TAXATION

Acuario Notes

A. General Principles
1. Taxation
a. Definition
- It is an inherent power by which the sovereign through its law making body raises
income to defray the necessary expenses of government by apportioning the cost
among those who, in some measure are privileged to enjoy its benefits and,
therefore, must bear its burden.
- It is a mode of raising revenue for public purposes.
b. Basis
- Taxation definition.
- The power of taxation is essential because the government can neither exist nor
endure without taxation.
- Taxes are the lifeblood of the government and their prompt and certain availability
is an imperious need.
- The theory behind the exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.
c. Theories
1. Lifeblood theory (Necessity theory)
- Taxation is a principal attribute of sovereignty. The exercise of the taking power
derives its source from the very existence of the State whose social contract with its
citizens obliges it to promote public interest and the public good.
2. Benefits-protection theory (Doctrine of Symbiotic Relationship)
- It involves the power of the State to demand and receive taxes based in the
reciprocal duties of support and protection between the State and its citizen.
d. Purpose
1. Revenue - To raise funds or property to enable the State to promote the general
welfare and protection of the people.
2. Non-Revenue
a. Promotion of general welfare
b. Regulation of activities/industries
c. Reduction of social inequality
d. Encourage economic growth
e. Protection
e. Objects
f. Nature
- Two-fold:
1. Inherent
Its exercise is guaranteed by the mere existence of the state. It could be
exercised even in the absence of constitutional grant.
The power to tax proceeds upon the theory that the existence of a government
is a necessity and this power is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent state or
government.
g. Stages/Aspects
- Levy
- Assessment

TAXATION
Acuario Notes

Payment
Refund

2. Principles of Sound Tax System (Canons of Taxation)

a. Fiscal Adequacy
- Revenue raised must be sufficient to meet government/public expenditures and
other public needs.
b. Administrative feasibility
- Tax laws must be clear and concise
- Capable of effective and efficient enforcement
- Convenient as to time and manner of payment; must not obstruct business growth
and economic development.
c. Theoretical Justice
- Must take into consideration the taxpayers ability to pay.
- The rule must be uniform and equitable and that the State must evolve a
progressive system of taxation. (Sec. 28(1), Art VI)

3. Taxation distinguished from Police Power and Eminent Domain

Taxation
Police Power
Authority
who Government
or
its Government
or
its
exercises the power
political subdivision
political subdivision
Purpose

To raise revenue

Persons affected

Upon the community

or class of individuals

Amount of monetary
imposition

No
ceiling
except
inherent limitations

Limited to the cost of

regulation, issuance or
surveillance

Benefits received

Protection of a secured
organized
society,
benefits received from
government/ No direct
benefit
Generally do not impair
contracts unless the
government is party to
contract
granting
exemption
for
a
consideration

Maintenance of healthy
economic standard of
society/
No
direct
benefit

Non-Impairment
Contracts

of

Promotion of general
welfare
through
regulations
Upon the community
or class of individuals

Contracts
impaired

may

be

Eminent Domain
Government or pub
service companies a
public utilities
To facilitate the tak
of private property
public purpose
On an individual
the
owner
of
particular property
No
imposition,
owner is paid the f
market value of
property
The person recei
the fair market value
the
property
tak
from
him/
Dir
benefit results
Contracts
may
impaired

TAXATION
Acuario Notes
-

Similarities:
1. Inherent powers of the State.
2. All are necessary attributes of the sovereign.
3. They exist independently of the Constitution.
4. They constitute the three methods by which the State interferes with private
rights and property.
5. They presuppose equivalent compensation.
6. The legislature can exercise all the three powers.

4. Taxes
a. Definition
- Taxes are enforced proportional contributions from persons and property, levied by
the state by virtue of its sovereignty for the support of the government and for all
its public needs
b. Nature
c. Characteristics
1. Comprehensive it covers persons, business, activities, professions, rights and
privileges.
2. Unlimited It is also unlimited in force and searching in extent that courts
scarcely venture to declare that it is subject to any restrictions, except those
that such rests in the discretion of the authority which exercises it.
3. Plenary It is complete. Under the NIRC, the BIR may avail of certain remedies
to ensure the collection of taxes.
4. Supreme It is supreme insofar as the selection of the subject of taxation is
concerned.
d. Distinguished from other Impositions/ forms of exactions
e. Classification
5. Extent/Scope of the Power of Taxation
6. Limitations on the power of taxation
a. Inherent
1. Taxation should be for public purpose.
a. It is for the welfare of the nation and/or or greater portion of the population;
b. It affects the area as a community rather than as individuals;
c. It is designed to support the services of the government for some of its
recognized objects.
- Duty test whether the thing to be furthered by the appropriation of public
revenue is something which is the duty of the State as a government to provide.
2. Taxation is inherently legislative.
3. The Government is exempt from tax.
- RA7160 expressly prohibits the LGUs from levying taxes from the National
Government, its agencies and instrumentalities and other LGUs.
- NIRC provides that the National Government may levy taxes upon governmentowned and controlled corporations, agencies and isntrumentalities.
4. Territoriality
- Taxing authority cannot impose taxes on subjects beyond its territorial
jurisdiction.

TAXATION
Acuario Notes

b. Constitutional
1. Due Process Clause
- The enforced contribution from the people cannot be made without law
authorizing the same.
- Two aspects:
a. Substantive due process requires the tax statute must be within the
constitutional authority of Congress and that it must be fair, just and
reasonable.
b. Procedural Due Process requires notice and hearing, or at least an
opportunity to be heard.
2. Equal Protection Clause
- Taxpayers of the same footing should be treated alike, both as to privileges
conferred as well as on obligations imposed.
- Violation in two ways:
a. When tax payers belonging to the same classification are treated differently
from one another
b. When tax payers belonging to different classifications are treated alike.
- Requisites for a valid classification:
a. There must be substantial distinctions that make real differences;
b. These must be germane and relevant to the purpose of law;
c. The distinction or classification must not only be applicable to present but
also to future conditions;
d. The distinction must apply to persons, things, and transactions belonging to
the same class.
3. Freedom of religion
- Two clauses:
a. The non-establishment clause;
b. The free-exercise clause.
4. Non-impairment of contracts
- It applies to the power of taxation but not to police power and eminent domain.
Further, it applies only where one party is the Government and other, a private
individual.
5. Non-Imprisonment for Non-Payment of Tax
- A poll tax is a tax imposed in persons without any qualification. Example:
Community Tax Certificate.
7. Certain Doctrines in Taxation
a. Prospectivity of Tax Laws
GR: Taxes must be imposed prospectively.
XPN: If the law expressly provides for retroactive imposition. Retroactive application of
revenue laws may be allowed if it not amount to denial of due process.
- Rules promulgated by the CIR shall be retroactive in the following cases:
1. Where the taxpayer deliberately misstates or omits material facts from his
return or any document required of him by the BIR;
2. Where the facts subsequently gathered by the BIR are materially different
from the facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith.

TAXATION
Acuario Notes

b. Imprescriptibility of Taxes
- Taxes are imprescriptible as they are the lifeblood of the government. However,
tax statutes may provide for statute of limitations.
c. Double Taxation
The imposition by the same taxing body of two taxes on what essentially the
same thing; the imposition of two taxes on the same property during the same
period and for the same taxing purpose.
- It is allowed because there is no prohibition.
- It is not allowed if the following elements are present;
1. The taxes are levied by the same taxing authority;
2. For the same subject matter;
3. For the same taxing period; and
4. For the same purpose.
International Judicial Double taxation is the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject matter
and for identical periods.
- Kinds of Double Taxation
1. As to validity
a. Direct Double Taxation (Obnoxious)
In the objectionable or prohibited sense since it violates the equal
protection clause.
b. Indirect Double Taxation (Not repugnant to the Constitution)
This is allowed if the taxes are of different nature or character
imposed by different taxing authorities.
Generally, it extends to all cases when one or more elements of
direct taxation are not present.
2. As to scope
a. Domestic Double Taxation
When the taxes are imposed by the local and national government
within the same State.
b. International Double Taxation
Occurs when there is an imposition of comparable taxes in two or
more states on the same taxpayer in respect of the same subject
matter and for identical periods.
- Methods to ease the burden of double taxation, local legislation and tax treaties
may provide for:
1. Tax credit an amount subtracted from taxpayers tax liability in order to
arrive at the net tax due.
2. Tax deduction an amount subtracted from the gross amount on which a
tax is calculated.
3. Tax exemption a grant of immunity to particular persons or entities from
obligation to pay taxes.
4. Imposition of a rate lower than the normal domestic rate.
d. Escape from taxation
- Basic forms:

a.

b.

c.

d.

e.

f.

TAXATION
6
Acuario Notes
Shifting 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.
It applies to indirect taxes since the law allows the burden of the
tax to be transferred. In case of direct tax, the shifting of burden can only
be via a contractual provision.
Examples: VAT, percentage tax, excise tax on excisable articles, ad
valorem tax that oil company pays to BIR upon removal or
petroleum products from its refinery.
Kinds of Shifting:
1. Forward shifting when the burden of tax is transferred from a
factor of production through the factors of distribution until it
finally settles on the ultimate purchaser or consumer.
2. Backward shifting when the burden is transferred from the
consumer through the factors of distribution to the factors of
production.
3. Onward shifting when the tax is shifted two or more times
either forward or backward.
Capitalization It is the reduction in the price of the taxed object equal to
the capitalized value of future taxes which the purchaser expects to be
called upon to pay.
Avoidance It is the scheme where the taxpayer uses legally permissible
alternative method of assessing taxable property or income, in order to avoid
or reduce tax liability.
Also known as Tax Minimization
Transformation It is the scheme where the manufacturer or producer upon
whom the tax has been imposed, fearing the loss of his market if he should
add the tax to the price, pays the tax and endeavors to recoup himself by
improving his process of production, thereby turning out his process
products at a lower cost.
Evasion It is the scheme where the taxpayer uses illegal or fraudulent
means to defeat or lessen payment of tax.
Elements:
1. End to be achieved
2. Accompanying State of mind which is described as being evil, in bad
faith, willful or deliberate and not incidental;
3. Course of action which is unlawful
Exemption

e. 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.
f. Set off
Doctrine of Set-off or compensation in taxation applies when the government
and the taxpayer are mutually debtors and creditors of each other.

TAXATION
7
Acuario Notes
Doctrine of equitable recoupment refers to a case where the taxpayer has a
claim for refund but he was not able to file a written claim due to the lapse of
the prescription period within which to make refund is allowed. The taxpayer is
allowed to credit such refund to his existing tax liability.
g. Compromise
It is an agreement between two or more persons who, to avoid lawsuit, amicably
settle their differences on such terms and conditions as they may agree on. It
implies the mutual agreement by the parties in regard to the thing or subject
matter which is to be compromised.
It is a contract whereby the parties, by reciprocal concessions avoid litigation or
put an end to one already commenced.
h. Tax amnesty
Being a general pardon or intentional overlooking by the state of its authority to
impose penalties on persons otherwise guilty of evasion or violation of a revenue
or tax law, partakes of an absolute forgiveness or waiver by the government of
its right to collect what otherwise would be due to it, and in this sense,
prejudicial thereto, particularly to give tax evaders, who wish to relent or are
willing to reform a chance to do so and become part of the new society with a
clean slate.
i.

Taxpayers suit

8. Tax Laws/Statutes
a. Definition
b. Nature
1. Not political
2. Civil in nature
3. Not penal in character
c. Construction and interpretation
1. Generally, no person or property is subject to tax unless within the terms or plain
import of a taxing statute.
2. Tax laws are prospective in nature.
3. Where the language is clear and categorical, the words employed are to be given
their ordinary meaning.
4. When there is doubt, tax laws are strictly construed against the government and
liberally construed in favor of the taxpayer.
5. Provisions of the taxing act are not to be extended by implication
6. Tax laws are special laws and prevail over general laws.
d. Sources
National Tax Law
I. 1987 Constitution
The 1987 Philippine Constitution sets limitations on the exercise of the power to tax.

TAXATION
8
Acuario Notes
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system
of taxation. (Article VI, Section 28, paragraph 1)
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. (Article VI, Section 29, paragraph 3)
The Congress may, by law, authorize the President to fix within specified limits, and subject to such
limitations and restriction 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 (Article VI, Section 28, paragraph 2) The President shall have the power
to veto any particular item or items in an appropriation, revenue or tariff bill, but the veto shall not
affect the item or items to which he does not object. (Article VI, Section 27, second paragraph)
The Supreme Court shall have the power to review, revise, reverse, modify or affirm on appeal or
certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts
in x x x all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed
in relation thereto. (Article VIII, Section 5, paragraph)
Tax exemptions are limited to those granted by law. However, no law granting any tax exemption
shall be passed without the concurrence of a majority of all the members of the Congress. (Article
VI,

Section

28,

par.

4).

The

Constitution

expressly

grants

tax

exemption

on

certain

entities/institutions such as (1) charitable institutions, churches, parsonages or convents

appurtenant thereto, mosques, and nonprofit cemeteries and all lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes (Article VI,
Section 28, paragraph 3); (2) non-stock non-profit educational institutions used actually, directly
and exclusively for educational purposes. (Article XVI, Section 4(3))
In addition to national taxes, the Constitution provides for local government taxation. (Article X,
Section 5) (Article X, Section 6) Parenthetically, the Local Government Code provides that all local
government units are granted general tax powers, as well as other revenue-raising powers like the
imposition of service fees and charges, in addition to those specifically granted to each of the local
government units. But no such taxes, fees and charges shall be imposed without a public hearing
having been held prior to the enactment of the ordinance. The levy must not be unjust excessive,
oppressive, confiscatory or contrary to a declared national economic policy (Section 186 and 187)
Further, there are common limitations to the grant of the power to tax to the local government,
such that taxes like income tax, documentary stamp tax, etc. cannot be imposed by the local
government.
II. Laws
The basic source of Philippine tax law is the National Internal Revenue Law, which codifies all tax
provisions, the latest of which is embodied in Republic Act No. 8424 (The Tax Reform Act of

TAXATION
9
Acuario Notes
1997). It amended previous national internal revenue codes, which was approved on December 11,
1997. A copy of the Tax Reform Act of 1997, which took effect on January 1, 1998, can be
found here.
Local taxation is treated separately in this Guide. There are, however, special laws that separately
provide special tax treatment in certain situations. (See attached matrix on special laws)
III. Treaties
The Philippines has entered into several tax treaties for the avoidance of double taxation and
prevention of fiscal evasion with respect to income taxes. At present, there are 31 Philippine Tax
Treaties in force. Copies are available at the BIR Library and the International Tax Affairs Division
of the BIR, which is under the Deputy Commissioner for Legal and Inspection Group.
The Philippine Treaty Series, edited and annotated by Haydee Yorac and published by Law
Publishing House, University of the Philippines, is available in seven (7) volumes, covering the years
1944 to 1978 . The Philippine Treaty Index, by Benjamin Domingo, covers the years 1978 to 1982. A
copy of the Philippine Treaty Index is available in the Department of Foreign Affairs (DFA) Library.
These publications contain treaties entered into by the Philippines. Tax privileges and exemptions
granted under treaties to which the Philippines is a signatory are recognized under Philippine tax
law. Copies of treaties entered into by the Philippines with other countries and/or international
organizations, from 1983 up to the present, are available at the DFA Library.
IV.

Administrative Material

The Secretary of Finance, upon the recommendation of the Commissioner, promulgates needful
rules and regulations for the effective enforcement of the provisions of the Tax Code (Section 244,
Tax Code of 1997). The Commissioner of Internal Revenue, however, has the exclusive and original
power to interpret the provisions of the Tax Code, but subject to review by the Secretary of Finance.
Administrative issuances which may be relied upon in interpreting the provisions of the Tax Code,
which are signed by the Secretary of Finance, or the Commissioner of Internal Revenue, or his duly
authorized representative, come in the form of Revenue Regulations, Revenue Memorandum Orders,
Revenue Memorandum Rulings, Revenue Memorandum Circulars, Revenue Memorandum Rulings,
and BIR Rulings.
Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation
of the Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for
the effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related
statutes.
Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions;
prescribe guidelines; and outline processes, operations, activities, workflows, methods and
procedures necessary in the implementation of stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations, except auditing.

TAXATION
10
Acuario Notes
Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax
laws, as applied to a specific set of facts, with or without established precedents, and which the
Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the
tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued
RMRs; otherwise, the Rulings are null and void ab initio.
Revenue Memorandum Circular (RMCs) are issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR and
other agencies/offices.
BIR Rulings are the official position of the Bureau to queries raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax laws.
Revenue Regulations, Revenue Memorandum Orders, Revenue Memorandum Rulings, Revenue
Memorandum Circulars, Revenue Memorandum Rulings, and BIR Rulings are found here.
V. Case Law
In the Philippines, Supreme Court decisions form part of the law of the land. As such, decisions by
the Supreme Court (sc.judiciary.gov.ph) in the exercise of its power to review, revise, reverse, modify
or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and
orders of lower courts cases involving the legality of any tax, impost, assessment, or toll or any
penalty imposed in relation thereto are adhered to and recognized as binding interpretations of
Philippine tax law. Court of Appeals and Court of Tax Appeals decisions which have become final
and executory are also recognized interpretations of Philippine tax law.
VI. Treatises and other books
There are no Philippine treatises exclusively devoted to Philippine Tax law but various Philippine
authors have come up with annotated versions of the Tax Code. These books can be purchased from
Rex Bookstore and Central Law Publishing, Inc.
VII. Periodicals
Periodicals on Philippine tax law are the:
(1) Philippine Revenue Service (copies available in the BIR Library), published by the BIR from
1969-1980;
(2) Philippine Revenue Journal (copies available in the BIR Library) which was both published by
the Bureau of Internal Revenue from 1969 to 2000; and
(3) the Tax Monthly, published by the National Tax Research Center (NTRC) (copies available in the
BIR Library and the NTRC).

VIII. Local Government Tax Law

TAXATION
Acuario Notes

11

Local government taxation in the Philippines is based on the constitutional grant of the power to tax
to the local governments.
Local taxes may be imposed, as the Constitution grants, to each local government unit, the power to
create its own sources of revenues and to levy taxes, fees, and charges which shall accrue to the
local governments (Article X, Section 5). With respect to national taxes, local Government units
shall have a just share, as determined by law, in the national taxes which shall be automatically
released to them (Article X, Section 6).
However, certain taxes, such as the following, may not be imposed by local government units:
(Section 133, Local Government Code and Tax Law and Jurisprudence by Vitug & Acosta, copyright
2000)
(1) Income tax, except when levied on banks and other financial institutions;
(2) Documentary stamp tax;
(3) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as
otherwise provided in the Local Government Code (Code) (except taxes levied on the transfer of real
property ownership under Section 135, and Section 151 of the Code);
(4) Customs duties, registration fees of vessels (except license fees imposed under Section 149, and
Section 151 of the Code), wharfage on wharves, tonnage dues and all other kinds of customs fees,
charges and dues except wharfage on wharves constructed and maintained by the local government
unit concerned;
(5) Taxes, fees, charges and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local governments in the guise of charges for wharfage, tolls
for bridges or otherwise, or other taxes in any form whatever upon such goods or merchandise;
(6) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;
(7) Taxes on business enterprises certified by the Board of Investments as pioneer or non-pioneer
for a period of six and four years, respectively, from the date of registration;
(8) Excise taxes on articles enumerated under the National Internal Revenue Code and taxes, fees,
or charges on petroleum products, but not a tax on the business of importing, manufacturing or
producing said products (Patron vs. Pililla, 198 SCRA 82);
(9) Percentage tax or value-added tax on sales, barters or exchanges of goods or services or similar
transactions thereon (but not fixed graduated taxes on gross sales or on volume of production);

(10)

TAXATION
12
Acuario Notes
Taxes on the gross receipts of transportation contractors and persons engaged in the

transportation of passengers or freight by hire and common carriers by air, land or water except as
provided by the Code;
(11) Taxes on premiums paid for reinsurance or retrocession;
(12) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof, except tricycles;
(13) Taxes, fees, or other charges on Philippine products actually exported except as provided by the
Code (the prohibition applies to any local export tax, fee, or levy on Philippine export products but
not to any local tax, fee, or levy that may be imposed on the business of exporting said products);
(14) Taxes, fees or charges on duly organized and registered Countryside and Barangay Business
Enterprises (R.A. No. 6810) and on cooperatives (R.A. No. 6938); and
(15)

Taxes, fees or charges of any kind on the National Government, its agencies and

instrumentalities, and local government units (Section 133, LGC)

The Local Government Code (www.comelec.gov.ph) or (www.dilg.gov.ph/) contains provisions on the
scope and limitation on the exercise of local government taxing power.
IX. National Tax Research Center (NTRC)
Constituted under Presidential Decree 74, the NTRC is mandated to conduct continuing research in
taxation to restructure the tax system and raise the level of tax consciousness among the Filipinos,
to achieve a faster rate of economic growth and to bring about a more equitable distribution of
wealth and income. Specifically, the NTRC performs the following functions:
1. Undertake comprehensive studies on the need for additional revenue for accelerated national
development and the sources from which this might most equitably be derived;
2. Re-examine the existing tax system and tax policy structure;
3. Conduct researches on taxation for the purpose of improving the tax system and tax policy;
4. Pass upon all tax measures and revenue proposal;
5. Recommend of such reforms and revisions as may be necessary to improve revenue collection
and to formulate sound tax policy and a more efficient tax structure.