General Principles of Taxation
such as rest in the discretion of the authority
which exercises it. (Tio v. Videogram Regulatory
Board, G.R. No. L-75697, 18 June 1987)
II. GENERAL PRINCIPLES OF TAXATION
3.
Plenary – as it is complete. Under the National
Internal Revenue Code (NIRC), the Bureau of
Internal Revenue (BIR) may avail of certain
remedies to ensure the collection of taxes.
4.
Supreme – insofar as the selection of the subject
of taxation is concerned. It cannot be
interpreted to mean that it is superior to the
other inherent powers of the government.
(Dimaampao, 2021)
A. DEFINITION, CHARACTERISTICS AND
PURPOSE OF TAXATION
DEFINITION
Taxation is the power by which the sovereign,
through its law-making body, raises revenue to
defray the necessary expenses of government. It is
merely a way of apportioning the costs of
government among those who, in some measure,
are privileged to enjoy its benefits and must bear its
burdens. (Aban, 2001)
Characteristics of Tax (P2-E-R-L4)
1.
It is a mode by which governments make exactions
for revenue in order to support their existence and
carry out their legitimate objectives. Taxation may
refer to either or both the power to tax or the act or
process by which the taxing power is exercised.
(Vitug, 2006)
Under Sec. 28 (1), Art. VI of the 1987
Constitution, the rule of taxation shall be
uniform and equitable. The Congress shall
evolve a progressive system of taxation.
2.
Generally Payable in money – unless the law
prescribes another form or kind of payment
(i.e., backpay certificates under Sec. 2, R.A. No.
304, as amended) Moreover, a tax is a pecuniary
burden. (Ingles, 2021)
3.
Enforced contribution – taxes are obligations
created by law (Vera v. Fernandez, G.R. No. L31364, 30 Mar. 1979)
4.
Paid at Regular periods or intervals
5.
Levied on persons, property or exercise of a
right or privilege
6.
Levied by the State having jurisdiction over the
subject to be taxed
7.
Levied by the legislature – such power is
exclusively vested in the legislature except
where the 1987 Constitution provides
otherwise.
NOTE: The elements of taxation are: (E-G-S)
1.
2.
3.
Proportionate in character – taxes are based on
one’s ability to pay.
It is an Enforced proportional contribution
from persons and properties;
It is levied for the support of the Government;
and
It is imposed by the State by virtue of its
Sovereignty. (PCGG v. Cojuangco, G.R. No.
147062-64, 14 Dec. 2001)
CHARACTERISTICS OF TAXATION
Characteristics of Taxation (C-U-P-S)
1.
2.
Comprehensive – as it covers persons,
businesses, activities, professions, rights and
privileges.
Unlimited – the power to impose taxes is one so
unlimited in force and so searching in extent,
that courts scarcely venture to declare that it is
subject to any restrictions whatever, except
27
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
threatened industry which is affected with
public interest, like the oil industry. (Caltex
Philippines, Inc. v. COA, G.R. No. 92585, 08
May 1992)
Under Sec. 28 (2), Art. VI of the 1987 Constitution, the
Congress may, by law, authorize the President to fix
within specified limits, and subject to such
limitations and restrictions as it may impose tariff
rates, import and export quotas, tonnage and
wharfage dues, and other duties and imposts within
the framework of the national development
program of the Government.
Taxation also has a regulatory purpose as
in the case of taxes levied on excises or
privileges like those imposed on tobacco
and alcoholic products, or amusement
places like night clubs, cabarets, cockpits,
among others. (Aban, 2001)
Likewise, Sec. 5, Art. X of the 1987 Constitution
provides that each local government unit shall have
the power to create its own resources 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 governments.
8.
NOTE: The power of taxation is sometimes
called the power to destroy. Therefore, it
should be exercised with caution to
minimize injury to the proprietary rights of
a taxpayer. (Philippine Health Care
Providers, Inc. v. CIR, G.R. No. 167330, 18
Sept. 2009)
Levied for a public purpose – taxes are exacted
only for a public purpose. They cannot be used
for purely private purposes or for the exclusive
benefit of private persons. It is the purpose
which determines the public character of the
tax law, not the number of persons benefited.
(Dimaampao, 2021)
NOTE: In the case of Lutz v. Araneta, G.R. No.
L-7859, 22 Dec. 1955, the Supreme Court
upheld the validity of the Sugar Adjustment
Act, which imposed a tax on milled sugar
since the purpose of the law was to
strengthen an industry that is so
undeniably vital to the economy – the sugar
industry. (Aban, 2001)
PURPOSE
1. Primary or revenue purpose – to raise funds or
property to enable the State to promote the
general welfare and protection of the people.
c.
Reduction of social inequality – a
progressive system of taxation prevents
the undue concentration of wealth in the
hands of few individuals. Progressivity is
based on the principle that those who are
able to pay more should shoulder the
bigger portion of the tax burden.
d.
Encourage economic growth – the grant of
incentives or exemptions encourage
investment in our local industries and
thereby promoting economic growth.
e.
Protectionism – tariffs and customs duties
are imposed upon imported goods and
articles to further protect important
sectors of the economy or local industries.
2. Secondary or non-revenue purposes
(P-R2-E-P)
a.
b.
Promotion of general welfare – taxation
may be used as an implement of police
power to promote the general welfare of
the people. 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.
(Planters Products, Inc. v. Fertiphil
Corporation, G.R. No. 166066, 14 Mar. 2008)
Regulation of activities/industries – Taxes
may also be imposed for a regulatory
purpose as, for instance, in the
rehabilitation and stabilization of a
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: To tax is two-fold. It is both inherent and
legislative in nature.
28
General Principles of Taxation
B. POWER OF TAXATION AS DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN
TAXATION
POLICE POWER
EMINENT DOMAIN
As to Authority Who Exercises the Power
Government
subdivision
or
its
political
Government
subdivision
or
its
political
Government or public service
companies and public utilities
welfare
To facilitate the taking of private
property for public purpose.
As to Purpose
To raise revenue in support of the
Government; regulation is merely
incidental.
To promote general
through regulations.
As to Persons Affected
Upon the community or class of
individuals.
Upon the community or class of
individuals.
On an individual as the owner of a
particular property.
As to Amount of Monetary Imposition
No ceiling
limitations.
except
inherent
Limited to the cost of regulation,
issuance of license, or surveillance.
No imposition; the owner is paid
just
compensation
for
his
property.
As to Benefits Received
NO DIRECT BENEFIT
Protection of a secured organized
society, benefits received from the
government.
NO DIRECT BENEFIT
Maintenance of healthy economic
standard of society, intangible
altruistic feeling that he has
contributed to the general welfare.
DIRECT BENEFIT
The
person
receives
compensation.
just
As to Non-Impairment of Contracts
Tax laws generally do not impair
contracts unless the government is
party to a contract granting
exemption for a consideration.
Contracts may be impaired.
Contracts may be impaired.
As to Transfer of Property Rights
Taxes paid become part of public
funds.
No transfer but only restraint on
its exercise.
Expropriated private property
becomes property of the State.
As to Scope
All persons, property and excises.
All persons, property and excises.
29
Private property upon payment of
just compensation.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
G.R No. 159796, 17 July 2007)
Q: Ordinance No. SP-2095 of the Quezon City
government imposes a Socialized Housing Tax
(SHT) equivalent to 0.5% on the assessed value
of land in excess of Php100,000. The SHT will be
used as one of the sources of funds for urban
development and housing program. Can Quezon
City impose such tax?
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., v. Municipality of Malvar,
Batangas, G.R. No. 204429, 18 Feb. 2014)
A: YES. Cities are allowed to exercise such powers
and discharge such functions and responsibilities as
are necessary, appropriate, or incidental to efficient
and effective provision of the basic services and
facilities which include, among others, programs
and projects for low-cost housing and other mass
dwellings. The collections made accrue to its
socialized housing programs and projects. The tax is
not a pure exercise of taxing power or merely to
raise revenue; it is levied with a regulatory purpose.
The levy is primarily in the exercise of the police
power for the general welfare of the entire city.
(Ferrer, Jr. vs. Bautista, G.R. No. 210551, 30 June
2015)
Q: Revenue laws R.A. 6260 and P.D. 276 were
enacted to establish the Coconut Investment
Fund and Coconut Consumers Stabilization
Fund (coco-levy funds). These funds shall be
owned by the coconut farmers in their private
capacities under the Coconut Industry Code.
In 2000, E.O. 313 was issued creating the
Coconut Trust Fund and designating the UCPB as
the trustee bank. This aimed to provide financial
assistance to the coconut farmers, to the coconut
industry, and to other agriculture-related
programs. UCPB suggested that the coco-levy
funds are closely similar to the SSS funds, which
have been declared not to be public funds but
properties of the SSS members and held merely
in trust by the government. Are the coco-levy
funds in the nature of taxes and thus, can only be
used for public purpose?
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: 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.
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
revenue is incidentally raised does not make the
imposition a tax. (Gerochi v. Department of Energy,
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Unlike ordinary revenue laws, R.A. No. 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
30
General Principles of Taxation
honoring the 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. (Manila Memorial Park v.
DSWD, G.R. No. 175356, 03 Dec. 2013)
are not taxes and not for public 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 Manggagawa sa Niyugan v. Executive
Secretary, G.R. Nos. 147036-37, 10 Apr. 2012)
Q: R.A. 9257 took effect, amending R.A. 7432,
which provides that the 20% senior citizen
discount may be claimed as a tax deduction from
gross income, gross sales, or gross receipts.
Petitioners challenge its constitutionality and
pray that the tax credit treatment of the 20%
discount be reinstated. They 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
compensation is warranted. But if it is eminent
domain, the tax deduction scheme is
unconstitutional because it is not a peso for peso
reimbursement of the 20% discount given to
senior citizens. Thus, it constitutes taking of
private property without payment of just
compensation. Is the tax deduction scheme an
exercise of police power or the power of
eminent domain?
C. SCOPE AND LIMITATIONS OF TAXATION
1. INHERENT AND CONSTITUTIONAL
LIMITATIONS OF TAXATION
Inherent Limitations: (P-I-T-I-E)
1.
2.
3.
4.
5.
Public Purpose;
Inherently Legislative;
Territorial;
International Comity; and
Exemption of government entities, agencies
and instrumentalities.
Constitutional Limitations
A: POLICE POWER. The 20% discount given to
senior citizens 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 provide
for a peso for peso reimbursement of the 20%
discount given by private establishments, no
constitutional infirmity obtains because, being a
valid exercise of police power, payment of just
compensation is not warranted.
1. Provisions directly affecting taxation
The 20% discount is intended to improve the
welfare of senior citizens who, at their age, are less
likely to be gainfully employed, more prone to
illnesses and other disabilities, and thus, in need of
subsidy in purchasing basic commodities. The
discount serves to honor senior citizens who
presumably spent the productive years of their lives
on contributing to the development and progress of
the nation. This distinct cultural Filipino practice of
31
a.
Prohibition against imprisonment for
non-payment of poll tax (Sec. 20, Art. III,
1987 Constitution)
b.
Uniformity and equality of taxation (Sec.
28(1), Art. VI, 1987 Constitution)
c.
Grant by Congress of authority to the
President to impose tariff rates (Sec.
28(2), Art. VI, 1987 Constitution)
d.
Prohibition against taxation of religious,
charitable entities, and educational
entities (Sec. 28(3), Art. VI, 1987
Constitution)
e.
Prohibition against taxation of non-stock,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
non-profit educational institutions (Sec.
4(3), Art. XIV, 1987 Constitution)
INHERENT LIMITATIONS
f.
Majority vote of Congress for grant of tax
exemption (Sec. 28(4), Art. VI, 1987
Constitution)
While the power of taxation is inherent to a State,
such power is still subject to limitations. If there
were no limitations imposed on the power, then the
State would be dangerous, rampant in wielding such
power. (Ingles, 2021)
g.
Prohibition on use of tax levied for special
purpose (Sec. 29(3), Art. VI, 1987
Constitution)
PUBLIC PURPOSE
h.
President’s veto power on appropriation,
revenue, tariff bills (Sec. 27 (2), Art. VI,
1987 Constitution)
i.
Non-impairment of jurisdiction of the
Supreme Court (Sec. 30, Art. VI, 1987
Constitution)
j.
Grant of power to the LGUs to create its
own sources of revenue (Sec. 5, Art. X,
1987 Constitution)
k.
Origin of Revenue and Tariff Bills (Sec. 24,
Art. VI, 1987 Constitution)
l.
No appropriation or use of public money
for religious purposes (Sec. 29(2), Art. VI,
1987 Constitution)
Taxes are exacted only for a public purpose. They
cannot be used for purely private purposes or for
the exclusive benefit of private persons. The reason
for this is simple. The power to tax exists for the
general welfare; hence, implicit in its power is the
limitation that it should be used only for a public
purpose. It would be robbery for the State to tax its
citizens and use the funds generated for a private
purpose. (Planters Products, Inc., v. Fertiphil
Corporation, G.R. No. 166006, 14 Mar. 2008)
Tax is Considered for Public Purpose if:
1.
2.
2.
3.
Provisions indirectly affecting taxation
a.
Equal protection (Sec. 1, Art. III, 1987
Constitution)
c.
Religious freedom (Sec. 5, Art. III, 1987
Constitution)
d.
Non-impairment
contracts (Sec.
Constitution)
e.
Determination when Enacted Tax Law is for
Public Purpose
Due process (Sec. 1, Art. III, 1987
Constitution)
b.
of
10,
It is for the welfare of the nation and/or for the
greater portion of the population;
It affects the area as a community rather than as
individuals; and
It is designed to support the services of the
government for some of its recognized objects.
Determination lies in the Congress. However, this
will not prevent the court from questioning the
propriety of such statute on the ground that the law
enacted is not for a public purpose; but once it is
settled that the law is for a public purpose, the court
may no longer inquire into the wisdom, expediency,
or necessity of such tax measure. (Dimaampao,
2021)
obligations of
Art. III, 1987
NOTE: If the tax measure is not for public purpose,
the act amounts to confiscation of property.
Freedom of the press (Sec. 4, Art. III, 1987
Constitution)
Principles Relative to Public Purpose
1.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
32
Inequalities resulting from the singling out
of one particular class for taxation or
General Principles of Taxation
Niyugan v. Executive Secretary, G.R. Nos. 147036-37,
10 Apr. 2012)
exemption infringe no constitutional
limitation because the legislature is free to
select the subjects of taxation.
Q: Lutz assailed the constitutionality of Secs. 2
and 3 of C.A. 567, which provided for an increase
of the existing tax on the manufacture of sugar.
Lutz alleged such tax as unconstitutional and
void for not being levied for a public purpose but
for the aid and support of the sugar industry
exclusively. Is the tax law increasing the existing
tax on the manufacture of sugar valid?
NOTE: The legislature is not required to adopt
a policy of “all or none” for the Congress has the
power to select the object of taxation. (Lutz v.
Araneta, G.R. No. L-7859, 22 Dec. 1955)
2.
As 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 v. Palomar, G.R. No. L-23645, 29 Oct.
1968)
3.
The only benefit to which the taxpayer is
constitutionally entitled is that derived
from his enjoyment of the privileges of
living in an organized society, established
and safeguarded by the devotion of taxes to
public purposes. (Gomez v. Palomar, G.R.
No. L-23645, 29 Oct. 1968)
4.
Public purpose may legally exist even if the
motive which impelled the legislature to
impose the tax was to favor one industry
over another. (Tio v. Videogram Regulatory
Board, G.R. No. 75697, 19 June 1987)
5.
Public purpose is continually expanding.
Areas formerly left to private initiative now
lose their boundaries and may be
undertaken by the government if it is to
meet the increasing social challenges of the
times.
6.
The public purpose of the tax law must exist
at the time of its enactment. (Pascual v.
Secretary of Public Works, G.R. No. L-10405,
29 Dec. 1960)
A: YES. The protection and promotion of the sugar
industry is a matter of public concern. The
legislature may determine within reasonable
bounds what is necessary for its protection and
expedient for its promotion. Legislative discretion
must be allowed full play, subject only to the test of
reasonableness. If objective and methods alike are
constitutionally valid, there is no reason why the
State may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made
to implement the State’s police power. (Lutz v.
Araneta, G.R. No. L-7859, 22 Dec. 1955)
INHERENTLY LEGISLATIVE
Only the legislature has the full discretion as to the
persons, property, occupation or business to be
taxed, provided these are all within the State’s
territorial jurisdiction. It can also fully determine
the amount or rate of tax, the kind of tax to be
imposed and method of collection. (1 Cooley 176184)
GR: The power to tax is exclusively vested in the
legislative body, being inherent in nature. Hence, it
may not be delegated. (Delegata potestas non potest
delegari)
Non-Delegable Legislative Powers
Q: Are subsequent laws, which convert a public
fund to private properties, valid?
1.
2.
A: NO. Taxes could be exacted only for a public
purpose; they cannot be declared private properties
of individuals although such individuals fall within
a distinct group of persons. (Pambansang Koalisyon
ng mga Samahang Magsasaka at Manggagagawa sa
3.
4.
5.
33
Selection of subject to be taxed
Determination of purposes for which
taxes shall be levied
Fixing of the rate/amount of taxation
Situs of tax
Kind of tax
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
3.
Rationale: These powers cannot be delegated
without infringing upon the theory of separation of
powers. (Pepsi-Cola Bottling Company of the Phil. v.
Municipality of Tanauan, G.R. No. L-31156, 27 Feb.
1976)
XPNs:
1.
Delegation to local government – the LGUs have
the power to create their own sources of
revenue and to levy taxes, fees, and charges.
(Sec. 5, Art. X, 1987 Constitution)
NOTE: Technically, this does not amount to a
delegation of the power to tax because the
questions which should be determined by
Congress are already answered by Congress
before the tax law leaves Congress.
NOTE: The constitutional provision does not
change
the
doctrine
that
municipal
corporations do not possess inherent powers of
taxation; what it does is to confer municipal
corporations a general power to levy taxes and
otherwise create sources of revenue. They no
longer have to wait for a statutory grant of these
powers. The power of the legislative authority
relative to the fiscal powers of local
governments has been reduced to the authority
to impose limitations on municipal powers.
Thus, in interpreting statutory provisions on
municipal fiscal powers, doubts will be resolved
in favor of municipal corporations. (Quezon City
v. ABS-CBN Broadcasting Corporation, G.R. No.
162015, 06 Mar. 2006)
2.
Q: The Court promulgated a decision declaring
the phrase “internal revenue” appearing in Sec.
284 of R.A. 7160 (Local Government Code)
unconstitutional and deleted the same. The
Office of the Solicitor-General (OSG), however,
contends that the provisions of the LGC are not
contrary to Sec. 6, Art. X of the Constitution. Is
the OSG’s contention correct?
A: NO. Sec. 6, Art. X of the 1987 Constitution textually
commands the allocation to the LGUs of their just
share in the national taxes. Sec. 6 embodies three
mandates: (1) the LGUs shall have a just share in the
national taxes; (2) the just share shall be
determined by law; and (3) the just share shall be
automatically released to the LGUs.
Delegation to the president – the authority of
the President to fix tariff rates, import or export
quotas, tonnage and wharfage dues or other
duties and imposts. (Sec. 28(2), Art. VI, 1987
Constitution)
Congress has exceeded its constitutional boundary
by limiting to the National Internal Revenue Taxes
the base from which to compute the just share of the
LGUs. Although the power of Congress to make laws
is plenary in nature, congressional lawmaking
remains subject to the limitations stated in the 1987
Constitution. Thus, the phrase “national internal
revenue taxes” engrafted in Sec. 284 is undoubtedly
more restrictive than the term national taxes
written in Sec. 6. (Congressman Mandanas v.
Executive Secretary Ochoa, Jr., G.R. No.
199802/208488, 10 Apr. 2019)
NOTE: When Congress tasks the President or
his/her alter egos to impose safeguard
measures under the delineated conditions, the
President or the alter egos may be properly
deemed as agents of Congress to perform an act
that inherently belongs as a matter of right to
the legislature. It is basic agency law that the
agent may not act beyond the specifically
delegated powers or disregard the restrictions
imposed by the principal. (Southern Cross
Cement Corporation v. Cement Manufacturers
Association of the Phil., G.R. No. 158540, 03 Aug
2005)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Delegation to administrative agencies – when
the delegation relates merely to administrative
implementation that may call for some degree
of discretionary powers under sufficient
standards expressed by law or implied from the
policy and purpose of the act. (Cervantes v.
Auditor General, G.R. No. L-4043, 26 May 1952;
Maceda v. Macaraig, G.R. No. 88291, 08 June
1993)
34
General Principles of Taxation
complex were actually divisible contracts which
each had different stages, with each stage
having different tax implication. (CIR v.
Marubeni, G.R. No. 137377, 18 Dec. 2001)
TERRITORIAL
Taxation may be exercised only within the
territorial jurisdiction of the taxing authority. (61
Am. Jur. 88) Within its territorial jurisdiction, the
taxing authority may determine the “place of
taxation” or “tax situs.” (2013 BAR)
Q: XYZ Air, a 100% foreign-owned airline
company based and registered in Netherlands,
is engaged in the international airline business
and is a member signatory of the International
Air Transport Association. Its commercial
airplanes neither operate within the Philippine
territory nor as its service passengers
embarking
from
Philippine
airports.
Nevertheless, XYZ Air is able to sell its airplane
tickets in the Philippines through ABC Agency,
its general agent in the Philippines. As XYZ Air’s
ticket sales, sold through ABC Agency for the
year 2013, amounted to P5,000,000, the BIR
assessed XYZ Air deficiency income taxes on the
ground that the income from the said sales
constituted income derived from sources within
the Philippines.
GR: The taxing power of a country is limited to
persons and property within and subject to its
jurisdiction.
Rationale:
1. Taxation is an act of sovereignty which
could only be exercised within a
country’s territorial limits.
2.
This is based on the theory that taxes
are paid for the protection and services
provided by the taxing authority which
could not be provided outside the
territorial boundaries of the taxing
State.
Aggrieved, XYZ Air filed a protest, arguing that,
as a non-resident foreign corporation, it should
only be taxed for income derived from sources
within the Philippines. However, since it only
derived income from serviced passengers
outside the Philippine territory, the situs of the
income from its ticket sales should be
considered outside the Philippines. Hence, no
income tax should be imposed on the same.
XPNs:
1. Where tax laws operate outside territorial
jurisdiction (e.g., taxation of resident citizens on
their incomes derived abroad)
2.
Where tax laws do not operate within the
territorial jurisdiction of the State
a. When exempted by treaty obligations; or
b. When exempted by international comity.
Is XYZ Air’s protest meritorious? Explain. (2019
BAR)
Principles Relative to Territorial Jurisdiction
1.
As the State can exercise its power to tax within
its territorial jurisdiction, it can tax sales within
foreign military zones as these military zones
are not considered foreign territory. (Reagan v.
CIR, G.R. No. L-26379, 27 Dec. 1969)
2.
The State can tax a transaction if the substantial
elements of the contract are situated in the
Philippines. (Manila Electric Company v. Yatco,
G.R. No. 45697, 01 Nov. 1939)
3.
Turnkey contracts relating to the installation of
a wharf complex and an ammonia storage
A: NO. Under the law, an international air carrier
with no landing rights in the Philippines is a
resident foreign corporation if its local sales agent
sells and issues tickets in its behalf. An offline
international carrier selling package tickets in the
Philippines through a local general sales agent, is
considered a resident foreign corporation doing
business in the Philippines. As such, it is taxable on
income derived from sources within the Philippines
and not on Gross Philippines Billings subject to any
applicable tax treaty. (Air Canada v. CIR, G.R. No.
169507, 11 Jan. 2016)
35
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
3.
INTERNATIONAL COMITY
It refers to the respect accorded by nations to each
other because they are sovereign equals. Thus, the
property or income of a foreign state may not be the
subject of taxation by another State.
Principles Relative to International Comity
Under international comity, a state must recognize
the generally-accepted tenets of international law,
among which are the principles of sovereign
equality among states and of their freedom from
suit without their consent, that limits that authority
of a government to effectively impose taxes in a
sovereign state and its instrumentalities, as well as
in its property held and activities undertaken in that
capacity. (2009 BAR)
1.
The obligation to comply with a tax treaty must
take precedence over an administrative
issuance. An administrative issuance such as a
Revenue Memorandum Order (RMO) should
not operate to divest entitlement to a relief
granted by a tax treaty. (Ingles, 2021)
2.
However,
tax
exemptions
based
on
international agreements are still subject to the
rule “laws granting exemption are construed
strictly against the taxpayer”. (Sea-Land
Services, Inc. v. Court of Appeals, G.R. No. 122605,
30 Apr. 2001)
3.
An Exchange of Notes is considered an
executive agreement binding on states. Hence,
an Exchange of Notes between the Philippines
and Japan which states that the Philippine
Government will assume taxes initially to be
paid by Japanese firms should be respected.
(Mitsubishi Corporation-Manila Branch v. CIR,
G.R. No. 175772, 05 June 2017)
Note: Tax treaties are entered into to minimize the
harshness of international double taxation. (Ingles,
2021)
Tax treaties are entered into "to reconcile the
national fiscal legislations of the contracting parties
and, in turn, help the taxpayer avoid simultaneous
taxations in two different jurisdictions." [They] are
entered into to minimize, if not eliminate, the
harshness of international juridical double taxation,
which is why they are also known as double tax
treaty or double tax agreements. (Air Canada v.
Commissioner of Internal Revenue, G.R. No. 169507,
11 Jan. 2016)
Q: ABCD Corporation (ABCD) is a domestic
corporation with individual and corporate
shareholders who are residents of the United
States. For the 2nd quarter of 1983, these U.S.based individual and corporate stockholders
received cash dividends from the corporation.
The corresponding withholding tax on dividend
income – 30% for individual and 35% for
corporate non-resident stockholders – was
deducted at source and remitted to the BIR.
International Comity as a Limitation on the
Power to Tax
The Constitution expressly adopted the generally
accepted principles of international law as part of
the law of the land. (Sec. 2, Art. II, 1987 Constitution)
Rationale:
1.
Par in parem non habet imperium. As between
equals, there is no sovereign. (Doctrine of
Sovereign Equality)
2.
The concept that when a foreign sovereign
enters the territorial jurisdiction of another, it
does not subject itself to the jurisdiction of the
other.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The rule of international law that a foreign
government may not be sued without its
consent so that it is useless to impose a tax
which could not be collected.
On May 15, 1984, ABCD filed with the
Commissioner of Internal Revenue a formal
claim for refund, alleging that under the RP-US
Tax Treaty, the deduction withheld at source as
tax on dividends earned was fixed at 25% of said
income. Thus, ABCD asserted that it overpaid
the withholding tax due on the cash dividends
given to its non-resident stockholders in the U.S.
36
General Principles of Taxation
The Commissioner denied the claim.
Principle of Pacta Sunt Servanda in Taxation
On January 17, 1985, ABCD filed a petition with
the Court of Tax Appeals (CTA) reiterating its
demand for refund.
Observance of any treaty obligation binding upon
the government of the Philippines is anchored on
the constitutional provision that the Philippines
“adopts the generally accepted principles of
international law as part of the law of the land. (Sec.
2, Art. II, 1987 Constitution)
Is the contention of ABCD Corporation correct?
Why or why not? (2009 BAR)
A: YES. The provision of a treaty must take
precedence over and above the provisions of the
local taxing statute consonant with the principle of
international comity. Tax treaties are accepted
limitations to the power of taxation. Thus, the CTA
should apply the treaty provision so that the claim
for refund representing the difference between the
amount actually withheld and paid to the BIR and
the amount due and payable under the treaty should
be granted. (Hawaiian-Philippine Company v. CIR,
CTA Case No. 3887, 31 May 1988)
Pacta sunt servanda is a fundamental international
law principle that requires agreeing parties to
comply with their treaty obligations in good faith.
Hence, the application of the provisions of the NIRC
must be subject to the provisions of tax treaties
entered into by the Philippines with foreign
countries. (Air Canada vs. CIR, G.R. No. 169507, 11
Jan. 2016)
Q: In 2011, the Commissioner of the U.S. Internal
Revenue Service (IRS) requested in writing the
Commissioner of Internal Revenue to get the
information from a bank in the Philippines,
regarding the deposits of a U.S. Citizen residing
in the Philippines, who is under examination by
the officials of the US IRS, pursuant to the USPhilippine Tax Treaty and other existing laws.
Should the BIR Commissioner agree to obtain
such information from the bank and provide the
same to the IRS? Explain your answer. (2012
BAR)
GR: The government is exempt from tax.
EXEMPTION FROM TAXATION OF
GOVERNMENT ENTITIES
Rationale: Otherwise, we would be “taking money
from one pocket and putting it in another.” (Board
of Assessment Appeals of Laguna v. CTA, G.R. No. L18125, 31 May 1963)
XPN: When it chooses to tax itself. Nothing prevents
Congress
from
decreeing
that
even
instrumentalities or agencies of the government
performing government functions may be subject to
tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one
can doubt its wisdom. (MCIAA v. Marcos, G.R. No.
120082, 11 Sept. 1996)
A: YES. The Commissioner should agree to the
request pursuant to the principle of international
comity. The Commissioner of the Internal Revenue
has the authority to inquire into bank deposit
accounts and related information held by financial
institutions of a specific taxpayer subject of a
request for the supply of tax information from a
foreign tax authority pursuant to an international
convention or agreement to which the Philippines is
a signatory or party of. (Sec 3, R.A. No. 10021 or
Exchange of Information on Tax Matters Act)
Since sovereignty is absolute and taxation is an act
of high sovereignty, the State, if so minded, could tax
itself, including its political subdivisions. (Maceda v.
Macaraig, G.R. No. 88291, 08 June 1993)
National Government is Exempt from Local
Taxation
If the taxing authority is the LGU, R.A. No. 7160
expressly prohibits LGUs from levying tax on the
National
Government,
its
agencies
and
instrumentalities and other LGUs.
37
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
“SEC. 133. Common Limitations on the Taxing Powers
of Local Government Units. — Unless otherwise
provided herein, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays
shall not extend to the levy of the following: xxx
In MIAA v. CA, G.R. No. 155650, 20 July 2006, MIAA's
Airport Lands and Buildings are exempt from real
estate tax imposed by local governments. Being an
instrumentality of the national government, it is
exempt from local taxation. Also, the real properties
of MIAA are owned by the Republic of the
Philippines and thus exempt from real estate tax.
(o) Taxes, fees or charges of any kind on the
National
Government,
its
agencies
and
instrumentalities and local government units.”
Note:
However,
while
government
instrumentalities are exempt from real property
taxes,
government-owned
or
controlled
corporations are not exempt from real property
taxes. (MIAA v. CA, G.R. No. 155650, 20 July 2006)
Q: PAGCOR is a duly created government
instrumentality by virtue of PD No. 1869. Under
its Charter, no form of tax or charge shall attach
in any way to the earnings of PAGCOR, except a
Franchise Tax of 5% of the gross revenue or
earnings derived from its operation under this
Franchise. Further, such tax shall be in lieu of all
kinds of taxes, levies, fees, or assessments of any
kind. The CIR issued an assessment against
PAGCOR for deficiency income tax, among
others, on the ground that PAGCOR is no longer
exempt from the payment of income taxes
because its income tax exemption has been
effectively withdrawn by the amendments to the
1997 NIRC introduced by RA No. 9337. Is the
contention of CIR correct?
Agency of the Government
It refers to any of the various units of the
government, including a department, bureau, office,
instrumentality,
or
government-owned
or
controlled corporation, or a local government or a
distinct unit therein.
Taxability of Agencies of Government
1.
Performing governmental functions – tax
exempt unless expressly taxed
2.
Performing proprietary functions – subject
to tax unless expressly exempted
A: NO. PAGCOR's income from gaming operations is
subject only to 5% franchise tax under PD No. 1869,
as amended, while its income from other related
services is subject to corporate income tax pursuant
to PD No. 1869, as amended, in relation to RA No.
9337. In PAGCOR v. BIR, the Court En Banc clarified
that RA No. 9337 did not repeal the tax privilege
granted to PAGCOR under PD No. 1869, with respect
to its income from gaming operations. What RA No.
9337 withdrew was PAGCOR's exemption from
corporate income tax on its income derived from
other related services, previously granted under
Section 27 (C) of RA No. 8424. (PAGCOR v. CIR, G.R.
No. 210689-90, 210704 & 210725 22 Nov. 2017, J.
Caguioa)
Instrumentality of the Government
It refers to any agency of national government, not
integrated within the department framework,
vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers,
administering special funds, and enjoying
operational autonomy, usually through charter.
An instrumentality is neither a stock or a non-stock
corporation and it performs governmental or public
functions. (Philippine Fisheries Development
Authority v. CA, G.R. No. 169836, 31 July 2007)
Q: Is PEZA a government instrumentality or a
GOCC? Is it exempt from real property taxation?
Taxability of Instrumentalities of Government
A: PEZA is an instrumentality of the government. It
is not integrated within the department framework
but is an agency attached to the Department of
A government instrumentality falls under Sec.
133(o) of the LGC, which states:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
38
General Principles of Taxation
instrumentality which is deemed exempt.
Trade and Industry. PEZA is also vested with special
functions or jurisdiction by law. Congress created
the PEZA to operate, administer, manage, and
develop special economic zones in the Philippines.
Although a body corporate vested with some
corporate powers, the PEZA is not a GOCC that is
taxable for real property taxes because it was not
organized as a stock or non-stock corporation.
Note: The Light Rail Transit Authority (LRTA) is
also exempt as it is a government instrumentality
vested with corporate powers. (LRTA v. Quezon City,
G.R. No. 221626, 09 Oct. 2019)
Government-Owned
Corporation (GOCC)
Being an instrumentality of the national
government, it cannot be taxed by LGUs. (City of
Lapu-Lapu v. PEZA, G.R. No. 184203, 26 Nov. 2014)
and
-Controlled
It refers to any agency:
Q: Philippine National Railways (PNR) operates
the rail transport of passengers and goods by
providing train stations and freight customer
facilities from Tutuban, Manila to the Bicol
Province. As the operator of the railroad transit,
PNR administers the land, improvements and
equipment within the main station in Tutuban,
Manila.
Invoking Sec. 193 of the LGC expressly
withdrawing the tax exemption privileges of
government-owned
and
controlled
corporations, the City Government of Manila
issued Final Notices in the amount of
P624,000,000 for the taxable years 2006 to
2010. On the other hand, PNR, seeking refuge
under the principle that the government cannot
tax itself, insisted that the PNR lands and
buildings are owned by the Republic.
1.
organized as a stock or non-stock corporation;
2.
vested with functions relating to public needs
whether governmental or proprietary in
nature; and
3.
owned by the Government directly or through
its instrumentalities either wholly, or, where
applicable as in the case of stock corporations,
to the extent of at least fifty-one (51) percent of
its capital stock.
NOTE: Government instrumentality may include a
GOCC and there may be “instrumentality” that does
not qualify as GOCC.
Taxability of GOCCs
GOCCs perform proprietary functions. Hence, they
are subject to taxation.
Is the PNR exempt from real property tax?
Explain your answer. (2016 BAR)
GOCC are taxable entities, and they are not exempt
from BIR assessment and collection, unless their
charter or the law creating them provides
otherwise. (2017 BAR)
A: YES. The properties of PNR are properties of
public dominion owned by the Republic of the
Philippines, which are exempt from real property
tax. (Sec. 234, LGC)
NOTE: Upon enactment of the LGC, any exemption
from real property tax given to all persons, whether
natural or juridical, including all GOCCs, were
withdrawn. (Ingles, 2021)
In MIAA v. CA, G.R. No. 155650, 20 July 2006, the
Supreme Court held that MIAA is a government
instrumentality and is not a government-owned and
controlled corporation, therefore the real
properties owned by MIAA are not subject to real
estate tax, except when MIAA leases its real
property to private entities. In the said case, PNR
was cited as an example of such government
However, certain corporations have been granted
exemption under Sec. 27(c) of R.A. 8424 (Tax Reform
Act of 1997) as amended by R.A. 9337 (Value Added
Tax Reform Law), and further amended by CREATE
Act which took effect on 01 July 2005, to wit:
39
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
1.
2.
3.
4.
5.
(Dimaampao, 2021)
Government Service Insurance System (GSIS);
Social Security System (SSS);
Philippine Health Insurance Corporation
(PhilHealth); and
Local Water Districts (LWDs).
Home Development Mutual Fund
Pursuant to the social justice policy, this prohibition
reflects the tender regard of the law for the millions
of our impoverished masses who cannot afford even
the nominal cost of a poll tax like the basic
community tax certificate. (Cruz, 2015)
NOTE: Philippine Charity Sweepstakes Office
(PCSO) was removed by TRAIN and replaced by
LWDs.
UNIFORMITY AND EQUALITY OF TAXATION
The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of
taxation. (Sec. 28(1), Art. VI, 1987 Constitution)
R.A. No. 9337 deleted Philippine Amusement
and Gaming Corporation (PAGCOR) from the
list of exempt GOCCs. (PAGCOR v. BIR, G.R. No.
215427, 10 Dec. 2014)
Q: Explain the following concepts in taxation:
a. Uniformity,
b. Equitability, and
c. Equality.
CONSTITUTIONAL LIMITATIONS
Taxation, being inherent in sovereignty, need not be
clothed with any constitutional authority for it to be
exercised by the sovereign state. Instead,
constitutional provisions are meant and intended
more to regulate and define, rather than to grant,
the power emanating therefrom.
A:
a. Uniformity – It means that all taxable articles
or kinds of property of the same class shall be
taxed at the same rate.
A tax is considered uniform when it operates
with the same force and effect in every place
where the subject is found. (Churchill v.
Concepcion, G.R. No. 115722, 22 Sept. 1916)
PROVISIONS DIRECTLY
AFFECTING TAXATION
PROHIBITION AGAINST IMPRISONMENT FOR
NON-PAYMENT OF POLL TAX
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. Accordingly, singling out one particular
class for taxation purposes does not infringe the
requirement of uniformity.
BASIS: No person shall be imprisoned for debt or
non-payment of a poll tax. (Sec. 20, Art. III, 1987
Constitution)
A poll tax is one levied on persons who are residents
within the territory of the taxing authority without
regard to their property, business, or occupation.
Thus, only the basic community tax under the LGC
could qualify as a poll tax, and the non-payment of
other (additional) taxes imposed, not being in the
nature of poll taxes, may validly be subjected by law
to imprisonment. (Vitug, 2006)
b. Equitability – Taxation is said to be equitable
when its burden falls on those better able to
pay.
c.
Valid and Reasonable Classification
In other words, while a person may not be
imprisoned for non-payment of a cedula or poll tax,
he may be imprisoned for non-payment of other
kinds of taxes where the law so expressly provides.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Equality – It is accomplished when the burden
of the tax falls equally and impartially upon all
the persons and property subject to it.
Uniformity does not call for perfect uniformity or
perfect equality. Reasonable classifications do not
40
General Principles of Taxation
Constitution. While singling out a class for taxation
purposes will not infringe upon this constitutional
limitation (Shell v. Vano, G.R. No. L-6093, 24 Feb.
1954), singling out a taxpayer from a class will no
doubt transgress the constitutional limitation.
(Ormoc Sugar Co. Inc., v. Treasurer of Ormoc City,
G.R. No. L-23794, 17 Feb. 1968) Treating doctors and
lawyers as a different class of professionals will not
comply with the requirements of a reasonable,
hence valid classification, because the classification
is not based upon substantial distinction which
makes real differences. The classification does not
comply with the requirement that it should be
germane to the purpose of the law either. (PepsiCola Bottling Co., Inc. v. City of Butuan, G.R. No. L22814, 28 Aug. 1968)
violate uniformity and equality of taxation. (Sison v.
Ancheta, G.R. No. L-59431, 25 July 1984)
However, the classification must be valid and
reasonable, according to the rules of equal
protection. If the classification is unreasonable, then
the rule on uniformity will be violated. (Pepsi-Cola
Bottling v. City of Butuan, G.R. No. L022814, 28 Aug.
1968)
The Constitution is also not violated when a certain
tax is not imposed in other jurisdictions, for the
Constitution does not require that the taxes for the
same purpose should be imposed in different
territorial subdivisions at the same time.
(Villanueva v. City of Iloilo, G.R. No. L-26521, 28 Dec.
1968)
Q: Heeding the pronouncement of the President
that the worsening traffic condition in the
metropolis was a sign of economic progress, the
Congress enacted R.A. No. 10701, also known as
An Act Imposing a Transport Tax on the
Purchase of Private Vehicles.
For classification to be valid, the following
requisites must concur: (B-A-G-S)
1.
2.
3.
4.
It must apply Both to present and future
conditions;
It must apply to All members of the same class;
It must be Germane to the purposes of the law;
and
It must be based on Substantial distinctions.
(Ormoc Sugar Company, Inc. v. The Treasurer of
Ormoc City, G.R. No. L-23794, 17 Feb. 1968)
Under R.A. No. 10701, buyers of private vehicles
are required to pay a transport tax equivalent to
5% of the total purchase price per vehicle
purchased. R.A. No. 10701 provides that the
Land Transportation Office (LTO) shall not
accept for registration any new vehicles without
proof of payment of the 5% transport tax. R.A.
No. 10701 further provides that existing owners
of private vehicles shall be required to pay a tax
equivalent to 5% of the current fair market
value of every vehicle registered with the LTO.
However, R.A. No. 10701 exempts owners of
public utility vehicles and the Government from
the coverage of the 5% transport tax.
Q: A law was passed exempting doctors and
lawyers from the operation of the value-added
tax. Other professionals complained and filed a
suit
questioning
the
law
for
being
discriminatory and violative of the equal
protection clause of the Constitution since
complainants were not given the same
exemption. Is the suit meritorious or not?
Reason briefly. (2004 BAR)
A group of private vehicle owners sued on the
ground that the law is unconstitutional for
contravening the Equal Protection Clause of the
Constitution.
A: YES. The VAT is designed for economic
efficiency. Hence, should be neutral to those who
belong to the same class. Professionals are a class of
taxpayers by themselves who, in compliance with
the rule of equality of taxation, must be treated
alike for tax purposes. Exempting lawyers and
doctors from a burden to which other professionals
are subjected will make the law discriminatory and
violative of the equal protection clause of the
Rule on the constitutionality and validity of R.A.
No. 10701. (2017 BAR)
A: R.A. NO. 10701 IS VALID AND
CONSTITUTIONAL. A levy of tax is not
41
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
unconstitutional because it is not intrinsically equal
and uniform in its operation. The uniformity rule
does not prohibit classification for purposes of
taxation. (British American Tobacco v. Camacho, G.R.
No. 163583, 15 Apr. 2009)
to the achievement of the end purpose of the law,
are not categorized further. Instead, they are
similarly treated both in privileges granted and
obligations required. (Tiu v. CA, G.R. No. 127410, 20
Jan. 1999)
Uniformity in taxation, like the kindred concept of
equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be
treated alike both in privileges and liabilities.
Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are
substantial and not arbitrary; (2) the categorization
is germane to achieve the legislative purpose; (3)
the law applies, all things being equal, to both
present and future conditions; and (4) the
classification applies equally well to all those
belonging to the same class. (Rufino R. Tan v. Del
Rosario, Jr., G.R. No. 109289, 03 Oct. 1994) All of the
foregoing requirements of a valid classification
having been met and those which are singled out are
a class in themselves, there is no violation of the
“Equal Protection Clause” of the Constitution.
Q: Does the 20% Sales Discount for Senior
Citizens and Persons with Disabilities violates
the constitutional right of equal protection
clause?
A: NO. The equal protection clause is not infringed
by legislation which applies only to those falling
within a specified class. If the groupings are
characterized by substantial distinctions that make
real differences, one class may be treated and
regulated differently from another. (Southern Luzon
Drug Corporation v. DSWD, G.R. No. 199669, 25 Apr.
2017)
Progressive Taxation
Taxation is progressive when tax rate increases as
the income of the taxpayer increases. It is based on
the principle that those who are able to pay more
should shoulder the bigger portion of the tax
burden.
Q: An Executive Order was issued pursuant to
law granting tax and duty incentives only to
businesses and residents within the “secured
area” of the Subic Economic Special Zone, and
denying said incentives to those who live within
the Zone but outside such “secured area”. Is the
constitutional right of equal protection of the
law violated by the Executive Order? Explain.
(2000 BAR)
Q: Does the Constitution prohibit regressive
taxes?
A: NO. The Constitution does not really prohibit the
imposition of regressive taxes. What it simply
provides is that Congress shall evolve a progressive
system of taxation.
A: NO. Equal protection of the law clause is subject
to reasonable classification. Classification, to be
valid, must (1) rest on substantial distinctions, (2)
be germane to the purpose of the law, (3) not be
limited to existing conditions only, (4) apply equally
to all members of the same class.
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 v. Secretary of Finance, G.R. No.
115455, 30 Oct. 1995)
There are substantial differences between big
investors being enticed to the “secured area” and
the business operators outside in accord with the
equal protection clause that does not require
territorial uniformity of laws. The classification
applies equally to all the resident individuals and
businesses within the “secured area". The residents,
being in like circumstances to contributing directly
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
42
General Principles of Taxation
2.
Note: VAT is admittedly regressive because it is
imposed on persons regardless of income.
However, it is still valid as the Constitution’s
mandate is simply to evolve a progressive system of
taxation. In any case, the VAT system minimizes the
regressive effects by providing zero-rated
transactions. (Abakada Guro Party List v. Ermita,
G.R. No. 168056, 15 Sept. 2005)
GRANT BY CONGRESS OF AUTHORITY TO
THE PRESIDENT TO IMPOSE TARIFF RATES
Assuming there is a conflict between the
specific limitation in the Constitution and the
general executive power of control and
supervision, the former prevails in the specific
instance of safeguard measures such as tariffs
and imposts and would thus serve to qualify the
general grant to the President of the power to
exercise control and supervision over his/her
subalterns. (Southern Cross Cement Corporation
v. Cement Manufacturers Association of the Phil.,
G.R. No. 158540, 03 Aug. 2005)
The Congress may, by law, authorize the President
to fix within specified limits and subject to such
limitations and restrictions as it may impose, tariff
rates, import and export quotas, tonnage and
wharfage dues and other duties or imposts within
the framework of the national development
program of the Government. (Sec. 28(2), Art. VI,
1987 Constitution)
Flexible Tariff Clause
3.
This clause provides the authority given to the
President to adjust tariff rates under Sec. 1608 of
R.A. No. 10863, known as Customs Modernization
and Tariff Act (CMTA) of 2016.
Within the framework of national development
program.
PROHIBITION AGAINST TAXATION OF
RELIGIOUS, CHARITABLE ENTITIES, AND
EDUCATIONAL ENTITIES
Requisites on the Authority of the President in
Imposing Tax
1.
Subject to Congressional limits and restrictions
– the authorization to the President can be
exercised only within the specified limits set in
the law and is further subject to limitations and
restrictions which Congress may impose.
Consequently, if Congress specifies that the
tariff rates should not exceed a given amount,
the President cannot impose a tariff rate that
exceeds such amount.
Charitable institutions, churches and parsonages 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. (Sec. 28(3),
Art. VI, 1987 Constitution)
Delegated by Congress through a law – the
authorization granted to the President must be
embodied in a law. Hence, the justification
cannot be supplied simply by inherent
executive powers.
Q: What is the coverage of tax exemption?
It is Congress which authorizes the President to
impose tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or
imposts. Thus, the authority cannot come from
the Finance Department, the National Economic
Development Authority, or the World Trade
Organization, no matter how insistent or
persistent these bodies may be. (Southern Cross
Cement Corporation v. Cement Manufacturers
Association of the Phil., G.R. No. 158540, 03 Aug.
2005)
A: The exemption only applies to real property tax.
(Lladoc v. CIR, G.R. No. L-19201, 16 June 1965)
Accordingly, a conveyance of such exempt property
can be subject to transfer taxes.
Properties Exempt under the Constitution from
the Payment of Property Taxes:
1.
2.
43
Charitable institutions;
Churches and parsonages or convents
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
3.
4.
5.
Rules on Taxation of Non-Stock Corporations for
Charitable and Religious Purposes
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.
(Sec. 28(3), Art. VI, 1987 Constitution)
1.
For purposes of income taxation
a.
Meaning of “Charitable” as Used in the
Constitution
It is not restricted to relief of the poor or sick. The
test whether an enterprise is charitable or not is
whether it exists to carry out a purpose recognized
in law as charitable or whether it is maintained for
gain, profit, or private advantage. (Lung Center of the
Philippines v. Quezon City, G.R. No. 144104, 29 June
2004)
However, the income of whatever kind and
character from any of their properties, real
or personal, or from any of their activities
for profit regardless of the disposition
made of such income, shall be subject to
tax. (Sec. 30, NIRC)
NOTE: An organization may be considered
as non-profit if it does not distribute any
part of its income to stockholders or
members. (CIR v. St. Luke’s Medical Center,
Inc., G.R. No. 195909, 26 Sept. 2012)
In addition, an organization must meet the
substantive test of charity. 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. (CIR v. St. Luke’s
Medical Center, Inc., G.R. No. 195909, 26 Sept. 2012)
b.
Meaning of “Actual, Direct and Exclusive Use of
the Property” as Used in the Constitution
Donations
received
by
religious,
charitable, and educational institutions are
considered as income but not taxable
income as they are items of exclusion. (Sec.
32(B)(3), NIRC)
On the part of the donor, such donations
are deductible expense provided that no
part of the income of which inures to the
benefit of any private stockholder or
individual in an amount not exceeding
10% in case of individual, and 5% in case
of a corporation, of the taxpayer’s taxable
income derived from trade or business or
profession. (Sec. 34 (H), NIRC)
It is the direct, immediate, and actual application of
the property itself to the purposes for which the
charitable institution is organized.
“Exclusive” is defined as possessed and enjoyed to
the exclusion of others; debarred from participation
or enjoyment; and “exclusively” is defined, “in a
manner to exclude; as enjoying a privilege
exclusively.” If real property is used for one or more
commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation.
NOTE: Donations to accredited nongovernment organizations, i.e., organized
and operated exclusively for scientific,
research, educational, character-building
and youth and sports development, health,
social welfare, cultural or charitable
purposes, or a combination thereof, are
NOTE: It is the actual use of the property and not
the use of the income from the real property that is
determinative of whether the property is used for
tax-exempt purposes.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The income of non-stock corporation or
association organized and operated
exclusively for religious and charitable
purposes, no part of which inures to the
benefit of any member, organizer, officer,
or any specific person, shall be exempt
from tax. (Sec. 30(E), NIRC)
44
General Principles of Taxation
Under the 1987 Constitution, it must be proved that
the properties are actually, directly, and exclusively
used for the purpose of the institution for the
exemption to be granted. (Sababan, 2008)
deductible in full. (Sec. 34(H)(2)(c), NIRC)
2.
For purposes of estate tax
Donations in favor of charitable institutions are
generally not subject to tax; Provided, however,
that not more than 30% of the said bequests,
devises, legacies, or transfers shall be used by
such institutions for administration purposes.
(Sec. 87(D), NIRC)
3.
Tax-Exempt Corporations and Organizations
For purposes of donor’s tax
Donations in favor of charitable and religious
institutions are generally exempt from tax;
Provided, however, that not more than 30% of
the said donations shall be used by such
institutions for administration purposes. (Sec.
101, NIRC)
A.
Labor,
agricultural
or
horticultural
organization not organized principally for
profit;
B.
Mutual savings bank not having a capital stock
represented by shares, and cooperative bank
without capital stock organized and operated
for mutual purposes and without profit;
A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or mutual
aid association or a non-stock corporation
organized by employees providing for the
payment of life, sickness, accident, or other
benefits exclusively to the members of such
society, order, or association, or nonstock
corporation or their dependents;
C.
Summary of Rules on Exemption
CRITERIA
SEC. 28(3), ART. VI,
1987 CONSTITUTION
Coverage of
constitutional
provision
Covers real property tax only;
the income of whatever kind
and nature from any of their
properties, real or personal,
or from any of their activities
for profit regardless of the
disposition made of such
income shall be subject to tax
Requisite to
avail of this
exemption
Property must be “actually,
directly, and exclusively used”
by religious, charitable, and
educational institutions
Test for the
grant of this
exemption
Use of the property for such
purposes, not the ownership
thereof
NOTE: The doctrine of exemption by incidental
purpose is no longer applicable. Such doctrine is
only applicable to cases where the cause of action
arose under the 1935 Constitution.
45
D.
Cemetery company owned and operated
exclusively for the benefit of its members;
E.
Non-stock corporation or association
organized and operated exclusively for
religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
belongs to or inures to the benefit of any
member, organizer, officer or any specific
person;
F.
Business league, chamber of commerce, or
board of trade, not organized for profit and no
part of the net income of which inures to the
benefit of any private stock-holder, or
individual;
G.
Civic league or organization not organized for
profit but operated exclusively for the
promotion of social welfare;
H.
Government educational institution;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
I.
J.
while Sec. 4(3), Art. XIV applies solely to non-stock,
non-profit educational institutions.
Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely
of assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses; and
Hence, in this case, we should apply its literal
interpretation – “solely” – in consonance with the
principle of strictissimi juris. The word “exclusively”
indicates that the provision is mandatory.
(Dimaampao, 2021)
Sec. 4(3), Art. XIV and Sec. 28(3), Art. VI of the
1987 Constitution Distinguished
Farmers', fruit growers', or like association
organized and operated as a sales agent for
the purpose of marketing the products of its
members and turning back to them the
proceeds of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by them. (Sec. 30, NIRC; RMO
No. 038-19)
SEC. 4(3), ART. XIV
SEC. 28(3), ART. VI
As to Grantee
NOTE: However, the income of whatever kind and
character of the foregoing organizations from any
of their properties, real or personal, or from any of
their activities conducted for profit regardless of
the disposition made of such income, shall be
subject to tax. (Sec. 30, NIRC)
Non-stock, non-profit
educational institution
PROHIBITION AGAINST TAXATION OF NONSTOCK, NON-PROFIT EDUCATIONAL
INSTITUTIONS
Charitable institutions,
churches
and
parsonages
or
convents appurtenant
thereto, mosques, nonprofit cemeteries, and
all lands, buildings, and
improvements,
actually, directly, and
exclusively used for
religious, charitable, or
educational purposes
As to Tax Exemption Granted
All taxes and duties
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be
exempt from taxes and duties. (Sec. 4(3), Art. XIV,
1987 Constitution)
Real property tax
Meaning of “Actually, Directly, and Exclusively
Used”
The tax exemption granted by the Constitution to
non-stock, non-profit educational institutions is
conditioned only on the actual, direct, and exclusive
use of their assets, revenues, and income for
educational purposes. A plain reading of the 1987
Constitution would show that Sec. 4(3), Art. XIV
does not require that the revenues and income
must have also been sourced from educational
activities or activities related to the purposes of an
educational institution. The phrase “all revenues” is
unqualified by any reference to the source of
revenues.
The use of the term “actually, directly, and
exclusively used” referring to religious institutions
cannot be applied to this article. The provision of
Sec. 28(3), Art. VI of the 1987 Constitution applies to
charitable, religious, and educational institutions;
NOTE: The test to determine exemption is the use
of both the revenues and assets. Hence, when the
revenues are actually, directly and exclusively used
for educational purposes, the non-stock, non-profit
educational institution shall be exempt from
Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used
actually, directly, and exclusively for educational
purposes shall be exempt from tax. (Sec. 4(4), Art.
XIV, 1987 Constitution)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
46
General Principles of Taxation
purposes. The test of exemption from taxation
is the use of the property for purposes
mentioned in the Constitution. The leased
portion of the building may be subject to real
property tax since such lease is for commercial
purposes, thereby, it removes the asset from
the property tax exemption granted under the
Constitution. (CIR vs. De La Salle University, Inc.,
G.R. No. 196596, 09 Nov. 2016)
income tax, VAT, and local business tax. The
revenues do not need to come from educational
activities, as long as it used for educational
purposes. (La Sallian Educational Innovators
Foundation v. CIR, G.R. No. 202792, 27 Feb. 2019)
And when the assets are actually, directly, and
exclusively used for educational purposes, the nonstock, non-profit educational institution shall be
exempt from real property tax. (CIR vs. De La Salle
University, Inc., G.R. No. 196596, 09 Nov. 2016)
B. NO. The income earned is not subject to income
tax provided that the revenues are used
actually, directly, and exclusively for
educational purposes as provided under Sec.
4(3), Art. XIV of the 1987 Constitution. The
requisites for availing the tax exemption under
Sec. 4(3), Art. XIV are as follows: (1) the
taxpayer falls under the classification nonstock, non-profit educational institution; and
(2) the income it seeks to be exempted from
taxation is used actually, directly and
exclusively for educational purposes; thus, so
long as the requisites are met, the revenues are
exempt from tax. (CIR vs. De La Salle University,
Inc., G.R. Nos. 196596, 198841 and 198941, 09
Nov. 2016)
Income from cafeterias, canteens and bookstores
located within the school premises are also exempt
if they are owned and operated by the educational
institution. (RMC 76-2003)
Q: San Juan University is a non-stock, non-profit
educational institution. It owns a piece of land
in Caloocan City on which its three 3-storey
school building stood. Two of the buildings are
devoted to classrooms, laboratories, a canteen,
a bookstore, and administrative offices. The
third building is reserved as dormitory for
student athletes who are granted scholarships
for a given academic year.
In 2017, San Juan University earned income
from tuition fees and from leasing a portion of
its premises to various concessionaires of food,
books, and school supplies.
MAJORITY VOTE OF CONGRESS FOR GRANT OF
TAX EXEMPTION
No law granting any tax exemption shall be passed
without the concurrence of a majority of all the
members of Congress. (Sec. 28(4), Art. VI, 1987
Constitution)
A. Can the City Treasurer of Caloocan City
collect real property taxes on the land and
building of San Juan University? Explain
your answer.
The inherent power of the State to impose taxes
carries with it the power to grant tax exemptions.
B. Is the income earned by San Juan University
for the year 2017 subject to income tax?
Explain your answer. (2017 BAR)
Granting of Exemptions
Exemptions may be created:
1. By the Constitution; or
2. By statute, subject to limitations as the
Constitution may provide.
A:
A. YES. The City Treasurer can collect real
property taxes but on the leased portion. Sec.
4(3), Art. XIV of the 1987 Constitution provides
that a non-stock, non-profit educational
institution shall be exempt from taxes and
duties only if the same are used actually,
directly, and exclusively for educational
Required Vote for Grant of Tax Exemption
In granting tax exemptions, the absolute majority
vote of all the members of Congress is required.
47
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
promotion of the sugar industry were in the nature
of taxes and no implied trust was created for the
benefit of sugar industries. Thus, the revenues
derived therefrom are to be treated as a special fund
to be administered for the purpose intended. No
part thereof may be used for the exclusive benefit of
any private person or entity but for the benefit of
the entire sugar industry. Once the purpose is
achieved, the balance, if any remaining, is to be
transferred to the general funds of the government.
(Vitug, 2006)
(Sec. 28(4), Art. VI, 1987 Constitution)
It means at least 50% plus 1 of all the members
voting separately.
NOTE: Hence, an exemption granted by a
Presidential Proclamation and not by law is invalid.
(John Hay Peoples Alternative Coalition v. Lim, G.R.
No. 119775, 24 Oct. 2003)
Tax amnesties, tax condonations, and tax refunds
are in the nature of tax exemptions. Such being the
case, a law granting tax amnesties, tax
condonations, and tax refunds requires the vote of
an absolute majority of the members of the
Congress.
LINE-ITEM VETO
The President shall have the power to veto any
particular item or items in an appropriation,
revenue or tariff bill but the veto shall not affect the
item or items which he does not object. (Sec. 27(2),
Art. VI, 1987 Constitution)
A tax amnesty, being a general pardon or
intentional overlooking by the State of its authority
to impose penalties otherwise guilty of evasion or
violation of a revenue or tax law, partakes of an
absolute forgiveness or waiver by the Government
of its right to collect what otherwise would be due
it, and in this sense, prejudicial thereto, particularly
to give tax evaders, who wish to relent and are
willing to reform a chance to do so and thereby
become part of the new society with a clean slate.
(Republic v. IAC, G.R. No. L-69344, 26 Apr. 1991)
The item or items vetoed shall be returned to the
Lower House of Congress together with the
objections of the President. If after a
reconsideration 2/3 of all the members of such
House shall agree to pass the bill, it shall be sent,
together with the objection, to the other House by
which it shall likewise be reconsidered, and if
approved by 2/3 of all the Members of that House,
it shall become a law. (Dimaampao, 2021)
Required Vote for Withdrawal of such Grant of
Tax Exemption
NOTE: The veto power on particular items only
applies to appropriation, revenue and tariff bills.
Bills other than appropriation, revenue and tariff
bills can only be vetoed by the President as a whole.
A relative majority or plurality of votes is sufficient,
that is, majority of a quorum.
PROHIBITION ON USE OF TAX LEVIED FOR
SPECIAL PURPOSE
NON-IMPAIRMENT OF JURISDICTION
OF THE SUPREME COURT
All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid
out for such purpose only. If the purpose for which
a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred
to the general funds of the government. (Sec. 29(3),
Art. VI, 1987 Constitution)
The Supreme Court shall have the power to review,
revise, reverse, modify, or affirm on appeal on
certiorari as the laws or the Rules of Court may
provide, final judgments or orders of lower courts in
all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in
relation thereto. (Sec. 5(2)(b), Art. VIII, 1987
Constitution)
NOTE: In Gaston v. Republic Planters Bank, G.R. No.
L-77194, 15 Mar. 1988, the Court ruled that the
“stabilization fees” collected by the State for the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
These jurisdictions are concurrent with the
48
General Principles of Taxation
municipality within the Metropolitan Manila Area.
(Sec. 277, LGC)
Regional Trial Court (RTC). Thus, the petition
should generally be filed with the RTC following the
hierarchy of courts. However, questions on tax laws
are usually filed directly with the Supreme Court as
these are impressed with paramount public
interest.
Q: May Congress, under the 1987 Constitution,
abolish the power to tax of local governments?
(2003 BAR)
A: NO. The Congress cannot abolish the local
government’s power to tax as it cannot abrogate
what is expressly granted by the fundamental law.
The only authority conferred to Congress is to
provide the guidelines and limitations on the local
government’s exercise of the power to tax.
NOTE: Sec. 30, Art. VI of the 1987 Constitution
provides that “no law shall be passed increasing the
appellate jurisdiction of the Supreme Court without
its advice and concurrence.”
The courts cannot inquire into the wisdom of a
taxing act, except when there is an allegation of any
violation of constitutional limitations or
restrictions.
The Local Government’s Power to Tax as the
Most Effective Instrument to Raise the Needed
Revenues
The right of LGUs to collect taxes due must always
be upheld to avoid severe tax erosion. This
consideration is consistent with the State policy to
guarantee the autonomy of the local government
and the objective of the LGC that they enjoy genuine
and meaningful local autonomy to empower them
to achieve their fullest development as self-reliant
communities and make them effective partners in
the attainment of national goals. (Dimaampao,
2021)
GRANT OF POWER TO THE LGUS TO CREATE
ITS OWN SOURCES OF REVENUE
Each LGU 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
governments. (Sec. 5, Art. X, 1987 Constitution)
NOTE: The power of local government units is
subject to limitations as Congress may provide, i.e.,
the Local Government Code. (Ingles, 2021)
Justification in the Delegation of Legislative
Taxing Power to Local Governments
Delegation of legislative taxing power to local
governments is justified by the necessary
implication that the power to create political
corporations for purposes of local self-government
carries with it the power to confer on such local
government agencies the authority to tax.
Q: In 2018, City X amended its Revenue Code to
include a new provision imposing a tax on every
sale of merchandise by a wholesaler based on
the total selling price of the goods, inclusive of
value-added taxes (VAT). ABC Corp., a
wholesaler operating within the city, challenged
the new provision based on the following
contentions: (1) The new provision is a form of
prohibited double taxation because it
essentially amounts to City X imposing VAT
which was already being levied by the national
government; and (2) since the tax being
imposed is akin to VAT, it is beyond the power of
City X to levy the same.
Local government units may, through ordinances
duly approved, grant tax exemptions, incentives or
reliefs under such terms and conditions as they may
deem necessary. (Sec. 192, LGC)
Condonation or Reduction of Tax by the
President of the Philippines
The President may, when public interest so
requires, condone, or reduce the real property tax
and interest for any year in any province or city or a
Rule on ABC Corp.’s second contention. (2019
BAR)
49
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
A: On the theory that, elected as they are from the
districts, the members of the House of
Representatives can be expected to be more
sensitive to the local needs and problems.
A: ABC CORP. IS INCORRECT. Under the LGC, LGUs
are empowered to enact ordinances that will aid in
their revenue generation, which is in consonance
with the principle of fiscal autonomy of LGUs.
Although the tax to be imposed is akin to VAT, the
LGU may nevertheless impose such local business
tax.
Q: R.A. 9337 is a consolidation of three
legislative bills namely, H.B. Nos. 3555 and
3705, and S.B. No. 1950. Because of the
conflicting provisions of the proposed bills, the
Senate agreed to the request of the House of
Representatives for a committee conference.
The Conference Committee on the Disagreeing
Provisions of House Bill recommended the
approval of its report, which the Senate and the
House of the Representatives did.
ALTERNATIVE ANSWER: ABC CORP. IS
INCORRECT. Under Section 133(i) of the LGC, cities
may not impose percentage or value-added tax
(VAT) on sales, barters or exchanges or similar
transactions on goods or services “except as
otherwise provided herein”. As an exception to
the said rule, Section 143(b) of the LGC allows the
imposition of taxes on wholesalers, distributors, or
dealers in any article of commerce of whatever kind
or nature for municipalities. Moreover, Section 151
of the LGC provides that cities may impose whatever
the municipality is imposing. Thus, City X may levy
the said tax.
1. Does R.A. 9337 violate Sec. 24, Art. VI of
the
Constitution
on
exclusive
origination of revenue bills?
2. Does R.A. 9337 violate Sec. 26(2), Art. VI
of the Constitution on the “NoAmendment Rule”?
ORIGIN OF REVENUE AND TARIFF BILLS
A:
1. NO. It was H.B. Nos. 3555 and 3705 that
initiated the move for amending provisions of
the NIRC dealing mainly with the VAT. Upon
transmittal of said House bills to the Senate, the
Senate came out with S.B. No. 1950 proposing
amendments not only to NIRC provisions on the
VAT but also amendments to NIRC provisions
on other kinds of taxes.
All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local
application, and private bills shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
(Sec. 24, Art VI, 1987 Constitution)
What is required to originate in the House of
Representatives is not the law but the revenue bill
which must “originate exclusively” in the lower
house. The bill may undergo such extensive changes
that the result may be a rewriting of the whole. The
Senate may not only concur with amendments but
also propose amendments. To deny the Senate's
power not only to “concur with amendments” but
also to “propose amendments” would be to violate
the coequality of legislative power of the two houses
of Congress and in fact make the House superior to
the Senate. (Tolentino v. Secretary of Finance, G.R.
No. 115873, 25 Aug. 1994)
Since there is no question that the revenue bill
exclusively originated in the House of
Representatives, the Senate was acting within
its Constitutional power to introduce
amendments to the House bill when it included
provisions in S.B. No. 1950 amending corporate
income taxes, percentage, excise and franchise
taxes. Verily, Sec. 24, Art. VI of the Constitution
does not contain any prohibition or limitation
on the extent of the amendments that may be
introduced by the Senate to the House revenue
bill. The Senate can propose amendments and
in fact, the amendments made are germane to
the purpose of the house bills, which is to raise
revenues for the government. The sections
introduced by the Senate are germane to the
Q: Why must appropriation, revenue, or tariff
bills
originate
from
the
House
of
Representatives?
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
50
General Principles of Taxation
subject matter and purposes of the house bills,
which is to supplement our country’s fiscal
deficit, among others. Thus, the Senate acted
within its power to propose those amendments.
2.
PROVISIONS INDIRECTLY AFFECTING
TAXATION
DUE PROCESS
NO. The “no-amendment rule” refers only to the
procedure to be followed by each house of
Congress with regard to bills initiated in each of
said respective houses, before said bill is
transmitted to the other house for its
concurrence or amendment. Verily, to construe
said provision in a way as to proscribe any
further changes to a bill after one house has
voted on it would lead to absurdity as this
would mean that the other house of Congress
would be deprived of its Constitutional power
to amend or introduce changes to said bill.
Thus, Sec. 26(2), Art. VI of the Constitution
cannot be taken to mean that the introduction
by the Bicameral Conference Committee of
amendments and modifications to disagreeing
provisions in bills that have been acted upon by
both houses of Congress is prohibited.
(ABAKADA Guro v. Executive Secretary, G.R. Nos.
168056, 168207, 168461, 168463 and 168730,
01 Sept. 2005)
No person shall be deprived of life, liberty, or
property without due process of law. (Sec. 1, Art. III,
1987 Constitution)
Requirements of Due Process in Taxation
Tax laws and their enforcement must comply with
substantive and procedural due process. (Ingles,
2021)
Substantive Due Process
The law must be:
1. Reasonable; and
2. For a public purpose. (Ingles, 2021)
Procedural Due Process
1.
2.
NO APPROPRIATION OR USE OF PUBLIC MONEY
FOR RELIGIOUS PURPOSES
There must be no arbitrariness in the
assessment and collection;
The prescribed rules must be followed
before assessment and collection. (Ingles,
2021)
Q: When is deprivation of life, liberty, and
property by the government done in compliance
with due process?
No public money or property shall be appropriated,
applied, paid, or employed directly or indirectly for
the use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of
religion or of any priest, preacher, minister, or other
religious teacher or dignitary as such, except when
such priest, preacher, minister or dignitary is
assigned to the armed forces or to any penal
institution, or government orphanage or
leprosarium. (Sec. 29(2), Art. VI, 1987 Constitution)
A: If the act is done:
1. Under authority of a law that is valid, or the
Constitution itself (Substantive Due Process);
and
2. After compliance with fair and reasonable
methods of procedure prescribed by law.
(Procedural Due Process)
This is in consonance with the inviolable principle
of separation of the Church and State. (Sec. 6, Art. II,
1987 Constitution)
Q: When may violation of due process be
invoked by the taxpayer?
A: The due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support
in the Constitution, as where it can be shown to
51
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
reimbursements. RC files suit to declare the
ordinance void on the ground that it is a class
legislation. Will a suit prosper? (2004 BAR)
amount to a confiscation of property. (Reyes v.
Almanzor, G.R. Nos. L-49839-46, 26 Apr. 1991)
EQUAL PROTECTION
A: NO. The remission or condonation of taxes due
and payable to the exclusion of 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. (Juan Luna Subdivision, Inc., v.
Sarmiento, G.R. L-3538, 28 May 1952)
No person shall be denied the equal protection of
the laws. (Sec. 1, Art. III, 1987 Constitution)
Definition
It means that all persons subjected to such
legislation shall be treated alike, under like
circumstances and conditions, both in the privileges
conferred and, in the liabilities, imposed. (1 Cooley
824-825; Sison Jr. v. Ancheta, G.R. No. 59431, 25 July
1984)
Q: The municipality of San Isidro passed an
ordinance imposing a tax on installation
managers. At that time, there was only one
installation manager in the municipality; thus,
only he would be liable for the tax.
Q: What is the “rational basis” test? Explain
briefly. (2010 BAR)
Is the law constitutional? (2013 BAR)
A: The rational basis test is applied to gauge the
constitutionality of an assailed law in the face of an
equal protection challenge. It has been held that “in
areas of social and economic policy, a statutory
classification that neither proceeds along suspect
lines nor infringes constitutional rights must be
upheld against equal protection challenge if there is
any reasonably conceivable state of facts that could
provide a rational basis for the classification.”
Under the rational basis test, it is sufficient that the
legislative classification is rationally related to
achieving some legitimate State interest. (British
American Tobacco v. Camacho and Parayno, GR No.
163583, 15 Apr. 2009)
A: YES. It complies with the requisites of equal
protection. It is not limited to existing conditions
only, as future installation managers will be subject
to the tax. (Shell v. Vaño, G.R. No. L-6093, 24 Feb.
1954)
Q: The City Council of Ormoc enacted Ordinance
No. 4, Series of 1964 taxing the production and
exportation of only centrifugal sugar. At the time
of the enactment, Ormoc Sugar Co. was the only
sugar central in Ormoc. Petitioner alleged that
said Ordinance is unconstitutional for being
violative of the equal protection clause. Is the
Ordinance valid?
Q: RC is a law-abiding citizen who pays his real
estate taxes promptly. Due to a series of
typhoons and adverse economic conditions, an
ordinance is passed by MM City granting a 50%
discount for payment of unpaid real estate taxes
for the preceding year and the condonation of
all penalties on fines resulting from the late
payment. Arguing that the ordinance rewards
delinquent taxpayers and discriminates against
prompt ones, RC demands that he be refunded
an amount equivalent to ½ of the real taxes he
paid. The municipal attorney rendered an
opinion that RC cannot be reimbursed because
the ordinance did not provide for such
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
A: NO. Equal protection clause applies only to
persons or things identically situated and does not
bar a reasonable classification of the subject of
legislation. The classification, to be reasonable,
should be in terms applicable to future conditions as
well. The taxing ordinance should not be singular
and exclusive as to exclude any substantially
established sugar central, of the same class as
Ormoc Sugar Co., from the coverage of the tax.
(Ormoc Sugar Industry v. City Treasurer of Ormoc
City, G.R. No. L-23794, 17 Feb. 1968)
52
General Principles of Taxation
religious information.
RELIGIOUS FREEDOM
Any restraints of such right can only be justified like
other restraints of freedom of expression on the
grounds that there is clear and present danger of
any substantive evil which the State has the right to
prevent. (American Bible Society v. City of Manila,
G.R. No. L-9637, 30 Apr. 1957)
No law shall be made respecting an establishment of
religion, or prohibiting the free exercise thereof.
The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed. No religious
test shall be required for the exercise of civil or
political rights. (Sec. 5, Art. III, 1987 Constitution)
Q: Is VAT registration restrictive of religious
and press freedom?
Q: Is the real property tax exemption of
religious organizations violative of the nonestablishment clause?
A: NO. The VAT registration fee, although fixed in
amount, is not imposed for the exercise of a
privilege but only for defraying part of the cost of
registration. (Tolentino v. Secretary of Finance, G.R.
No. 115873, 25 Aug. 1994)
A: NO. Neither the purpose nor the effect of the
exemption is the advancement or the inhibition of
religion; and it constitutes neither personal
sponsorship of, nor hostility to religion. (Walz v. Tax
Commission, 397 US 664)
NON-IMPAIRMENT CLAUSE
NOTE: Under Sec. 30 of the NIRC, income of
religious organizations from activities conducted
for profit or from any of their property, regardless
of disposition of such income is subject to income
tax. (Ingles, 2021)
No law impairing the obligation of contracts shall be
passed. (Sec. 10, Art. III, 1987 Constitution)
Q: Is the imposition of fixed license fee a prior
restraint on the freedom of the press and
religious freedom?
When the law changes the terms of the contract by:
Instances when there is Impairment of the
Obligations of Contract
1.
2.
3.
A: YES. As a license fee is fixed in the amount and
unrelated to the receipts of the taxpayer, the license
fee, when applied to a religious sect, is actually
being imposed as a condition for the exercise of the
sect’s right under the Constitution. (Tolentino v.
Secretary of Finance, G.R. No. 115873, 25 Aug. 1994)
Making new conditions;
Changing conditions in the contract; or
Dispenses with the conditions expressed
therein.
Contractual Tax Exemptions
Contractual tax exemptions are:
1. Those entered into by the taxing authority;
2. Those lawfully entered under enabling laws;
and
3. Wherein the government acts in its private
capacity and sheds its cloak of authority and
immunity. (Manila Electric Co. v. Province of
Laguna, G.R. No. 131359, 05 May 1999)
Q: Is a municipal license tax on the sale of bibles
and religious articles by a non-stock, non-profit
missionary organization at minimal profits
valid?
A: NO. Such imposition of license tax constitutes
curtailment of religious freedom and worship
which is guaranteed by the Constitution.
Examples of contractual tax exemptions which are
protected by the non-impairment clause are
government bonds or debentures and perfected
mining concession granted by the Spanish
NOTE: The constitutional guarantee of the free
exercise and enjoyment of religious profession and
worship carries with it the right to disseminate
53
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
Q: Congress enacted R.A. No. 7716, or otherwise
known as the Expanded Value-Added Tax Law,
which seeks to widen the tax base of the existing
VAT system and enhance its administration.
Government. (Casanovas v. Hord, G.R. No. 3473, 22
Mar. 1907)
Rationale for the Non-impairment Clause in
relation to Contractual Tax Exemption
Thereafter, petitions for the declaration of
unconstitutionality were filed before the
Supreme Court. One of the contentions of the
petitioners is that the application of such law to
existing contracts of sale of real properties by
installment or on deferred payment basis would
result in substantial increases in the monthly
amortizations to be paid due to the 10% VAT.
Hence, R.A. 7716 violates the non-impairment
clause of contracts.
When the State grants an exemption on the basis of
a contract, consideration is presumed to be paid to
the State and the public is supposed to receive the
whole equivalent thereof.
NOTE: This applies only where one party is the
government and the other party is a private person.
Rules regarding Non-impairment of Obligation
and Contract with respect to the Grant of Tax
Exemptions
1.
Is the contention tenable?
A: NO. R.A. No. 7716 does not violate the nonimpairment clause. The contention that the
imposition of the VAT on the sales and leases of real
estate by virtue of contracts entered into prior to
the effectivity of the law would violate the
constitutional provision that “No law impairing the
obligation of contracts shall be passed” is without
legal basis.
Unilaterally granted by law
If the grant of the exemption is merely a
spontaneous concession by the legislature, such
exemption may be revoked.
NOTE: A license conferring a tax exemption can
be revoked at any time since it does not confer
an absolute right, even if these were granted as
inducement to invest in the country. (Republic
v. Caguioa, G.R. No. 168584, 15 Oct. 2007)
2.
The parties to a contract cannot fetter the exercise
of the taxing power of the State. For not only are
existing laws read into contracts in order to fix
obligations as between parties, but the reservation
of essential attributes of sovereign power is also
read into contracts as a basic postulate of the legal
order.
Franchise
If it is without payment of any consideration or
the assumption of any new burden by the
grantee, it is a mere gratuity and exemption
may be revoked.
The Contract Clause has never been thought 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. (Tolentino v.
Secretary of Finance, G.R. No. 115455, 25 Aug. 1994)
NOTE: A franchise is likewise subject to
amendment, alteration, or repeal by Congress
when the public interest so requires. (Cagayan
Electric Power and Light Co., Inc. v. CIR, G.R. No.
L-60126, 25 Sept. 1985)
3.
Q: X Corporation was the recipient in 1990 of
two tax exemptions both from Congress, one
law exempting the company’s bond issues from
taxes and the other exempting the company
from taxes in the operation of its public utilities.
The two laws extending the tax exemptions
were revoked by Congress before their expiry
dates. Were the revocations constitutional?
Bilaterally agreed upon
However, if the tax exemption constitutes a
binding
contract
and
for
valuable
consideration,
the
government
cannot
unilaterally revoke the tax exemption.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
54
General Principles of Taxation
taxing authority may determine the “place of
taxation” or “tax situs.” (2013 BAR)
(1997 BAR)
A: YES. The exempting statutes are both granted
unilaterally by Congress in the exercise of taxing
powers. Since taxation is the rule and tax
exemption, the exception, any tax exemptions
unilaterally granted can be withdrawn at the
pleasure of the taxing authority without violating
the Constitution. (Mactan Cebu International
Airport Authority v. Marcos, G.R. No. 120082, 11 Sept.
1996)
SITUS OF TAXATION
It is the place or authority that has the right to
impose and collect taxes. (Commissioner of Internal
Revenue v. Marubeni Corporation, G.R. No. 137377,
18 Dec. 2001)
Factors to Determine the Situs of Taxation:
(Re-Ci-N-S2)
FREEDOM OF THE PRESS
1.
2.
3.
4.
5.
BASIS: No law shall be passed abridging the
freedom of speech, of expression, or of the press, or
the right of the people peaceably to assemble and
petition the government for redress of grievances.
(Sec. 4, Art. III, 1987 Constitution)
Residence of the taxpayer,
Citizenship of the taxpayer,
Nature of the tax,
Subject matter of the tax, and
Source of income.
RULES OBSERVED IN FIXING TAX SITUS
Q: Is R.A. No. 7716 unconstitutional for it
violates the freedom of the press under Art. III,
Sec. 4 of the Constitution by imposing VAT on the
gross
receipts
of
newspapers
from
advertisements and on their acquisition of
paper, ink and services for publication?
1. Poll/Capitation/Community tax
Taxed upon the residence of taxpayer, regardless of
the source of income or location of property of the
taxpayer.
A: NO. Even with due recognition of its high estate
and its importance in a democratic society,
however, the press is not immune from general
regulation by the State. It has been held that the
publisher of a newspaper has no immunity from the
application of general laws. He has no special
privilege to invade the rights and liberty of others.
He must answer for libel. He may be punished for
contempt of court. Like others, he must pay
equitable and nondiscriminatory taxes on his
business. (Tolentino v. Secretary of Finance, G.R. No.
115873, 25 Aug. 1994)
2. Property tax
a.
Real property
Taxed upon the location of the property (lex rei
sitae/lex situs), regardless of whether the
owner is a resident or a non-resident.
Rationale:
2. TERRITORIALITY PRINCIPLE AND SITUS OF
TAXATION
TERRITORIALITY PRINCIPLE
Taxation may be exercised only within the
territorial jurisdiction of the taxing authority. (61
Am. Jur. 88) Within its territorial jurisdiction, the
55
i.
The taxing authority has control because
of the stationary and fixed character of
the property; and
ii.
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.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
b.
Application of the Doctrine of Mobilia Sequuntur
Personam not Mandatory in all Cases
Personal property
i.
ii.
Tangible personal property – taxed upon
the location of the property.
Such doctrine has been decreed 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 the 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 would result in inescapable and
patent injustice." (Wells Fargo Bank and Union Trust
v. Collector, G.R. No. L-46720, 28 June 1940)
Intangible personal property
GR: Taxed upon the domicile of the owner,
wherever it is actually kept or located, pursuant to
the principle of the mobilia sequntur personam, i.e.,
movable follows the person/owner.
XPNs:
1.
When the property has acquired a business
situs in another jurisdiction, such that it has
definite location there, accompanied by some
degree of permanency; or
2.
3. Excise tax
Excise taxes are taxes imposed on the exercise of a
right or privilege or performance of an act.
(Dimaampao, 2021)
When an express provision of the statute
provides for another rule.
a.
NOTE: Under Sec. 104 of the NIRC, in case of donor’s
and estate tax, the following properties are
considered as situated, thus taxed, in the Philippines
and the residence of their owners are immaterial,
except where the foreign country grants exemption
or does not impose taxes on intangible properties to
Filipino citizens:
a.
Tax Situs of Income Tax
Franchise which must be exercised in the
Philippines;
b. Shares, obligations, or bonds issued by any
corporation sociedad anonima organized or
constituted in the Philippines in accordance
with its laws;
c.
Shares, obligations, or bonds by any foreign
corporation 85% of its business is located
in the Philippines;
Shares or rights in any partnership, business
or industry established in the Philippines.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
CLASS OF TAXPAYER
SOURCES OF INCOME
Resident Citizen
(RC)
Within and without the
Philippines
Non-Resident Citizen
(NRC)
Within
Domestic
Corporation (DC)
Within and without the
Philippines
Resident Foreign
Corporation (RFC)
Within
Non-Resident
Foreign Corporation
(NRFC)
Within
NOTE: The source of an income is the property,
activity or service that produces the income. For the
source of income to be considered as coming from
the Philippines, it is sufficient that the income is
derived from activity within the Philippines.
(Commissioner v. British Overseas Airways Corp., G.R.
Nos. L-65773-74, 30 Apr. 1987)
d. Shares, obligations, or bonds issued by any
foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines; and
e.
Income tax
56
General Principles of Taxation
b.
income; or
Donor’s Tax and Estate Tax
4. Reduce the Philippine income tax rate.
Tax Situs of Donor’s Tax and Estate Tax
KIND OF
DONOR
SOURCE
Resident or
Citizen of the
Philippines
Properties within and
without the Philippines
D. REQUISITES OF A VALID TAX
Q: Enumerate the requisites of a valid tax.
Properties within the
Philippines
Non-Resident,
Non-Citizen of
the Philippines
c.
A: The requisites of a valid tax are: (Uni-JIP)
1.
2.
3.
NOTE: Intangible personal
property is subject to the
rule of reciprocity. (Ingles,
2018)
4.
Value-Added Tax
Taxed upon the place where the transaction is
made. If the transaction is made (perfected and
consummated) outside of the Philippines, we can no
longer tax such transaction. (Dimaampao, 2021)
It should be for a Public purpose;
It should be Uniform;
The person or property being taxed should
be within the Jurisdiction of the taxing
authority; and
The tax must not impinge on the Inherent
and constitutional limitations on the power
of taxation.
E. TAX AS DISTINGUISHED FROM OTHER FORMS
OF EXACTIONS
NOTE: Situs of taxation of excise tax 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, 05 Sept. 2012)
TARIFF OR CUSTOMS DUTIES
TARIFF OR
CUSTOMS DUTIES
TAX
Coverage
An all-embracing term
to include various
kinds of enforced
contributions imposed
upon persons for the
attainment of public
purpose
REMEDIES AVAILABLE AGAINST
MULTIPLICITY OF SITUS
Tax laws and treaties with other States may:
Only a kind of tax;
limited coverage
Object
1. Exempt foreign nationals from local taxation
and local nationals from foreign taxation
under the principle of reciprocity;
Persons,
property,
privilege,
or
transactions
Goods imported
exported
2. Credit foreign taxes paid from local taxes due;
3. Allow foreign taxes as deduction from gross
57
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
or
Political Law
TOLL
TAX
TAX
Amount
TOLL
Generally, amount is
unlimited
Definition
An
enforced
proportional
contribution
from
persons and property
for public purpose
A consideration paid
for the use of a road,
bridge or the like, of a
public nature
Demand
proprietorship
Imposed on persons,
properties, rights or
transactions
of
Amount is limited to
the
cost
and
maintenance of public
improvement
Non-payment
does
not make the business
illegal
Normally paid after
the start of business;
post-activity
imposition
For the use of another’s
property
Imposing Authority
May only be imposed
by the State under its
sovereignty authority
May be imposed by
private individuals or
entities, as an attribute
of ownership
Q: A municipality, BB, has an ordinance which
requires that all stores, restaurants, and other
establishments selling liquor should pay a fixed
annual fee of P20,000. 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)
LICENSE FEE
LICENSE FEE
Purpose
Imposed
revenue
to
raise
For regulation
control
and
Basis
Collected under the
power of taxation
Collected under police
power
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Normally paid before
the commencement of
the
business;
preactivity imposition
Building fees are not taxes or impositions upon
property, but regulatory fees imposed by a city for
the activity of building or repairing a structure.
Hence, a foundation which is exempt from taxes
cannot claim that it is exempt from the payment of
building fees, as these are not taxes in the first place.
(Angeles University Foundation v. City of Angeles, G.R.
No. 189999, 27 June 2012)
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. (Diaz v. Secretary of Finance, G.R.
No. 193007, 19 July 2011)
TAX
Non-payment
makes
the business illegal
Time of Payment
Purpose
For the support of the
government
Imposed
on
the
exercise of a right or
privilege, such as the
commencement of a
business or profession
Effect of Non-Payment
Amount
Generally, the amount
is unlimited
Limited
to
the
necessary expenses of
regulation and control
Subject
Basis
Demand of sovereignty
LICENSE FEE
58
General Principles of Taxation
A: NO. The refusal of the mayor is not justified. 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 or consumption is a local tax
imposed through the exercise of taxing powers.
Both a license fee and a 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. (Campania General de Tabacos de
Filipinos v. City of Manila, G.R. No. L-16619, 29 June
1963)
The purpose of special levies or 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. (Republic v. Bacolod-Murla Milling Co.,
G.R. No. L-19824, 09 July 1966)
DEBT
TAX
Basis
Obligation created by
law
SPECIAL ASSESSMENT
TAX
SPECIAL ASSESSMENT
Not assignable
An enforced proportional
contribution
from
owners
of
lands
especially those who are
peculiarly benefited by
public improvements
Generally payable in
money; in exceptional
instances, it may be
satisfied in kind
Not subject to set-off
Levied on land only
May result in
imprisonment
Not a personal liability of
the person assessed
No interest unless there
shall be assessed and
collected on any unpaid
amount
of
tax
(deficiency interest or
delinquency interest).
May only be imposed by
the local government
Contribution to the cost
of public improvement
No interest shall be
due unless it has been
expressly stipulated
in writing. (Art. 1956,
Civil Code)
Interest Rate to be Imposed
Interest is fixed at the
rate of double the legal
interest rate for loans,
or forbearance of any
money in the absence of
Scope
Regular exaction
No
imprisonment
except when debt
arises from crime
Interest Stipulation Requirement
Purpose
For the support of
the government
Subject to set-off
Effect of Non-Payment
Imposing Authority
May be imposed by
national or local
government
Payable in kind or in
money
Set-off
Person Liable
A personal liability
of the taxpayer
Assignable
Mode of Payment
Subject
Imposed on persons,
property rights, or
transactions
Obligation based on
contract, express or
implied
Assignability
Nature
An
enforced
proportional
contribution from
persons
and
property for public
purpose
DEBT
Exceptional as to time
and locality
59
Interest
depends
upon the written
stipulation of the
parties.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
an express stipulation
as set by the BSP from
the date prescribed for
payment
until
the
amount is fully paid.
Dec. 2005)
If
no
written
stipulation, as to the
rate, legal rate of
interest
shall
be
imposed.
Q: Distinguish a direct from an indirect tax. Give
examples. (1994, 2000, 2001, 2006 BAR)
A: Direct taxes are demanded from the very person
who, as intended, should pay the tax which he
cannot shift to another; while indirect taxes are
demanded in the first instance from one person
with the expectation that he can shift the burden to
someone else, not as a tax but as a part of the
purchase price. (Maceda v. Macaraig, Jr., G.R. No.
88291, 08 June 1993)
Prescription
Governed by the special
prescriptive
periods
provided for in the NIRC
Governed by the
ordinary periods of
prescription
F. KINDS OF TAXES
Direct taxes are taxes wherein either the incidence
(or liability for the payment of the tax) as well as the
impact or burden of the tax falls on the same
person. Indirect taxes, on the other hand, are taxes
wherein the incidence of or the liability of payment
of the tax falls on one person but the burden thereof
can be shifted or passed on to another person.
AS TO OBJECT
1.
2.
3.
Personal/poll or capitation tax – a fixed
amount imposed upon all persons, or upon all
persons of a certain class or residents within a
specified territory, without regard to their
property or occupation. (e.g., community tax)
Income tax, estate tax, and donor's tax are
considered as direct taxes. On the other hand,
value-added tax, excise tax, other percentage taxes,
and documentary stamp tax are indirect taxes.
Property tax – tax imposed on 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)
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 or
suppliers of the goods. Hence, it is important to
determine if the tax exemption granted specifically
includes the indirect tax; otherwise, it is presumed
that the tax exemption embraces only those taxes
for which the buyer is directly liable. (CIR v. PLDT,
G.R. No. 140230, 15 Dec. 2005)
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, among others.
In case of withholding taxes, the incidence and
burden of taxation fall on the same entity, the
statutory taxpayer. The burden of taxation is not
shifted to the withholding agent who merely
collects, by withholding, the tax due from income
payments to entities arising from certain
transactions and remits the same to the
government. Due to this difference, the deficiency
VAT and excise tax cannot be “deemed” as
withholding taxes merely because they constitute
AS TO BURDEN OR INCIDENCE
Based on the possibility of shifting the incidence of
taxation, taxes may be classified into:
1.
2.
Direct taxes, and
Indirect taxes. (CIR v. PLDT, G.R. No. 140230, 15
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
60
General Principles of Taxation
indirect taxes. (Asia International Auctioneers, Inc. v.
CIR, G.R. No. 179115, 26 Sept. 2012)
In indirect taxation, a distinction is made between
the liability for the tax and burden of the tax. For
instance, the seller who is liable for the VAT (i.e., has
the incidence of taxation) may shift or pass on the
amount of VAT it paid on goods, properties, or
services to the buyer, who has the burden of
taxation. 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, 19 July 2011)
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, income 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
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. 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, 25 Jan.
2012)
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., income tax, estate tax,
donor’s tax, VAT, other percentage taxes and
documentary stamp taxes)
2.
Local or municipal – tax levied by a local
government. (e.g., real estate tax and
community tax)
Impact and Incidence of Taxation Distinguished
IMPACT OF
TAXATION
INCIDENCE OF
TAXATION
It refers to the statutory
liability to pay the tax; it
falls on the person
originally assessed with
a particular tax
It is the economic
cost of tax; it is also
known as burden of
taxation
It is the imposition of tax
(liability)
It is the payment of
tax (burden)
It is on the seller upon
whom the tax has been
imposed
It is on the final
consumer, the place
at which the tax
comes to rest
AS TO GRADUATION
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)
61
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, which can be the value of
the property, or amount of gross receipts,
among others. (e.g., VAT and other percentage
taxes)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
A: It expresses the underlying basis of taxation
which is governmental necessity. For indeed,
without taxation, a government can neither exist
nor endure.
G. DOCTRINES IN TAXATION
1. LIFEBLOOD THEORY
Considering that taxes are the lifeblood of the
government, and in Holmes’ memorable metaphor,
the price we pay for civilization, tax laws must be
faithfully and strictly implemented. (CIR v. Acosta,
G.R. No. 154068, 3 Aug. 2007) Taxes should be
collected promptly. No court shall have the
authority to grant an injunction to restrain the
collection of any internal revenue tax, fee or charge
imposed by the NIRC. (Angeles City v. Angeles
Electric Cooperation, G.R. No. 166134, 29 June 2010)
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 v.
CTA, G.R. No. 106611, 21 July 1994)
Taxes are what we pay for a civilized society.
Without taxes, the State would be paralyzed. (CIR v.
Algue, G.R. No. L-28896, 17 Feb. 1988)
2. CONSTRUCTION AND INTERPRETATION OF
TAX LAWS, RULES, AND REGULATIONS
NOTE: However, even with the lifeblood theory, the
power of taxation must still be exercised reasonably
and in accordance with the law and prescribed
procedure. (CIR v. Algue, G.R. No. L-28896, 17 Feb.
1988)
TAX LAWS
GR: Tax statutes must be construed strictly against
the government and liberally in favor of the
taxpayer. (MCIAA v. Marcos, G.R. No. 120082, 11
Sept. 1996) The imposition of a tax cannot be
presumed.
Manifestations of Lifeblood Theory
(C-A-R-D-I)
1.
Taxes could not be the subject of
Compensation and set-off, subject to
certain exceptions
2.
Imposition even in the
constitutional grant
Absence
3.
State’s Right to select objects and subjects
of taxation
4.
A valid tax may result in Destruction of
property
5.
No Injunction to enjoin collection of taxes
except for a period of 60 days upon
application to the CTA as an incident of its
appellate jurisdiction
Rationale: Taxes are burdens on the taxpayer and
should not be unduly imposed or presumed beyond
what the statutes expressly and clearly import. (CIR
v. The Philippine American Accident Insurance, Inc.,
G.R. No. 141658, 18 Mar. 2005)
of
XPN: The statute imposes a tax clearly, expressly,
and unambiguously.
XPN to XPN: The rule that, in case of doubt of
legislative intent, the doubt must be liberally
construed in favor of taxpayer does not extend to
cases involving the issue of the validity of the tax
law itself which, in every case, is presumed valid.
TAX EXEMPTIONS AND EXCLUSIONS
Q: Discuss the meaning and the implications of
the statement: “Taxes are the lifeblood of the
government and their prompt and certain
availability is an imperious need”. (1991 BAR)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
GR: Statutes granting tax exemptions are construed
in strictissimi juris against the taxpayers and
liberally in favor of the taxing authority. (MCIAA v.
Marcos, G.R. No. 120082, 11 Sept. 1996)
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General Principles of Taxation
167274-75, 21 July 2008)
Tax exclusions (removal of otherwise taxable items
from the reach of taxation) are likewise strictly
construed
against
the
taxpayer.
(Smart
Communications, Inc. v. City of Davao, G.R. No.
155491, 16 Sept. 2008)
TAX RULES AND REGULATIONS
The construction placed by the office charged with
implementing and enforcing the provisions of a
Code should be given controlling weight unless
such interpretation is clearly erroneous.
NOTE: Tax refunds are in the nature of tax
exemptions which are construed in strictissimi juris
against the taxpayer and liberally in favor of the
government. (Kepco Philippines Corporation v. CIR,
G.R. No. 179961, 31 Jan. 2011)
It is axiomatic that a rule or regulation must bear
upon, and be consistent with, the provisions of the
enabling statute if such rule or regulation is to be
valid. In case of conflict between a statute and an
administrative order, the former must prevail. To
be valid, an administrative rule or regulation must
conform, not contradict, the provisions of the
enabling law. An implementing rule or regulation
cannot modify, expand, or subtract from the law it
is intended to implement. Any rule that is not
consistent with the statute itself is null and void.
(Fort Bonifacio Development Corporation v. CIR, G.R.
No. 175707, 19 Nov. 2014)
It is a basic precept of statutory construction that
the express mention of one person, thing, act, or
consequence excludes all others as expressed in the
familiar maxim expressio unius est exclusio alterius.
Thus, the omission or removal of PAGCOR from
exemption from the payment of corporate income
tax is to require it to pay corporate income tax.
(PAGCOR v. BIR, G.R. No. 172087, 15 Mar. 2011)
XPNs: (P-E-A)
1.
If the grantee of the exemption is a Political
subdivision or instrumentality, the rigid rule of
construction does not apply because the
practical effect of the exemption is merely to
reduce the amount of money that has to be
handled by the government in the course of its
operations. (MCIAA v. Marcos, G.R. No. 120082,
11 Sept. 1996)
Admittedly the government is not estopped from
collecting taxes legally due because of mistakes or
errors of its agents. But like other principles of law,
this admits of exceptions in the interest of justice
and fair play, as where injustice will result to the
taxpayer. (CIR v. CA, G.R. No. 117982, 06 Feb. 1997)
NOTE: It is a recognized principle that the rule
on strict interpretation does not apply in the
case of exemptions in favor of a government
political subdivision or instrumentality. In the
case of property owned by the state or a city or
other public corporations, the express
exemption should not be construed with the
same degree of strictness that applies to
exemptions contrary to the policy of the state,
since as to such property "exemption is the rule
and taxation the exception”. (Maceda v.
Macaraig, G.R. No. 88291, 31 May 1991)
In criminal cases, statutes of limitations are acts of
grace, a surrendering by the sovereign of its right to
prosecute. They receive strict construction in favor
of the Government and limitations in such cases will
not be presumed in the absence of clear legislation.
(Lim v. CA, G.R. Nos. 48134-37, 18 Oct. 1990)
2.
Erroneous payment of the tax, or
3.
Absence of law for the government’s exaction.
(CIR v. Fortune Tobacco Corporation, G.R. Nos.
PENAL PROVISIONS OF TAX LAWS
3. PROSPECTIVITY OF TAX LAWS
Tax laws, including rules and regulations operate
prospectively unless otherwise legislatively
intended by express terms or by necessary
implication. (Gulf Air Company, Philippine Branch v.
CIR, G.R. No. 182045, 19 Sept. 2012)
GR: Tax laws must be applied prospectively.
63
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
2.
XPN: If the law expressly provides for retroactive
application.
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: Retroactive application of revenue laws may
be allowed if it will not amount to denial of due
process. There is violation of due process when the
tax law imposes harsh and oppressive tax.
(Dimaampao, 2021)
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?
Revenue statutes are substantive laws and in no
sense must their application be equated with that of
remedial laws. (CIR v. Acosta, G.R. No. 154068, 03
Aug. 2007)
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, 03
Aug. 2007)
BIR Rules and Regulations that Revoke, Modify,
or Reverse a Ruling or Circular
GR: Those BIR Rules and Regulations shall not be
given retroactive application if the revocation,
modification, or reversal will be prejudicial to the
taxpayers.
Q: Due to uncertainty as to whether 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)
XPNs: (MO-M-B-E)
1.
It may be given retroactive effect even if
such would be prejudicial to the taxpayer
in the following cases:
a.
Where the taxpayer deliberately
Misstates or Omits material facts from
his return, or any document required
of him by the BIR;
b.
Where the facts subsequently
gathered by the BIR are Materially
different from the facts on which the
ruling is based; or
c.
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-
Where the taxpayer acted in Bad faith.
(Sec. 246, NIRC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
If the revocation is due to the fact that the
regulation is Erroneous or contrary to law,
such revocation shall have retroactive
operation as to affect past transactions,
because a wrong construction of the law
cannot give rise to a vested right that can
be invoked by a taxpayer.
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General Principles of Taxation
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, 19
June 1986)
There are two kinds of double taxation:
1. Direct double taxation, and
2. Indirect double taxation.
The retroactive application of the BIR regulation
that is prejudicial to the taxpayer is a violation of
due process. When there is a clash between the
Lifeblood Doctrine and due process, the latter
prevails. (Commissioner v. CIR, G.R. No. 117982, 06
Feb. 1997)
Elements of Direct Double Taxation:
DIRECT (STRICT SENSE)
1. The same property is taxed Twice when it
should be taxed only once; and
2. Both taxes are imposed: (Ju-P2-A-C-S)
a.
b.
c.
d.
e.
4. IMPRESCRIPTIBILITY OF TAXES
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.
f.
within the same Jurisdiction;
for the same Purpose;
during the same taxing Period;
by the same taxing Authority;
the taxes must be of the same kind or
Character; and
on the same Subject matter. (City of
Manila v. Coca Cola Bottlers Philippines,
G.R. No. 181845, 04 Aug. 2009)
All the elements must be present in order to apply
double taxation in its strict sense.
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, 24 Feb. 1999)
Rationale: It constitutes double taxation in the
objectionable or prohibited sense since it violates
the equal protection clause of the Constitution.
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 v. Bisaya Land
Transportation Co., Inc., G.R. Nos. L-12100 and L11812, 29 May 1959)
NOTE: Imposition of a penalty and a tax on one
taxpayer does not amount to double taxation.
(Republic Bank v. CTA, G.R. No. 62554, 02 Sept. 1992)
INDIRECT (BROAD SENSE)
It is a permissible double taxation wherein some
elements of direct double taxation are absent.
Tax Treaties as relief from Double Taxation
5. DOUBLE TAXATION
The purpose is to reconcile the national fiscal
legislation of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in
two different jurisdictions (e.g., international
double taxation). This is to 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
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. (Villanueva v. City of Iloilo, G.R. No. L26521, 28 Dec. 1968)
65
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
Q: Differentiate between double taxation in the
strict sense and in a broad sense and give an
example of each. (2015 BAR)
dynamic economies.
Tax Treaties vs. Revenue Memorandum Order
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. An example is the imposition of
final withholding tax on cash dividend and requiring
the taxpayer to declare this tax-paid income in his
tax returns.
Q: The CTA denied the claim for a refund of the
Petitioner on the ground that the application for
a tax treaty relief was not filed with
International Tax Affairs Division prior to its
availment of the preferential rate of ten percent
(10%) under the RP-Germany Tax Treaty
provision, and thus violated the fifteen (15) day
period mandated under Sec. III(2) of Revenue
Memorandum Order (RMO) No. 1-2000.
Petitioner invoked that it has met all the
conditions under Art. 10 of the RP-Germany Tax
Treaty, the CTA erred in denying its claim solely
on the basis of RMO No. 1-2000.
On the other hand, double taxation in the 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. (CIR v.
Solidbank Corp., G.R. No. 148191, 25, Nov. 2003) An
example is subjecting the interest income of banks
on their deposits with other banks to the 5% Gross
Receipts Tax (GRT) despite of the same income
having been subjected to 20% Final Withholding
Tax (FWT). The GRT is a tax on the privilege of
engaging in business, while the FWT is a tax on the
privilege of earning income. (CIR v. Bank of
Commerce, G.R. No. 149636, 08 June 2005)
Does failure to strictly comply with RMO No. 12000 will deprive persons or corporations of the
benefit of a tax treaty?
A: NO. Tax treaties are entered into to minimize, if
not eliminate the harshness of international
juridical double taxation, which is why they are also
known as double tax treaty or double tax
agreements. The time-honored international
Principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on
the part of the states that enter into the agreement.
Thus, laws and issuances must ensure that the
reliefs granted under tax treaties are accorded to
the parties entitled thereto. The BIR must not
impose additional requirements that would negate
the availment of the reliefs provided for under
international agreements. More so, when the RPGermany Tax Treaty does not provide for any prerequisite for the availment of the benefits under
said agreement. Bearing in mind the rationale of tax
treaties, the period of application for the availment
of tax treaty relief as required by RMO No. 1-2000
should not operate to divest entitlement to the relief
as it would constitute a violation of the duty
required by good faith in complying with a tax
treaty. In sum, the obligation to comply with a tax
treaty must take precedence over the objective
of RMO No. 1-2000. (Deutsche Bank vs. CIR, G.R. No.
188550, 19 Aug. 2013)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Q: In 2018, City X amended its Revenue Code to
include a new provision imposing a tax on every
sale of merchandise by a wholesaler based on
the total selling price of the goods, inclusive of
value-added taxes (VAT). ABC Corp., a
wholesaler operating within the city, challenged
the new provision based on the following
contentions: (1) The new provision is a form of
prohibited double taxation because it
essentially amounts to City X imposing VAT
which was already being levied by the national
government; and (2) Since the tax being
imposed is akin to VAT, it is beyond the power of
City X to levy the same.
Rule on ABC Corp.’s first contention. (2019 BAR)
A: ABC CORP. IS INCORRECT. Under the NIRC,
direct double taxation exists only when two taxes
are imposed on the same: (1) subject matter, (2)
purpose, (3) by the same taxing authority, (4)
66
General Principles of Taxation
within the same jurisdiction, (5) during the same
taxing period, and (6) the taxes of the same kind of
nature. In this case, the taxing authorities are
different. Hence, the tax imposed by the LGU is not a
form of direct double taxation.
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; and
Q: KM Corporation, doing business in the City of
Kalookan, has been a distributor and retailer of
clothing and household materials. It has been
paying the City of Kalookan local taxes based on
Secs. 15 (Tax on Wholesalers, Distributors or
Dealers) and 17 (Tax on Retailers) of the
Revenue Code of Kalookan City (Code).
Subsequently, the Sangguniang Panglungsod
enacted an ordinance amending the Code by
inserting Sec. 21 which imposes a tax on
“Businesses Subject to Excise, Value-Added and
Percentage Taxes under the NIRC,” at the rate of
50% of 1% per annum on the gross sales and
receipts on persons “who sell goods and services
in the course of trade or business.” KM
Corporation paid the taxes due under Sec. 21
under protest, claiming that (a) local
government units could not impose a tax on
businesses already taxed under the NIRC and (b)
this would amount to double taxation, since its
business was already taxed under Secs. 15 and
17 of the Code.
2. The second method 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:
a.
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 taxpayer's remaining
income or capital; and
b. 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.
NOTE: 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. S.C. Johnson
and Son, Inc., G.R. No. 127105, 25 June 1999)
Does this amount to double taxation? (2018
BAR)
A: YES. The three taxes are all in the nature of local
business taxes on wholesalers, retailers and service
providers which are imposed by the same taxing
authority on the same subject matter for the same
tax period; hence, the elements of double taxation
are present. (Nursery Care Corp. v. Acebedo, G.R. No.
180651, 30 July 2014)
6. EXEMPTION FROM TAXATION
It is the grant of immunity, express or implied, to
particular persons or corporations, from a tax upon
property or an excise tax which persons or
corporations generally within the same taxing
districts are obliged to pay.
TAX TREATY AS A MODE IN ELIMINATING
DOUBLE TAXATION
NOTE: It is the legislature, unless limited by a
provision of the state constitution, which has full
power to exempt any person, 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
In order to eliminate double taxation, a tax treaty
may resort to two methods of relief:
1. The first method sets out the respective rights to
tax of the state of source or situs and of the state
of residence with regard to certain classes of
67
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
9.
pass ordinances on exemption only from local
taxes. (John Hay Peoples Alternative Coalition et al.
v. Lim et. al., G. R. No. 119775, 24 Oct. 2003)
NOTE: Taxation is the rule and exemption is the
exception. (FELS Energy Inc. v. Province of Batangas,
G.R. No. 168557, 16 Feb. 2007) The burden of proof
rests upon the party claiming exemption to prove
that it is, in fact, covered by the exemption so
claimed. As a rule, tax exemptions are construed
strongly against the claimant. Exemptions must be
shown to exist clearly and categorically and
supported by clear legal provision. (PAGCOR v. BIR,
G.R. No. 172087, 15 Mar. 2011)
10. Strictly construed against the taxpayer.
11. Implies a waiver on the part of the government
of its right to collect what otherwise would be
due.
12. Exemptions are not presumed. The burden is
upon the claimant to establish right to
exemption beyond reasonable doubt. However,
the strict interpretation does not apply in the
case of exemptions running to the benefit of the
government itself or its agencies.
Principles governing Tax Exemptions
1.
Personal in nature and covers only taxes for
which the grantee is directly liable. It cannot be
transferred or assigned by the person to whom
it is given without the consent of the State.
Tax exemptions are highly disfavored in law.
2.
Tax exemptions are personal and nontransferable.
3.
He who claims an exemption must justify that
the legislature intended to exempt him by
words too plain to be mistaken. He must
convincingly prove that he is exempted.
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. Municipality of Pililla, G.R. No. 90776,
03 June 1991)
4.
It must be strictly construed against the
taxpayer.
Not all Refunds are in the Nature of a Tax
Exemption
NOTE: Deductions for income tax purposes
partake of the nature of tax exemptions, hence,
they are also strictly construed against the
taxpayer.
A tax refund may only be considered as a tax
exemption when it is based either on a taxexemption 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.
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.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
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.
68
General Principles of Taxation
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)
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.
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, 11 Sept. 1996)
Q: Pursuant to Sec. 11 of the “Host Agreement”
between the United Nations and the Philippine
government, it was provided that the World
Health Organization (WHO), “its assets, income
and other properties shall be: (a) exempt from
all direct and indirect taxes.” Precision
Construction Corporation (PCC) was hired to
construct the WHO Medical Center in Manila.
Upon completion of the building, the BIR
assessed a 12% VAT on the gross receipts of
PCC derived from the construction of the WHO
building. The BIR contends that the 12% VAT is
not a direct nor an indirect tax on the WHO but
a tax that is primarily due from the contractor
and is therefore not covered by the Host
Agreement. The WHO argues that the VAT is
deemed an indirect tax as PCC can shift the tax
burden to it. Is the BIR correct? Explain. (2016
BAR)
NOTE: 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 Corp. v. CIR,
G.R. No. L-61632, 16 Aug. 1983)
5.
Treaty
6.
Licensing ordinance
As to Extent
1.
2.
Total – connotes absolute immunity
Partial – one where a collection of a part of the
tax is dispensed with
As to Object
1.
2.
A: NO. Since the WHO, the contractee, is exempt
from direct and indirect taxes pursuant to an
international agreement where the Philippines is a
signatory, the exemption from direct taxes should
mean that the entity or person exempt is the
contractor itself because the manifest intention of
the government is to exempt the contractor so that
no tax may be shifted to the contractee. (CIR v. John
Gotamco & Sons, Inc., G.R. No. L-31092, 27 Feb.
1987) The immunity of WHO from indirect taxes
extends to the contractor by treating the sale of
service as effectively zero-rated when the law
provided that – “services rendered to persons or
Personal – granted directly in favor of certain
persons
Impersonal – granted directly in favor of a
certain class of property
These exemptions must not be confused with tax
exemptions granted under franchises which are
not contracts within the purview of the nonimpairment clause of the constitution. (Cagayan
Electric Co. v. Commissioner, G.R. No. L-601026, 25
Sept. 1985)
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
pursuant to the exemption granted under
Section 16 of PD No. 972 or the “Coal
Development Act of 1976”. However, after RA
No. 9337 took effect, NPC started to withhold a
tax of 5% representing the final withholding
VAT on SMC's coal billings on the belief that the
sale of coal by SMC was no longer exempt from
VAT. It was argued that the provision which
grants tax exemption to SMC under Section 109
(e) of the NIRC of 1997 was withdrawn by the
legislature when RA No. 9337 was passed
deleting the "sale or importation of coal and
natural gas, in whatever form or state" from the
list of transactions exempt from VAT. Does
SMC’s sale of coal remain exempt from VAT
notwithstanding R.A. 9337?
entities whose exemption under special laws or
international agreements to which the Philippines
is a signatory effectively subjects the supply to
such service to zero percent rate”. (Sec. 108(B)(3),
NIRC) Accordingly, the BIR is wrong in assessing
the 12% VAT from the contractor PCC.
NOTE: For indirect taxes, the tax exemption of the
buyer (or whoever the burden of tax falls to) does
not exempt him from the payment of indirect taxes
because such person is not the one statutorily
liable for the payment of the tax in the first place.
(Philippine Acetylene Co., Inc. v. CIR, G.R. No. L19707, 17 Aug. 1967)
The exception is when the buyer (or whoever the
burden of tax falls to) is specifically exempted from
payment of indirect taxes. (CIR v. John Gotamco &
Sons, Inc., G.R. No. L-31092, 27 Feb. 1987)
A: YES. SMC is exempt from the payment of VAT on
the sale of coal produced under its COC, because
Section 16 (a) of PD No. 972, a special law, grants
SMC exemption from all national taxes except
income tax.
Rationale or Grounds for Exemption
The inherent power of the State to impose taxes
naturally carries with it the power to grant tax
exemptions.
SMC's claim for VAT exemption is anchored not on
the paragraph deleted by RA No. 9337 from the list
of VAT exempt transactions under Section 109 of
the NIRC of 1997, as amended, but on the tax
incentives granted to operators of COCs executed
pursuant to PD No. 972. The Court agrees with the
CTA that the tax exemption provided under Section
16 of PD No. 972 was not revoked, withdrawn or
repealed — expressly or impliedly — by Congress
with the enactment of RA No. 9337. (CIR v. Semirara
Mining Corporation, G.R. No. 202922, 19 Jun. 2017, J.
Caguioa)
The rationale or grounds for tax exemption are the
same as the non-revenue/special or regulatory
purposes of taxation:
1.
Sumptuary or regulatory purpose – to
promote the general welfare and to protect the
health, safety, or morals of inhabitants;
2.
Tax exemptions implement the state’s police
power; and
3.
Compensatory purpose – 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)
Q: The BTC Power Corporation (BTC) entered in
a Build-Operate-Transfer (BOT) agreement
with National Power Corporation (NPC), a taxexempt 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 and 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.
NOTE: There is no tax exemption based solely on
the ground of equity. (Davao Gulf v. CIR, G.R. No.
117359, 23 July 1998)
Q: SMC, a coal mining operator, has been selling
coal to NPC for years without paying VAT
UNIVERSITY OF SANTO TOMAS
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General Principles of Taxation
4.
Is NPC correct?
A: NO. The 1991 LGC 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 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. (Batangas Power
Corporation v. Batangas City, G.R. No. 152675, 28
Apr. 2004)
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, G.R. No. 119122, 08 Aug. 2000)
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, G.R. No.
120082, 11 Sept. 1996)
Q: BCDA was the owner of four (4) real
properties in BGC collectively referred to as the
"Expanded Big Delta Lots”. It entered into a
contract to sell with the NET GROUP. The total
purchase price was P2,032,749,327.96. NET
GROUP
deducted
the
amount
of
Php101,637,466.40 as CWT and issued to BCDA
the corresponding certificates of creditable tax
withheld at source. BCDA then wrote the BIR for
refund of the amount but to no avail. BCDA
claimed that it was exempt from all taxes and
fees arising from or in relation to the sale, as
provided under its charter, R.A No. 7227, as
amended by RA 7917. Is BCDA exempt from
Creditable Withholding Tax (CWT) on the sale of
its BGC properties?
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. Secretary of Finance, G.R. No. 115455,
30 Oct. 1995)
A: YES. Insofar as the sale of the "Expanded Big
Delta Lots" is concerned, R.A. No. 7227 as amended
by R.A. No. 7917 specifically exempts BCDA from
taxes. R.A. No. 7227, as amended is a special law.
The NIRC, being a general law, is not deemed to have
amended or superseded the special law in the
absence of an express repeal thereof in the NIRC
itself. Sec. 8 of R.A. No. 7227, as amended by R.A. No.
7917, specifically governs BCDA's disposition of the
properties enumerated therein and their sale
proceeds. The law exempts these sale proceeds
from all kinds of fees and taxes as the same law has
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 (e.g., if the exemption is
granted by the Constitution, its revocation may
be affected through constitutional amendment
only)
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. (CIR v. CA, G.R. No. 95022, 23 Mar.
1992)
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
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, 28
Feb. 2004)
already appropriated them for specific purposes
and for designated beneficiaries.
It is settled that between a general law and a special
law, the latter prevails. For a special law reveals the
legislative intent more clearly than a general law
does. Verily, the special law should be deemed an
exception to the general law. (CIR v. BCDA, G.R. No.
217898, 15 Jan. 2020)
Q: Mr. Pascual’s income from leasing his
property reaches the maximum rate of tax
under the law. He donated ½ of his said
property to a non-stock, non-profit educational
institution whose income and assets are
actually, directly, and exclusively used for
educational purposes, and therefore qualified
for tax exemption under Sec. 4(3), Art. XIV, of
the Constitution and Sec. 3(h) of the NIRC.
Having thus transferred a portion of his said
asset, Mr. Pascual succeeded in paying a lesser
tax on the rental income derived from his
property. Is there tax avoidance or tax evasion?
Explain. (2000 BAR)
Q: Differentiate Tax Exemption from Tax
Assumption.
A: A tax exemption is a grant of immunity from
payment of tax, while an assumption of tax liability
does not provide immunity from payment of tax as
it merely allows the shifting of the burden of
taxation to another entity. (BIR Ruling No. ITAD 0232017)
A: THERE IS TAX AVOIDANCE. Mr. Pascual has
exploited a legally permissive alternative method to
reduce his income by transferring part of his rental
income to a tax-exempt entity through a donation
of ½ of the income producing property. The
donation is likewise exempt from donor’s tax. The
donation is the legal means employed to transfer
the incidence of income tax on the rental income.
7. ESCAPE FROM TAXATION
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.
Q: Maria Suerte, a Filipino citizen, purchased a
lot in Makati City in 1980 at a price of P1 million.
Said property has been leased to MAS
Corporation, a domestic corporation engaged in
manufacturing paper products, owned 99% by
Maria Suerte. In October 2007, EIP Corporation,
a real estate developer, expressed its desire to
buy the Makati property at its fair market value
of P300 million, payable as follows: (a) P60
million down payment; and (b) balance, payable
equally in twenty four (24) monthly consecutive
instalments. Upon the advice of a tax lawyer,
Maria Suerte exchanged her Makati property for
shares of stocks of MAS Corporation. A BIR
ruling, confirming the tax-free exchange of
property for shares of stock, was secured from
the BIR National Office and a Certificate
Authorizing Registration was issued by the
Revenue District Officer (RDO) where the
property was located. Subsequently, she sold
Examples of taxes when shifting may apply are VAT,
percentage tax, excise tax on excisable articles.
NOTE: Only indirect taxes may be shifted. In case of
direct taxes, the shifting of burden can only be made
by contractual provision.
Determination of Direct or Indirect Tax
Refer to previous discussion on “Kinds of Taxes – As
to burden or incidence.” – page 60)
TAX AVOIDANCE
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
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
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General Principles of Taxation
Tax Avoidance and Tax Evasion Distinguished
her entire stockholdings in MAS Corporation to
EIP Corporation for P300 million. In view of the
tax advice, Maria Suerte paid only the capital
gains tax of P44,850,000 (P299 million x 15%),
instead of the corporate income tax of
P89,700,000 (30% on P299 million gain from
sale of real property). After evaluating the
capital gains tax payment, the RDO wrote a
letter to Maria Suerte, stating that she
committed tax evasion.
TAX AVOIDANCE
Validity
Legal and not subject
to criminal penalty
Minimization
taxes
A: NO. The exchange of the real estate property for
the shares of stocks is considered as a legitimate tax
avoidance scheme. (Sec. 40(C)(2)(b), NIRC) The sale
of the shares of stocks of domestic corporation,
which is a capital asset, is subject to a final tax of
15% on the net capital gains realized. (Sec. 24(C),
NIRC)
Tax evasion 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,
28 Feb. 2004)
Accompanying State of mind, which is “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. (CIR v. Estate of Benigno Toda, G.R.
No. 147188, 14 Sept. 2004)
Almost always results
in absence of tax
payment
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, 30 Apr.
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. L10507, 30 May 1958)
Q: HSBC transferred the assets of its Merchant
Acquiring Business in the Philippines to GPAP
Phils., Inc. The CIR issued a Final Assessment
Notice (FAN) against HSBC for deficiency Income
Tax on the sale of "Goodwill" of its Merchant
Acquiring Business (MAB). HSBC filed its
Administrative Protest. CIR issued a Final
Decision on Disputed Assessment (FDDA). HSBC,
thus, filed the present Petition for Review with
the CTA Division. In its Answer, CIR claimed that
the Deed of Assignment did not pertain to a sale
of shares but to a sale or transfer of business or
"Goodwill," which is subject to ordinary income
tax and not capital gains tax. CTA Division
granted HSBC’s petition and cancelled the FDDA
and FAN. The CTA Division found that, contrary
to CIR's assertion, the evidence bears that the
transaction in question is a sale or transfer of
capital asset, and not a sale of an ordinary asset
which the CTA En Banc affirmed. Is the act of the
Elements in determining Tax Evasion: (U-S-E)
2.
of
Evidence that may be Used to Prove Tax Evasion
TAX EVASION OR TAX DODGING
Course of action or failure of action is Unlawful;
Illegal and subject to
criminal penalty
Effect
Is the contention of the RDO tenable? Explain.
1.
TAX EVASION
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
then subject the income to only 6% individual
capital gains tax and not the 35% (presently
20/25% under CREATE) corporate income tax. (CIR
v. The Estate of Benigno Toda Jr., G.R. No. 147188, 14
Sept. 2004)
respondent one that falls as tax evasion?
A: NO. A taxpayer has the legal right to decrease the
amount of what otherwise would be his taxes or
altogether avoid them by means which the law
permits. This is called tax avoidance. It is the use of
legal means to reduce tax liability. However, this
method should be used by the taxpayer in good faith
and at arm’s length.
Q: Lucky V Corporation (Lucky) owns a 10storey building in a 2,000 square meter lot in the
City of Makati. It sold the lot and building to
Rainier for P80M. One month after, Rainier sold
the lot and building to Healthy Smoke Company
(HSC) for P200M. Lucky filed its annual tax
return and declared its gain from the sale of the
lot and building in the amount of P750,000.
In this case, when HSBC transferred the assets of its
MAB in the Philippines to GPAP-Phils., Inc. in
exchange for shares, pursuant to the tax-free
exchange provision under Section 40(C)(2) of the
1997 NIRC, as amended, and subsequently sold such
shares to GPAP-Singapore and paid the
corresponding CGT in accordance with Section
27(D)(2) of the same Code, it simply availed of tax
saving devices within the means sanctioned by law.
Further, this methodology was adopted by HSBC not
merely to reduce taxes but also for a legitimate
business purpose — i.e., the restructuring of the
MAB to achieve more efficiency and economies of
scale. Consequently, what was employed to
minimize taxes was a tax avoidance scheme. (CIR v
Co, et al. G.R., 241424 09 Dec. 2020, J. Caguioa)
An investigation conducted by the BIR revealed
that two months prior to the sale of the
properties to Rainier, Lucky received P40M
from HSC and not from Rainier. Said amount of
P40M was debited by HSC and reflected in its
trial balance as “other inv. – Lucky Bldg.” The
month after, another P40M was reflected in
HSC’s trial balance as “other inv. – Lucky Bldg.”
The BIR concluded that there is tax evasion
since the real buyer of the properties of Lucky is
HSC and not Rainier. It issued an assessment for
deficiency income tax in the amount of P79M
against Lucky. Lucky argues that it resorted to
tax avoidance or a tax saving device, which is
allowed by the NIRC and BIR Rules since it paid
the correct taxes based on its sale to Rainier. On
the other hand, Rainier and HSC also paid the
prescribed taxes arising from the sale by Rainier
to HSC. Is the BIR correct in assessing taxes on
Lucky? Explain. (2016 BAR)
Q: CIC, thru its authorized representative BT,
sold a 16-storey commercial building to RA for
100M who then sold it on the same day to RMI
for 200M. These two transactions were
evidenced by two separate Deeds of Absolute
Sale notarized on the same day by the same
notary public. For the sale of the property to
RMI, RA paid a capital gains tax in the amount of
P10M. Is the scheme perpetuated a case of tax
evasion or tax avoidance?
Q: YES. The sale of the property of Lucky to Rainier
and consequently the sale by Rainier to HSC being
prompted more on the mitigation of tax liabilities
than for legitimate business purposes, therefore,
constitutes tax evasion. The real buyer from Lucky
is HSC as evidenced by the direct receipt of
payments by the former from the latter where the
latter recorded “other inv. – Lucky Bldg.” The
scheme of resorting to a two-step transaction in
selling the property to the ultimate buyer in order
to escape paying higher taxes is considered as
outside of those lawful means allowed in mitigating
tax liabilities which makes Lucky criminally and
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 RA, and then from RA to RMI cannot be
considered a legitimate tax planning, which is one
way of tax avoidance. Such scheme is tainted with
fraud.
In the case, it is obvious that the objective of the sale
to RA was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
74
General Principles of Taxation
civilly liable. Hence, the BIR is correct in assessing
taxes on Lucky. (CIR v. The Estate of Benigno Toda Jr.,
G.R. No. 147188, 14 Sept. 2004)
she should know that their ITRs should be filed and
should have made sure that their ITRs were filed.
She cannot just leave entirely to her husband the
filing of her ITR. Petitioner also testified that she
does not know how much her tax obligations was,
nor did she bother to inquire or determine the facts
surrounding the filing of her ITR. Such neglect or
omission as aptly found by the former second
division is tantamount to “deliberate ignorance or
conscious avoidance.” Further, such noncompliance with the BIR’s notices clearly shows
petitioner’s intent not to file her ITR. (People v.
Kintanar, CTA E.B. Criminal Case No. 006, 03 Dec.
2010)
Will Blindness Doctrine
A taxpayer can no longer raise the defense that the
errors on their tax returns are not their
responsibility or that it is the fault of the
accountants they hired. (Ingles, 2021)
The only thing that needs to be proven is that the
taxpayer was aware of his obligation to file the tax
return, but he nevertheless voluntarily, knowingly,
and intentionally failed to file the required returns.
(People v. Kintanar, CTA E.B. Criminal Case No. 006,
03 Dec. 2010)
8. 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.
Q: Gloria Kintanar was charged of violation of
Art. 255 of the NIRC for failure to make or file
her ITRs. Kintanar claimed that entrusted the
duty of filing the said returns to her husband
who filed their ITRs, through their hired
accountant. Is Gloria Kintanar guilty of tax
evasion?
NOTE: Equitable recoupment is allowed only in
common-law countries, not in the Philippines.
A: YES. The Supreme Court, in its resolution,
affirmed the conviction of a taxpayer for tax evasion
due to non-filing of income tax returns (ITR). The
accused Gloria Kintanar was not able to
satisfactorily convince the court that she did not
deliberately and willfully neglect to file her ITR,
considering that she entrusted the filing to her
husband who caused the filing through an
accountant. The court believed that the accused
was not relieved from her criminal liability. As
principal, she must assume responsibility over the
acts of her accountant. (Sec. 51(f), NIRC)
Q: True or False. The Doctrine of Equitable
Recoupment allows a taxpayer whose claim for
refund has prescribed to offset tax liabilities
with his claim of overpayment.
A: TRUE. The Doctrine of Equitable Recoupment
arose from common law allowing offsetting of a
prescribed claim for refund against a tax liability
arising from the same transaction on which an
overpayment is made, and underpayment is due.
The doctrine finds no application to cases where the
taxes involved are totally unrelated, and although it
seems equitable, it is not allowed in our jurisdiction.
(CIR v. UST, G.R. No. L-11274, 28 Nov. 1958)
The Doctrine on Willful Blindness simply means
that an individual or corporation can no longer say
that the errors on their tax returns are not their
responsibility or that it is the fault of the accountant
they hired.
Hence, the natural presumption is that the
petitioner knows what her tax obligations under the
law are. As a businesswoman, she should have taken
ordinary care of her tax duties and obligations and
75
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Political Law
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, 29 June
1963)
9. PROHIBITION ON COMPENSATION AND SETOFF
Compensation or set-off shall take place when two
persons, in their own right, are creditors and
debtors of each other. (Art. 1278, Civil Code)
Offsetting can be allowed only if the determination
of the taxpayer’s liability is intertwined with the
resolution of the claim for tax refund of
erroneously or illegally collected taxes under Sec.
229 of the NIRC. However, it will not be allowed if
the period to assess deficiency taxes in the excess
of the amount claimed for refund had already
prescribed. (CIR v. Toledo Power Company, G.R. No.
196415, 02 Dec. 2015)
Rules governing Compensation or Set-off as
Applied in Taxation
GR: No set-off is admissible against the demands
for taxes levied for general or local governmental
purposes.
Taxes cannot be subject to compensation because
the government and the taxpayer are not creditors
and debtors of each other. (Philex Mining
Corporation v. CIR, G.R. No. 125704, 28 Aug. 1998;
CIR v. Toledo Power Company, G.R. No. 196415, 02
Dec. 2015)
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)
NOTE: The prevalent rule in our jurisdiction
disfavors set-off or legal compensation of tax
obligations for the following reasons:
1.
Taxes are of a distinct kind, essence, and nature,
and these impositions cannot be so classed in
merely the same category as ordinary
obligations;
2.
The applicable laws and principles governing
each are peculiar, not necessarily common to
each; and
3.
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, G.R. No.
180356, 16 Feb. 2010)
NOTE: It is only when the local tax assessment and
the final judgment are both overdue, demandable,
and fully liquidated that set-off or compensation
may be allowed. (Domingo v. Garlitos, G.R. No. L18994, 09 June 1963)
Public policy is better subserved if the integrity
and independence of taxes be maintained under
the Lifeblood Doctrine. The collection of a tax
cannot await the results of a lawsuit against the
government. (Republic v. Mambulao Lumber
Company, G.R. No. L-177725, 28 Feb. 1962;
Francia v. IAC, G.R. No. L-67649, 28 June 1988;
Caltex Philippines, Inc. v. Commission on Audit,
G.R. No. 92585, 08 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
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
76