights involved which are legally demandable and enforceable. It is one which is proper to be examined or
decided in courts of justice because its determination would not involve an encroachment upon the legislative or executive power. In simple terms, a
political question refers to the wisdom, while a justiciable question refers to the legality of the acts complained of.

In the case at bar, the issues raised in the petition do not refer to the wisdom but to the legality of the acts complained of. Thus, the Supreme Court found
the instant controversy within the ambit of judicial review.

Also, in the present case, petitioners alleged grave abuse of discretion and clear violations of law by public respondents. They put in issue the overpriced
construction of the town center; the grossly disadvantageous bond flotation; the irrevocable assignment of the provincial governments annual regular
income, including the IRA, to respondent RCBC to cover and secure the payment of the bonds floated; and the lack of consultation and discussion with
the community regarding the proposed project, as well as a proper and legitimate bidding for the construction of the town center.

Thus, the high court said that, even if the issues were political in nature, it would still come within their powers of review under the expanded jurisdiction
conferred upon them by Section 1, Article VIII of the Constitution, which includes the authority to determine whether grave abuse of discretion
amounting to excess or lack of jurisdiction has been committed by any branch or instrumentality of the government.

REMULLA v. MALIKSI; G.R. No. 171633

On May 7, 1957, Marietta O'Hara de Villa (de Villa), in her personal capacity and as administratrix of the estate of her late husband Guillermo, ceded,
through a deed of donation[4] (1957 deed of donation), 134,957 square meters (sq. m.) (donated portion) of their 396,622 sq. m. property (subject
property) in favor of the Province of Cavite, on which now stands various government offices and facilities. For her part, de Villa, through her
Answer,[9] opposed the expropriation proceedings, claiming that there are still areas within the donated portion which the Province of Cavite failed to
develop.

On November 4, 2003, respondent then Cavite Governor Erineo S. Maliksi (Maliksi) issued Executive Order No. 004[15] authorizing the
creation of a committee which recommended the terms and conditions for the proper settlement of the expropriation case. The said committee thereafter
submitted its Committee Report[16] dated November 24, 2003 recommending that: (a) the just compensation be pegged at the amount of P495.00 per sq.
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m. plus 6% annual interest for 22 years,[17] for a total net consideration of P50,000,000.00, which amount shall be equally shouldered by the Province of
Cavite and Trece Martires City; (b) the total area to be expropriated be limited to only 116,287 sq. m. and the donated portion be reduced to 48,429 sq.
m.; and (c) 193,662 sq. m. of the subject property be reverted to Goldenrod which include a fenced stadium, one-half of the Trece Martires Cemetery, the
forest park; a residential area, and some stalls; in turn, Goldenrod will construct a commercial/business center, an art/historical museum, and an
educational institution within five years from the signing of the compromise agreement, among others.
Thereafter, the subject compromise was approved by the RTC in a Decision[20] dated March 18, 2004 and an Amended Decision[21]dated March
25, 2004 (compromise judgment), both of which were ratified by the Sangguniang Panlalawigan of the Province of Cavite and the Sangguniang
Panlungsod of Trece Martires City per Resolution Nos. 195-S-2004[22] and 2004-049,[23] respectively.

On motion of respondents, however, the CA rendered a Resolution[31] dated May 18, 2005, dismissing Remulla's petition for annulment of judgment
based on the following grounds: (a) there was yet no disbursement of public funds at the time of its filing; thus, it cannot be considered as a taxpayer's
suit; and (b) Remulla was not a real party in interest to question the propriety of the subject compromise as he was not a signatory thereto.
JOYA v. PCGG; G.R. No. 96541

FACTS:

The Republic of the Philippines through the PCGG entered into a Consignment Agreement with Christie’s of New York, selling 82 Old Masters Paintings and antique
silverware seized from Malacanang and the Metropolitan Museum of Manila alleged to be part of the ill-gotten wealth of the late Pres. Marcos, his relatives and cronies.
Prior to the auction sale, COA questioned the Consignment Agreement, there was already opposition to the auction sale. Nevertheless, it proceeded as scheduled and the
proceeds of $13,302,604.86 were turned over to the Bureau of Treasury.

ISSUE:

o Whether or not PCGG has jurisdiction and authority to enter into an agreement with Christie’s of New York for the sale of the artworks

RULING:

On jurisdiction of the Court to exercise judicial review

The rule is settled that no question involving the constitutionality or validity of a law or governmental act may be heard and decided by the court unless there is
compliance with the legal requisites for judicial inquiry, namely: that the question must be raised by the proper party; that there must be an actual case or controversy;
that the question must be raised at the earliest possible opportunity; and, that the decision on the constitutional or legal question must be necessary to the determination
of the case itself. But the most important are the first two (2) requisites.

Standing of Petitioners

On the first requisite, we have held that one having no right or interest to protect cannot invoke the jurisdiction of the court as party-plaintiff in an action. This is
premised on Sec. 2, Rule 3, of the Rules of Court which provides that every action must be prosecuted and defended in the name of the real party-in-interest, and that all
persons having interest in the subject of the action and in obtaining the relief demanded shall be joined as plaintiffs. The Court will exercise its power of judicial review
only if the case is brought before it by a party who has the legal standing to raise the constitutional or legal question. "Legal standing" means a personal and substantial
interest in the case such that the party has sustained or will sustain direct injury as a result of the governmental act that is being challenged. The term "interest" is
material interest, an interest in issue and to be affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental interest.
Moreover, the interest of the party plaintiff must be personal and not one based on a desire to vindicate the constitutional right of some third and related party.

EXCEPTIONS TO LEGAL STANDING: Mandamus and Taxpayer’s Suit:

There are certain instances however when this Court has allowed exceptions to the rule on legal standing, as when a citizen brings a case for mandamus to procure the
enforcement of a public duty for the fulfillment of a public right recognized by the Constitution, and when a taxpayer questions the validity of a governmental act
authorizing the disbursement of public funds.

Petitioners claim that as Filipino citizens, taxpayers and artists deeply concerned with the preservation and protection of the country's artistic wealth, they have the legal
personality to restrain respondents Executive Secretary and PCGG from acting contrary to their public duty to conserve the artistic creations as mandated by the 1987
Constitution, particularly Art. XIV, Secs. 14 to 18, on Arts and Culture, and R.A. 4846 known as "The Cultural Properties Preservation and Protection Act," governing
the preservation and disposition of national and important cultural properties. Petitioners also anchor their case on the premise that the paintings and silverware are
public properties collectively owned by them and by the people in general to view and enjoy as great works of art. They allege that with the unauthorized act of PCGG
in selling the art pieces, petitioners have been deprived of their right to public property without due process of law in violation of the Constitution.

Petitioners' arguments are devoid of merit. They lack basis in fact and in law. They themselves allege that the paintings were donated by private persons from different
parts of the world to the Metropolitan Museum of Manila Foundation, which is a non-profit and non-stock corporations established to promote non-Philippine arts. The
foundation's chairman was former First Lady Imelda R. Marcos, while its president was Bienvenido R. Tantoco. On this basis, the ownership of these paintings legally
belongs to the foundation or corporation or the members thereof, although the public has been given the opportunity to view and appreciate these paintings when they
were placed on exhibit.

Similarly, as alleged in the petition, the pieces of antique silverware were given to the Marcos couple as gifts from friends and dignitaries from foreign countries on their
silver wedding and anniversary, an occasion personal to them. When the Marcos administration was toppled by the revolutionary government, these paintings and
silverware were taken from Malacañang and the Metropolitan Museum of Manila and transferred to the Central Bank Museum. The confiscation of these properties by
the Aquino administration however should not be understood to mean that the ownership of these paintings has automatically passed on the government without
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complying with constitutional and statutory requirements of due process and just compensation. If these properties were already acquired by the government, any
constitutional or statutory defect in their acquisition and their subsequent disposition must be raised only by the proper parties — the true owners thereof — whose
authority to recover emanates from their proprietary rights which are protected by statutes and the Constitution. Having failed to show that they are the legal owners of
the artworks or that the valued pieces have become publicly owned, petitioners do not possess any clear legal right whatsoever to question their alleged unauthorized
disposition.

Requisites for a Mandamus Suit

Further, although this action is also one of mandamus filed by concerned citizens, it does not fulfill the criteria for a mandamus suit. In Legaspi v. Civil Service
Commission, this Court laid down the rule that a writ of mandamus may be issued to a citizen only when the public right to be enforced and the concomitant duty of the
state are unequivocably set forth in the Constitution. In the case at bar, petitioners are not after the fulfillment of a positive duty required of respondent officials under
the 1987 Constitution. What they seek is the enjoining of an official act because it is constitutionally infirmed. Moreover, petitioners' claim for the continued enjoyment
and appreciation by the public of the artworks is at most a privilege and is unenforceable as a constitutional right in this action for mandamus.

When a Taxpayer's Suit may prosper

Neither can this petition be allowed as a taxpayer's suit. Not every action filed by a taxpayer can qualify to challenge the legality of official acts done by the government.
A taxpayer's suit can prosper only if the governmental acts being questioned involve disbursement of public funds upon the theory that the expenditure of public funds
by an officer of the state for the purpose of administering an unconstitutional act constitutes a misapplication of such funds, which may be enjoined at the request of a
taxpayer. Obviously, petitioners are not challenging any expenditure involving public funds but the disposition of what they allege to be public properties. It is worthy to
note that petitioners admit that the paintings and antique silverware were acquired from private sources and not with public money.

Actual Controversy

For a court to exercise its power of adjudication, there must be an actual case of controversy — one which involves a conflict of legal rights, an assertion of opposite
legal claims susceptible of judicial resolution; the case must not be moot or academic or based on extra-legal or other similar considerations not cognizable by a court of
justice. A case becomes moot and academic when its purpose has become stale, such as the case before us. Since the purpose of this petition for prohibition is to enjoin
respondent public officials from holding the auction sale of the artworks on a particular date — 11 January 1991 — which is long past, the issues raised in the petition
have become moot and academic.

At this point, however, we need to emphasize that this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case or
legal standing when paramount public interest is involved. We find however that there is no such justification in the petition at bar to warrant the relaxation of the rule.

Anti-Graft League of the Philippines v. San Juan

G.R. No. 97787
August 1, 1996

Petitioner Anti-Graft League of the Philippines, a self-confessed non-governmental, non-stock and non-profit organization,
which was constituted to protect the interest of the Republic and its instrumentalities and political subdivisions and its
constituents against abuses of its public officials and employees.
This instant petition for certiorari is a taxpayer’s suit which it filed because the Provincial Board of Rizal (the Board)
allegedly illegally disbursed public funds in transactions involving four parcels of land in Ugong Norte, Pasig.
President Ferdinand E. Marcos issued Presidential Decree No. 674, establishing the Technological Colleges of Rizal. It
directed the Board to provide funds for the purchase of a site and the construction of the necessary structures thereon.
The Province was able to negotiate with respondent Ortigas & Co., Ltd. (Ortigas) for the acquisition of four parcels of land
located in Ugong Norte, Pasig. The project never materialized because of the decimation of the Provinces resources
brought about by the creation of the Metro Manila Commission (MMC) in 1976.
Lying idle, the property was eventually sold to Valley View Realty Development Corporation (Valley View) for P700.00 per
square meter or a total of P134,523,900.00, of which 30 million was given as downpayment.
Ortigas filed at the RTC of Pasig for rescission of contract plus damages with preliminary injunction against the Province
as the latter violated the contract by selling the subject lots which were intended to be utilized solely as a site for the
construction of the Rizal Technological Colleges and the Rizal Provincial Hospital. Another case was filed by the new
Board of the province as the consideration was exceedingly low. The two cases were dismissed as there were
compromise agreement where as the Province returned the 30million downpayment and the property was reconveyed to
Ortigas at P2,250.00 per square meter, or a total of P432,398,250.00, or higher than market value.
Petitioner filed the instant petition seeking to nullify the compromise agreements.
Issue: Whether petitioner has standing to sue
HELD
STANDING
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 No standing. Taxpayer’s suit requires:

o Public funds are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or
some irregularity is committed
o That the petitioner is directly affected by the alleged ultra vires act.
 Petitioner never referred to such purchase as an illegal disbursement of public funds but focused on the alleged
fraudulent reconveyance of said property to Ortigas because the price paid was lower than the prevailing market
value of neighboring lots. The first requirement, therefore, which would make this petition a taxpayers suit is
absent.
 Undeniably, as a taxpayer, petitioner would somehow be adversely affected by an illegal use of public money.
o When no unlawful spending has been shown petitioner, even as a taxpayer, cannot question the
transaction validly executed since he is not party to the contract.
PROPER APPEAL
 Petitioner is questioning the reconveyance of the subject lots to Ortigas, that is, the acts of the Governor of Rizal
and of the members.
 The proper remedy which it should have taken was to file a petition for review of the trial courts decision before the
Court of Appeals because petitioner is questioning the wisdom of the trial courts action which, in turn, calls for a
factual determination of the feasibility of an amicable settlement between the litigants. No legal issue cognizable
by this Court was ever raised by petitioner.

Citizen’s Suit

• PROVINCE OF NORTH COTABATO v. GRP; G.R. No. 18359

Inherent Powers

‣ESSO STANDARD v. CIR; G.R. Nos. L-28508-9

• Esso Standard Oil vs. Evans, Contractor not exempt from payment of state privilege tax
In 1952, in Esso Standard Oil vs. Evans, it was held that a contractor is not exempt from the payment of a state privilege tax on
the business of storing gasoline simply because the Federal Government with which it has a contract for the storage of gasoline is
immune from state taxation. The Court said therein, “This tax was imposed because Esso stored gasoline. It is not.. based on the worth
of the government property. Instead, the amount collected is graduated in accordance with the exercise of Esso’s privilege to engage in
such operations; so it is not ‘on’ the federal property . . . Federal ownership of the fuel will not immunize such a private contractor from
the tax on storage. It may generally, as it did here, burden the United States financially. But since James vs. Dravo Contracting Co., 302
U.S. 134, 151, 82 L ed 155, 167, 58 S Ct 208, 114 ALR 318, this has been no fatal flaw . . .”
‣PROGRESSIVE DEVELOPMENT CORPORATION v. QUEZON CITY; G.R. No. L-36081
•• Progressive Development Corp. vs. QC [G.R. No. 36081. April 24, 1989.]
• Third Division, Feliciano (J): 4 concurring
•
• Facts: On 24 December 1969, the City Council of Quezon City adopted Ordinance 7997, Series of 1969, otherwise known as the
Market Code of Quezon City, Section 3 of which provided “privately owned and operated public markets shall submit monthly to the
Treasurer’s Office, a certified list of stallholders showing the amount of stall fees or rentals paid daily by each stallholder, and shall
pay 10% of the gross receipts from stall rentals to the City, as supervision fee. Failure to submit said list and to pay the corresponding
amount within the period herein prescribed shall subject the operator to the penalties provided in this Code including revocation of
permit to operate.” The Market Code was thereafter amended by Ordinance 9236, Series of 1972, on 23 March 1972, which imposed
a 5% tax on gross receipts on rentals or lease of space in privately-owned public markets in Quezon City. For the effective
implementation of the Ordinance, it ordered owners of privately owned public markets shall submit . . . a monthly certified list of
stallholders of lessees of space in their markets showing the name of stallholder or lessee; the amount of rental; and the period of
lease, indicating therein whether the same is on a daily, monthly or yearly basis. The ordinance provides that in case of consistent
failure to pay the percentage tax for 3 consecutive months, the City shall revoke the permit of the privately-owned market to operate
and/or take any other appropriate action or remedy allowed by law for the collection of the overdue percentage tax and surcharge.
•
• On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a public market known as the “Farmers
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Market & Shopping Center” filed a Petition for Prohibition with Preliminary Injunction against the city before the then CFI Rizal on the
ground that the supervision fee or license tax imposed by the ordinances is in reality a tax on income which respondent may not
impose, the same being expressly prohibited by RA 2264, as amended. On 21 October 1972, the lower court dismissed the petition,
ruling that the questioned imposition is not a tax on income, but rather a privilege tax or license fee which local governments are
empowered to impose and collect. Having failed to obtain reconsideration of said decision, the company filed the petition for review.
•
• The Supreme Court affirmed the Decision of the then CFI Rizal, Quezon City, Branch 18, and denied the petition for lack of merit
• Statutory grant for local government unit to lawfully impose a gross receipts tax
As a general rule, there must be a statutory grant for a local government unit to impose lawfully a
gross receipts tax, that unit not having the inherent power of taxation. The rule, however, finds no application in the present case where
what is involved is an exercise of, principally, the regulatory power of the city and where that regulatory power is expressly
accompanied by the taxing power.

‣PAL v. EDU; G.R. No. L-41383

• Philippine Airlines vs. Edu [G.R. No. L-41383. August 15, 1988.] En Banc, Gutierrez
Jr. (J): 13 concurring
•
•
• Facts: The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the Philippines and engaged in the air
transportation business under a legislative franchise, Act 4271, as amended by RA 2360 and 2667. Under its franchise, PAL is
exempt from the payment of taxes. On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees. Sometime in 1971, however, Commissioner Romeo F. Edu, in his
capacity as Land Transportation Commissioner, issued a regulation requiring all tax exempt entities, among them PAL to pay motor
vehicle registration fees. This is pursuant to Section 8, RA 4136, otherwise known as the Land Transportation and Traffic Code.
Despite PAL’s protestations, Commissioner Edu refused to register the appellant’s motor vehicles unless the amounts imposed under
RA 4136 were paid. PAL thus paid, under protest, the amount of P19,529.75 as registration fees of its motor vehicles. After paying
under protest, PAL through counsel, wrote a letter dated 19 May 1971, to Commissioner Edu demanding a refund of the amounts
paid, invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in
reality taxes from the payment of which PAL is exempt by virtue of its legislative franchise. Commissioner Edu denied the request for
refund basing his action on the decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect
that motor vehicle registration fees are regulatory exactions and not revenue measures and, therefore, do not come within the
exemption granted to PAL under its franchise. Hence, PAL filed the complaint against Commissioner Edu and National Treasurer
Ubaldo Carbonell with the CFI Rizal, Branch 18 (Civil Case Q-15862.) On 24 April 1973, the trial court rendered a decision dismissing
the PAL’s complaint “guided by the later ruling laid down by the Supreme Court in the case of Republic v. Philippine Rabbit Bus Lines,
Inc. (supra).” From this judgment, PAL appealed to the Court of Appeals which certified the case to the Supreme Court.
•
• The Supreme Court partially granted the petition, and denied the refund of registration fees paid in 1971. The Land Transportation
Franchising and Regulatory Board (LTFRB) was enjoined from collecting any tax, fee, or other charge on the registration and
licensing of the petitioner’s motor vehicles from 9 April 1979 as provided in PD 1590.
• Section 12, Article III of RA 537 grants the city council power to tax, not merely regulate or fix license fees
Section 12, Article III of Republic Act No. 537, otherwise known as the Revised Charter of Quezon City, authorizes the City
Council: “To provide for the levy and collection of taxes and other city revenues and apply the same to the payment of city expenses in
accordance with appropriations. To tax, fix the license fee,
and regulate the business of the following: preparation and sale of meat, poultry, fish, game, butter, cheese, lard, vegetables, bread and
other provisions.” The scope of legislative authority conferred upon the Quezon City Council in respect of businesses is comprehensive:
the grant of authority is not only” [to] regulate” and “fix the license fee,” but also “to tax.”

• Section 2 of RA 2264; Authority of cities and municipalities to impose municipal license taxes
Section 2 of Republic Act No. 2264, as amended, otherwise known as the Local Autonomy Act, provides that: “Any provision of
law to the contrary notwithstanding, all chartered cities, municipalities and municipal districts shall have authority to impose municipal
license taxes or fees upon persons engaged in any occupation or business, or exercising privileges in chartered cities, municipalities or
municipal districts by requiring them to secure licenses at rates fixed by the municipal board or city council of the city, the municipal
council of the municipality, or the municipal district council of the municipal district; to collect fees and charges for service rendered by
the city, municipality or municipal district; to regulate and impose reasonable fees for services rendered in connection with any
business, profession or occupation being conducted within the city, municipality or municipal district and otherwise to levy for public
purposes just and uniform taxes licenses or fees.” TA 2264 confers upon local governments broad taxing authority extending to almost
“everything, excepting those which are mentioned therein,” provided that the tax levied is “for public purposes, just and uniform,” does
not transgress any constitutional provision and is not repugnant to a controlling statute.
PAL’s current franchise clear and specific; PAL is tax exempt
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PAL’s current franchise is clear and specific. It has removed the ambiguity found in the earlier law. PAL is now exempt from
the payment of any tax, fee, or other charge on the registration and licensing of motor vehicles. Such payments are already included in
the basic tax or franchise tax provided in Subsections
(a) and (b) of Section 13, PD 1590 and may no longer be exacted.

• Compania General de Tabacos de Filipinas vs. Manila [G.R. No. L-16619. June 29, 1963.] En Banc, Dizon (J): 8
concurring, 2 took no part
•
• Facts: Compañia General de Tabacos de Filipinas (Tabacalera), as a duly licensed first class wholesale and retail liquor dealer paid
the City the fixed license fees prescribed by Ordinance 3358 for the years 1954 to 1957, inclusive. In 1954, City Ordinance 3634,
amending City Ordinance 3420, and City Ordinance 3816, amending City Ordinance 3301 were passed. By reason thereof, the City
Treasurer issued the regulations, according to which, the term “general merchandise”, as used in said ordinances, includes all articles
referred to in chapter 1, Sections 123 to 148 of the National Internal Revenue Code. Of these, Section 133-135 included liquor among
the taxable articles. Pursuant to said regulations, Tabacalera included its sales of liquor in its sworn quarterly declaration submitted to
the City Treasurer beginning from the third quarter of 1954 to the second quarter of 1957, with a total value of P722,501.09 and
correspondingly paid a wholesaler’s tax amounting to P13,688 and a retailer’s tax amounting to P1,520, or a total of P15,208. In 1954,
the City, through its treasurer, addressed a letter to Messrs. Sycip, Gorres, Velayo and Co., an accounting firm, expressing the view
that liquor dealers paying the annual wholesale and retail fixed tax under City Ordinance 3358 are not subject to the wholesale and
retail dealers’ taxes prescribed by City Ordinances 3634, 3301, and 3816. Upon learning of said opinion, the Tabacalera stopped
including its sales of liquor in its quarterly sworn declarations submitted in accordance with the City Ordinances 3634, 3301, and
3816, and on 3 December 1957, it addressed a letter to the City Treasurer demanding refund of the alleged overpayment. As the
claim was disallowed, the Tabacalera filed the action in the CFI Manila to recover from the City of Manila and its Treasurer, Marcelino
Sarmiento the sum of P15,280.00 allegedly overpaid by it as taxes on its wholesale and retail sales of liquor for the period from the
third quarter of 1954 to the second quarter of 1957, inclusive, under Ordinances 3634, 3301, and 3816. The CFI Manila ordered the
City Treasurer of Manila to refund the sum of P15,280 to Compañia General de Tabacos de Filipinas. Hence, the appeal.
•
•
• The Supreme Court reversed the decision appealed from, with the result that the case should be dismissed, with costs.
• Meaning of “tax”; Distinction of taxes and license fee
The term “tax” applies — generally speaking — to all kinds of exactions which become public funds. The term is often loosely
used to include levies for revenue as well as levies for regulatory purposes. Thus license fees are commonly called taxes. Legally
speaking, however, license fee is a legal concept quite distinct from tax; the former is imposed in the exercise of police power for
purposes of regulation, while the latter is imposed under the taxing power for the purpose of raising revenues (MacQuillin, Municipal
Corporations, Vol. 9, 3rd Edition, p. 26).

• Ordinance 3358 a valid regulatory enactment for the sale of intoxicating liquors
Ordinance 3358 is clearly one that prescribes municipal license fees for the privilege to engage in the business of selling liquor
or alcoholic beverages, having been enacted by the Municipal Board of Manila pursuant to its charter power to fix license fees on, and
regulate, the sale of intoxicating liquors, whether imported or locally manufactured. (Section 18 [p], RA as amended). The license fees
imposed by it are essentially for purposes of regulation, and are justified, considering that the sale of intoxicating liquor is, potentially at
least, harmful to public health and morals, and must be subject to supervision or regulation by the state and by cities and municipalities
authorized to act in the premises. (MacQuillin, supra, p. 445).

• Ordinance 3634, 3301 and 316 are revenue measures

On the other hand, it is clear that Ordinances Nos. 3634, 3301, and 3816 impose taxes on the sales of
• general merchandise, wholesale or retail, and are revenue measures enacted by the Municipal Board of Manila by virtue of its power
to tax dealers for the sale of such merchandise. (Section 10 [o], RA 409, as amended.) Merchandise includes liquor; Merchandise
defined
Under Ordinance 3634 the word “merchandise” as employed therein clearly includes liquor. Aside from this, it was held in City
of Manila vs. Inter-Island Gas Service Inc. (99 Phil. 847), that the word “merchandise” refers to all subjects of commerce and traffic;
whatever is usually bought and sold in trade or market; goods or wares bought and sold for gain; commodities or goods to trade; and
commercial commodities in general.

• Tabacalera not subject to double taxation; License fee and tax may be imposed on same subject
matter
That Tabacalera is being subjected to double taxation is more apparent than real. What is collected under Ordinance 3358 is a
license fee for the privilege of engaging in the sale of liquor, a calling in which not anyone or anybody may freely engage, considering
that the sale of liquor indiscriminately may endanger public health and morals. On the other hand, what the three ordinances impose is
a tax for revenue purposes based on the sales made of the same article or merchandise. Both a license fee and a tax may be imposed
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on the same business or occupation, or for selling the same article, this not being in violation of the rule against double taxation (Bentley
Gray Dry Goods Co., vs. City of Tampa 137 Fla. 641, 188 SO. 758; MacQuillin, Municipal Corporations, Vol. 9, 3rd Edition, p. 83).

• Government not bound by errors of its officers, specially on matters of law

The contention that the City is repudiating its previous view, expressed by its Treasurer in a letter addressed to Messrs. Sycip,
Gorres, Velayo & Co. in 1954, that a liquor dealer who pays the annual license fee under Ordinance 3358 is exempted from the
wholesalers and retailers taxes under the other three ordinances is of no consequence. The government is not bound by the errors or
mistakes committed by its officers, specially on matters of law.

‣OSMEÑA v. ORBOS; G.R. No. 99886

• OSMEÑA vs. ORBOS

220 SCRA 703
GR No. 99886, March 31, 1993
•
• " To avoid the taint of unlawful delegation of the power to tax, there must be a standard which implies that the legislature determines matter of
principle and lays down fundamental policy."
•
FACTS: Senator John Osmeña assails the constitutionality of paragraph 1c of PD 1956, as amended by EO 137, empowering the Energy
Regulatory Board (ERB) to approve the increase of fuel prices or impose additional amounts on petroleum products which proceeds shall accrue to
the Oil Price Stabilization Fund (OPSF) established for the reimbursement to ailing oil companies in the event of sudden price increases. The
petitioner avers that the collection on oil products establishments is an undue and invalid delegation of legislative power to tax. Further, the
petitioner points out that since a 'special fund' consists of monies collected through the taxing power of a State, such amounts belong to the State,
although the use thereof is limited to the special purpose/objective for which it was created. It thus appears that the challenge posed by the
petitioner is premised primarily on the view that the powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation
power of the State.
•
• ISSUE: Is there an undue delegation of the legislative power of taxation?
•
• HELD: None. It seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the
State. Moreover, that the OPSF as a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and
while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA.
The Court is satisfied that these measures comply with the constitutional description of a "special fund." With regard to the alleged undue
delegation of legislative power, the Court finds that the provision conferring the authority upon the ERB to impose additional amounts on
petroleum products provides a sufficient standard by which the authority must be exercised. In addition to the general policy of the law to protect
the local consumer by stabilizing and subsidizing domestic pump rates, P.D. 1956 expressly authorizes the ERB to impose additional amounts to
augment the resources of the Fund.

ROMEO P. GEROCHI v. DEPARTMENT OF ENERGY, GR NO. 159796, 2007-07-17

• Facts:

• Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network, Inc. (ECN) (petitioners), come
before this Court in this original action praying that Section 34 of Republic Act (RA) 9136, otherwise known as the

• "Electric Power Industry Reform Act of 2001" (EPIRA), imposing the Universal Charge,[1] and Rule 18 of the Rules and Regulations
(IRR)[2] which seeks to implement the said imposition, be declared unconstitutional. Petitioners also pray... that the Universal Charge
imposed upon the consumers be refunded and that a preliminary injunction and/or temporary restraining order (TRO) be issued
directing the respondents to refrain from implementing, charging, and collecting the said charge.

• Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to fund the operations of the NPC

• On the other hand, respondent PSALM through the Office of the Government Corporate Counsel (OGCC) contends that unlike a tax
which is imposed to provide income for public purposes, such as support of the government, administration of the law, or payment of
public expenses, the... assailed Universal Charge is levied for a specific regulatory purpose, which is to ensure the viability of the
country's electric power industry. Thus, it is exacted by the State in the exercise of its inherent police power.
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• espondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General (OSG), share the same view
that the Universal Charge is not a tax because it is levied for a specific regulatory purpose, which is to ensure the viability of the
country's electric... power industry, and is, therefore, an exaction in the exercise of the State's police power.

• Respondents

• Issues:

• further contend that said Universal Charge does not possess the essential characteristics of a tax, that its imposition would redound to
the benefit of the electric power... industry and not to the public, and that its rate is uniformly levied on electricity end-users, unlike a
tax which is imposed based on the individual taxpayer's ability to pay.

• Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax

• Ruling:

• The instant complaint is bereft of merit.

• The conservative and pivotal distinction between these two powers rests in the purpose for which the charge is made. If generation of
revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the
fact... that revenue is incidentally raised does not make the imposition a tax.[... rom the aforementioned purposes, it can be gleaned
that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power. Public welfare is surely
promoted.

• t is a well-established doctrine that the taxing power may be used as an implement of police power.

• Evidently, the establishment and maintenance of the Special Trust Fund, under the last paragraph of Section 34, R.A. No. 9136, is
well within the pervasive and non-waivable power and responsibility of the government to secure the physical and economic survival
and... well-being of the community, that comprehensive sovereign authority we designate as the police power of the State.[46]

• This feature of the Universal Charge further boosts the position that the same is an exaction imposed primarily in pursuit of the State's
police objectives. The STF reasonably serves and assures the attainment and perpetuity of the purposes for which the Universal
Charge is... imposed, i.e., to ensure the viability of the country's electric power industry.

Product v. Fertiphil Corp.

G.R. No. 166006 March 14, 2008
REYES, R.T., J.

Lessons Applicable: Bet. private and public suit, easier to file public suit, Apply real party in interest test for private suit and direct injury
test for public suit, Validity test varies depending on which inherent power

Laws Applicable:

FACTS:

 President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the
imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers which resulted in having Fertiphil
paying P 10/bag sold to the Fertilizer and Perticide Authority (FPA).
 FPA remits its collection to Far East Bank and Trust Company who applies to the payment of corporate debts of Planters Products
Inc. (PPI)
 After the Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. Upon return of democracy, Fertiphil demanded
a refund but PPI refused. Fertiphil filed a complaint for collection and damages against FPA and PPI with the RTC on the ground
that LOI No. 1465 is unjust, unreaonable oppressive, invalid and unlawful resulting to denial of due process of law.
 FPA answered that it is a valid exercise of the police power of the state in ensuring the stability of the fertilizing industry in the
country and that Fertiphil did NOT sustain damages since the burden imposed fell on the ultimate consumers.
 RTC and CA favored Fertiphil holding that it is an exercise of the power of taxation ad is as such because it is NOT for public
purpose as PPI is a private corporation.
ISSUE:
1. W/N Fertiphil has locus standi
2. W/N LOI No. 1465 is an invalid exercise of the power of taxation rather the police power

Held:
1. Yes. In private suits, locus standi requires a litigant to be a "real party in interest" or party who stands to be benefited or injured by
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the judgment in the suit. In public suits, there is the right of the ordinary citizen to petition the courts to be freed from unlawful
government intrusion and illegal official action subject to the direct injury test or where there must be personal and substantial interest
in the case such that he has sustained or will sustain direct injury as a result. Being a mere procedural technicality, it has also been
held that locus standi may be waived in the public interest such as cases of transcendental importance or with far-reaching implications
whether private or public suit, Fertiphil has locus standi.

2. As a seller, it bore the ultimate burden of paying the levy which made its products more expensive and harm its business. It is also of
paramount public importance since it involves the constitutionality of a tax law and use of taxes for public purpose.

3. Yes. Police power and the power of taxation are inherent powers of the state but distinct and have different tests for validity. Police
power is the power of the state to enact the legislation that may interfere with personal liberty on property in order to promote general
welfare. While, the power of taxation is the power to levy taxes as to be used for public purpose. The main purpose of police power is
the regulation of a behavior 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.

In this case, it is for purpose of revenue. But it is a robbery for the State to tax the citizen and use the funds generation for a private
purpose. Public purpose does NOT only pertain to those purpose which are traditionally viewed as essentially governmental function
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.

• CHEVRON PHILIPPINES, INC. (Formerly CALTEX PHILIPPINES, INC.), Petitioner,

vs.
BASES CONVERSION DEVELOPMENT AUTHORITY and CLARK DEVELOPMENT CORPORATION, Respondents
• Facts:
• On June 28, 2002, the Board of Directors of respondent Clark Development Corporation (CDC) issued and approved Policy
Guidelines on the Movement of Petroleum Fuel to and from the Clark Special Economic Zone. In one of its provisions, it levied royalty
fees to suppliers delivering Coastal fuel from outside sources for Php0.50 per liter for those delivering fuel to CSEZ locators not
sanctioned by CDC and Php1.00 per litter for those bringing-in petroleum fuel from outside sources. The policy guidelines were
implemented effective July 27, 2002.

• The petitioner Chevron Philippines Inc (formerly Caltex Philippines Inc) who is a fuel supplier to Nanox Philippines, a locator inside the
CSEZ, received a Statement of Account from CDC billing them to pay the royalty fees amounting to Php115,000 for its fuel sales from
Coastal depot to Nanox Philippines from August 1 to September 21, 2002.

• Petitioner, contending that nothing in the law authorizes CDC to impose royalty fees based on a per unit measurement of any
commodity sold within the special economic zone, protested against the CDC and Bases Conversion Development Authority (BCDA).
They alleged that the royalty fees imposed had no reasonable relation to the probably expenses of regulation and that the imposition
on a per unit measurement of fuel sales was for a revenue generating purpose, thus, akin to a “tax”.

• BCDA denied the protest. The Office of the President dismissed the appeal as well for lack of merit.

• Upon appeal, CA dismissed the case. CA held that in imposing the royalty fees, CDC was exercising its right to regulate the flow of
fuel into CSEZ under the vested exclusive right to distribute fuel within CSEZ pursuant to its Joint Venture Agreement (JVA) with
Subic Bay Metropolitan Authority (SBMA) and Coastal Subic Bay Terminal, Inc. (CSBTI) dated April 11, 1996. The appellate court
also found that royalty fees were assessed on fuel delivered, not on the sale, by petitioner and that the basis of such imposition was
petitioner’s delivery receipts to Nanox Philippines. The fact that revenue is incidentally also obtained does not make the imposition a
tax as long as the primary purpose of such imposition is regulation.

• When elevated in SC, petitioner argued that: 1) CDC has no power to impose fees on sale of fuel inside CSEZ on the basis of income
generating functions and its right to market and distribute goods inside the CSEZ as this would amount to tax which they have no
power to impose, and that the imposed fee is not regulatory in nature but rather a revenue generating measure; 2) even if the fees are
regulatory in nature, it is unreasonable and are grossly in excess of regulation costs.

• Respondents contended that the purpose of royalty fees is to regulate the flow of fuel to and from the CSEZ and revenue (if any) is
just an incidental product. They viewed it as a valid exercise of police power since it is aimed at promoting the general welfare of
public; that being the CSEZ administrator, they are responsible for the safe distribution of fuel products inside the CSEZ.
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• Issue:
Whether the act of CDC in imposing royalty fees can be considered as valid exercise of the police power.
• Held:
Yes. SC held that CDC was within the limits of the police power of the State when it imposed royalty fees.
• In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the implemented measure. If
the purpose is primarily to raise revenue, then it will be deemed a tax even though the measure results in some form of regulation. On
the other hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of the police power of the state,
even though incidentally, revenue is generated.

• In this case, SC held that the subject royalty fee was imposed for regulatory purposes and not for generation of income or profits. The
Policy Guidelines was issued to ensure the safety, security, and good condition of the petroleum fuel industry within the CSEZ. The
questioned royalty fees form part of the regulatory framework to ensure “free flow or movement” of petroleum fuel to and from the
CSEZ. The fact that respondents have the exclusive right to distribute and market petroleum products within CSEZ pursuant to its
JVA with SBMA and CSBTI does not diminish the regulatory purpose of the royalty fee for fuel products supplied by petitioner to its
client at the CSEZ.

• However, it was erroneous for petitioner to argue that such exclusive right of respondent CDC to market and distribute fuel inside
CSEZ is the sole basis of the royalty fees imposed under the Policy Guidelines. Being the administrator of CSEZ, the responsibility of
ensuring the safe, efficient and orderly distribution of fuel products within the Zone falls on CDC. Addressing specific concerns
demanded by the nature of goods or products involved is encompassed in the range of services which respondent CDC is expected
to provide under Sec. 2 of E.O. No. 80, in pursuance of its general power of supervision and control over the movement of all supplies
and equipment into the CSEZ.

• There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Fuel is a highly
combustible product which, if left unchecked, poses a serious threat to life and property. Also, the reasonable relation between the
royalty fees imposed on a “per liter” basis and the regulation sought to be attained is that the higher the volume of fuel entering CSEZ,
the greater the extent and frequency of supervision and inspection required to ensure safety, security, and order within the Zone.

• Respondents submit that the increased administrative costs were triggered by security risks that have recently emerged, such as
terrorist strikes. The need for regulation is more evident in the light of 9/11 tragedy considering that what is being moved from one
location to another are highly combustible fuel products that could cause loss of lives and damage to properties.

As to the issue of reasonableness of the amount of the fees, SC held that no evidence was adduced by the petitioner to show that the
fees imposed are unreasonable. Administrative issuances have the force and effect of law. They benefit from the same presumption of
validity and constitutionality enjoyed by statutes. These two precepts place a heavy burden upon any party assailing governmental
regulations. Petitioner’s plain allegations are simply not enough to overcome the presumption of validity and reasonableness of the
subject imposition.
‣ANGELES UNIVERSITY v. CITY OF ANGELES; G.R. No. 189999

Facts:

1. Petitioner is an educational institution and was converted into a non-stock, non-profit education foundation under the provisions of
R.A. 6055
2. Sometime in August 2005, petitioner filed with the Office of the City Building Official an application for a building permit for the
construction of an 11-storey building
3. Said office issued a Building Permit Fee Assessment in the amount of P126,839.20 and P238,741.64 as Locational Clearance Fee.
4. Petitioner claimed that it is exempt from the payment of the building permit and locational clearance fees, citing legal opinions
rendered by the DOJ.
5. Petitioner also reminded the respondents that they have previously issued building permits acknowledging such exemption from
payment of building permit fees on the construction of petitioner’s 4-storey AUF Information Technology Center building
6. Petitioner stresses that the tax exemption granted to educational stock corporations which have converted into non-profit
foundations was broadened to include any other charges imposed by the Government as one of the incentives for such conversion.

Issues:

1. Whether petitioner is exempt from the payment of building permit and related fees imposed under the National Building Code; and
2. Whether the parcel of land owned by petitioner which has been assessed for real property tax is likewise exempt.
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Ruling:

R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted to non-stock, non-profit educational
foundations.

On February 19, 1977, P.D 1096 was issued adopting the National Building Code of the Philippines. The said Code requires every
person, firm or corporation, including any agency or instrumentality of the government to obtain a building permit for any construction,
alteration or repair of any building or structure.

Exempted from the payment of building permit fees are:

 Public buildings and

 Traditional indigenous family dwellings.

Not being expressly included in the enumeration of structures to which the building permit fees do not apply, petitioner’s claim for
exemption rests solely on its interpretation of the term “other charges imposed by the National Government” in the tax exemption clause
of R.A. No. 6055.

A “charge” is broadly defined as the “price of, or rate for, something,” while the word “fee” pertains to a “charge fixed by law for services
of public officers or for use of a privilege under control of government.” As used in the LGC, charges refers to pecuniary liability, as
rents or fees against persons or property, while fee means a charge fixed by law or ordinance for the regulation or inspection of a
business or activity.

Note that the “other charges” mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words “imposed by the Government on all
property used exclusively for the educational activities of the foundation.”

Building permit fees are not impositions on property but on the activity subject of government regulation. While it may be argued that the
fees relate to particular properties, i.e., buildings and structures, they are actually imposed on certain activities the owner may conduct
either to build such structures or to repair, alter, renovate or demolish the same.

That a building permit fee is a regulatory imposition.

Thus, ancillary permits such as electrical permit, sanitary permit and zoning clearance must also be secured and the corresponding fees
paid before a building permit may be issued.

Since building permit fees are not charges on property, they are not impositions from which petitioner is exempt.

As to petitioner’s argument that the building permit fees collected by respondents are in reality taxes because the primary purpose is to
raise revenues for the local government unit, the same does not hold water.

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. In this case, the Secretary of Public Works and Highways who is mandated to prescribe and fix the amount
of fees and other charges that the Building Official shall collect in connection with the performance of regulatory functions, has
promulgated and issued the Implementing Rules and Regulations which provide for the bases of assessment of such fees

Petitioner failed to demonstrate that the bases of assessment were arbitrarily determined or unrelated to the activity being regulated.
Neither has petitioner adduced evidence to show that the rates of building permit fees imposed and collected by the respondents were
unreasonable or in excess of the cost of regulation and inspection.

In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the implemented measure. If the
purpose is primarily to raise revenue, then it will be deemed a tax even though the measure results in some form of regulation. On the
other hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of the police power of the state, even
though incidentally, revenue is generated.

Concededly, in the case of building permit fees imposed by the National Government under the National Building Code, revenue is
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incidentally generated for the benefit of local government units.

Section 208: the Building Official is hereby authorized to retain not more than twenty percent of his collection for the operating
expenses of his office.

The remaining eighty percent shall be deposited with the provincial, city or municipal treasurer and shall accrue to the General Fund of
the province, city or municipality concerned.

Now, on petitioner’s claim that it is exempted from the payment of real property tax assessed against its real property presently
occupied by informal settlers.

Petitioner failed to discharge its burden to prove that its real property is actually, directly and exclusively used for educational purposes.
While there is no allegation or proof that petitioner leases the land to its present occupants, still there is no compliance with the
constitutional and statutory requirement that said real property is actually, directly and exclusively used for educational purposes. The
respondents correctly assessed the land for real property taxes for the taxable period during which the land is not being devoted solely
to petitioner’s educational activities.

•• Villegas v. Hiu Chiong Tsai Pao Ho (GR L-29646, 10 Nov 1978)

• En Banc, Fernandez (p) : 4 concurring, 3 concurring in result, 1 not taking part.
•
• Facts: On 22 February 1968, Ordinance 6537 was passed by the Municipal Board of Manila and signed by Manila Mayor Antonio J.
Villegas on March 27, 1968. Ordinance 6537, entitled “An ordinance making it unlawful for any person not a citizen of the Philippines
to be employed in any place of employment or to be engaged in any kind of trade, business or occupation within the City of Manila
without first securing an employment permit from the mayor of Manila; and for other purposes.” Law prohibits aliens from employment
and trade in the City of Manila without the requisite mayor’s permit) . Exceptions to law are persons employed in the diplomatic or
consular missions of foreign countries, or in the technical assistance programs of both the Philippine Government and any foreign
government, and those working in their respective households, and members of religious orders or congregations, sect or
denomination, who are not paid monetarily or in kind. Permit fee is P50. Penalty is imprisonment of 3 to 6 months or fine of P100-200,
or both.
•
• On 4 May 1968, Hiu Chiong Tsai Pao Ho, who was employed in Manila, filed a petition, with the CFI Manila (Civil Case 72797),
praying for (1) the issuance of the writ of preliminary injunction and restraining order to stop the implementation of the ordinance, and
(2) judgment to declare the ordinance null and void.
•
• On 24 May 1968, Judge Francisco Arca (CFI Manila, Branch I) issued the writ of preliminary injunction and on 17 September 1968,
the Judge rendered a decision declaring the ordinance null and void, and the preliminary injunction is made permanent. Mayor
Villegas filed a petition for certiorari to review the decision of the CFI.
•
• Supreme Court affirmed the decision of the CFI.
• Due process and equal protection clauses
The ordinance is arbitrary, oppressive and unreasonable, being applied only to aliens who are thus, deprived of their rights to
life, liberty and property and therefore, violates the due process and equal protection clauses of the Constitution. Requiring a person,
before he can be employed, to get a permit from the City Mayor of Manila, who may withhold or refuse it at will is tantamount to denying
him the basic right of the people in the Philippines to engage in a means of livelihood. Once an alien is admitted by the State within its
territory, he cannot be deprived of life without due process of law, including the means of livelihood. The shelter of protection under the
due process and equal protection clause is given to all persons, both aliens and citizens.

• Police Power, illegal delegation of legislative powers

The ordinance does not lay down any criterion or standard to guide the Mayor in the exercise of his discretion, thus conferring
upon the mayor arbitrary and unrestricted powers. The ordinance does not provide a standard to guide or limit the mayor’s action,
expresses no purpose to be attained by requiring a permit, and enumerates no conditions for its grant or refusal. (See also Chinese
Flour Importers Association vs. Price Stabilization Board, and Primicias vs. Fugoso for related principles

• Uniformity of Taxation, discriminatory and violative

The ordinance’s purpose is clearly to raise money under the guise of regulation by exacting P50 from
aliens who have been cleared for employment. The amount is unreasonable and excessive because it fails to consider differences in
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situation among aliens required to pay it, i.e. being casual, permanent, full-time, part-time, rank-an-file or executive.

• FACTS:
• Petitioner Smart Communications, Inc. (Smart) In the course of its business, Smart constructed a telecommunications tower within the territorial
jurisdiction of the Municipality. The construction of the tower was for the purpose of receiving and transmitting cellular communications within
the covered area.
• On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003, entitled "An Ordinance Regulating the Establishment of Special
Projects."
• On 24 August 2004, Smart received from the Permit and Licensing Division of the Office of the Mayor of the Municipality an assessment letter
with a schedule of payment for the total amount of P389,950.00 for Smart’s telecommunications tower.
• Due to the alleged arrears in the payment of the assessment, the Municipality also caused the posting of a closure notice on the
telecommunications tower.
• On 9 September 2004, Smart filed a protest, claiming lack of due process in the issuance of the assessment and closure notice. In the same
protest, Smart challenged the validity of Ordinance No. 18 on which the assessment was based. The Municipality denied Smart’s protest.
• On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City, Batangas, Branch 6, an "Appeal/Petition" assailing the validity of
Ordinance No. 18.
• TRIAL COURT RULED:
• The trial court held that the assessment covering the period from 2001 to July 2003 was void since Ordinance No. 18 was approved only on 30
July 2003. However, the trial court declared valid the assessment starting 1 October 2003, citing Article 4 of the Civil Code of the Philippines,9 in
relation to the provisions of Ordinance No. 18 and Section 166 of Republic Act No. 7160 or the Local Government Code of 1991 (LGC).10 The
dispositive portion of the trial court’s Decision reads:
• WHEREFORE, in light of the foregoing, the Petition is partly GRANTED.
• CTA division and CTA en banc dismissed the petition for review of Smart.
• The Ruling of the CTA En Banc:
• The CTA En Banc dismissed the petition on the ground of lack of jurisdiction. The CTA En Banc declared that it is a court of special jurisdiction and
as such, it can take cognizance only of such matters as are clearly within its jurisdiction. Citing Section 7(a), paragraph 3, of Republic Act No. 9282,
the CTA En Banc held that the CTA has exclusive appellate jurisdiction to review on appeal, decisions, orders or resolutions of the Regional Trial
Courts in local tax cases originally resolved by them in the exercise of their original or appellate jurisdiction. However, the same provision does
not confer on the CTA jurisdiction to resolve cases where the constitutionality of a law or rule is challenged.
• ISSUES:
• The petition raises the following arguments:
• 1. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law and jurisprudence considering that the
CTA En Banc should have exercised its jurisdiction and declared the Ordinance as illegal.
• 2. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law and jurisprudence considering that the
doctrine of exhaustion of administrative remedies does not apply in [this case].
• 3. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law and jurisprudence considering that the
respondent has no authority to impose the so-called "fees" on the basis of the void ordinance.
• HELD:
• Petitioner: Smart argues that the "fees" in Ordinance No. 18 are actually taxes since they are not regulatory, but revenue-raising. Smart contends
that the designation of "fees" in Ordinance No. 18 is not controlling.
• COURT:
• The Court finds that the fees imposed under Ordinance No. 18 are not taxes.
• Section 5, Article X of the 1987 Constitution provides that "each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government."
• Consistent with this constitutional mandate, the LGC grants the taxing powers to each local government unit. Specifically, Section 142 of the LGC
grants municipalities the power to levy taxes, fees, and charges not otherwise levied by provinces. Section 143 of the LGC provides for the scale
of taxes on business that may be imposed by municipalities while Section 147 of the same law provides for the fees and charges that may be
imposed by municipalities on business and occupation.
• The LGC defines the term "charges" as referring to pecuniary liability, as rents or fees against persons or property, while the term "fee" means "a
charge fixed by law or ordinance for the regulation or inspection of a business or activity."
• In this case, the Municipality issued Ordinance No. 18, which is entitled "An Ordinance Regulating the Establishment of Special Projects," to
regulate the "placing, stringing, attaching, installing, repair and construction of all gas mains, electric, telegraph and telephone wires, conduits,
meters and other apparatus, and provide for the correction, condemnation or removal of the same when found to be dangerous, defective or
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otherwise hazardous to the welfare of the inhabitant[s]." It was also envisioned to address the foreseen "environmental depredation" to be
brought about by these "special projects" to the Municipality. Pursuant to these objectives, the Municipality imposed fees on various structures,
which included telecommunications towers.
• As clearly stated in its whereas clauses, the primary purpose of Ordinance No. 18 is to regulate the "placing, stringing, attaching, installing, repair
and construction of all gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus" listed therein, which included
Smart’s telecommunications tower. Clearly, the purpose of the assailed Ordinance is to regulate the enumerated activities particularly related to
the construction and maintenance of various structures. The fees in Ordinance No. 18 are not impositions on the building or structure itself;
rather, they are impositions on the activity subject of government regulation, such as the installation and construction of the structures.
• Since the main purpose of Ordinance No. 18 is to regulate certain construction activities of the identified special projects, which included "cell
sites" or telecommunications towers, the fees imposed in Ordinance No. 18 are primarily regulatory in nature, and not primarily revenue-raising.
While the fees may contribute to the revenues of the Municipality, this effect is merely incidental. Thus, the fees imposed in Ordinance No. 18
are not taxes.
• In Progressive Development Corporation v. Quezon City, the Court declared that "if the generating of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax."
• Considering that the fees in Ordinance No. 18 are not in the nature of local taxes, and Smart is questioning the constitutionality of the ordinance,
the CTA correctly dismissed the petition for lack of jurisdiction. Likewise, Section 187 of the LGC, which outlines the procedure for questioning the
constitutionality of a tax ordinance, is inapplicable, rendering unnecessary the resolution of the issue on non-exhaustion of administrative
remedies.
• PETITIONER:
• Smart argues that the Municipality exceeded its power to impose taxes and fees as provided in Book II, Title One, Chapter 2, Article II of the LGC.
Smart maintains that the mayor’s permit fees in Ordinance No. 18 (equivalent to 1% of the project cost) are not among those expressly
enumerated in the LGC.
• COURT:
• As discussed, the fees in Ordinance No.18 are not taxes. Logically, the imposition does not appear in the enumeration of taxes under Section 143
of the LGC.
• Moreover, even if the fees do not appear in Section 143 or any other provision in the LGC, the Municipality is empowered to impose taxes, fees
and charges, not specifically enumerated in the LGC or taxed under the Tax Code or other applicable law. Section 186 of the LGC, granting local
government units wide latitude in imposing fees, expressly provides:
• Section 186. Power To Levy Other Taxes, Fees or Charges. - Local government units may exercise the power to levy taxes, fees or charges on any
base or subject not otherwise specifically enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended,
or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared
national policy: Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing
conducted for the purpose.
• PETITIONER: argues that the Municipality is encroaching on the regulatory powers of the National Telecommunications Commission (NTC).
• COURT: The fees are not imposed to regulate the administrative, technical, financial, or marketing operations of telecommunications entities,
such as Smart’s; rather, to regulate the installation and maintenance of physical structures – Smart’s cell sites or telecommunications tower. The
regulation of the installation and maintenance of such physical structures is an exercise of the police power of the Municipality. Clearly, the
Municipality does not encroach on NTC’s regulatory powers.
• PETITIONER: Ordinance No. 18 violates Sections 130(b)(3)27 and 186 of the LGC since the fees are unjust, excessive, oppressive and confiscatory
• COURT: On the constitutionality issue, Smart merely pleaded for the declaration of unconstitutionality of Ordinance No. 18 in the Prayer of the
Petition, without any argument or evidence to support its plea. Nowhere in the body of the Petition was this issue specifically raised and
discussed. Significantly, Smart failed to cite any constitutional provision allegedly violated by respondent when it issued Ordinance No. 18.
• Settled is the rule that every law, in this case an ordinance, is presumed valid. To strike down a law as unconstitutional, Smart has the burden to
prove a clear and unequivocal breach of the Constitution, which Smart miserably failed to do.
• WHEREFORE, the Court DENIES the petition.

POWER OF TAXATION COMPARED WITH OTHER POWERS OF THE STATE

Distinctions of the three inherent powers of the State

TAXATION POLICE POWER EMINENT DOMAIN

Authority who Governmen or its politica Government or its Government or public service
exercises the t l political subdivision companies and public utilities
power subdivisio
n
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Purpose To raise revenue in order to Promotion of general To facilitate the taking of

support of the Government. welfare private property for public
Regulation is merely throug purpose
incidental. h regulations.
Persons affected Upon the community or Upon community or On an individual as the owner
class of class of a
individuals of individuals particular property
Amount of No except inheren Limited to the cost of No imposition, the owner is
monetary ceilin t regulation, issuance of paid the fair market value of
imposition g license or surveillance his property
limitation
s
Benefits received Protection of a secured Maintenance of The person receives the fair
organized society, benefits healthy economic market value of the property
received from standard of society/ taken from him/ direct
government/ No No direct benefit benefit results
direct benefit
Non-Impairment of Tax laws generally do not Contracts may be Contracts may be
contracts impair contracts, unless: impaired impaired
government is party to
contract granting
exemption for a
consideration
Test of validity Must not be contrary to Must comply with the Must be for public purpose and
inherent and tests on "lawful with payment of just
constitutional limitations subjects" compensation
and "lawful means"

Similarities between taxation, eminent

4. They constitute the 3 methods by which the
domain and police power State interferes with private rights and
property.
5. They presuppose equivalent compensation.
1. They are inherent powers of the State. 6. The Legislature can exercise all 3 powers.
2. All are necessary attributes of the sovereign.
3. They exist independently of the Constitution.
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Q: Can police power and taxation co-exist in one act of the government?

A: YES. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the
government. Taxes may be levied with a regulatory purpose to provide a 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 (Caltex Philippines, Inc. v. Commission on Audit, 208 SCRA 726). Thus, the power of taxation may be exercised to
implement police power (Tiu v. Videogram Regulatory Board, 151 SCRA 208).

Q: Distinguish taxation power from police power.

A: Taxation is distinguishable from police power as to the means employed to implement these public good goals.
Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive
effects of taxation, and the belief that taxes are the lifeblood of the state yet at the same time, it has been
recognized that taxation may be made the implement of the state’s police power (Southern Cross Cement
Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005).

Q: Galaxia Telecommunications Company constructed a telecommunications tower for the purpose of

receiving and transmitting cellular communications. Meanwhile, the municipal authorities passed an
ordinance entitled “An Ordinance Regulating the Establishment of Special Projects”, which imposed fees to
regulate activities particularly related to the construction and maintenance of various structures certain
construction activities of the identified special projects, which includes “cell sites” or
telecommunications towers. Is the imposition of the fee an exercise of the power of taxation?

A: NO. The designation given by the municipal authorities does not decide whether the imposition is properly a
license tax or a license fee. The determining factors are the purpose and effect of the imposition as may be
apparent from the provisions of the ordinance. If the generating of revenue is the primary purpose and regulation
is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that incidentally
revenue is also obtained does not make the imposition a tax (Gerochi v. Department of Energy, 527 SCRA 696,
2007). The fees in the ordinance are not impositions on the building or structure itself; rather, they are
impositions on the activity subject of government regulation, such as the installation and construction of the
structures. It is primarily regulatory in nature, and not primarily revenue-raising. While the fees may contribute
to the revenues of the municipality, this effect is merely incidental. Thus, the fees imposed in the said ordinance
are not taxes (Smart Communications, Inc., vs. Municipality of Malvar, Batangas, G.R. No. 204429, February 18, 2014).

Q: Revenue laws R.A. 6260 and P.D. 276 were enacted to establish the Coconut Investment Fund and
Coconut Consumers Stabilization Fund. These
imposed levy for every sale of copra. Additional laws were enacted for the management of
coconut levy funds (coco-levy funds), including the Coconut Industry Code, which provided
that the coco-levy funds shall be owned by the coconut farmers in their private capacities.

On 2000, E.O. 312 was issued which established “Sagip Niyugan Program”. )t sought to establish a P1-
billion fund by disposing of assets acquired using coco-levy funds or assets of entities
supported by those funds. To manage the fund, a committee was formed which engage the
services of a private reputable auditing firm to conduct periodic audits by the majority vote of
its members.

FDI Bank was also designated as the trustee bank. It suggested that the coco-levy funds are
closely similar to the Social Security System (SSS) funds, which have been declared to be not
public funds but properties of the SSS members and held merely in trust by the government.
Are coco-levy funds public funds?

A: YES. The coco-levy funds were raised pursuant to law to support a proper governmental purpose.
They were raised with the use of the police and taxing powers of the State for the benefit of the
coconut industry and its farmers in general. The COA reviewed the use of the funds. The Bureau of
Internal Revenue (BIR) treated them as public funds and the very laws governing coconut levies
recognize their public character. Unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise
money to boost the government’s general funds but to provide means for the rehabilitation and stabilization
of a threatened industry, the coconut industry, which is so affected with public interest as to be
within the police power of the State. The subject laws are akin to the imposed sugar liens. It cannot be
likened to SSS Law which collects premium contributions that are not taxes and not for public
 TAXATION LAW 1 (REVIEWER)
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purpose. The SSS members pay contributions in exchange for insurance protection and benefits like
loans, medical or health services, and retirement package (Pambansang Koalisyon ng mga Samahang
Magsasaka at Manggagaw a sa Niyugan v. Executive Secretary, G.R. Nos. 147036-37, April 10, 2012).

Q: On April 23, 1992, RA 7432 was passed into law, granting senior citizens certain
privileges, including the 20% sales discount to certain establishments . Such law also
provides that the cost discount granted by these establishments may be claimed as a tax
credit or reduction from tax liability. On February 26, 2004, RA 9257 was issued, amending RA
7432, which provides that the 20% may be claimed as deduction from the gross income, net
of VAT, if applicable, for income tax purposes, and from gross sales or gross receipts of the
business enterprise concerned, for VAT or other percentage tax purposes. Petitioners
challenges the constitutionality of the tax deduction scheme under RA 9257 and prays that
the tax credit treatment of the 20% discount be reinstated.

Petitioners posit that the resolution of this case lies in the determination of whether the
legally mandated 20% senior citizen discount is an exercise of police power or eminent
domain. If it is police power, no just
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES
compensation is warranted. But if it is 5. It is Proportionate in character
eminent domain, the tax deduction scheme is 6. It is levied on Persons and property
unconstitutional because it is not a peso for 7. It is levied for a Public purpose
peso reimbursement of the 20% discount given
REQUISITES OF A VALID TAX
to senior citizens. Thus, it constitutes taking
of private property without payment of just 1. It should be for a public purpose
compensation. Is the tax deduction scheme a 2. It should be uniform
valid exercise of police power? 3. That either the person or property being
taxed be within the jurisdiction of the taxing
authority
A: YES. The disquisition on eminent domain in 4. The tax must not impinge on the inherent and
Central Luzon Drug Corporation (G.R. No. 159647, constitutional limitations on the power of
April 15, 2005) is obiter dicta and, thus, not taxation.
binding precedent. A fair reading of Carlos
Superdrug Corporation (G526 SCRA 130 [2007]) TAX AS DISTINGUISHED FROM
would show that we categorically ruled therein OTHER FORMS OF EXACTIONS
that the 20% discount is a valid exercise of police
power. Thus, even if the current law, through its
tax deduction scheme (which abandoned the tax
credit scheme under the previous law), does not TAX TARIFF/CUS
provide for a peso for peso reimbursement of the T OMS
20% discount given by private establishments, no DUTIES
constitutional infirmity obtains because, being a An all embracing Only a kind of
Coverage term to include tax
valid exercise of police power, payment of just
compensation is not warranted. The 20% discount various kinds of therefore
is intended to improve the welfare of senior citizens enforced limited
who, at their age, are less likely to be gainfully contributions coverage
employed, more prone to illnesses and other imposed upon
disabilities, and, thus, in need of subsidy in persons for the
purchasing basic commodities. It may not be amiss attainment of
to mention also that the discount serves to honor public
senior citizens who presumably spent the purpose.
productive years of their lives on contributing to Persons, property, Goods
Object
the development and progress of the nation. This etc. imported or
distinct cultural Filipino practice of honoring the exported
elderly is an integral part of this law. As to its
nature and effects, the 20% discount is a
regulation affecting the ability of private
establishments to price their products and
services relative to a special class of individuals,
senior citizens, for which the Constitution affords
preferential concern. (Memorial Park v. DSWD, 711
SCRA 302 [2013])

are enforced proportional contributions from

persons and properties, levied by the State by
virtue of its sovereignty for the support of the
government and for all its public needs (1
Cooley 62).

Characteristics of taxes [SLEP4]

1. It is levied by the State which has

jurisdiction over the person or property
2. It is levied by the State through its Law-making
body
3. It is an Enforced contribution not
dependent on the will of the person taxed
4. It is generally Payable in money
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Time of Normally paid Normally paid
Payment after the start of before the
business commencement
of the business
TAX TOLL
An enforced SPECIAL
Definition TAX
proportional A consideration ASSESSMENT
contribution paid for the use of An enforced
from persons a road, bridge or Nature An enforced proportional
and property for the like, of a
proportional contribution from
public public nature.
contribution from owners of lands
purpose/s.
persons and especially those
Basis Demand of Demand of property for public who are peculiarly
sovereignty proprietorship
purpose/s. benefited by public
Amount Generally the Amount is limited improvements
amount is to the cost and Levied only on
Imposed on
unlimited maintenance of Subject
persons, property land
public
rights or
improvement
transactions
Purpose For the support For the use of
A personal liability Not a personal
of the another’s Person
of the taxpayer liability of the
government property Liable
person assessed
Authority May be imposed May be imposed
For the support of Contribution to the
by the State only by private Purpose
the government cost of public
individuals or
improvement
entities
Regular exaction Exceptional as to
NOTE: Taxes may be imposed only by the Scope time and locality
government under its sovereign authority; toll fees
may be demanded by either the government or
private individuals or entities, as an attribute of TAX DEBT
ownership. Basis Obligation Obligation based
created by law on contract,
VAT on tollway operations cannot be deemed a tax on express or implied
tax due to the nature of VAT as an indirect tax. The Assignability Not assignable Assignable
seller remains directly and legally liable for the Mode of Payable in Payable in kind or
payment of VAT, but the buyer bears its burden since Payment money or in in money
the amount of VAT paid by the former is added to the kind
selling price. Once shifted, the VAT ceases to be a tax Set-off Not subject to Subject to set-off
and simply becomes part of the cost that the buyer set-off
must pay in order to purchase the good, property or Effect of non- May result in No imprisonment
service (Renato V. Diaz and Aurora Ma. F. Timbol, v. payment imprisonment (except when debt
Secretary of Finance and CIR, G.R. No. 193007, July 19, arises from crime)
2011). Interest Bears interest Interest depends
only if upon the written
TAX LICENSE FEE delinquent stipulation of the
Purpose Imposed to raise For regulation parties
revenue and control Prescription Governed by Governed by the
Basis Collected under Collected under the special ordinary periods of
the power of police power prescriptive prescription
taxation periods
Amount Generally, amount Limited to the provided for
is unlimited necessary in the NIRC
expenses of
regulation and TAX PENALTY
control Definition An enforced Sanction imposed
Subject Imposed on Imposed on the proportional as a punishment
persons, property, exercise of a contribution for a violation of
rights or right or privilege from persons the law or acts
transaction and property deemed injurious;
Effect of Non-payment does Non-payment for public violation of tax
Non- not make the makes the purpose/s. laws may give rise
Payment business illegal business illegal to imposition of
penalty.
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includes the indirect tax, otherwise, it is presumed

Purpose To raise To regulate that the tax exemption embraces only those taxes for
revenue conduct which the buyer is directly liable.(CIR v. PLDT, 478
Authority Maybe Maybe imposed SCRA 61)
imposed by by private
the State entities Indirect taxes, like VAT and excise tax, are different
only from withholding taxes (direct taxes). To distinguish,
KINDS OF TAXES indirect taxes, the incidence of taxation falls on one
person but the burden thereof can be shifted or
AS TO OBJECT passed on to another person, such as when the tax
is imposed upon goods before reaching the consumer
1. Personal/Poll or Capitation tax – A who ultimately pays for it. On the other hand, in
fixed amount imposed upon all case of withholding taxes, the incidence and burden
persons, or upon all persons of a of taxation fall on the same entity, the statutory
certain class, residents within a taxpayer. The burden of taxation is not shifted to the
specified territory, without regard to withholding agent who merely collects, by
their property or occupation. E.g. withholding, the tax due from income payments to
Community tax entities arising from certain transactions and remits
2. Property tax – Tax imposed on the
property, whether real or personal, in
proportion either to its value, or in
accordance with some other
reasonable method of apportionment.
E.g. Real Property tax
3. Privilege/Excise tax – a charge upon the
performance of an act, the enjoyment
of a privilege, or the engaging in an
occupation. An excise tax is a tax that
does not fall as property tax. E.g.
Income tax, Estate tax, Donor’s tax,
VAT

NOTE: This is different from the excise

tax under the NIRC which is a business
tax imposed on items such as cigars,
cigarettes, wines, liquors, frameworks,
mineral products, etc.

AS TO BURDEN OR INCIDENCE
(2001, 2006 Bar)

1. Direct – one that is demanded from

the person who also shoulders the
burden of tax. It is a tax for which the
taxpayer is directly liable on the
transaction or business it engages in.
E.g. Income tax, Estate tax and Donor’s
tax
2. Indirect – tax primarily paid by
persons who can shift the burden to
another E.g. VAT and Other
percentage taxes

NOTE: The liability for payment of the

indirect taxes lies only with the seller of
the goods or services, not in the buyer
thereof. Thus, one cannot invoke one’s
exemption privilege to avoid the passing on
or the shifting of the VAT to him by the
manufacturers/suppliers of the goods.
Hence, it is important to determine if the
tax exemption granted specifically
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3. Proportionate – A tax of a fixed percentage of

same to the government. Due to this amounts of the base (value of the property, or
difference, the deficiency VAT and excise amount of gross receipts etc.) E.g. VAT and
tax cannot be “deemed” as withholding Other Percentage taxe
taxes merely because they constitute
indirect taxes (Asia International
Auctioneers, Inc. v. CIR, G.R. No. 179115,
September 26, 2012).

AS TO TAX RATES

1. Specific –tax of a fixed amount

imposed by the head or number, or
by some standard of weight or
measurement. E.g. Excise tax on
cigar, cigarettes and liquors
2. Ad valorem – tax based on 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 can be determined.
E.g. Real Estate Tax,
)ncome tax, Donor’s tax and Estate tax
3. Mixed – a choice between ad valorem
and/or specific depending on the
condition attached.

AS TO PURPOSES

1. General/Fiscal or Revenue – tax

imposed solely for the general
purpose of the government. E.g.
Income tax and Donor’s tax
2. Special / Regulatory or Sumptuary –
tax levied for specific purpose, i.e.
to achieve some social or economic
ends E.g. Tariff and certain duties
on imports

AS TO SCOPE/ OR AUTHORITY TO IMPOSE

1. National tax – Tax levied by the National

Government.
E.g. )ncome tax, Estate tax, Donor’s tax,
Value added tax, other Percentage
taxes and Documentary Stamp
taxes
2. Local or Municipal – A tax levied by
a local government. E.g. Real Estate
tax and Community tax

AS TO GRADUATION

1. Progressive – A tax rate which

increases as the tax base or
bracket increases. E.g. Income tax,
Estate tax and Donor’s tax
2. Regressive – The tax rate decreases
as the tax base or bracket increases.
 TAXATION LAW 1 (REVIEWER)
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• LORENZO vs. POSADAS JR.
• G.R. No. L-43082
• June 18, 1937
• in the will but the intention to create one is
• FACTS: Thomas Hanley died, leaving a will and
a considerable amount of real and personal
properties. Proceedings for the probate of his
will and the settlement and distribution of his
estate were begun in the CFI of Zamboanga. The
will was admitted to probate.
• The CFI considered it proper for the best
interests of the estate to appoint a trustee to
administer the real properties which, under the
will, were to pass to nephew Matthew ten years
after the two executors named in the will was
appointed trustee. Moore acted as trustee until
he resigned and the plaintiff Lorenzo herein was
appointed in his stead.
• During the incumbency of the plaintiff as
trustee, the defendant Collector of Internal
Revenue (Posadas) assessed against the estate
an inheritance tax, together with the penalties
for deliquency in payment. Lorenzo paid said
amount under protest, notifying Posadas at the
same time that unless the amount was promptly
refunded suit would be brought for its recovery.
Posadas overruled Lorenzo’s protest and
refused to refund the said amount. Plaintiff
went to court. The CFI dismissed Lorenzo’s
complaint and Posadas’ counterclaim. Both
parties appealed to this court.
• ISSUE:
•
• (e) Has there been delinquency in the payment
of the inheritance tax?
• • As the existence of the trust was already proven,
• HELD: The judgment of the lower court is
accordingly modified, with costs against the
plaintiff in both instances
• YES
• The defendant maintains that it was the duty of
the executor to pay the inheritance tax before
the delivery of the decedent’s property to the
trustee. Stated otherwise, the defendant
contends that delivery to the trustee was
delivery to the cestui que trust, the beneficiary in
this case, within the meaning of the first
paragraph of subsection (b) of section 1544 of
the Revised Administrative Code. This
contention is well taken and is sustained. A
trustee is but an instrument or agent for
the cestui que trust
•
• The appointment of Moore as trustee was made
by the trial court in conformity with the wishes
of the testator as expressed in his will. It is true
that the word “trust” is not mentioned or used
clear. No particular or technical words are
required to create a testamentary trust. The
words “trust” and “trustee”, though apt for the
purpose, are not necessary. In fact, the use of
these two words is not conclusive on the
question that a trust is created. ” To constitute
a valid testamentary trust there must be a
concurrence of three circumstances:
•
• (1) Sufficient words to raise a trust;
• (2) a definite subject;
• (3) a certain or ascertain object; statutes in
some jurisdictions expressly or in effect so
providing.”
•
• There is no doubt that the testator intended to
create a trust. He ordered in his will that certain
of his properties be kept together undisposed
during a fixed period, for a stated purpose. The
probate court certainly exercised sound
judgment in appointmening a trustee to carry
into effect the provisions of the will
•
it results that the estate which plaintiff
represents has been delinquent in the payment
of inheritance tax and, therefore, liable for the
payment of interest and surcharge provided by
law in such cases.
• The delinquency in payment occurred on March
10, 1924, the date when Moore became trustee.
On that date trust estate vested in him. The
interest due should be computed from that date.
• NOTES: Other issues:
•
• (a) When does the inheritance tax accrue and
when must it be satisfied?
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• The accrual of the inheritance tax is distinct
from the obligation to pay the same.
• Acording to article 657 of the Civil Code, “the
rights to the succession of a person are
transmitted from the moment of his death.” “In
other words”, said Arellano, C. J., “. . . the heirs
succeed immediately to all of the property of the
deceased ancestor. The property belongs to the
heirs at the moment of the death of the ancestor
as completely as if the ancestor had executed
and delivered to them a deed for the same
before his death.”
• Whatever may be the time when actual
transmission of the inheritance takes place,
succession takes place in any event at the
moment of the decedent’s death. The time when
the heirs legally succeed to the inheritance may
differ from the time when the heirs actually
receive such inheritance. ” Thomas Hanley
having died on May 27, 1922, the inheritance
tax accrued as of the date.
• From the fact, however, that Thomas Hanley
died on May 27, 1922, it does not follow that the
obligation to pay the tax arose as of the date.
The time for the payment on inheritance tax is
clearly fixed by section 1544 of the Revised
Administrative Code as amended by Act No.
3031, in relation to section 1543 of the same
Code. The two sections follow:
• SEC. 1543. Exemption of certain acquisitions and
transmissions. — The following shall not be
taxed:
• (a) The merger of the usufruct in the owner of
the naked title.
• (b) The transmission or delivery of the
inheritance or legacy by the fiduciary heir or
legatee to the trustees.
• (c) The transmission from the first heir, legatee,
or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.
xx
• SEC. 1544. When tax to be paid. — The tax fixed
in this article shall be paid:
• (a) In the second and third cases of the next
preceding section, before entrance into
possession of the property.
• (b) In other cases, within the six months
subsequent to the death of the predecessor; but
if judicial testamentary or intestate proceedings
shall be instituted prior to the expiration of said
period, the payment shall be made by the
executor or administrator before delivering to
each beneficiary his share.
• The instant case does[not] fall under subsection
(a), but under subsection (b), of section 1544
above-quoted, as there is here no fiduciary
heirs, first heirs, legatee or donee. Under the
subsection, the tax should have been paid
before the delivery of the properties in question
to Moore as trustee.
• (b) Should the inheritance tax be computed on
the basis of the value of the estate at the time of
the testator’s death, or on its value ten years
later?
•
• If death is the generating source from which the
power of the estate to impose inheritance taxes
takes its being and if, upon the death of the
decedent, succession takes place and the right of
the estate to tax vests instantly, the tax should
be measured by the value of the estate as it
stood at the time of the decedent’s death,
regardless of any subsequent contingency value
of any subsequent increase or decrease in value
•
• (c) In determining the net value of the estate
subject to tax, is it proper to deduct the
compensation due to trustees?
•
• A trustee, no doubt, is entitled to receive a fair
compensation for his services. But from this it
does not follow that the compensation due him
may lawfully be deducted in arriving at the net
value of the estate subject to tax. There is no
statute in the Philippines which requires
trustees’ commissions to be deducted in
determining the net value of the estate subject
to inheritance tax
•
• (d) What law governs the case at bar? Should
the provisions of Act No. 3606 favorable to the
tax-payer be given retroactive effect?
•
• A statute should be considered as prospective in
its operation, whether it enacts, amends, or
repeals an inheritance tax, unless the language
of the statute clearly demands or expresses that
it shall have a retroactive effect, . . . .” Act No.
3606 itself contains no provisions indicating
legislative intent to give it retroactive effect. No
 TAXATION LAW 1 (REVIEWER)
ASPECT OF TAXATION - TAXES

such effect can be given the statute by this

court.

‣MARINDUQUE IRON MINES v.

MUNICIPAL COUNCIL; G.R. No. L-
18924

It is a well-established rule that a

statute will not be construed as imposing a tax
unless it does so clearly, expressly and
unambiguously. A tax cannot be imposed without
clear and express words for that purpose.
Accordingly, the general rule of requiring
adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and
the provisions of a taxing act are not to be
extended by implication. [Marinduque Iron
Mines vs. Municipality of Hinabangan. GR No.
L-18924. June 30, 1964]

In Marinduque Iron Mines, Inc. v.

Municipal Council of the Municipality of
Hinabangan, Samar,15 the Supreme Court
held the ordinance in question failed to levy
any tax as the main section of the ordinance
was merely declaratory of the LGU’s
authority to impose a tax. It should have
expressly required the taxpayer to pay a tax.
§1.2.2 Function of DOF local finance
circulars The DOF periodically issues local
finance circulars to prescribe guidelines in
the LGUs’ levy and administration of local
taxes, fees and charges. Among others,
such circulars serve as guides to: (a) (b) (c)
local elective officials in the enactment of
revenue ordinances; local treasury offices in
collecting taxes and other local impositions,
as well as in determining or computing tax
discounts or penalties and surcharges; and
tax-paying public as to the proper
interpretation and application of the laws
and rules governing local taxation.
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