You are on page 1of 16

Taxation I Midterm Reviewer under Atty. Esther R.

Ibanez

By: Karen Pearl Cue

Reference: Lim and Vitug, Acosta

CONCEPT, UNDERLYING BASIS AND PURPOSE


Concept:
Taxation is a mode by which governments make exactions for revenue in
order to support their existence and carry out their legitimate purpose.
Taxation is the inherent power of the State to demand enforced
contributions upon its subjects and objects within its territorial
jurisdiction for public purpose to support the govt.
Theory or Underlying Basis:
Governmental necessity, without it, govt can neither exist or
endure;
Taxes are the lifeblood of the govt and their prompt and
certain availability are an imperious need. (CIR vs. Pineda, 21
scra 105)
Taxation is the indispensable and inevitable price for civilized
society (CIR vs. Algue, Inc. L-28896)
Grant of protection and benefits by the State to its citizens;
Without funds, the govt cannot continue to pay its expenses,
support itself and deliver basic services to the people, because
of this it has a right to compel all its citizens, residents and
property within its limits to contribute.
PURPOSE OF TAXATION
Revenues derived from taxes are intended to finance the govt
and its activities, and are exempt from execution (Mun. of
Makati vs. CA 109 scra 206)
a) Primary- to raise or generate revenues and to mobilize
resources
b) Secondary or Regulatory
To regulate the conduct of business or professions
To achieve economic and social stability
To protect local industries
c) Compensatory
Reduces inequalities in wealth distribution
Key instrument of social control
Strengthens anemic enterprises
Provides incentives
Check inflation
a) Benefit-Received Theory- The govt and the people have the
reciprocal duties of support and protection.
b) Lifeblood Doctrine- Taxes are the lifeblood of the govt without
which it can neither exist nor endure.
Principles of a Sound Tax System
1. Fiscal adequacy- the proceeds of the tax revenue should
coincide and approximate the needs of the govt expenditures.
2. Theoretical Justice- tax system be fair to the average taxpayer
and based on his ability to pay.
3. Administrative Feasibility- tax system should be capable of
being properly and efficiently administered by the govt with the
least inconvenience with the taxpayer.
Sec. 28, Art. VI, Philippine Constitution:

(1) The rule of taxation shall be uniform and equitable. The


Congress shall evolve a progressive system of taxation.
(2) The Congress may, by law, authorize the President to fix within
the specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export q
quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development
program of the govt.
(3) 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.
(4) No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
SCOPE AND LIMITATION OF TAXATION
Inherent Limitations
1. For public purpose
Support of the state
For recognized objects of the govt or directly to
promote welfare of the community.
Pascual vs. Sec of Public Works SC held that legislature is
without the power to appropriate public revenues for anything
other than public purpose.
Lutz vs. Araneta- taxation may be used to implement an object
of police power, being a legitimate aim of govt.
Gomez vs. Palomar- tax proceeds for the support of public
educational system
City of Baguio vs. Dela Rosa- tax proceeds for granting
assistance to the Boys and Girls Scouts
Valentin tio vs. Videogram Regulatory Board- It is beyon serious
question that a tax does not cease to be valid merely because it
regulates, discourages or deters activities taxed. The power to
impose taxes is one so unlimited in force and so searching in
extent, that the courts scarcely venture to declare that it is
subject to any restrictions whatever, except such as rest in the
discretion of the authority which exercises it.
2. Inherently legislative
Luzon Stevedoring vs. CTA- Along with police power (for
public good or welfare) and eminent domain (for public
use), taxation (for revenue) is an inherent power of the
sovereignty.
NPC vs. Province of Albay- Legislative in character and
legislative in prerogative
Lozano vs. Energy Regulatory Board- the court sanctioned
an imposition by the Board of an amount of petroleum
products to augment the Oil Price Stabilization Fund under
P.D. 1956 as not being an act of taxation.
Petro vs. Pililla- The legislative taxing power includes the
authority:
To determine the nature (kind)
Object (purpose)
Extent (amount or rate)

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez

Coverage (subjects and objects)


Situs (place) of tax imposition
Maceda vs. ERB- Justice Paras dissented and considered it a
tax imposition which congress can validly impose
Victorias Milling vs. PPA- the court held that imposition of
10% on earnings of arrastre and stevedoring operators was
more of a contractual compensation for the use of port
facilities than a tax that can thus be made by the ports
authority.

Delegatory Power of Taxation


a) Legislative body of the govt
b) To local government units
c) President
LGU and President exercises power of delegation- a delegated
power cannot be further delegated (DELEGATA POTESTAS NON
POTEST DELEGARI)
3. Subject to international comity or treaty
A state must recognize the generally accepted principles of
sovereign among states and of their freedom from suit without
their consent, that limit the authority of a govt to effectively
impose taxes on a sovereign state and its instrumentalities, as
well as on its property held, and activities undertaken, in that
capacity. Even where one enters the territory of another, there
is an implied understanding that the former does not thereby
submit itself to the authority and jurisdiction of the latter.
Pepsi-Cola vs. Municipality of Tanauan- SC has adopted the
position that a violation thereof would contravene the general
clause on due process, and any tax thereby levied shall amount
to the taking of property without due process of law may not be
passed over under the guise of the taxing powers, except when
the taking of the property is in the lawful exercise of the taxing
power, as when the tax is
1. For public purpose
2. Observance of uniformity rule
3. Person or property taxed is within the jurisdiction
of the taxing authority
4. Assessment and collection of certain kinds of
taxes, notice and opportunity for hearing is
provided
4. Exaction is payable in money
5. Territorial
May be exercised only within the territorial jurisdiction of the
taxing authority.
Wells Fargo Bank vs. Union Trust; Meralco vs. Yatco - In the
selection of appropriate criteria, the taxing authority is given
wide latitude; among the circumstances often considered are
the nature of the tax, the extent of benefit that may be derived
by the tax payer and equity principles.
CIR vs. Marubeni- petitioner CIR cannot collect because the
contractors tax cannot be imposed on the offshore portion of
the contract where the materials and equipment were all
manufactured or done in Japan for lack of taxing power.
In fixing the tax situs:
Poll taxes- tax situsis the residence of the taxpayer

By: Karen Pearl Cue

Property taxes- where the property is situated


Excise taxes- where privilege is exercised, where taxpayer is
a national of, where he had his residence
Not absolute because its exercise is subject to constitutional
limitations and inherent restrictions;

CONSTITUTIONAL LIMITATIONS
1. Observance of due process of law
Instances of violation of due process:
Tax being imposed amounts to confiscation;
Tax law is in violation of requisite public purpose;
Subject or object is outside the territorial jurisdiction
of the taxing authority;
Taxpayer is not given an opportunity to be heard;
Tax law is applied retroactively;
2. Equal protection of law- all persons subject to legislation shall
be treated alike;
3. Uniformity- all taxable articles of the same class shall be taxed
at the same rate;
Juan Luna Subdivision vs. Sarmiento- the term uniformity
requires that all subjects or objects of taxation, similarly
situated, are to be treated alike or put on equal footing both in
privileges and liabilities.
City of Baguio vs. de Leon- equality and uniformity in taxation
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 may be found.
CIR vs. Lingayen Gulf Electric- When tax laws applies equally well
to all persons, firms, and corporations placed in similar
situation, there is no infringement of the rule of equality.
Inequality which results in singling out one particular class for
taxation or exemption infringes no constitutional limitation.
Pepsi Cola vs. City of Butuan- Classification is permitted:
1. Standards used are not arbitrary but reasonable
and substantial;
2. Classification is germane to achieve the purpose
of legislation;
3. Classification applies to both present and future
conditions, other circumstances being equal;
4. If classification applies equally to all those
belonging to the same class.
Eastern Theatrical Co. vs. Alfonso- SC held to be absolutely
without merit the contention that an ordinance which impose
taxes on some places of amusement such as cinematographs,
theaters, vauderville companies, theatrical shows, boxing
exhibitions and other kinds of amusements or places of
amusements, but not on many more kinds of amusements like
race tracks, cockpits, carabets, concert halls, circuses, and
other places of amusements is against the equality and
uniformity of the tax imposition.
Basco vs. PAGCOR- Equality and uniformity in taxation means
that all taxable articles or kinds of property of the same class
shall be taxed at the same rate.
Assoc. of Customs Brokers vs. Municipality of Manila- There is
no pretense that the ordinance equally applies to motor

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez


vehicles which come to Manila for a temporary stay or for short
errands, and it cannot be denied that they contribute in no
small degree to the deterioration of the streets and public
highways. The fact that they are benefited by their use
corresponding burden. And yet such is not the case. This is an
inequality which we find in the ordinance, and which renders it
offensive to the constitution.
Shell Co. vs. Vano- But the fact that only one person is affected
by a tax law or ordinance, which is otherwise of general
application, does not render the law or ordinance invalid as
being discriminatory.
Philtrust vs. Yatco- where the differentiation complained of
conforms to the practical dictates of justice and equity, it is not
discriminatory within the meaning of this clause and is therefore
uniform. There is quite a similarity then to the standard of equal
protection for all that is required is that the tax applies equally
to all persons, firms, and corporations placed in similar
situation.
4. Progressive scheme of taxation- based on the ability-to-pay
principle
5. Non-imprisonment for non-payment of poll taxes
6. Non-impairment of the obligation and contract rule
7. Free-worship clause
8. Religious entities selling or distributing religious literature is
subject to VAT-registration fee imposed on Non-VAT
enterprises
9. Exemption of religious, charitable or educational entities, nonprofit cemeteries, churches and mosque from property taxes
10. Exemption from taxes and revenues and assets on non-profit,
non-stock educational institutions including grants,
endowments, donations or contributions for educational
purposes.
Art XIV, Sec 4 (3)- All revenues and assets of non-stock, nonprofit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes
and duties. Upon dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of in
the manner provided by law.
Proprietary
educational
institutions
including
those
cooperatively-owned, may likewise be entitled to such
exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment.
Secretary of Justice Opinion No. 130- The exemption does not
cover revenues derived from, or assets used in, unrelated
activities or enterprise. Similar tax exemption benefits may be
extended to proprietary educational institutions by law subject
to such limitations as it may provide.
11. Non-appropriation of public funds or property for the benefit
of any church, sect or system of religion, etc.
Art VI, Sec 28 (3)- Charitable institutions, churches, parsonages
or convents appurtenant thereto, mosques and non-profit
cemeteries and all lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.

12.
13.

14.
15.

By: Karen Pearl Cue

Hodges vs. Municipal Board of Iloilo- The tax exemption covers


property taxes only; accordingly, a conveyance of such exempt
property can be subject to transfer taxes.
Apostolic Prefect vs. City Treasurer of Baguio- Special levies or
assessments, not being taxes, are not covered by the
exemption. The LGC, however, extends the exemption to special
assessments.
Herrera vs. Q.C. Board of Assessment Appeals- The term
exclusively means primarily, not solely. Thus, the admission of
pay patients does not detract from the charitable character of a
hospital, if all its funds are devoted exclusively to the
maintenance of the institution as a public charity.
Praire Du Chian Sanitarium vs. City of Praire Du Chian- where
rendering charity is its primary object, and the funds derived
from payments made by patients able to pay are devoted to the
benevolent purposes of the institution, the mere fact that a
profit has been made will not deprive the hospital of its
benevolent character.
Abra Valley College vs. Aquino- In exempting from the real
property tax a portion of the school building which was being
used for the residence of the school director and his family but
subjecting to the tax another portion thereof which was being
leased to a marketing firm for commercial purposes. The 1987
Constitution additionally requires that the property actually
and directly used for religious, educational or charitable
purposes.
Roman Catholic Church vs. Hastings- The issue of title or
ownership is not relevant; accordingly, a piece of real property
that is leased for a consideration by a religious entity, which is
then used by the latter actually, directly, and exclusively for
religious, educational or charitable purposes would be exempt
from property taxes.
No money shall be paid out of the Treasury except in
pursuance of an appropriate made by law.
Concurrence of a majority of ALL members of the Congress for
the passage of a law granting tax exemption
Art VI, Sec 28 (4)- No law granting any tax exemption shall be
passed without the concurrence of a majority of all the
members of the Congress.
Art VI, Sec 29 (3)- 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 govt
Gaston vs. Republic Planters Bank- The Court ruled that the
stabilization fees collected by the State for the promotion of
sugar industry were in the nature of taxes and no implied trust
was created for the benefit of sugar producers. 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 govt.
Non-diversification of tax collections
Non-delegation of the power of taxation

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez

16.

17.

18.

19.

Exceptions:
a) Power to tax delegated to the President under flexibility
clause and Tariff and Customs Code
b) Delegated to the LGU under LGC
c) Matters involving expedient and effective administration
and implementations of assessments and collection of
taxes on certain aspects of taxing process that are not
legislative in character
President shall have the power to veto any particular item in
an appropriation, revenue or tariff, but veto shall not affect
the items to which no objection has been made. Art 6, Sec 27
(2)
Non-impairment of the jurisdiction of the SC to review tax
cases
Art VII, Sec 5 (2)b- The Supreme Court shall have the power
to review, revise, reverse, modify or affirm on appeal or
certiorari, as the law of the Rules of Court may provide,
final judgments and orders of lower courts in all cases
involving the legality of any tax, impost, assessment, or toll
or any penalty imposed in relation thereto.
Appropriations, revenue or tariff bills shall originate
exclusively in the House of Representatives but the Senate
may propose or concur with amendments
Art. VI, Sec 28 (2)- 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 devt
program of the govt.
Each LGU shall exercise the power to create its own sources of
revenue and shall have a just share in the national taxes.
Art X, Sec 5- Each local govt 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.
Art X, Sec 6- Local government units shall have a just share, as
determined by law, in the national taxes which shall be
automatically released to them.

Provisions Indirectly Affecting Taxation


1. Police Power and Eminent Domain
Taxation
Levied
for
the purpose
of
raising
revenue;

Purpose

Amount
Exaction

of

There is no
limit;

Police Power
Exercised to
promote
public welfare
through
regulations;
Limited
to
cover the cost
of regulation,
issuance
of
the license or
surveillance;

Eminent Domain
Taking of private
property
for
public use;

No
exaction;
compensation is
paid by the
govt;

By: Karen Pearl Cue

Benefit

No special or
direct benefit
is received;

Nonimpairment
of contracts
Transfer of
property
rights

The
nonimpairment
rule subsists;
Transfer paid
becomes
part of the
public fund;

Scope

Affects
all
persons,
property and
excises;

No
direct
benefits are
received;
damnum
absque
injuria
Contracts may
be impaired;

Direct
benefit
results in the
form of just
compensation;

No transfer
but
only
restraint on
the exercise
of
property
rights exist;
Affects
all
persons,
property,
privileges, and
even rights;

Property is taken
by the govt for
public use upon
payment of just
compensation;

Contracts may
be impaired;

Necessity of the
public for private
property;

Similarities of three inherent powers of the govt


1. Sovereignty, resting upon necessity;
2. Inherent powers of the State;
3. Legislative in nature;
4. State interferes with private rights;
5. Exist independently of the Constitution;
6. Presupposes an equivalent compensation;
7. Public purpose;
8. Exercise of LGU may be limited by Natl legislation;

Garces vs. Estenzo- church-state separation;


American Bible Society vs. City of Manila- The constitutional
guaranty of the free exercise and enjoyment of religious
profession and worship carries with it the right to disseminate
religious information. Any restraint of such right can only be
justified, like other restraint of such right can only be justified,
like other restraints of freedom or expression, on the ground
that there is a clear and present danger of any substantive evil
which the State has the right to prevent.
Grosjean vs. American Press Co.- It is one thing to impose a tax
on the income or property of a preacher. It is quite another
thing to exact a tax from him for the privilege of delivering a
sermon.

Mandatory Character of Constitutional Provisions


When are provisions of revenue laws mandatory and directory?
a) Mandatory- If they are intended for the security of the citizens
or to ensure equality in taxation as to the nature and amount of
each persons tax. Acts done in violation of such mandatory
provisions are invalid.
b) Directory- If they are designed merely for the information and
direction of the tax officers or to secure dispatch or methodical
and systematic modes of proceedings. Non-compliance with
directory laws does not render ineffective acts performed by tax
officials concerned.

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez

Marcelino vs. Cruz- the established rule is that constitutional


provisions are to be considered as mandatory unless by express
provision or by necessary implication, a different intention is
manifest. A directory provision is merely intended for
expediency or convenience such that to have it enforced may
cause harm than by disregarding it.

ASPECTS OF TAXATION (phases, processes, stages or steps)


1. Levy- which is the act of imposition by the legislature such as by
its enactment of the law. Understood to include not only the
mandate on when and how the tax is imposed, but also,
whenever it may be appropriate the grant of tax exemptions,
tax amnesties, or tax condonations.
CIR vs. Botelbo Shipping- Tax exemptions, like tax impositions,
are themselves subject to due observance of the limitations of
taxation.
2. Assessment and Collection- act of administration and
implementation of the tax law by executive through its
administrative agencies.
Assessment means notice and demand for payment of tax
liability, should not be confused with assessment relative to
real property taxation, which refers to the listing and valuation
of taxable real property.
3. Payment- act of compliance by the taxpayer, including such
options, schemes or remedies as may be legally open or
available to him.

2)
3)

Property tax- taxes assessed on things or property of a certain class.


Excise (privilege) tax- taxes on privilege, occupation or business not
falling within the classification of poll or property taxes. Ex. Internal
revenue taxes, customs duties
c)

d)

1)

b) As to subject matter
Personal (poll or capitation)- does not consider the amount of
property, occupation or business of the taxpayer.

As to incidence (Who pays the burden of taxation?)


1. Direct tax- imposed on the person obliged to pay the same
and this burden cannot be shifted or passed on to another.
Example: income tax
2. Indirect tax- Payment is demanded from a person who is
allowed to transfer the burden of taxation to another.
Example: VAT
Maceda vs. Macaraig- A direct tax for which a taxpayer is
directly liable on the transaction or business it engages it.
As to amount (Excise Tax)
1. Specific tax- fixed amount based on volume, weights, or
quantity of good as measured by tools, instruments or
standards. Requires no assessment.
Tan vs. Mun. of Pagbilao- Taxes imposed per head, unit or
number, or by weight or volume beyond a listing require no
assessment beyond a listing and classification of the subjects or
articles to be taxed.
Ad Valorem Tax- Imposition is based on the value of the
property subject to tax. Assessment is necessary.
As to rate
1. Proportion or flat rate- unitary of single rate.
Ex. 12% VAT
2. Progressive or graduated tax- As tax base grows the tax
rate increases. Ex. Individual income tax 5%-32%
3. Regressive tax- tax rate increases as the tax base decreases
4. Degressive tax- increase in tax rate is not proportionate to
the increase in tax base
5. Mixed tax- at certain point it is progressive, then regressive.
As to authority
1. National tax- taxes imposed by natl govt
2. Local tax- imposed by local govt
Meralco Securities vs. Central Board of Assessment Appeals- The
real property tax under the then Property Tax Code is a national
tax since tax always been imposed by the national govt and
enforced through out the Philippines.
2.

e)
CLASSIFICATION OF TAXES
a) As to purpose
1. Fiscal (general or revenue)- they are levied without a
specific or pre-determined purpose
2. Regulatory (special or sumptuary)- those intended to
achieve some social or economic goals.
Calalang vs. Lorenzo- An imposition may partake the nature of
both a revenue measure and a regulatory fee. In such a case,
the real intent and the primary and substantial purpose of the
law must be inquired into from which it may be held to be one
of the other depending on the statutes predominant objective.
PAL vs. Edu- The Court held that since the fees imposed are
mainly used for revenue and only a fifth thereof is retained by
the LTO for regulation, the same should be considered as taxes
rather than license fees.
Villegas vs. Hsiu- Only the portion of a permit fee in excess of
the cost of regulation was held to be a tax.
Esso Standard Eastern vs. CIR- A margin levy on foreign
exchange was held to be police power measure to strengthen
the countrys international reserve rather than tax.
Lozano vs. Energy Regulatory Board- An amount imposed by
the Energy Regulatory Board on petroleum products to augment
the resources of the Price Stabilization Fund under P.D. 1956
was not considered, with Justice Paras dissenting, as an act of
taxation.

By: Karen Pearl Cue

f)

DISTINGUISHED FROM CERTAIN EXACTIONS


TAX
Purpose
Revenue purposes
Source of power
Taxing power of the
govt
Amount
No limit
Subject or object of
imposition

Person,
properties,
business,
rights,
interests, privileges,
acts and transactions

LICENSE
Purposes of regulation
Police power of the
govt
Has limit based on
necessity to carry out
regulation
Required
for
commencement
of
business or profession
or to exercise a
right/privilege

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez


Revocability

Nature of permanence

Always revocable

Scope

Power to tax includes


the power to license
Current data

Does not include the


power to tax
Preceding
years
quarters data. If new
business, based on
capitalization
Not self-assessing
Not subject to the 3
limitations because it
is an exercise of police
power to guard and
safeguard the interest
and welfare of the
public;
Pre-activity imposition

Basis of computation

Nature
Limitation

When imposed
Exemption

Self-assessing
Subject
to
constitutional,
Inherent
and
contractual limitations

Post-activity
imposition
Exemption from tax
does not include
exemption
from
regulatory fees

Exemption
from
regulatory fees is not
allowed.

Victorias Milling vs. PPA- An imposition by the ports authority of


10% govt share on earnings of arrastre and stevedoring
operators was held to be a contractual compensation rather
than tax.
Sambrano vs. CTA; Republic vs. Far East; CIR vs. Prieto- For
certain purposes, tax may be considered debts, in the generic
sense, such as their (taxes) collection being enforceable by court
action in the application of certain statutes of limitation and in
the matter of deductible items from gross income.

Factors that determine whether an imposition is a tax or a license:


1. Amount of the imposition
2. Intent of the imposition
3. Effect of the imposition
Tax
Demand of sovereignty
Ones support for the govt
Imposed only by the govt
Based on governmental needs

Tax
Based on law
Not assignable
Non-payment
covers
imprisonment, except poll tax
Payable in money
Not subject to set-off
Does not earn interest, except
when delinquent
NIRC

Toll
Demand of proprietorship
Compensation for the use of
somebody elses property
Imposed by govt or by private
individuals
Determined by the cost of property
or improvement thereon
Debt
Based on contract
Assignable
No imprisonment for non-payment
Payable in cash or kind
Subject to set-off
Draws interest when stipulated or
in default
Civil Code or Rules of Court

By: Karen Pearl Cue

When a tax is considered a debt?


a) When secured by a bond
b) When collection is enforced by court action
c) When tax is the subject of a compromise agreement validly
entered into between the govt and the taxpayer
d) Interest on tax delinquency is considered as interest on
indebtedness.
Tax
Levied on business, interests,
transactions, rights, persons,
properties or privileges
May be made a personal liability
of person assessed

Based on necessity with no hope


for direct or immediate benefit
Power to tax carries with it right
to levy special assessment
Exemption does not include
exemption
from
special
assessments
Imposition of a charge on all
property, real and personal in a
prescribed area is a tax and not
an
assessment, although the
purpose is to make local
improvement on a street or
highway
Is of general application

Special Assessment
Levied on land

Cannot be made the personal


liability of the person assessed,
because it is the land that
answers for the liability
Based wholly on benefits received

Exemption is qualified

Imposed by the natl or local govt

Exceptional in application for the


recovery
of
cost
and/or
maintenance of improvement

INTERPRETATION AND CONTRUCTION OF TAX STATUTES

CIR vs. Firemens Insurance Co.- the primordial consideration is,


every time, is the legislative intent. But where doubts exists in
determining that intent, the doubt must be resolved liberally in
favor of taxpayers and strictly against the taxing authority.
CIR vs. Central Vegetable Manufacturing- Tax burdens are not to
be imposed beyond what the statute expressedly and clearly
imports, tax statutes being construed strictissimi juris against
the govt.
Floro Cement vs. Gorospe- The exemptions (or equivalent
provisions such as tax amnesties) are not presumed.
Luzon Stevedoring vs. CTA; People vs. Castaneda; CIR vs
Mitsubishi; Republic vs IAC; CIR vs Guerrero - The exemptions
when granted are strictly construed against the grantee.
Manila Electric Co vs. Vera- such provisions being highly
disfavored and may almost be said to be odious to the law.
Thus, a provision in a treaty (Mutual Defense Agreement)
between the United States and the Philippines, stating that no
tax of any kind or description will be levied on any material
equipment or supplies which may be purchased or otherwise
acquired in connection with a construction project, was held not

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez

to exempt the oil used by private contractors of that project in


the operation of their machines or other equipment in
pursuance of their contracts.
CIR vs. J. Kiener Co, Ltd- The exception contained in the tax
statute must be strictly construed against the one claiming the
exemption because the law does not look with favor on tax
exemptions and that he who would seek to be, thus, privileged
must justify it by words too plain to be mistaken and too
categorical to be misinterpreted.
Luzon Stevedoring vs. CTA- An exemption from tax in the
importation of engines and spare parts to be used by passenger
or cargo vessels has been held not to include taxes on the
importation of engines and parts used by tugboats which are
neither passenger nor cargo vessels.
Wonder Mechanical vs. CTA- Neither does a grant of tax
exemption for the manufacture and sale of certain type of
machine include the manufacture and sale of articles produced
by said machine. There is no way to dispute the cardinal rule in
taxation that exemptions therefrom are highly disfavored in law
and he who claims tax exemption must be able to justify his
claim or right. The exemption cannot be established by mere
implication but it must be clearly expressed.
CIR vs Gotamco & Sons- Tax exemption of World Health
Organization from direct to indirect taxes was held to preclude
the imposition of the contractors tax on the construction of its
building by an independent contractor since the burden of the
tax, said the court, is invariably shifted to the owner.
CIR vs. CA, CTA & Ateneo- SC states Petitioner CIR erred in
applying the principles of tax exemption without first applying
the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and impractical
to determine who are exempted without first determining who
are covered by the aforesaid provisions. The Commissioner
should have determined first if private respondent was covered
by Sec. 205, applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace, before
asking Ateneo to prove its exemption therefor. The Court takes
this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that statute will not be construed as
imposing a tax unless it does so clearly, expressedly, and
unambiguously. Tax cannot be imposed without clear and
express words for that purpose accordingly. The general rule of
requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of taxing
act are not be extended by application.

CLASSIFICATION OF TAX EXEMPTIONS


A. Express (by exemption provisions in the Constitution, statutes,
treaties, franchises or similar legislative acts)
NPC vs RIC- P.D. 1177 (confirmed by PD 1931) which withdrew
the exemption of government-owned or controlled corporations
from income tax, custom duties, and other taxes or fees as are
imposed by revenue laws was held to cover both national and
local taxes.
B.

Implied of by Omission

By: Karen Pearl Cue

SSS vs Bacolod City- There is no tax by silence but, but where the
law levies a tax, so also must the tax exemption be explicit in the
law. While exemptions are not presumed, the govt however,
unless otherwise expressed, is deemed not subject to a law
imposing taxes.
Bisaya Land Transportation vs CIR- No prohibition against the
govt taxing itself. There is no tax exemption solely on the
ground of equity, but equity can be used as basis for a statutory
exemption; thus, at times the law authorizes the condonation of
taxes on equitable considerations.

C.

Contractual- those agreed to by the taxing authority in contracts


lawfully entered into by them under enabling laws.
Cagayan Electric vs CIR; Prov. Of Mismis Oriental vs Cagayanthese exemptions must not be confused with tax exemptions
granted under franchises which are not contracts within the
purview of the non-impairment clause of the Constitution.
Casanova vs Hord- Contractual tax exemptions covering the
matters that are not essentially government in nature, such as
those contained in government bonds or debentures, unlike in
franchises, may not be revoked without impairing the
obligations of contracts.
CIR vs CTA- In the case of legislative franchises, the Court stated
A legislative franchise partakes of the nature of a contract.
Carcar Electric & Ice Plant vs CIR- So was the exemption upheld
in favor of Carcar Electric when it was required to pay the
corporate franchise tax under Sec. 259 of the Internal Revenue
Code, as amended by RA 39.
Penid vs Virata- To sustain otherwise is to derogate from the
basic tenet that statutes offering rewards must be liberally
construed in favor of informers with mere technicality yielding
to the substantive purpose of the law.
D. Constitutional
E. Statutory
F. Total
G. Partial
CONSTRUCTION OF TAX LAWS
Tax law must be strictly construed against the State, liberally
construed in favor of the tax payer.
Tax exemption must be strictly construed against the tax payer
and liberally in favor of the govt.
Exceptions:
1) Exemptions in favor of the govt
2) Exemptions in favor of traditional exemptees
3) When law itself provides
4) Retirement laws
GROUND FOR TAX EXEMPTIONS
1) May be taxed based on a contract
2) May be based on the ground of public policy
3) May be based on some ground to foster charitable and other
benevolent institutions
4) May be created under a treaty on grounds of reciprocity

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez


5)

objection that they infringe upon the due process of law clause
of the Constitution; that taxes on income are not subject to the
constitutional objection because of their retroactivity.

May be created to lessen the rigors of International or Multiple


taxation.

Tax Amnesty- general pardon or intentional overlooking by the state of


its authority to impose penalties on persons otherwise guilty of tax
evasion or violation of a tax law.

2)

Tax Exemption
Immunity from tax
Grantee need not pay anything
Can be availed by any qualified
taxpayer
Prospective in application
Liability does not attach top one
enjoying a privilege of tax
exemption
Immunity from civil liability only
Requires no payment of tax

Tax Amnesty
Condonation from payment of
existing tax liability
Grantee pays a portion
Not always available

Retroactive in application
Tax liability attaches to a taxpayer
who wants to avail of tax amnesty
Immunity from criminal, civl and
administrative liability
Requires the payment of certain
percentage of unpaid taxes

CIR vs CA, ROH Auto Products- It should be understandable then


that those who ultimately took over the reigns of the govt
following the successful revolution would promptly provide for a
broad, and not a confined tax amnesty.
Banez, Jr. vs CA- To avail a tax amnesty granted by the govt, and
to be immune from suit on its delinquencies, the taxpayer must
have voluntarily disclosed his previously untaxed income and
must have paid the corresponding tax on such previously
untaxed income.
People vs Castaneda- Tax amnesty, much like tax exemption, is
never favored nor presumed in law and if granted by statute,
the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of
the taxing authority.
Asia Intl Auctioners vs CIR- The exclusion of withholding taxes
for the tax benefit of the Tax Amnesty Program does not cover
indirect taxes such as VAT and excise tax.

CERTAIN DOCTRINES IN TAXATION


1) Prospectivity of Tax Laws- prospective in character and in
application
Hyro Resources vs CA- Taxes may be imposed retroactively by
law but unless so expessed by such law, these taxes must only
be imposed prospectively.
Hilado vs Collector- Tax laws are neither political nor penal in
nature, and they are deemed laws o the occupied territory
rather than the occupying enemy.
Central Azucarera de Don Pedro vs CTA- ex post facto rule,
except for the penalty imposed (not the interest), would be
inapplicable. A harsh retroactivity of the law, however, may
make it inequitable and violative of the constitution; similarly,
due process is violated if the tax is oppressive.
Fernandez vs Fernandez- Property taxes and benefits
assessments on real estate, retroactively, are not open to the

By: Karen Pearl Cue

3)

Imprescriptibility of taxes- imprescriptible unless the law itself


provides for prescription.
CIR vs Ayala Securities Corp- Unless otherwise provided by the
tax law itself, taxes are imprescriptible. NIRC provides for
statutes of limitation in the assessment and collection of taxes
therein imposed.
Collector vs. Bisaya Land Transportation- prescriptive periods
therein contained were considered to be applicable only to
those taxes that were thereunder required to be reported or
returned by the tax payer for tax purposes. The Court thus held
that the then 25% surtax imposed on unreasonably
accumulated surplus profits of corporations is imprescriptible
and there is no time limit on the right of the Commissioner to
assess the same. Where, however, the taxpayer, although not
required, files a return and declares his tax liability, then the
prescriptive periods may become operative.
CIR vs CA- For the purpose of safeguarding taxpayers from any
unreasonable examination, investigation, or assessment, our tax
law provides a statute of limitations in the collection of taxes.
Thus, the law on prescription; being a remedial measure, should
be liberally construed in order to afford such protection.
Double Taxation- taxing the object/subject within the territorial
jurisdiction twice, by the same taxing authority for the same
period, purpose, and involving the same kind of tax.
Two kinds:
1) Direct duplicate taxation- objectionable and prohibited
because it violates the constitutional provision on
uniformity and equality. Same subject/object is taxed twice
when it should be taxed once.
2) Indirect duplicate taxation- No constitutional violation.
Such as: taxing the same property by 2 different taxing
authorities.
Domestic Double Taxation- Subject matter of taxation is taxed
by both the national and local govt at the same time within the
same period.

REMEDIES/MEASURES AGAINST DOUBLE OR MULTIPLICITY OF


TAXATION
a) Provision for tax exemption
b) Allowance of tax credit for foreign taxes paid;
c) Allowance of deduction for foreign taxes paid;
d) Application of Principle of Reciprocity;
e) Enter into treaties and/or agreement with foreign government;
f) Allowance and/or application for tax incentives, and
g) Reduction of Philippine Tax rate

Villanueva vs City of Iloilo- There would be no double taxation


where a lessor of property has to reckon with and pays a real
estate tax on the leased premises, a real estate dealers tax

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez

4)

5)

based on rental receipts, and an income on such rentals, these


impositions of being of different character and purposes.
Proctor & Gamble, Phils vs Mun. of Jagna- There is also no
double taxation when a tax is imposed on soap and other similar
products of taxpayer and another tax on the storage of copra, a
raw material for the the taxpayers product.
CIR vs Lednicky- Double Taxation is one of direct duplicate
taxation when the levies are made by the same taxing authority;
otherwise, the case is merely indirect duplicate taxation.
Pepsi Cola vs Tanauan- Standing alone and not being forbidden
by our fundamental law, double taxation is not a valid defense
against the validity of a tax measure. But from it might emanate
such defenses aganst taxation as oppressiveness and inequality
of the tax.
POWER TO TAX INVOLVES THE POWER TO DESTROY
Sison vs Ancheta- The power to tax is not the power to destroy
while this court sits- Justice Holmes
Roxas vs CTA- (a) The power to tax must be exercised with
caution to minimize injury to the proprietary rights of a
taxpayer; but (b) if the tax is lawful and not violative of any of
the inherent and constitutional limitations, the fact alone that it
may destroy an activity or object of taxation will not entirely
permit the courts to afford any relief; and (c) a subject or object
that may not be destroyed by the taxing authority may not
likewise be taxed. Thus, a tax may not be imposed on the
exercise of a fundamental right since to otherwise permit it
would amount to destroying that fundamental right.
McCulloch vs Maryland- The doctrine was used to support the
holding that stats of the union are prohibited from taxing the
U.S. Federal Government. It is from this latter context or, in
general, when taxation disregards its own limitations that the
phrase the power to tax is not the power to destroy while the
court sits. Had perhaps correctly evolved (Panhandle Oil Co.vs.
Mississippi).
CIR vs Tokyo Shipping- Where the SC remarked that after 15
long years and the expenses of litigation the money that will be
finally refunded to the private respondent is just worth a
damaged nickel.
Standard Oil vs Posadas- While ordinarily the govt does not tax
its own political subdivisions or its other entities, it may,
however do so by providing for it explicitly.
ESCAPE FROM TAXATION

TAX EVASION (tax dodging)


Scheme used outside those of
lawful means to escape payment of
taxes and when availed usually
subjects taxpayer to penalties.
Accomplished by breaking the law;

Connotes fraud, deceit and malice;

TAX
AVOIDANCE
(tax
minimization)
Tax saving device within means
sanctioned by law. Not punishable.

Accomplished by legal procedures


and do not violate the letter of the
law.
No fraud involved;

By: Karen Pearl Cue

Elements of Tax Evasion:


1. Payment of an amount of tax less than what is known to be
legally due;
2. Accompanying state of mind, which is evil, bad faith, deliberate,
willful or intentional, and not merely incidental;
3. Cause of action or failure of action which is unlawful;

Tax Condonation- to remit or to desist or refrain from exacting


or imposing a tax. It cannot extend to refund of taxes already
paid when obtaining.

FORMS OR ESCAPE FROM TAXATION


1) Shifting- process of transferring the tax burden from statutory
taxpayer to another without violating the law;
2) Capitalization- Seller is willing to lower the price of commodity
provided the taxes will be shouldered by the buyer;
3) Transformation- Manufacturer absorbs the additional taxes
imposed by the govt without passing it to the buyers for fear of
lost of his market. Instead, he increases quantity of production,
thereby turning their units of production at a lower cost
resulting to the transformation of the tax into a gain through
the medium of production.
Norton and Harrison vs CIR- The organization of a corporation
prompted more on the mitigation of tax liabilities than for
legitimate business purposes could, for example, constitute one
of tax evasion.
Delpher Traders vs IAC- An estate planning within the means
sanctioned by Sec 35 of the Tax Code hs been held to be one of
tax avoidance.
6)

DOCTRINE OF EQUITABLE RECOUPMENT- Refund of taxes are


barred by prescription which can no longer be claimed by
taxpayer but there is a present tax being assessed against the
said taxpayer, such present tax may be recoup or set-off against
the tax, the refund of which has been barred.
Collector vs UST- The SC altogether rejected the doctrine,
saying that it was not convinced of the wisdom and
propriety thereof, and that it may work to tempt both the
collecting agency and the taxpayer to delay and neglect
their respective pursuits of legal action within the period
set by law.

7)

Set-off Taxes
General Rule: Taxes are not subject to Set-off or Legal
Compensation because tax is not a debt.
A tax is not a debt for the reason that a tax does not depend
upon the consent of the taxpayer and there is no express or
implied contract to pay taxes.

Exceptions:
1) Tax is secured by a bond
2) Collection is enforced by court action
3) Compromise agreement validly entered into between the govt
and the taxpayer
4) Interest on tax delinquency is considered as interest on
indebtedness

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez


8)
Requisites of Set-Off
1) Both obligations from the govt and the taxpayer are due and
demandable
2) It is fully liquidated
Reasons why taxes are not subject to legal compensation:
1) Lifeblood doctrine
2) Govt and taxpayer are not creditor and debtor.
3) Taxes are not in the nature of contracts.

Republic vs Mambulao Lumber- The SC enunciated the rule


that taxes are not subject to set-off or legal compensation.
(1) taxes are of 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) public policy is better subserved if
the integrity and independence of taxes be maintained.
Domingo vs Garlitos- tribunal reversed itself when it ruled
that where the taxes and the taxpayers claim are fully
liquidated, due and demandable, legal compensation under
Art. 1279 of the Civil Code can take place by operation of
law, and both debts are extinguished to the concurrent
amount.
Francia vs IAC- Although legal compensation was clearly
inapplicable since the tax sought to be the object of set-off
was due to a city, whereas the other liability was the
compensation due the taxpayer from the natl govt arising
from the latters exercise of eminent domain, the Court
nonetheless expressed that taxes are not subject to legal
compensation in an apparent step to revert to the
Mambulao Lumber doctrine.
Philex Mining Corp vs CIR- We have consistently ruled that
there can be no offsetting of taxes against the claims that
the taxpayer may have against the govt. A person cannot
refuse to pay tax on the ground that the govt owes him an
amount equal to or greater than the tax being collected.
The collection of tax cannot await the results of a lawsuit
against the govt.
Republic vs Sampaguita Pictures- The SC allowed taxes due
from the taxpayer to be considered paid through the
delivery of negotiable certificate of indebtedness issued by
the Philippine Govt which had theretofore already been
presented and surrendered to the National Treasurer.
CIR vs Esso Standard Eastern- The SC affirmed the Tax
Courts decision applying a tax credit approved in 1964 for
overpayment of Essos 1959 income tax to its 1960
deficiency income tax and, thus sanctioned the imposition
of penalty interest only on the balance thereof. The
obligation to return the excess, said the court, arose from
he time of payment and not when the payee admitted the
obligation. Any contrary rule would be unjust and absurd
considering that the money overpaid was all the while with
the govt.

By: Karen Pearl Cue

TAXPAYERS SUIT- Class suit brought by one or more taxpayer


on behalf of themselves and as representation of a class of
taxpayers situated within a taxing district and for the purpose of
seeking relief from illegal or unauthorized acts of the govt or its
tax officials which acts are injurious to their common interest as
taxpayers.

REQUISITES OF TAXPAYERS SUIT


a) Tax money is being exacted and spent in violation of specific
constitutional protections against abuses of legislative power;
b) Public money is being deflected to any improper purpose;
c) Petitioners seek to restrain the respondents from wasting public
funds through an enforcement of an invalid or unconstitutional
law;

9)

Pascual vs Sec of Public Works- It is only when an act


complained of, which may include a legislative enactment,
directly involves the illegal disbursement of public funds derived
from taxation that the taxpayers suit may be allowed.
Lozada and Igot vs Comelec- The suit would be improper to
question the inaction of the Commission on Elections to call a
special election.
Dumlao vs Comelec- The suit would be improper to stop said
Commission from holding an exercise of suffrage.
Gonzales vs Marcos- The suit would be improper where the
disbursement does not involve funds raised by taxation.
Maceda vs Macaraig Jr.- The petitioner alleged that he was
instituting the suit in his capacity as a taxpayer and a dulyelected Senator of the Phils. Public respondent, on the other
hand, argued that in a taxpayers suit, the petitioner must show
that he had sustained direct injury as a result of the action and
that it is not sufficient for him to have a mere general interest
common to all members of the public. The Court disagreed and
ruled that the petitioner could file the petition since it involves
an issue on the legality of the tax refund to NPC by way of tax
credit certificates and the use of said assigned tax credits by
respondent oil companies to pay for their tax duty liabilities to
the BIR and BOC or what could thus be a case of illegal
expenditure of tax money.
DOCTRINE OF TRANSCENDAL IMPORTANCE- Ordinary citizens
and/or taxpayers are allowed to sue or file a taxpayers suit
even if the failed to show direct injury to them or the assailed
irregular expenditure of public funds sourced from taxation
provided they can show paramount public interest or the farreaching implications of such disbursement.

TAX PAYERS SUIT


Complainant or plaintiff
is affected by the
expenditure of public
funds;

10) COMPROMISES

CITIZENS SUIT
Complainant or
plaintiff is a mere
instrument of the
public concern;

CLASS SUIT
Complaint of a group of
individuals with common
concern
against
a
respondent
for
an
alleged violation of the
groups individual rights;

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez

Sec 204 NIRC. Authority of the Commissioner to Compromise,


Abate and Refund Tax Credits- the Commissioner may
(A) Compromise the payment of any internal revenue tax,
when:
(1) a reasonable doubt as to the validity of the claim
against the taxpayer exists; or
(2) The financial position of the taxpayer
demonstrates a clear inability to pay the assessed
tax.
Art. 2034 NCC- There may be a compromise upon the civil
liability arising from an offense; but such compromise shall not
extinguish the public action for the imposition of the legal
penalty.
Art 2035 NCC- No compromise upon the following questions
shall be valid:
(1) The civil status of persons;
(2) The validity of marriage or a legal separation;
(3) Any ground for legal separation;
(4) Future support;
(5) Jurisdiction of courts;
(6) Future legitime;
Sec 709, TCC- The power to compromise in respect to customs
duties is, at best, limited to cases where potestive authority is
specifically granted such as in the remission of duties by the
Collector of Customs.
Sec 216, TCC- Cases involving the imposition of fines, surcharges
and forfeitures which may be compromised by Commissioner
subject to the approval of the Secretary of Finance.

11) DOCTRINE OF PRIMARY JURISDICTION- It precludes a court


from arrogating unto itself the authority to resolve a
controversy the jurisdiction over which is initially lodged with an
administrative body of special competence.

Where the determination requires expertise, specialized skills


and knowledge of the proper administrative bodies because
technical matter or intricate questions of fact are involved, the
relief must first be obtained in an administrative proceeding
before a remedy will be supplied by the Court even though the
matter is within the jurisdiction of a court.
This doctrine does not require the issuance of any warrant of
arrest by the Courts but the person arrested should be brought
before an official authorized to conduct preliminary
investigation.

12) DOCTRINE OF JUDICIAL NON-INTERFERENCE- The courts cannot


inquire into the wisdom of a taxing act or the advisability or
expediency of a tax measure.
13) MOST FAVORED NATION CLAUSE- This concept is intended to
establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations

By: Karen Pearl Cue

may enjoy privileges accorded by either party to those of the


most favored nation.
This will allow the taxpayer of one state to avail more liberal
provisions granted in another tax treaty to which the country of
residence or such taxpayer is also a party provided that the
subject matter of taxation is the same as that in the tax treaty
under which the taxpayer is liable.

14) DOCTRINE OF SOVEREIGN EQUALITY- This international rule


maintains that the property or income of a foreign state or govt
may not be the subject of taxation by another State.
If a tax law violates some international treaty, laws or
convention, it is not only invalid but unconstitutional because
the Constitution provides that: Philippine adopts the generally
accepted principles of international laws as part of the law of
the land.
15) DOCTRINE OF ESTOPPEL- In the performance of its
governmental functions, the State cannot be estopped by the
neglect, errors or mistakes of its agents or officers.
The erroneous application and enforcement of law by public
officials do not block the subsequent correct application of the
statutes.

BUREAU OF INTERNAL REVENUE


I.
1.
2.

Powers and Duties of the BIR


Assessment and collection of taxes;
Enforcement of all forfeitures, penalties, fines and judgments in
all cases decided in its favor by the Courts;
3. Giving effects to and administering the supervisory and police
powers conferred to by the NIRC and/or other laws;
4. Assignment of internal revenue officers and other employees to
other duties;
5. Provisions and distribution of proper officials of forms, receipts,
certificates, stamps, etc.
6. Issuance of receipts and clearancs;
7. Submits annual report, pertinent information to Congress and
reports to the Congressional Oversight Committee in matters of
taxation.
8. Authority of the internal revenue officers to make arrest
seizure;
9. Authority of the internal revenue to administer oath and take
testimony;
10. Authority of the tax officials in searching taxable articles;
11. Remedy for enforcement of forfeiture;
12. Authority to sell and/or destroy forfeited property.
Powers of the Commissioner of Internal Revenue
1) Original and exclusive power to interpret the provisions of the
NIRC;
2) To recommend the implementing guidelines of a tax law to the
Secretary of Finance;
3) To decide cases relative to DROP (Sec.4)

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez


4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)

To obtain information and to summon, examine, and take


testimony of persons to effect tax collection;
To make assessment;
To make/amend a return for and in behalf of a taxpayer; or to
disregard one filed by a taxpayer;
To change a tax period;
To conduct inventory or surveillance;
To prescribe presumptive gross sales/receipts;
To prescribe real estate values;
To accredit tax agents;
To inquire into bank deposits under certain cases;
To prescribe additional procedural or documentary
requirements for tax administration and enforcement;
To delegate his powers to any subordinate officer with rank
equivalent to a division chief of an office;
To compromise tax liabilities of taxpayers;
To refund cost of IR taxes;
To abate or cancel tax liabilities in certain cases;
To examine tax returns and determine tax due thereon;
To administer oaths and take testimony;
To make arrest and seizure;
To divide the Philippines into revenue districts for
administrative purposes upon approval of the Sec. of Finance;
To cause revenue officers and employees to make a canvass
from time to time of any revenue district or region concerning
taxpayers;
Sy Po vs CTA- Assessements issued by the Commissioner are
presumed to be correct and valid, and a taxpayer who disagrees
not only must prove that the assessment is wrong but he must
state the correct one.
Central Azucarerea de Don Pedro vs CTA- When a report
required by law for the assessment of any internal revenue tax
is not forthcoming or when there is reason to believe that any
such report is false, incomplete or erroneous, the Commissioner
shall assess the proper tax on the best evidence obtainable.
Benepayo vs Collector- In order to pass the test of judicial
scrutiny, the assessment must be based on actual facts and not
itself, in turn, based on mere presumptions no matter how
reasonable such presumptions appear to be.
Collector vs Bohol Land Transportation- Within the applicable
statute of limitation, the Commission may re-examine or reassess the taxpayer, the govt not being estopped by error or
mistakes of its agents.
Meralco Securities vs Savellano- The Court ruled that the
Commissioner may not be compelled by the courts through
mandamus to impose tax assessment which he believes is not
proper.
Samson vs Barrios- If the law imposes a duty upon a public
officer and gives him the right to decide how or when the duty
shall be performed, such duty is discretionary and not
ministerial. The duty is ministerial only when the discharge of
the same requires neither the exercise of official discretion nor
judgment.
People vs Rubio- The SC ruled that a search warrant may not be
used as a means of gaining access to a mans house or office

By: Karen Pearl Cue

solely for the purpose of making a search to secure evidence to


be used against him in a criminal or penal proceeding.
Molo vs Yatco- A warrant would be proper to search for and
seize books of account, invoices and records when so used as
instruments or agencies for perpetrating fraud upon the govt.
Records in custodial egis cannot, however, be seized without
leave of court.
Bache & Co vs Ruiz- An application for a search warrant stating
that the person named therein has committed a violation of the
Tax Code and Tariff and Customs Laws without specifying the
offense, and seeking the seizure of all books of accounts and
records, defeats the major objectives of eliminating general
search warrants and does not satisfy the constitutional
requirements. Documents that are thereby illegally seized are
inadmissible in evidence.
Frank Uyad Unifish Packing Corp vs BIR- Search warrant for
seizure of book of accounts, invoices, receipt and other financial
record may be done by the BIR with the Regional Trial Court but
the article to be seized must be done with particularly.
Vera v Hon. Cuevas- As regards the exercise of its police powers
the BIR may do so only in the enforcement of its tax collection
duties and not for any other purpose such as that which entails
promotion of health.
U.S. vs Viado- When making arrests and seizures, revenue
agents assume the category of peace officers and they are in
that capacity entitled to the privileges of such officers under
penal and procedural laws.

Non-delegable powers of the CIR


a) Power to recommend the promulgation of rules and regulation
to the Secretary of Finance;
b) Power to issue rulings of first impression or to reverse, revoke
or modify any existing ruling of the Bureau;
c) Power to compromise;
d) To abate any tax liability;
e) Power to assign and reassign internal revenue officers to
establishments where articles subject to excise tax and
produced or kept;
Instances where authority to investigate is dispensed with:
1) When taxpayer does not issue sales invoices or receipts;
2) When taxpayer is found to keep private books of accounts;
3) When taxpayer is not provided with the necessary privilege tax
receipts;
4) When taxpayer is in possession of unpaid tax articles subject to
excise tax;
Powers of Revenue Regional Directors
a) To implement tax laws, policies, plans, programs, revenue
regulations of the department or agencies in the regional areas;
b) Administer and enforce internal revenue laws, rules and
regulations;
c) Enforce assessment and collection of internal revenue taxes,
charges and fees;
d) Issue Letters of Authority for examination of taxpayer within the
region;

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez


e)
f)
g)
h)

Provide economical, efficient and effective service to the people


in the area in matters of taxation;
Coordinate with regional offices or other departments, bureaus
and agencies in the area;
Exercise control and supervision over its officers and employees;
and
Perform other functions as may be provided by law or delegated
to him by the CIR.

2 KINDS OF POWERS OF ADMINISTRATIVE AGENCIES:


1) Quasi-Legislative or Rule Making Power- Power to make rules
and regulations which results in delegated legislation that is
within the confines of the granting statute and the doctrine of
non-delegability and separability of powers.
Includes issuance of the ff:
a) Supplementary or detailed legislation
b) Contingent legislation;
c) Interpretative rule
2)

Quasi-judicial or Administrative Adjudicatory Power- Power to


adjudicate the rights of persons before it. It is the power to hear
and determine questions of fact to which the legislative policy is
to apply and to decide in accordance with the standards laid
down by the law itself in enforcing and administering the same
law. In the exercise of this authority due process must be
afforded to concerned parties.

BIR RULES AND REGULATIONS


1) Consistent and in harmony with law;
2) Reasonable;
3) Useful and necessary;
4) Published in the Offical Gazette;

CIR vs CA, R.O.H. Auto Product & CTA- The authority of the Sec
of Finance, in conjunction with the CIR, to promulgate all
needful rules and regulations for the effective enforcement of
internal revenue laws cannot be controverted.
Arches vs Bellosillo- A revenue regulation, the issuance of which
is authorized by stature, has the force and effect of law.
CIR vs CA, CTA, and Fortune Tobacco Corp- Interpretative rule,
one the 3 quasi-legislative or rule-making power of the an
administrative agency refers to no single person or party in
particular, but concerns all those belonging to the same class
which may be covered by the said interpretative rule.
CIR vs Burroughs- Any revocation, modification or reversal of
such rules or regulations, including rulings or circulars of the
Commissioner, shall not be given retroactive effect if the same
would be prejudicial to the taxpayer, except in case of rulings:
a) where the taxpayer deliberately misstates or
omits material facts;
b) where the facts subsequently gathered by the BIR
are materially different from the facts on which
the ruling is based; or
c) where the taxpayer acted in bad faith;

By: Karen Pearl Cue

CIR vs Fortune Tobacco Corp- The due observance of the


requirements of notice, of hearing and publication should not
have been ignored.
PBC vs CIR- It must be noted that a claim for refund is in the
nature of a claim for exemption and should be construed in
strictissimi juris against the taxpayer.

Princple of Strictissimi Juris- Tax exemptions must be strictly construed


against the taxpayer and liberally in favor of the government. Taxation is
the Rule and Exemption is the Exception.
FEATURES OF INCOME TAX LAW
1) Progressive and based on Ability-to-Pay Principle
2) Global tax system is applicable to taxable corporation, whereas,
the schedular tax system is applied to taxable individuals
3) Adopted the most comprehensive tax situs
Income tax- tax on all yearly profits, income, gains emoluments and the
like of persons (individual and/or judicial) arising from property,
profession, trades, offices and activities whether gross or depending on
the class of taxpayer and the kind of income.
Taxable income- refers to gross income less allowable deductions and/or
personal and additional exemptions and health/hospitalization premium
allowances.
PURPOSE OF INCOME TAX
To ease the impact of continuing rise in oil and food prices on
the people, and
To provide relief and additional money to spend for basic
necessities especially for minimum wage earners;
To simplify the application of the OSD beginning July 1, 2008;
Nature of Income Tax
a) Self-assessing or self-computed;
b) National tax;
c) Regarded as an excise tax because it actually levies upon the
right to earn an income;
d) Direct tax;
e) General tax;
f) Not covered by the Principle of Territoriality;
Functions of Income Tax
Provides large amounts of revenue for the support o the govt;
Offsets the regressive sales, consumption and estate taxes;
Mitigates the evil arising from the inequalities in the distribution
of income through the imposition of progressive, graduated
income tax rates.
Progressive System of Taxation- Application of income tax rates to the
taxable income of a taxpayer which much be proportionate in character
and shall be used as an instrument to promote social justice to achieve
social equity and must not be regressive
It is the constitutional mandate that will correct the inequalities
in taxation by equitably distributing the tax burden based upon
the Ability-to-Pay Principle

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez

This has been introduced in our tax system as a measure of


raising more revenues to meet adequately the increased needs
of the Govt and at the same time to correct inequities in
taxation by equitably distributing the tax burden based upon
the principle of ability to pay.

2 SYSTEMS OF INCOME TAXATION


1) Global System- taxpayer is required to report all income earned
during a taxable period in one income tax return, which income
shall be taxed under the same rule of income taxation.
2) Schedular System- requires a separate return for each type of
income and the tax is computed on per return or per schedule
basis and it provides for different tax treatment of different
types of income.
Global Income Taxation
System that taxes all categories of
income except certain passive
income and capital gains.
Taxpayer is required to report all
income earned during a taxable
period in one income tax return;
Total allowable deductions
personal and additional
exemptions are deducted from
the gross income.
Based on the aggregate income
from all sources that are not
subject to final income tax.
Globalized income is subject to a
unitary but progressive and
graduated rate of 0% to 32%;

Schedular Income Taxation


System employed where the
income tax treatment varies and
is made to depend on the kind or
category taxable income of the
taxable. It has different rates
Taxpayer is required to file
separate tax return for each type
of income and the tax is
computed on per return or per
schedule basis.
Separate returns are filed by the
recipient of the income except for
passive income.
Income from different sources are
not globalized, they are treated
separately and are subject to
different sets of graduated or flat
income tax rates;
Itemizes the different incomes
and provides for varied rate of
taxes are applied thereto. It has
different rates;
Individual taxpayers follow this
system. Income from different
sources are classified and treated
differently;
There is need to categorize
income from different sources.

c)
d)
e)
f)
g)
h)
i)
j)
k)

By: Karen Pearl Cue

Final withholding tax system on certain passive investment


income paid to residents;
Final withholding tax on income payments made to nonresidents;
Capital gains tax on sale or exchange of real property classified
as capital asset;
Branch profit remittance tax;
Tax on improperly accumulated earnings of corporations;
Fringe benefit tax;
Preferential rates or special rates of income tax on individuals or
corporations;
Minimum corporate income tax;
Optional corporate income tax;

Gross Income- All income, gain or profit subject to tax, whether the same
is realized from legal or illegal activities.
Net Income- Gross income less allowable deductions and exemptions.
Gross Income Taxation
Fixed or computed without
allowable deductions;
Applies to: (a) compensation
income earners, (b) non-resident
aliens not engaged in trade or
business, (c) non-resident foreign
corporations.
A final tax is imposed on the gross
amount of specific types of
income, such as interest,
royalties, prize, dividend and
capital gains;
Grants no exemptions;
Tax base is gross income;

Net Income Taxation


Reduced by allowable deductions;
Applies to: (a) self-employed
taxpayers in business or
profession, (b) domestic
corporations, (c) resident
corporations, (d) special
corporations;
Certain deductions are allowed
and subtracted from the
aggregate income not to final tax
and the tax is computed on the
resulting net income therefrom.
Exemptions are granted;
Tax base is net income;

Semi-schedular or Semi-global tax system- It reduces the range of


graduated tax rates applied on the net taxable income of self-employed
and professional form 5% to 60% to 0% to 35%, the same set of tax rates
applied on compensation income, but increased the preferential tax rates
on capital gains and passive investment incomes.

Advantages of Gross Income Taxation


a) Computation is simple;
b) Does away with wastage and supplies and requires less
manpower;
c) Less discretion is allowed the tax examiners;
d) Less probability of connivance between taxpayer and tax
examiners;
e) Substantial reduction in corruption and tax evasion;
f) Examination and/or investigation of tax return can be faster or
even do away with;
g) Favorable to the authorities because they may be able to collect
more taxes;
h) Couple with an effective withholding tax system, govt is assured
to bigger revenue;

2 Kinds of Income Tax under RA 8424


a) Graduated income tax
1) Net income tax
2) Gross income tax
b) Normal corporate income tax;

Disadvantages of Gross Income Taxation


a) No deductions and exemptions are allowed;
b) Taxpayer may derived gross income but suffers net loss;
c) Susceptible to fraud in the absence of general audit;
d) Rule on taxation may not be equitable and uniform;

Corporate taxpayers adopt this


system. All their income are
globalized and taxed at 32%.
No need to classify taxable
income;

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez


e)
f)

g)
h)

What could be taxed may not be income but mere return of


capital;
This system may serve as a disincentive to further production
and distribution of essential commodities necessary for
economic development;
Taxpayers may lose interest to each more by lessening their
purchasing capacity;
Govt may end up collecting lesser taxes in the absence of audit,
because the taxpayers may cheat on their sources of income;

Advantages of Net Income Taxation


a) Fair and just due to grant of deductions;
b) Presence of tax audit minimizes fraud;
c) Provides equitable relief in the form of deductions, exemptions
and tax credits;
Disadvantages of Net Income Taxation
a) Susceptible to corruption;
b) Confusing and complex process of filing of income tax returns;
c) Costly and difficult to administer
Income- money earned without obligation to repay the same or any
restrictions attached thereto as to its disposition. Includes earnings,
lawfully or unlawfully acquired.
Imputed Income- income in kinds given to income earners as part of their
compensation for services rendered, such as: meals rice subsidy, living
quarters, etc.
Receipts- reference to all wealth that flows into the taxpayer which
includes return of capital.
What are the inclusions into the gross income of a taxpayer?
Compensation;
Gross income derived from trade, business or profession;
Gains derived from dealings in property;
Interest;
Rents;
Royalties;
Annuities;
Prizes and winnings;
Pensions;
Partners distributive share from net income;
Income
Fruit of capital, labor or both
Amount of money coming to a
person or corporation within a
specified time whether as payment
for services, interests, or profits
from investments;
All wealth that flows into taxpayer
other than mere return of capital
which includes a result of wealth or
as a substitute for money value for
something permanently lost;

Capital
Tree or source of income
Fund or tool for the production of
health;

Statement of the money value of


the property actually used by the
enterprise, irrespective of the
persons who may have contributed
it;

By: Karen Pearl Cue

Subject to income tax


Flow of service rendered by capital
or labor;

Not subject to income tax


Capital is wealth;

Requisites of Income to be taxable


There must be gain or profit;
Gain must be realized or received;
Gain must not be excluded or exempted by law or treaty from
income taxation;
INCOME TAXPAYERS
1.

Resident citizens
ARTICLE IV
CITIZENSHIP

Section 1. The following are citizens of the Philippines:


1.
2.
3.
4.

Those who are citizens of the Philippines at the time of the


adoption of this Constitution;
Those whose fathers or mothers are citizens of the Philippines;
Those born before January 17, 1973, of Filipino mothers, who
elect Philippine Citizenship upon reaching the age of majority;
and
Those who are naturalized in the accordance with law.

Section 2. Natural-born citizens are those who are citizens of the


Philippines from birth without having to perform any act to acquire or
perfect their Philippine citizenship. Those who elect Philippine citizenship
in accordance with paragraph (3), Section 1 hereof shall be deemed
natural-born citizens.
Section 3. Philippine citizenship may be lost or reacquired in the manner
provided by law.
Section 4. Citizens of the Philippines who marry aliens shall retain their
citizenship, unless by their act or omission they are deemed, under the
law to have renounced it.
Section 5. Dual allegiance of citizens is inimical to the national interest
and shall be dealt with by law.

Resident Citizens- are individuals who are:


Engaged in trade or business
Exercise a profession;
Employed, earning purely compensation income;
Not engaged in business or profession but has income;
Mixed income

Non-resident citizens- are citizens of the Philippines:


Who establishes to the satisfaction of the CIR the fact of his
physical presence abroad with a definite intention to reside
therein;
Who leaves the Philippines during the taxable year to reside
abroad, whether as an immigrant or for employment on a
permanent basis;

Taxation I Midterm Reviewer under Atty. Esther R. Ibanez

Who works and derives income from abroad and whose


employment threat requires him to be physically present
abroad for at least 183 days during the taxable year;
Who has been previously considered as non-resident citizen and
who arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines.

3 types of Non-Resident Citizens


1) Immigrants;
2) Employees of a foreign entity on a permanent basis;
3) OCW/Seamen
2.

Overseas contract workers and seamen

An OCW is taxed only on his income earned in the Philippines;


A Filipino Seaman is considered an OCW if he receives
compensation income for services rendered abroad as a
member of the complement of a vessel engaged exclusively in
international trade.

3.
4.

5.

6.

7.
8.
9.

Resident aliens- individual whose residence is within the


Philippines and who is not a citizen thereof.
Non-resident aliens engaged in trade or business- An alien
whose aggregate period of stay in the Philippines is more than
180 days during any calendar year.
Non-resident alien not engaged in trade or business- An alien
whose aggregate period of stay does not exceed 180 days
during a calendar year.
Special aliens- alien individuals employed by:
Regional headquarters of Multinational Corporations;
Offshore banking units;
Foreign service contractors;
Estates under judicial settlement
Irrevocable trust
Co-ownership

Taxpayer- any natural or artificial person subject to tax


Different tax base and tax rates applicable to individual taxpayers
Individual Taxpayers
Tax Base
Tax Rates
Resident citizen
All income from
Taxable net income
whatever sources;
subject to graduated
rate of 5-32%;
Non-resident citizen
Income derived from
-dosources within the
Philippines;
Overseas Contract
Income derived within
-doWorkers/ Seamen
the Philippines only
Resident aliens
-do-do(a) Aliensemployed by Income derived from
15% tax on gross
regional or area
salaries, wages,
income
headquarters of
annuities,
multinational
compensation
corporations; (b)
received from
Aliens employed by
employer
Offshore Banking

By: Karen Pearl Cue

Units, (c) Aliens


employed by
petroleum service
contractors and
subcontractors, (d)
Filipinos employed in
Asian Devt Bank
occupying managerial
of technical positions
and their alien
counterparts;
Non-resident aliens
not engaged in
business
(a) Estate under
judicial proceeding,
(b) Irrevocable Trust

Income derived within


the Philippines only

25% tax on gross


income

Income derived from


whatever sources

Taxable net income


subject to graduated
rate of 5%-32%

Income Exempt from Income Tax:


1) Income received but enumerated under the term exlusions.
2) Those considered mere return of capital;
3) Those exempted under laws, special laws or treaties;
4) Gains realized from the sale, exchange or retirement of bonds
with maturity of more than 5 years is exempt from income tax;
5) Those covered by Employers Convenience Rule
Employers Convenience Rule- Allowances in kind furnished to the
employee for and as a necessary incident to the performance of his
duties which directly benefits the employer more than it does the
employee.
6)

Those already subjected to the final withholding tax;