Jose Maria College-College of Law SY 2019 - 2020: LAW ON TAXATION I (Atty. Dante A. Maranan, CPA)

Jose Maria College- College of Law
LAW ON TAXATION I (Atty. Dante A. Maranan, CPA)

SY 2019- 2020
GENERAL PRINCIPLES OF TAXATION
Definition of Taxation
- Taxation is the power by which the sovereign raises revenue to defray the necessary expenses of
the government. (Aban)
- Taxation is a process or an act imposing a charge by governmental authority on property,
individuals, or transactions to raise money for public purposes. (Black’s Law Dictionary)
- Taxation is a means by which the State, through its law-making body, raises income to defray the
necessary expenses of the government. (De Leon)
- Taxation is the inherent power of the State, exercised through the legislature, to impose burdens
upon the subjects and the objects within its jurisdiction, for the purpose of raising revenues to
carry out the legitimate objects of the government. (Domondon)
- Taxation is an enforced proportional contribution, imposed by the State by its sovereign capacity,
to support the government. (Ingles)
“Taxation is the most powerful among the inherent powers of the State since the power to tax is plenary,
all encompassing, and unlimited.”
Elements of Taxation
1. It is an enforced proportional contribution from persons and properties (pecuniary burden);
2. It is imposed by the State by virtue of its sovereignty;
3. It is levied for the support of the government
(PCGG vs Cojuangco)
Basic Concepts of Taxation

1. Taxation is a power.
- It is a power wielded by the State, to collect money, so that they have to spend something for
public purposes.
2. Taxation is a process.
- It’s basically a process. From the time the Tax law is being made, is being enforced, form the time
it is collected, it is a whole process that all of us encounter.
3. Taxation is a means.
- It is a means of survival. Taxation is not only a way for the State to collect money but also for the
State to survive. It is a way for the State to endure and survive.
Impact and Incidence of Taxation (Direct and Indirect Taxes)

Impact of taxation:
point where the tax is originally imposed or the one on whom the tax is formally assessed .
Incidence of taxation:
point on whom the tax burden finally rests.
It is essential to know where the impact of taxation lies because it generally determines: (1) the proper
party to claim a refund of erroneously imposed indirect taxes, and (2) whether the indirect taxes can be
passed on to an exempt buyer.
Direct taxes: those that are exacted from the very person who, it is intended or desired, should pay them.
These are impositions for which a taxpayer is directly liable on the transactions or business he is engaged.
Indirect taxes: those that are demanded, in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to someone else. These are taxes wherein the

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liability for the payment of tax falls on one person but the burden thereof can be shifted or passed on to
another person, such as when the tax is imposed upon the goods before reaching the consumer who
ultimately pays for it.
Objects for Taxation

1. Persons;
2. Property: and
3. Rights.
I. Nature and Characteristics of Taxation
Three-Fold Nature:
1. Taxation is an inherent power of the State;
a) it does not need the Constitution in order for the government to exercise the power of
taxation; and
b) it does not need any laws so that the government may enact tax measures in order for it to
survive.
- The State is free to select the subjects of taxation and the Court has repeatedly held that
inequalities which results from singling out of one particular class for taxation or
exemption infringe no constitutional limitation. (Lutz vs Araneta)
- The State has the power to determine the subjects of taxation, it is also free to select those
who will be exempt from taxation. (Gomez vs Palomar)
- Taxes must be exacted for a public purpose
2. Taxation is a legislative power in itself;

3. Taxation is subject only to inherent and constitutional limitations.
Cases:
1. CIR vs Dash Eng’g Phils
- Taxes are the lifeblood of the government and, consequently, tax laws must be faithfully and
strictly implemented as they are not intended to be liberally construed.
2. PILMICO- MAURI Foods vs CIR

- The Court recognizes that the Court of Tax Appeals, which by the very nature of its function is
dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise
on the subject, and its conclusions will not be overturned unless there has been an abuse or
improvident exercise of authority. Such findings can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse on the part of the
tax court. In the absence of any clear and convincing proof to the contrary, the Court must
presume that the CTA rendered a decision which is valid in every respect.
- Revenue laws are not intended to be liberally construed. Taxes are the lifeblood of the
government and in Holmes’ memorable metaphor, the price we pay for civilization; hence, laws
relative thereto must be faithfully and strictly implemented.
3. Davao Gulf Lumber vs CIR

- A tax cannot be imposed unless it is supported by the clear and express language of a statute; on
the other hand, once the tax is unquestionably imposed, “[a] claim of exemption from tax
payments must be clearly shown and based on language in the law too plain to be mistaken.”
Since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax exemption,
it must be construed strictissimi juris against the grantee. Hence, petitioner’s claim of refund on
the basis of the specific taxes it actually paid must expressly be granted in a statute stated in a
language too clear to be mistaken.

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- Petitioner asserts that “equity and justice demand that the computation of the tax refunds be
based on actual amounts paid under Sections 153 and 156 of the NIRC.” We disagree. According
to an eminent authority on taxation, “there is no tax exemption solely on the ground of equity.”
4. CIR vs Algue
- Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
- The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and
prominent businessmen to venture in an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
- It is said that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard-earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government, for
its part, is expected to respond in the form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material values, This symbiotic relationship is
the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
5. Marcos vs CA
- It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the
collection of taxes, is of paramount importance for the sustenance of government. Taxes are the
lifeblood of the government and should be collected without unnecessary hindrance. However,
such collection should be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.
- In the Philippine experience, the enforcement and collection of estate tax, is executive in
character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue.
Section 3 of the National Internal Revenue Code attests to this: “Sec. 3. Powers and duties of the
Bureau.—The powers and duties of the Bureau of Internal Revenue shall comprehend the
assessment and collection of all national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts.
Said Bureau shall also give effect to and administer the supervisory and police power conferred to
it by this Code or other laws.”
6. Reyes vs Almazor
- The power to tax “is an attribute of sovereignty”. In fact, it is the strongest of all the powers of
government. But for all its plenitude, the power to tax is not unconfined as there are restrictions.
Adversely effecting as it does property rights, both the due process and equal protection clauses of
the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If
it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that “the
power to tax involves the power to destroy.” The web or unreality spun from Marshall’s famous

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dictum was brushed away by one stroke of Mr. Justice Holmes’ pen, thus: “The power to tax is not
the power to destroy while this Court sits.” “So it is in the Philippines.”
- Verily, taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. However, such collection should be made in accordance with law as any arbitrariness
will negate the very reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so that the real purpose of
taxations, which is the promotion of the common good, may be achieved. Consequently, it stands
to reason that petitioners who are burdened by the government by its Rental Freezing Laws (then
R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be penalized by
the same government by the imposition of excessive taxes petitioners can ill afford and eventually
result in the forfeiture of their properties.
II. Limitations of the Power to Tax
“The power to Tax is the power to destroy” (Marshall) vs “The power to Tax is not the power to
destroy” (Holmes)
- To reconcile, the power to tax is the power to destroy, refers to a valid tax law; while the power to
tax is NOT the power to destroy, r efers to an invalid tax law; meaning it violated some inherent
limitations or constitutional limitations.
Implication of “Power to Tax is Not the Power to Destroy”:
(1) The courts may strike down an invalid tax law;
(2) The power to tax is still subject to limitations;
A. Inherent Limitations;
Lifeblood Theory
- taxes are the lifeblood of the state, without which, the government cannot endure or survive. (see
Art 19, CC)
- Taxes are the lifeblood of the State, through which the government and its agencies continue to
operate and with which the State effects its functions for the welfare of its constituents (CIR vs
CTA)
- Injunction generally does not lie against the collection of taxes. (CIR vs Cebu Portland)
- The State is not estopped from collecting taxes by the mistakes or errors of its agents. (PGCI vs
CIR)
- The no-estoppel rule is not absolute. Hence, when the taxpayer oly raises the defense of
prescription only on appeal and the State does not question the timeliness of the defense, the
State can be bound by the acts of its agents (here, it took 12yrs for the BIR to collect tax).(China
Bank vs CIR)
- Laws exempting subjects from taxation are strictly construed against the taxpayer.
B. Constitutional Limitations; The Congress, Senate and House of Representatives, are tasked to create
tax laws.
General Rule: the power to tax cannot be delegated
Exceptions:
a. Delegation to the LGU (Art 10, Sec. 5, Consti)
- It is DELEGATED and a DIRECT GRANT

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- It is a mere delegated power. Without the Constitution, the LGU’s will not have the power to tax.
It is not an inherent power. Nonetheless, it is a direct grant by the Constitution. The express
provision of the Constitution, the LGU’s have the power to tax without having to wait for an
executing law. The purpose of the Local Government Code is merely to limit the powers to tax.
- The power of the LGU to tax is limited, not plenary.
- National Government: Power to tax is plenary.
- Local Government: Power to tax is not plenary because it is limited by the Local Government
Code.
b. Delegation to the President (Art. 6, Sec 28, Consti)
- Limited to tariffs and customs duties. This is related to importation or exportation.

- Requirements for the Valid Exercise of the President of the Power to Tax:
a. There must be a law promulgated by Congress authorizing the President to do

such thing;
b. The exercise must be within the limits set forth in the law.
- Customs Modernization and Tariff Act is the law which authorizes the President to adjust/remove
the rates
c. Delegation to the Administrative Agencies
- Also known as “Subordinate Legislation”

- The rules and regulations issued by administrative bodies must conform to the law. It can neither
expand nor constrict what is written in the red letter of the law. If there is a discrepancy between
the law and the revenue regulation, it is the law which will prevail.
- Principle: The Rule is that administrative regulations must be in harmony with the
provisions of the law. The revenue regulations must not expand, modify, alter or amend the basic
law which it seeks to implement.
- Tests for Valid Delegation: a. Completeness Test
b. Sufficient Standards Test
d. Delegation to the People at Large
- through Initiative and Referendum
e. Emergency powers of the President
Scope the legislative power of the Congress in the taxation:

a. Object of taxation;
b. Nature and Kind;
c. Extent or the Rate of that particular subject or object;
d. Coverage of taxation
e. Place or Situs of Taxation.
-
(3) The power to tax involves the power to destroy so it must be exercised with great caution (Phil Health
Care v. Commission)

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Cases:
1. Tio vs Videogram Regulatory Board
- Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not
cease to be valid merely because it regulates, discourages, or even definitely deters the activities
taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the
courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest
in the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its
constituents. This is, in general, a sufficient security against erroneous and oppressive taxation.
The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by
the realization that earnings of videogram establishments of around P600 million per annum
have not been subjected to tax, thereby depriving the Government of an additional source of
revenue. It is an end-user tax, imposed on retailers for every videogram they make available for
public viewing, It is similar to the 30% amusement tax imposed or borne by the movie industry
which the theater-owners pay to the government, but which is passed on to the entire cost of the
admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that
is imposed uniformly on all videogram operators. The levy of the 30% tax is for a public purpose.
It was imposed primarily to answer the need for regulating the video industry, particularly
because of the rampant film piracy, the flagrant violation of intellectual property rights, and the
proliferation of pornographic video tapes. And while it was also an objective of the DECREE to
protect the movie industry, the tax remains a valid imposition.
2. ABAKADA vs Ermita
- As a prelude, the Court deems it apt to restate the general principles and concepts of value-added
tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of
goods or properties and services. Being an indirect tax on expenditure, the seller of goods or
services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax
collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the
end-consumers. In contrast, a direct tax is a tax for which a taxpayer is directly liable on the
transaction or business it engages in, without transferring the burden to someone else. Examples
are individual and corporate income taxes, transfer taxes, and residence taxes.
- The legislature may delegate to executive officers or bodies the power to determine certain facts
or conditions, or the happening of contingencies, on which the operation of a statute is, by its
terms, made to depend, but the legislature must prescribe sufficient standards, policies or
limitations on their authority. While the power to tax cannot be delegated to executive agencies,
details as to the enforcement and administration of an exercise of such power may be left to them,
including the power to determine the existence of facts on which its operation depends. The
rationale for this is that the preliminary ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty
of correlating information and making recommendations is the kind of subsidiary activity which
the legislature may perform through its members, or which it may delegate to others to perform.
Intelligent legislation on the complicated problems of modern society is impossible in the absence
of accurate information on the part of the legislators, and any reasonable method of securing such
information is proper. The Constitution as a continuously operative charter of government does
not require that Congress find for itself every fact upon which it desires to base legislative action
or that it make for itself detailed determinations which it has declared to be prerequisite to
application of legislative policy to particular facts and circumstances impossible for Congress
itself properly to investigate.

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- Uniformity in taxation means that all taxable articles or kinds of property of the same class shall
be taxed at the same rate. Different articles may be taxed at different amounts provided that the
rate is uniform on the same class everywhere with all people at all times.
- The Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it
simply provides is that Congress shall “evolve a progressive system of taxation.” The Court stated
in the Tolentino case, thus: The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive. What it simply provides is that Congress shall ‘evolve a
progressive system of taxation.’ 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.’ Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have
been prohibited with the proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which
the present Art. VI, §28 (1) was taken. Sales taxes are also regressive. Resort to indirect taxes
should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid
them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the
law minimizes the regressive effects of this imposition by providing for zero rating of certain
transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while granting exemptions to
other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC).
3. Manila Race Horses Trainers Association vs dela Fuente

- From the viewpoint of economics and public policy the taxing of boarding stables for race horses
to the exclusion of boarding stables for horses dedicated to other purposes is not indefensible. The
owners of boarding stables for race horses and, for that matter, the race horse owners themselves,
who in the scheme of shifting may carry the taxation burden, are a class by themselves and
appropriately taxed where owners of other kinds of horses are taxed less or not at all, considering
that equity in taxation is generally conceived in terms of ability to pay in relation to the benefits
received by the tax-payer and by the public from the business or property taxed. Race horses are
devoted to gambling if legalized, their owners derive fat income and the public hardly any profit
from horse racing, and this business demands relatively heavy police supervision. Taking
everything into account, the differentiation against which the plaintiffs complain conform to the
practical dictates of justice and equity and is not discriminatory within the meaning of the
Constitution.
4. Ormoc Sugar vs Treasurer of Ormoc

- When the taxing ordinance was enacted, Ormoc Sugar Co., Inc. was the only sugar central in the
City. A reasonable classification should be in terms applicable to future conditions as well. The
taxing ordinance should not be singular and exclusive as to exclude any subsequently established
sugar central from the coverage of the tax. A subsequently established sugar central cannot be
subject to tax because the ordinance expressly points to Ormoc Sugar Company, Inc. as the entity
to be levied upon.
- Appellant is not entitled to interest on the refund because the taxes were not arbitrarily collected.
There is sufficient basis to preclude arbitrariness. The constitutionality of the statute is presumed
until declared otherwise.
5. La Insular vs Machuca Go- Tauco

- Where an Act of the Legislature imposes a new or additional tax upon goods contracted to be sold
and places the burden of paying said tax upon the purchaser, the obligation of the contract
between the contracting parties is not thereby changed in the sense necessary to release the surety
upon the obligation for the purchase price of the goods.
6. Cagayan Electric Power vs CIR

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- Taxation; Statutes; Where income tax exemption of a fran-chiseholder was withdrawn by the
legislature in January, 1968 but was restored in August, 1969, the franchise holder is liable for
income tax from January, 1968 to August, 1969.—The Tax Court acted correctly in holding that
the exemption was restored by the subsequent enactment on August 4, 1969 of Republic Act No.
6020 which reenacted the said tax exemption. Hence, the petitioner is liable only for the income
tax for the period from January 1 to August 3, 1969 when its tax exemption was modified by
Republic Act No. 5431.
- Same; Same; Where imposition of a tax statute was controversial, taxpayer may not be held liable
to pay surcharge and interest.—However, it cannot be denied that the said 1969 assessment
appears to be highly controversial. The Commissioner at the outset was not certain as to
petitioner’s income tax liability. It had reason not to pay income tax because of the tax exemption
in its franchise. For this reason, it should be liable only for tax proper and should not be held
liable for the surcharge and interest.
7. American Bible Society vs City of Manila

- The business of "retail dealers in general merchandise" is expressly enumerated in subsection (o),
section 18 of Republic Act No. 409: hence. an ordinance prescribing a municipal tax on said
business does not have to be approved by the President to be effective, as it is not among those
businesses referred to in subsection (ii) Section 18 of the same Act subject to the approval of the
President.
- The consti-tutional guaranty of the free exercise and enjoyment of religious profession and
worship carries with it the right to disseminate religious information. Any restraint of such right
can only be justified like other restraints of freedom of expression on the grounds that there is a
clear and present danger of any substantive evil which the State has the right to prevent." (Tañada
and Fernando on the Constitution of the Philippines, Vol. I, 4th ed., p. 297). In the case at bar,
plaintiff is engaged in the distribution and sales of bibles and religious articles. The City Treasurer
of Manila informed the plaintiff that it was conducting the business of general merchandise
without providing itself with the necessary Mayor's permit and municipal license, in violation of
Ordinance No. 3000, as amended, and Ordinance No. 2529, as amended, and required plaintiff to
secure the corresponding permit and license. Plaintiff protested against this requirement and
claimed that it never made any profit from the sale of its bibles. Held: It is true the price asked for
the religious articles was in some instances a little bit higher than the actual cost of the same, but
this cannot mean that plaintiff was engaged in the business or occupation of selling said
"merchandise" for profit. For this reasons, the provisions of City Ordinance No. 2529, as
amended, which requires the payment of license fee for conducting the business of general
merchandise, cannot be applied to plaintiff society, for in doing so, it would impair its free
exercise and enjoyment of its religious profession and worship, as well as its rights of
dissemination of religious beliefs. Upon the other hand, City Ordinance No. 3000, as amended,
which requires the obtention of the Mayor's permit before any person can engage in any of the
businesses, trades or occupations enumerated therein, does not impose any charge upon the
enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices.
Hence, it cannot be considered unconstitutional, even if applied to plaintiff Society. But as
Ordinance No. 2529 is not applicable to plaintiff and the City of Manila is powerless to license or
tax the business of plaintiff society involved herein, for the reasons above stated, Ordinance No.
3000 is also inapplicable to said business, trade or occupation of the plaintiff.
8. Lladoc vs CIR
- Section 22(3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries,
churches and parsonages or convents, appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious purposes. The exemption is only from the payment of
taxes assessed on such properties enumerated, as property taxes, as contra-distinguished from
excise taxes.

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- A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift
inter vivos, the imposition of which on property used exclusively for religious purposes, does not
constitute an impairment of the Constitution.
- The head of the diocese and not the parish priest is the real party in interest in the imposition of a
donee’s tax on property donated to the church for religious purposes.
9. Herrera vs QC Board of Assessment Appeals

- The admission of paypatients does not detract from the charitable character of a hospital, if all of
its funds are devoted “exclusively to the maintenance of the institution” as a “public charity”. In
other words, “where rendering charity is its primary object, and the funds derived from payments
made by patients able to pay are devoted to the benevolent purposes of the institution, the mere
fact that a profit has been made will not deprive the hospital of its benevolent character”. The fact,
therefore, that in the case at bar, St. Catherine’s Hospital, which is a charitable institution, admits
pay-patients, does not bar it from claiming that it is devoted exclusively to benevolent purposes, it
being admitted that the income derived from paypatients is devoted to the improvement of the
charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside
from “out-charity patients” who come only for consultation.
- The exemption in favor of property used exclusively for charitable or educational purposes is “not
limited to property actually indispensable” therefor, but extends to facilities which are “incidental
to and reasonably necessary for” the accomplishment of said purposes, such as, in the case of
hospitals, “a school for training nurses, a nurses’ home, property used to provide housing facilities
for interns, resident doctors, superintendents, and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents”, such as “athletic fields”, including
“a farm used for the inmates of the institution”.
- The existence of “St. Catherine’s School of Midwifery”, with an enrollment of about 200 students,
who practice partly in St. Catherine’s Hospital and partly in St. Mary’s Hospital, which, likewise,
belongs to petitioners, does not, and cannot affect the exemption to which St. Catherine’s Hospital
is entitled under the Constitution. The fact that the size of the enrollment and the students, aside
from the amount they paid for board and lodging, warrant the belief that a substantial profit is
derived from the operation of the said school, is immaterial to the issue of whether or not real
estate taxes should be paid, because “all lands, buildings and improvements used exclusively for
religious, charitable or educational purposes shall be exempt from taxation”, pursuant to the
Constitution, regardless of whether or not material profits are derived from the operation of the
institutions in question. In other words, Congress may, if it deems fit to do so, impose taxes upon
such “profits”, but said “lands, buildings and improvements” are beyond its taxing power.
- The fact that a garage located in the hospital was being used in the operation of the school of
midwifery because the students enrolled therein were entitled to transportation and that the
hospital directress who received no compensation, and her family, resided in the building, were
incidental to the operation of the hospital, and, accordingly, did not affect the charitable character
of the hospital and the educational nature of the school.
10. CIR vs De La Salle University

- Thus, when a non-stock, nonprofit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and
LBT. On the other hand, when it also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.
- Parenthetically, income and revenues of non-stock, nonprofit educational institution not used
actually, directly and exclusively for educational purposes are not exempt from duties and taxes.
To avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.

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- While a non-stock, nonprofit educational institution is classified as a tax-exempt entity under

Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational
institution is covered by Section 27 (Rates of Income Tax on Domestic Corporations).
- By the Tax Code’s clear terms, a proprietary educational institution is entitled only to the reduced
rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary
educational institution is nonprofit and (2) its gross income from unrelated trade, business or
activity does not exceed 50% of its total gross income.
11. CIR vs St. Luke’s Medical Center

- The Court partly grants the petition of the BIR but on a different ground. We hold that Section
27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other
hand, can be construed together without the removal of such tax exemption. The effect of the
introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section
27(A)(1).
- Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary educational institution” as “any private school
maintained and administered by private individuals or groups” with a government permit.
“Non-profit” means no net income or asset accrues to or benefits any member or specific person,
with all the net income or asset devoted to the institution’s purposes and all its activities
conducted not for profit.
- “Non-profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club
Filipino Inc. de Cebu, 5 SCRA 321 (1962), this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. The club was non-profit because of its purpose and there
was no evidence that it was engaged in a profit-making enterprise.
- To be a charitable institution, however, an organization must meet the substantive test of charity
in Lung Center of the Philippines vs. Quezon City, 433 SCRA 119 (2004). The issue in Lung Center
concerns exemption from real property tax and not income tax. However, it provides for the test
of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions provide for free goods
and services to the public which would otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which should have been spent to address public
needs, because certain private entities already assume a part of the burden. This is the rationale
for the tax exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been funded by
appropriations from the Treasury.
- Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements
for a tax exemption are specified by the law granting it. The power of Congress to tax implies the
power to exempt from tax. Congress can create tax exemptions, subject to the constitutional
provision that “[n]o law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of Congress.” The requirements for a tax exemption are strictly
construed against the taxpayer because an exemption restricts the collection of taxes necessary for
the existence of the government.
- For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that “[c]haritable institutions,

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churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and
all lands, buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.” The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution. The test requires that
the institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held
that the Lung Center of the Philippines did not lose its charitable character when it used a portion
of its lot for commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.
- The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the
Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt
from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define
a charitable institution, but requires that the institution “actually, directly and exclusively” use the
property for a charitable purpose.
- There is no dispute that St. Luke’s is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke’s from paying taxes. This only
refers to the organization of St. Luke’s. Even if St. Luke’s meets the test of charity, a charitable
institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3),
Article VI of the Constitution requires that a charitable institution use the property “actually,
directly and exclusively” for charitable purposes. To be exempt from income taxes, Section 30(E)
of the NIRC requires that a charitable institution must be “organized and operated exclusively”
for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC
requires that the institution be “operated exclusively” for social welfare.
- Even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its
tax exempt status for its not-for-profit activities. The only consequence is that the “income of
whatever kind and character” of a charitable institution “from any of its activities conducted for
profit, regardless of the disposition made of such income, shall be subject to tax.” Prior to the
introduction of Section 27(B), the tax rate on such income from for-profit activities was the
ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate
is now 10%.
- The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the
clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be “operated exclusively” for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. Such income from for-profit activities,
under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
- A tax exemption is effectively a social subsidy granted by the State because an exempt institution
is spared from sharing in the expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be limited to institutions beneficial to the
public and those which improve social welfare. A profit-making entity should not be allowed to
exploit this subsidy to the detriment of the government and other taxpayers.
12. Abra Valley College vs Aquino

- The test of exemption from taxation is the use of the property for purposes mentioned in the
Constitution.
- As early as 1916, in YMCA of Manila vs. Collector of Internal Revenue, 33 Phil. 217 [1916], this
Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and

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maintains a restaurant for its members, still these do not constitute business in the ordinary
acceptance of the word, but an institution used exclusively for religious, charitable and
educational purposes, and as such, it is entitled to be exempted from taxation.
- As early as 1916, in YMCA of Manila vs. Collector of Internal Revenue, 33 Phil. 217 [1916], this
Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and
maintains a restaurant for its members, still these do not constitute business in the ordinary
acceptance of the word, but an institution used exclusively for religious, charitable and
educational purposes, and as such, it is entitled to be exempted from taxation.
- In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972],
this Court included in the exemption a vegetable garden in an adjacent lot and another lot
formerly used as a cemetery. It was clarified that the term “used exclusively” considers incidental
use also. Thus, the exemption from payment of land tax in favor of the convent includes, not only
the land actually occupied by the building but also the adjacent garden devoted to the incidental
use of the parish priest. The lot which is not used for commercial purposes but serves solely as a
sort of lodging place, also qualifies for exemption because this constitutes incidental use in
religious functions.
- The phrase “exclusively used for educational purposes” was further clarified by this Court in the
cases of Herrera vs. Quezon City Board of Assessment Appeals, 3 SCRA 186 [1961] and
Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965],
thus““Moreover, the exemption in favor of property used exclusively for charitable or educational
purposes is ‘not limited to property actually indispensable’ therefor (Cooley on Taxation, Vol. 2, p.
1430), but extends to facilities which are incidental to and reasonably necessary for the
accomplishment of said purposes, such as in the case of hospitals, ‘a school for training nurses, a
nurses’ home, property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational facilities for student
nurses, interns, and residents’ (84 CJS 6621), such as ‘athletic fields’ including ‘a firm used for the
inmates of the institution.’ ”
- It must be stressed however, that while this Court allows a more liberal and non-restrictive
interpretation of the phrase “exclusively used for educational purposes” as provided for in Article
VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always
been made that exemption extends to facilities which are incidental to and reasonably necessary
for the accomplishment of the main purposes. Otherwise stated, the use of the school building or
lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the
use of the second floor of the main building in the case at bar for residential purposes of the
Director and his family, may find justification under the concept of incidental use, which is
complimentary to the main or primary purpose—educational, the lease of the first floor thereof to
the Northern Marketing Corporation cannot by any stretch of the imagination be considered
incidental to the purposes of education.
- Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school
building as well as the lot where it is built, should be taxed, not because the second floor of the
same is being used by the Director and his family for residential purposes, but because the first
floor thereof is being used for commercial purposes. However, since only a portion is used for
purposes of commerce, it is only fair that half of the assessed tax be returned to the school
involved.
III. Power of Taxation as Distinguished from Police Power and Eminent Domain
Cases:
1. Gerochi vs Dept. of Energy1
- Congress enacted RA 9136 or the Electric Power Industry Act of 2001. Gerochi et al assail the
validity of Section 34 of the EPIRA Law for being an undue delegation of the power of taxation.
Section 34 provides for the imposition of a “Universal Charge” to all electricity end users after a

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period of 1 year after the effectively of the EPIRA Law. The universal charge to be collected would
serve as payment for government debts, missionary electrification, equalization of taxes and
royalties applied to renewable energy and imported energy, environmental charge and for a
charge to account for all forms of cross subsidies for a period not exceeding three years. The
universal charge shall be collected by the ERC on a monthly basis from all end users and will then
be managed by the PSALM Corp. through the creation of a special trust fund
2. Chevron Phils vs BCDA

- 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 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. Thus, in Gerochi v. Department of Energy, the Court stated: The conservative and
pivotal distinction between these two (2) 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.
3. MMDA vs Garin
- We restate here the doctrine in the said decision as it applies to the case at bar: police power, as
an inherent attribute of sovereignty, is the power vested by the Constitution in the legislature to
make, ordain, and establish all manner of wholesome and reasonable laws, statutes and
ordinances, either with penalties or without, not repugnant to the Constitution, as they shall judge
to be for the good and welfare of the commonwealth, and for the subjects of the same. Having
been lodged primarily in the National Legislature, it cannot be exercised by any group or body of
individuals not possessing legislative power. The National Legislature, however, may delegate this
power to the president and administrative boards as well as the lawmaking bodies of municipal
corporations or local government units (LGUs). Once delegated, the agents can exercise only such
legislative powers as are conferred on them by the national lawmaking body.
4. Carlos Superdrug vs DSWD

- Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse
petitioners for the discount privilege accorded to senior citizens. This is because the discount is
treated as a deduction, a tax-deductible expense that is subtracted from the gross income and
results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to
reduce the income prior to the application of the tax rate to compute the amount of tax which is
due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but
merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as
a deduction reduces the net income of the private establishments concerned. The discounts given
would have entered the coffers and formed part of the gross sales of the private establishments,
were it not for R.A. No. 9257.
- The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit. This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just compensation. Just compensation is
defined as the full and fair equivalent of the property taken from its owner by the expropriator.
The measure is not the taker’s gain but the owner’s loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the equivalent to be rendered for
the property to be taken shall be real, substantial, full and ample. A tax deduction does not offer

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full reimbursement of the senior citizen discount. As such, it would not meet the definition of just
compensation.
- This raises the question of whether the State, in promoting the health and welfare of a special
group of citizens, can impose upon private establishments the burden of partly subsidizing a
government program. The Court believes so. The Senior Citizens Act was enacted primarily to
maximize the contribution of senior citizens to nation-building, and to grant benefits and
privileges to them for their improvement and well-being as the State considers them an integral
part of our society.
- The law is a legitimate exercise of police power which, similar to the power of eminent domain,
has general welfare for its object. Police power is not capable of an exact definition, but has been
purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and
provide enough room for an efficient and flexible response to conditions and circumstances, thus
assuring the greatest benefits. Accordingly, it has been described as “the most essential, insistent
and the least limitable of powers, extending as it does to all the great public needs.” It is “[t]he
power vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be for the good and welfare of the
commonwealth, and of the subjects of the same.” For this reason, when the conditions so demand
as determined by the legislature, property rights must bow to the primacy of police power because
property rights, though sheltered by due process, must yield to general welfare. Police power as
an attribute to promote the common good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of
the provision in question, there is no basis for its nullification in view of the presumption of
validity which every law has in its favor.
- It is unfair for petitioners to criticize the law because they cannot raise the prices of their
medicines given the cutthroat nature of the players in the industry. It is a business decision on the
part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as
alleged by petitioners, is merely a result of this decision. Inasmuch as pricing is a property right,
petitioners cannot reproach the law for being oppressive, simply because they cannot afford to
raise their prices for fear of losing their customers to competition.
- The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects property rights, petitioners
must accept the realities of business and the State, in the exercise of police power, can intervene
in the operations of a business which may result in an impairment of property rights in the
process. Moreover, the right to property has a social dimension. While Article XIII of the
Constitution provides the precept for the protection of property, various laws and jurisprudence,
particularly on agrarian reform and the regulation of contracts and public utilities, continuously
serve as a reminder that the right to property can be relinquished upon the command of the State
for the promotion of public good.
IV. Basis of Taxation
Cases:
1. Angeles City vs Angeles Electric Corp.
- A principle deeply embedded in our jurisprudence is that taxes being the lifeblood of the
government should be collected promptly, without unnecessary hindrance or delay. In line with
this principle, the National Internal Revenue Code of 1997 (NIRC) expressly provides that no
court shall have the authority to grant an injunction to restrain the collection of any national
internal revenue tax, fee or charge imposed by the code. An exception to this rule obtains only
when in the opinion of the Court of Tax Appeals (CTA) the collection thereof may jeopardize the
interest of the government and/or the taxpayer.

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- The situation, however, is different in the case of the collection of local taxes as there is no express
provision in the LGC prohibiting courts from issuing an injunction to restrain local governments
from collecting taxes. Thus, we ruled that: Unlike the National Internal Revenue Code, the Local
Tax Code does not contain any specific provision prohibiting courts from enjoining the collection
of local taxes. Such statutory lapse or intent, however it may be viewed, may have allowed
preliminary injunction where local taxes are involved but cannot negate the procedural rules and
requirements under Rule 58.
- Two requisites must exist to warrant the issuance of a writ of preliminary injunction, namely: (1)
the existence of a clear and unmistakable right that must be protected; and (2) an urgent and
paramount necessity for the writ to prevent serious damage.
- As a rule, the issuance of a preliminary injunction rests entirely within the discretion of the court
taking cognizance of the case and will not be interfered with, except where there is grave abuse of
discretion committed by the court. For grave abuse of discretion to prosper as a ground for
certiorari, it must be demonstrated that the lower court or tribunal has exercised its power in an
arbitrary and despotic manner, by reason of passion or personal hostility, and it must be patent
and gross as would amount to an evasion or to a unilateral refusal to perform the duty enjoined or
to act in contemplation of law. In other words, mere abuse of discretion is not enough.
2. Gerochi vs Dept of Energy

- The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its
very nature no limits, so that security against its abuse is to be found only in the responsibility of
the legislature which imposes the tax on the constituency that is to pay it. It is based on the
principle that taxes are the lifeblood of the government, and their prompt and certain availability
is an imperious need. Thus, the theory behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare
and well-being of the people. On the other hand, police power is the power of the state to promote
public welfare by restraining and regulating the use of liberty and property. It is the most
pervasive, the least limitable, and the most demanding of the three fundamental powers of the
State. The justification is found in the Latin maxims salus populi est suprema lex (the welfare of
the people is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as
not to injure the property of others). As an inherent attribute of sovereignty which virtually
extends to all public needs, police power grants a wide panoply of instruments through which the
State, as parens patriae, gives effect to a host of its regulatory powers. We have held that the
power to “regulate” means the power to protect, foster, promote, preserve, and control, with due
regard for the interests, first and foremost, of the public, then of the utility and of its patrons.
- 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. In exacting the assailed Universal Charge
through Sec. 34 of the EPIRA, the State’s police power, particularly its regulatory dimension, is
invoked. Such can be deduced from Sec. 34 which enumerates the purposes for which the
Universal Charge is imposed and which can be amply discerned as regulatory in character.
- It is a well-established doctrine that the taxing power may be used as an implement of police
power. In Valmonte v. Energy Regulatory Board, et al., 162 SCRA 521 (1988), and in Gaston v.
Republic Planters Bank, 158 SCRA 626 (1988), this Court held that the Oil Price Stabilization
Fund (OPSF) and the Sugar Stabilization Fund (SSF) were exactions made in the exercise of the
police power. The doctrine was reiterated in Osmeña v. Orbos, 220 SCRA 703 (1993), with respect
to the OPSF. Thus, we disagree with petitioners that the instant case is different from the
aforementioned cases. With the Universal Charge, a Special Trust Fund (STF) is also created
under the administration of PSALM.
- In the face of the increasing complexity of modern life, delegation of legislative power to various
specialized administrative agencies is allowed as an exception to this principle. Given the volume

dadlapulapu 15
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and variety of interactions in today’s society, it is doubtful if the legislature can promulgate laws
that will deal adequately with and respond promptly to the minutiae of everyday life. Hence, the
need to delegate to administrative bodies—the principal agencies tasked to execute laws in their
specialized fields—the authority to promulgate rules and regulations to implement a given statute
and effectuate its policies. All that is required for the valid exercise of this power of subordinate
legislation is that the regulation be germane to the objects and purposes of the law and that the
regulation be not in contradiction to, but in conformity with, the standards prescribed by the law.
These requirements are denominated as the completeness test and the sufficient standard test.
Under the first test, the law must be complete in all its terms and conditions when it leaves the
legislature such that when it reaches the delegate, the only thing he will have to do is to enforce it.
The second test mandates adequate guidelines or limitations in the law to determine the
boundaries of the delegate’s authority and prevent the delegation from running riot. The Court
finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is
complete in all its essential terms and conditions, and that it contains sufficient standards.
3. CIR vs Algue
- Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
- It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment"
and "renders hopeless a request for reconsideration," being "tantamount to an outright denial
thereof and makes the said request deemed rejected." But there is a special circumstance in the
case at bar that prevents application of this accepted doctrine. The proven fact is that four days
after the private respondent received the petitioner's notice of assessment, it filed its letter of
protest. This was apparently not taken into account before the warrant of distraint and levy was
issued; indeed, such protest could not be located in the office of the petitioner. It was only after
Atty. Guevara gave the BIR acopy of the protest that it was, if at all, considered by the tax
authorities. During the intervening period, the warrant was premature and could therefore not be
served.
- As the Court of Tax Appeals correctly noted, the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on April 7,
1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.
- We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not
made in one lump sum but periodically and in different amounts as each payee's need arose. It
should be remembered that this was a family corporation where strict business procedures were
not applied and immediate issuance of receipts was not required. Even so, at the end of the year,
when the books were to be closed, each payee made an accounting of all of the fees received by
him or her, to make up the total of P75,000.00. Admittedly, everything seemed to be informal.
This arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.
- We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P1 25,000.00. After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the payees who did

dadlapulapu 16
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practically everything, from the formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties.
- The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and
prominent businessmen to venture in an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
- It is said that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard-earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government, for
its part, is expected to respond in the form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material values, This symbiotic relationship is
the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
V. Principles of Sound Tax System
a. Fiscal Adequacy
- The sources of revenue should be adequate to meet government expenditures and their variations.
Case: Chavez vs Ongpin

- We agree with the observation of the Office of the Solicitor General that without Executive Order
No. 73, the basis for collection of real property taxes will still be the 1978 revision of property
values. Certainly, to continue collecting real property taxes based on valuations arrived at several
years ago, in disregard of the increases in the value of real properties that have occurred since
then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the
characteristics of a sound tax system, requires that sources of revenues must be adequate to meet
government expenditures and their variations.
b. Administrative Feasibility
- The tax system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer.
- for (a) and (b):

however, even if the imposition is burdensome to the taxpayer, the tax imposition is not
necessarily invalid unless some aspect of it is shown to violate any law or the Constitution
c. Theoretical Justice
- The tax system should be fair to the average taxpayer and based upon the ability to pay.
VI. Tax as Distinguished from Other Exactions:

- It is important to differentiate taxes from other exactions, especially when it comes to problems
and issues on double taxation, tax exemptions, and the jurisdiction of the Court of Tax Appeals.
Simply, if an exaction is not a tax, then the defence of a taxpayer, of double taxation will
necessarily fail. In the same manner, a tax-exempt individual or corporation is generally only
exempt from paying taxes; hence, if the exaction is not a tax, then the individual or corporation
must still pay the exaction.
a. License Fees/ Regulatory Fees

dadlapulapu 17
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- If generating revenue is the primary purpose and regulation is merely incidental, then it is TAX;
but if regulation is the primary purpose and the fact that revenue is merely incidentally obtained,
it is not tax.
- The power of taxation can be used as an implement of police power, however, if the purpose is
primarily revenue, or if revenue is at least one of the real and substantial purposes, then the
exaction is properly called a TAX.
- To be considered a license fee, the imposition must relate to an occupation or activity that
engages the public interest in health, morals, safety and development as to require regulation for
the protection and promotion of such public interest.
- The imposition must also bear a reasonable relation to the probable expenses of regulation, taking
into account not only the costs of direct regulation but also its incidental consequences as well.
TAX LICENSE FEE
Source Taxing power Police Power of the State
Purpose For raising revenue For regulation
Object Persons, property & Right to exercise a privilege

privilege
As to the No limit Only necessary to carry out regulation

amount
Cases:
1 Ferrer vs City Mayor Bautista
- For a writ of certiorari to issue, the following requisites must concur: (1) it must be directed
against a tribunal, board, or officer exercising judicial or quasi-judicial functions; (2) the tribunal,
board, or officer must have acted without or in excess of jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction; and (3) there is no appeal or any plain,
speedy, and adequate remedy in the ordinary course of law. The enactment by the Quezon City
Council of the assailed ordinances was done in the exercise of its legislative, not judicial or
quasi-judicial, function. Under Republic Act (R.A.) No. 7160, or the Local Government Code of
1991 (LGC), local legislative power shall be exercised by the Sangguniang Panlungsod for the city.
Said law likewise is specific in providing that the power to impose a tax, fee, or charge, or to
generate revenue shall be exercised by the sanggunian of the local government unit concerned
through an appropriate ordinance.
2. Victoria Milling vs Municipality of Victorias

- Under the provisions of Section 1 of Commonwealth Act 472 and pertinent jurisprudence, a
municipality is authorized to impose three kinds of licenses: (1) license for regulation of useful
occupations or enterprises; (2) license for restriction or regulation of non-usef ul occupations or
enterprises; and (3) license for revenue. The first two easily fall within the broad police power
granted under the general welfare clause (Sec, 2238, Rev. Adm. Code). The third class, however, is
for revenue purposes. It is not a license fee, properly speaking, and yet it is generally so termed. It
rests on the taxing power. That taxing power must be expressly conferred by statute upon the
municipality.
3. City of Iloilo vs Villanueva

- If the fee is designed to raise substantially more than the cost of the regulation to which. it
purports to be an incident, its purpose is to raise revenue. If it is a fee attached to a particular

dadlapulapu 18
SY 2019- 2020
provision for regulation, and appears to be imposed to cover the cost of that regulation, and does
substantially only that, then it is merely for the cost-paying part of a regulatory measure. A license
fee, in order to be considered merely as a regulatory measure, must be only of a sufficient amount
to include the expenses of issuing the license and the cost of the necessary inspection or police
surveillance, taking into account not only the expense of direct regulation but also incidental
consequences.
4. PDC vs Quezon City

- To be considered a license fee, the imposition questioned must relate to an occupation or activity
that so engages the public interest in health, morals, safety and development as to require
regulation for the protection and promotion of such public interest; the imposition must also bear
a reasonable relation to the probable expenses of regulation, taking into account not only the cost
of direct regulation but also its incidental consequences as well. When an activity, occupation or
profession is of such a character that inspection or supervision by public officials is reasonably
necessary for the safeguarding and furtherance of public health, morals and safety, or the general
welfare, the legislature may provide that such inspection or supervision or other form of
regulation shall be carried out at the expense of the persons engaged in such occupation or
performing such activity, and that no one shall engage in the occupation or carry out the activity
until a fee or charge sufficient to cover the cost of the inspection or supervision has been paid.
Accordingly, 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.
5. Angeles University Foundation vs City of Angeles

- That a building permit fee is a regulatory imposition is highlighted by the fact that in processing
an application for a building permit, the Building Official shall see to it that the applicant satisfies
and conforms with approved standard requirements on zoning and land use, lines and grades,
structural design, sanitary and sewerage, environmental health, electrical and mechanical safety
as well as with other rules and regulations implementing the National Building Code. 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. And as can be
gleaned from the implementing rules and regulations of the National Building Code, clearances
from various government authorities exercising and enforcing regulatory functions affecting
buildings/structures, like local government units, may be further required before a building
permit may be issued.
b. Special Assessment
- Under the LGC, local government units may impose a special levy on lands specially benefited by
public works projects or improvements funded by the LGU.
- The purpose of special levies/ assessments is to finance the improvement of particular properties,
with the benefits of the improvement accruing or inuring to the owners thereof who, after all, pay
the assessment.
TAX SPECIAL ASSESSMENT
Imposed on Persons, properties, etc Only on land
Why imposed Regardless of public Public improvement

improvement benefits the land and
increases its value
purpose Support of government Contribution to cost of

dadlapulapu 19
SY 2019- 2020
public improvement
When Regular exaction Exceptional as to time and

imposed locality
basis necessity Benefits obtained
c. Toll Fees
- Fees paid by the public to toll way operators for the use of toll ways are not taxes. These are
exactions which end up as earnings of toll way operators, not the government.
TAX TOLL FEES
Imposed by State Private persons
Purpose Raise revenues Reimbursement of costs and expenses

incurred in the construction of toll
ways, and to assure reasonable
margin of income
Basis State’s sovereign power Attribute of ownership
Case: Diaz vs Sec of Finance

- Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators render.
Essentially, tollway operators construct, maintain, and operate expressways, also called tollways,
at the operators’ expense. Tollways serve as alternatives to regular public highways that meander
through populated areas and branch out to local roads. Traffic in the regular public highways is
for this reason slow-moving. In consideration for constructing tollways at their expense, the
operators are allowed to collect government-approved fees from motorists using the tollways until
such operators could fully recover their expenses and earn reasonable returns from their
investments. When a tollway operator takes a toll fee from a motorist, the fee is in effect for the
latter’s use of the tollway facilities over which the operator enjoys private proprietary rights that
its contract and the law recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use their properties or facilities
for a fee: 1. Lessors of property, whether personal or real; 2. Warehousing service operators; 3.
Lessors or distributors of cinematographic films; 4. Proprietors, operators or keepers of hotels,
motels, resthouses, pension houses, inns, resorts; 5. Lending investors (for use of money); 6.
Transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative to their
transport of goods or cargoes; and 7. Common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another place in the Philippines.
d. Penalty
e. Debt
Cases:
1. CIR vs Palanca

dadlapulapu 20
SY 2019- 2020
- In Commissioner of Internal Revenue vs. Prieto, L-13912, September 30, 1960, it was held that,
while the distinction between "taxes" and "debts" was recognized in this jurisdiction, the variance
in their legal concept does not extend to the interests paid on them, at least insofar as Section
30(b)(1) of the Tax Code is concerned. The rule in the Prieto case, that the interest on the donor's
tax is deductible, is applicable to interest paid on the estate and inheritance taxes. The rationale of
this Court's previous determination, that interests on taxes should be considered as interests of
indebtedness within the meaning of Section 30(b) (1) of the Tax Code, applies to the said taxes.
Although taxes already due are not the same as debts, they are, however, obligations that may be
considered as such.
2. Francia vs IAC
- This principal contention of the petitioner has no merit. We have consistently ruled that 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. In the case of Republic v. Mambulao Lumber Co. (4
SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or
compensation. We stated that: “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. x x x (80
C.J.S., 73-74). ‘The general rule based on grounds of public policy is well-settled that 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 duty to, and are the positive acts of the government to the
making and enforcing of which, the personal consent of individual taxpayer is not required. x x x’”
3. Domingo vs Garlitos
- The ordinary procedure by which to settle claims or indebtedness against the estate of a deceased
person, as an inheritance tax, is for the claimant to present a claim before the probate court sa
that said court may order the administrator to pay the amount hereof. The legal basis for such a
procedure is the fact that in the testate or intestate proceedings to settle the estate of a deceased
person, the properties belonging to the estate are under the jurisdiction of the court and such
jurisdiction continues until said properties havebeen distributed among the heirs entitled thereto.
During the pendency of the proceedings all the estate is in custodia Iegis and the proper
procedure is not to allow the sheriff. in case of a court judgment, to seize the properties but to ask
the court for an order to require the administrator to pay the amount due from the estate and
required to be paid.

dadlapulapu 21

Jose Maria College-College of Law SY 2019 - 2020: LAW ON TAXATION I (Atty. Dante A. Maranan, CPA)

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Jose Maria College- College of Law

LAW ON TAXATION I (Atty. Dante A. Maranan, CPA)

GENERAL PRINCIPLES OF TAXATION

Basic Concepts of Taxation

Impact and Incidence of Taxation (Direct and Indirect Taxes)

Objects for Taxation

I. Nature and Characteristics of Taxation

2. Taxation is a legislative power in itself;

2. ​PILMICO- MAURI Foods vs CIR

3​. Davao Gulf Lumber vs CIR

II. Limitations of the Power to Tax

Implication of “Power to Tax is Not the Power to Destroy”:

(1) The courts may strike down an invalid tax law;

(2) The power to tax is still subject to limitations;

General Rule: the power to tax cannot be delegated

- It is DELEGATED and a DIRECT GRANT

b. Delegation to the President (Art. 6, Sec 28, Consti)

- Limited to tariffs and customs duties. This is related to importation or exportation.

a. There must be a law promulgated by Congress authorizing the President to do

c. Delegation to the Administrative Agencies

- Also known as “Subordinate Legislation”

- Tests for Valid Delegation: a. Completeness Test

b. Sufficient Standards Test

d. Delegation to the People at Large

- through Initiative and Referendum

e. Emergency powers of the President

Scope the legislative power of the Congress in the taxation:

3. Manila Race Horses Trainers Association vs dela Fuente

4. Ormoc Sugar vs Treasurer of Ormoc

5. La Insular vs Machuca Go- Tauco

6. Cagayan Electric Power vs CIR

7. American Bible Society vs City of Manila

9. Herrera vs QC Board of Assessment Appeals

10. CIR vs De La Salle University

- While a non-stock, nonprofit educational institution is classified as a tax-exempt entity under

11. CIR vs St. Luke’s Medical Center

12. Abra Valley College vs Aquino

2. Chevron Phils vs BCDA

4. Carlos Superdrug vs DSWD

IV. Basis of Taxation

2. Gerochi vs Dept of Energy

V. Principles of Sound Tax System

Case: Chavez vs Ongpin

- for (a) and (b):

VI. Tax as Distinguished from Other Exactions:

a. License Fees/ Regulatory Fees

TAX LICENSE FEE

Source Taxing power Police Power of the State

Purpose For raising revenue For regulation

Object Persons, property & Right to exercise a privilege

As to the No limit Only necessary to carry out regulation

2. Victoria Milling vs Municipality of Victorias

3. City of Iloilo vs Villanueva

4. PDC vs Quezon City

5. Angeles University Foundation vs City of Angeles

TAX SPECIAL ASSESSMENT

Imposed on Persons, properties, etc Only on land

Why imposed Regardless of public Public improvement

purpose Support of government Contribution to cost of

When Regular exaction Exceptional as to time and

basis necessity Benefits obtained

TAX TOLL FEES

Imposed by State Private persons

2. PILMICO- MAURI Foods vs CIR

3. Davao Gulf Lumber vs CIR