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Tax 1 Notes

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Atty. Balan: of the tax laws and ordinances. Applied to
taxation, due process mandates that there
Constitutional Limitations: 7 Questions should be a valid law imposing a tax to a
particular taxpayer, and should the taxpayer
Cases on: failed to pay the same, it must be given each
and every opportunity to explain itself and justify.
1. Non-stock, Non-profit educational instuttions No law imposing a tax, then the taxpayer shall
not be collected such tax. On the other hand,
2. Non impairment of contracts
granting that the taxpayer failed to pay in full but
3. Due Process was not issued as assessment notice informing
the facts and the law of the assessment, still, the
4. Equal Protection taxpayer could not be held to pay. These are the
essence of due process. The taxing authority,
5. Exemption of charitable institutions while implementing the necessary mandates of
its office must give due respect to the
established procedures the way it works in an
organized society.
Constitutional Limitations:
This post is a sequel to the limitations of the
taxing power of the state. This time let us b. Equal protection of law. "...nor shall any
proceed to the CONSTITUTIONAL person be denied equal protection of law". Equal
LIMITATIONS - those limitations on the state's protection relates to how a particular tax
exercise of the taxing power specifically measure or ordinance is being applied to
provided by the particular provisions of the persons or class of persons similarly situated.
Philippine Constitution. Thus, if two entities falling on the same
classification shall be taxed similarly. Example, if
1. Due process of Law an ordinance imposes a tax on technicians and
2. Equal Protection of Law it happened that in a locality there was a single
3. Non-Imprisonment for non-payment of technician, such technician cannot complain for
debt or poll tax unequal application because the ordinance is
4. Non-impairment of obligations of made applicable to all technicians belonging to
contracts the same class.
5. Rule of taxation shall be uniform and
6. Separation of church and state
7. Exemption of charitable, educational, c. Non-imprisonment for non-payment of
and religious institutions debt or poll tax. Debt refers to a civil obligation
8. Concurrence of the majority members of that is payable in money or in kind, while poll tax
Congress in granting tax exemption or community tax refers to an charge or
9. Non-impairment of the jurisdiction of the imposition administered by the local government
Supreme Court on tax cases unit (LGU) where the taxpayer is located. The
10. Veto power of the President in tax bills prohibition admits the fact of inequality of
distribution of wealth in the society and provides
for instances in extreme poverty. This is likewise
in furtherance of the basic doctrine in civil law
a. Due process of law. As provided for, no that civil liability does not put the person liable
person shall be deprived of life, liberty or behind bars. Applied to tax, while poll tax is a
property without due process of law. This covers basic mandate in the Local Government Code,
two types: substantive, and procedural. its non-payment does not entitle imprisonment.
Substantive due process relates to the
circumstances and procedures in the passage of
tax laws and ordinances, while the other relates
to the procedural aspects in the implementation

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Tax 1 Notes
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d. Non-impairment of obligations of the constitution provided certain tax exemptions
contracts. To impair is to damage or to harm from income, real property and customs duties
and obligation referred to is the duty or and taxes under specific circumstances and
commitment imposed upon by the valid contract limitations. There must be showing of an actual,
entered into by the contracting parties. Applied direct, and exclusive use and furtherance of
such objectives in order to be exempt to prevent
abuse and capitalization of such objectives to
escape from tax.
to tax, a new tax law shall not be passed in such
a way as to impair or to prejudice the obligation
of a contracting party by virtue of a contract
entered into with the state. This is to give due h. Concurrence of the majority members of
respect to the contractual terms the state is bind Congress in granting tax exemption. Tax
with respect to its contract with private exemptions are immunity from a particular tax
individuals. A theoretical example of this is, if an that is being imposed to others similarly situated.
exemption is granted by the state by virtue of a The more exemptions, the less collections.
contract with a private entity for which a valuable Accordingly, in order to control and to see to it
consideration is involved, then no new law could that only those necessarily entitled must be
later be passed to prejudice said exemption. provided exemptions, the constitution require
that such grant of tax exemption shall be
concurred by the vote of the majority of the
membership in the Congress. It should be noted
e. Rule of taxation shall be uniform and that Philippines is on a bicameral congress, the
equitable. As stated in uniform application senate and the lower house, thus, granting tax
above, uniformity relates to classification of exemptions are not quite easy to legislate.
taxpayers to be subjected to tax. Equitable on
the other hand relates to the ability to pay the
tax of those that belong to the same class. In
other words, it refers to how much will each pay i. Non-impairment of the jurisdiction of the
and the constitution requires that there must be Supreme Court on tax cases. This is in
a reasonable classification and justification for furtherance of the principles of check and
the unequal imposition. balances. The jurisdiction of the lower courts are
based on the mercy of the laws passed for the
purpose, thus, may be modified and revised
from time to time. However, in the case of the
f. Separation of church and state. This is Supreme Court, no law can take its power to
based on the sad experiences during the become the final arbiter of tax cases.
Spanish regime where the church had much to
say about the governance of state. Applied to
tax, no public money from taxes shall be spent
for furtherance of religious activities. Thus, a j. Veto power of the President in tax bills.
municipality cannot spend public funds for the Generally, on bills passed by Congress, the
celebration of its municipal fiesta. President is empowered to either approve or
disapprove a bill as a whole. If approved or not
acted upon within a certain period of time, it
becomes a law, and if vetoed, it does not
g. Exemption of educational, charitable, and become a law in its entirety. Tax bills however,
religious institutions. The state acknowledges can be granted either fully or partially. If a bill is
the valuable contribution of educating its granted partially, provisions which are approved
inhabitants, benefits brought about by charities becomes part of the law while those provisions
on various programs for general welfare, and the vetoed upon becomes ineffective.
religious well-being of its inhabitants to the
success and development of the society as a
whole. Thus, to encourage private individuals
and entities for the furtherance of this objectives,

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Inherent Limitations on Taxing considered extensions of the territoriality of
the foreign states; to impose taxes upon
Power: them would be tantamount to an exercise of
jurisdiction over these foreign states.
1. Public Purpose
2. International Committee
3. Exemption of the Government
4. Situs of Taxation 3. Exemption of the Government

Atty. Balan: 3 Questions The power cannot be delegated to the President

and to local government. However, it may be
1. Public Purpose delegated to the municipal corporations which
are instrumentalities of the state for the better
Taxes are exacted only for public purpose. They administration of the government in matters of
cannot be used for purely private purpose or for local concerns.
the exclusive benefit of private persons. The
reason behind this is that the power to tax exists As a matter of public policy, property of the State
for the general welfare; hence, implicit in its and of its municipal subdivisions devoted to
power is the limitation that it should be used only government uses and purposes is deemed to be
for public purpose. exempt from taxation although no express
provision in the law is made therefor.
Case: The SC held the levy of 30% tax under
P.D 1987 as for a public purpose, and therefore
a valid imposition. The law, according to the
Court, was imposed primarily for answering the General Rule: The Government is tax exempt.
need for regulating the video industry,
particularly because of the rampant film piracy, - However, it can also tax itself.
the flagrant violation of intellectual property
rights, and the proliferation of pornographic
video tapes. Hence, while the direct beneficiary
of the said decree is the movie industry, the
citizens are held to be its indirect beneficiaries. 1. Administrative Agencies

a. Governmental function - tax exempt

2. International Committee unless when the law expressly provides for tax.
(Sec. 32 B7)
Under Section 2, Article II of our Constitution,
the Philippines adopts the generally accepted b. Proprietary function taxable unless
principles of international law as part of the law exempted by law. (Sec. 27C)
of the land and adheres to the policy of peace,
equality, justice, freedom, cooperation, and 2. GOCCs
amity with all nations. One principle of
international law which has attained wide General Rule: Income is taxable at the rate
recognition is the principle of Sovereign Equality imposed upon corporations or associations
among states. According to this principle, states engaged in a similar business, industry, or
are juridically equal, enjoy the same rights, and activity.
have equal capacity in their exercise.
Exception: GSIS, SSS, PHIC, PCSO and
To Illustrate: If a tax law is passed imposing PAGCOR. (Sec. 27(C), NIRC)
taxes on the income of foreign ambassadors or
imposing real property tax upon foreigh 3. Government Educational Institutions
embassies, this is NOT a valid law because the
imposition is in violation of the universal a. Property or real estate tax property
principles of international law. Under actually, directly and exclusively used for
international laws, foreign embassies are educational purposes exempt but income of
whatever kind and character from any of their

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Tax 1 Notes
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properties, real or personal, regardless of the 4. Territoriality / Situs of Taxation
disposition, is taxable. (Sec. 30, last par., NIRC)
b. Income received by them as such are
exempt from taxes. However, their income from A. POLL/CAPITATION/COMMUNITY TAX
any of their activities conducted for profit
regardless of the disposition, is taxable. (Sec. Poll or capitation, or community taxes are based
30, last par., NIRC) upon the residence of the taxpayer, regardless
of the source of income or location of the
4. Income derived from any public utility or property of the taxpayer.
from the exercise of any essential governmental
function accruing to the Government of the
Philippines or to any political subdivision thereof
is not included in gross income and exempt from B. PROPERTY TAX
taxation. (Sec. 32(B)(7)(b), NIRC)
Real estate is subject to taxation in the state or
5. Donations in favor of governmental country where it is located, regardless of
institutions are considered as income on the part whether the owner is a resident or a non-
of the donee. However, it is not considered as resident. (first national Bank v. Maine)
taxable income because it is an exclusion from
Personal Property, wherever it was actually
the computation of gross income. (Sec.32 (B)
kept or located, was held to be at the domicile of
(3), NIRC)
its owner, following the age-old doctrine of
6. The amount of all bequests, legacies, mobiliasequunturpersonam.
devises or transfers to or for the use of the
Domicile. The domicile of a person is the place
Government or any political subdivision for
which constitutes the principal seat of his
exclusively public purposes is deductible from
residence, his business, his pursuits, his
the gross estate. (Sec.86 (A)(3), NIRC)
connections, his attachments and his political
7. Gifts made to or for the use of the relations. It embraces the fact of residence at a
National Government or any entity created by place with the intent to regard it and make it a
any of its agencies which is not conducted for home and live there for an indefinite time. To
profit, or to any political subdivision of the said establish a domicile, the act and the intent must
Government are exempt from donors tax. (Sec. concur. There must be the fact of living in a
101(A)(2), NIRC) place with the intent to make it ones home (26
R.C.L., pp. 274-275)
8. Local government units are expressly
prohibited by the LGC from levying tax upon NOTE: Section 104, R.A No. 8424 enumerates
National Government, its agencies, and certain properties which have acquired actual
instrumentalities, and local government units. situs in the Philippines:
[Sec. 133 (o), LGC]
a. Franchise exercised in the Philippines
9. Unless otherwise provided in the Local b. Shares of stock, obligations, bonds
Government Code (LGC), tax exemptions issued by domestic corporations
granted to all persons, whether natural or organized and constituted in accordance
juridical, including GOCC, except local water with Philippine Laws
districts, cooperatives duly registered under RA c. Shares, obligations, bonds issued by a
No. 6938, non-stock and non-profit institutions, foreign corporation where 85% of its
are withdrawn upon effectivity of the LGC. (Sec. business is located in the Philippines. It
193, LGC) is subject to donors tax and estate tax
d. Shares, obligations bonds issued by
10. Real property owned by the Republic of foreign corporations which has been
the Philippines or any of its political subdivisions used in the furtherance of the business
except when the beneficial use thereof has been of the foreign corporation
granted, for consideration or otherwise, to a e. Shares/rights in a partnership business
taxable person shall be exempt from payment of or industry established in the
real property tax. (Sec. 234, LGC) Philippines.

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Tax 1 Notes
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These properties are considered as situated, have been published in a newspaper of general
thus taxed, in the Philippines; the residence of circulation at least two (2) weeks before the first
their owners is immaterial. hearing thereon.

"(3) In case of opposition, the rules on contested

Sources of Tax Laws cases shall be observed.

"In addition such rule must be published. On the

(Key: SPEC2TRA BLT) other hand, interpretative rules are designed to
provide guidelines to the law which the
1. Statutes
administrative agency is in charge of enforcing."
2. Presidential Decrees
It should be understandable that when an
3. Executive Orders administrative rule is merely interpretative in
4. Constitution nature, its applicability needs nothing further
than its bare issuance for it gives no real
5. Court Decisions consequence more than what the law itself
has already prescribed. When, upon the
6. Tax Codes other hand, the administrative rule goes
beyond merely providing for the means that
7. Revenue Regulations
can facilitate or render least cumbersome
8. Administrative Issuances the implementation of the law but
substantially adds to or increases the
9. BIR Rulings burden of those governed, it behooves the
agency to accord at least to those directly
10. Local Tax Ordinance
affected a chance to be heard, and
11. Tax Treaties and Conventions thereafter to be duly informed, before that
new issuance is given the force and effect
of law. (CIR vs. CA and Fortune)
Case on Administrative Issuances:

a legislative rule is in the nature of subordinate

legislation, designed to implement a primary
legislation by providing the details thereof. In the
same way that laws must have the benefit of
public hearing, it is generally required that There is double taxation where one tax is
before a legislative rule is adopted there must imposed by the State and the other is imposed
by the city; it being widely recognized that there
be hearing. In this connection, the Administrative
is nothing inherently obnoxious in the
Code of 1987 provides: requirement that license fees or taxes be
enacted with respect to the same occupation,
"Public Participation. - If not otherwise required calling or activity by both the state and the
by law, an agency shall, as far as practicable, political subdivision thereof.
publish or circulate notices of proposed rules
and afford interested parties the opportunity to
submit their views prior to the adoption of any Q: Is double taxation prohibited in the
rule. Philippines?

A: There is no constitutional prohibition against

"(2) In the fixing of rates, no rule or final order
double taxation. It is not favored but
shall be valid unless the proposed rates shall

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Tax 1 Notes
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permissible.(Pepsi Cola Bottling Co. v. City of 2. Credit Method: The tax paid in the state
Butuan, 1968). of source is credited against the tax
levied in the state of residence.

The basic difference between the two methods

Kinds of Double Taxation is that in the exemption method, the focus is on
the income or capital itself, whereas the credit
1. Direct - double taxation in the method focuses upon the tax.
objectionable or prohibited sense.
This constitutes a violation of
substantive due process.

a. the same property or subject matter is (1) That there will be a disbursement of
taxed twice when it should be taxed only once. funds which came from revenues, where
such disbursement is illegal or not
b. both taxes are levied for the same permitted by law; and
purpose (2) That the person suffers direct harm or
injury because of the first requisite
c. imposed by the same taxing authority

d. within the same jurisdiction

Taxpayers sui requires illegal expenditure of
e. during the same taxing period public money. InMaceda vs. Macaraig, Jr., The
SC sustained the right of Senator Maceda as
f. covering the same kind or character of taxpayer to file a petition questioning the legality
tax.(Villanueva vs. City of Iloilo) of the tax refund to NPC by way of tax credit
certificates and use of said assigned tax
certificate by oil companies to pay for their tax
and duty liabilities to the BIR and Bureau of
2. Indirect Double Taxation not legally Customs.
objectionable. This is allowed if the
taxes are of different taxing authorities. However, in the case of Gonzales vs. Marcos,
It has been held that a real estate tax the SC held that the taxpayer has no legal
although imposed by the same taxing personality to assail the validity of EO No. 30
authority, is not of the same kind of creating the Cultural Center of the Philippines.
character. (Villanueva vs. Iloilo City) Assailed order does not involve the use of public
funds. There was finding to the effect that the
funds came from donations and contributions
and not by taxation. Accordingly, there was that
Tax treaty as a mode of eliminating double absence of the requisite pecuniary or monetary
taxation interest.
In order to eliminate double taxation, a tax treaty In the case of Abaya vs. Ebdane, Jr., the SC
resorts to two methods of relief, to wit: stressed that the prevailing doctrine in the
taxpayers suits is to allow taxpayers to question
1. Exemption Method: the income or contracts entered into by the national
capital which is taxable in the state of government or GOCCs allegedly in
source or situs is exempted in the state contravention of law. A taxpayer is allowed to
of residence, although in some sue where there is a claim that public funds are
instances it may be taken into account illegally disbursed, or that public money is being
in determining the rate of tax applicable deflected to any improper purpose, or that there
to the taxpayers remaining income or is wastage of public funds through the
capital. enforcement of an invalid or unconstitutional law.

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Significantly, a taxpayer need not be a party to expense, the net difference between the original
the contract to challenge its validity. cost basis and new basis is taxable under the
economic benefit principle. (BIR Ruling No. 029,
March 19, 1998)

manufacturer or producer upon whom the tax
has been imposed, fearing the loss of his market
(1) SHIFTING the process by which the if he should add the tax to the price, pays the tax
tax burden is transferred from the statutory and endeavors to recoup himself by improving
taxpayer (impact of taxation) to another (incident his process of production, thereby turning out his
of taxation) without violating the law. units at a lower cost.

IMPACT OF TAXATION point on which tax is

originally imposed.
(4) TAX AVOIDANCE the exploitation by
INCIDENCE OF TAXATION point on which the the taxpayer of legally permissible alternative tax
tax burden finally rests or settles down. rates or methods of assessing taxable property
or income, in order to avoid or reduce tax
Illustration: Value added tax. The seller is liability.
required by law to pay tax, but the burden is
actually shifted or passed on to the buyer. Example: estate planning (conveyance of
property to a family corporation for shares)
(Delpher Trades Corp. vs. IAC, 157 SCRA 349)


a. Forward shifting- when burden of (5) TAX EVASION use by the taxpayer of
tax is transferred from a factor of illegal or fraudulent means to defeat or lessen
production through the factors of the payment of the tax.
distribution until it finally settles on
the ultimate purchaser or consumer
CASE: Republic v. Gonzales
Facts: Defendant-appellant, Blas Gonzales is a
b. Backward shifting- when burden is private concessionaire in the US military Base at
transferred from consumer through factors of Clark Field, Angeles City, who is engaged in the
distribution to the factors of production manufacture of furniture and, per agreement
with base authorities, supplied them with his
c. Onward shifting- when the tax is
manufactured articles.
shifted 2 or more times either forward or
backward The BIR discovered that for the years 1946-47,
appellant have undeclared income for the two
years causing deficiency in its tax dues. Despite
the demand of the BIR to pay its tax due,
(2) CAPITALIZATION a mere increase in appellant failed to do so. In defense, appellant
the value of the property is not income but claim that as a concessionaire in an American
merely an unrealized increase in capital. No Air Base, he is not subject to Philippine Tax laws
income until after the actual sale or other pursuant to the US-Phil. Military Bases
disposition of the property in excess of its Agreement.
original cost.
Issue: Is appellant is exempt from taxes?
EXCEPT: if by reason of appraisal, the cost Ruling: No. A Filipino concessionaire in an
basis of property increased and the resultant American Air Base is subject to Philippine
basis is used as the new tax base for purposes Income Tax laws under the US-Phil Military
of computing the allowable depreciation Bases Agreement. Non in the provisions of the

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Tax 1 Notes
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agreement shields a concessionaire, like the General Rule: Rulings are not retroactive if
appellant, from the payment of the income tax. they are prejudicial to the taxpayer. (Sec. 246,
For one thing, even the exemption in favor of NIRC)
members of the US armed forces and nationals
of the US does not include income derived from Exceptions:
Philippine sources.
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 is materially different from the facts
Prospectivity of Laws: on which the ruling is based.
In general laws should be prospective not 3. Where the taxpayer acted in bad faith.
retroactive. However, there are some

1. If the laws themselves povide for their Case on Non-retro activity of BIR Rulings:
retoractivity (Art. 4 Civil Code).
Question: Whether pawnshops included in the
2. If the laws are remedial in nature.
term lending investors for the purpose of
3. If the statute is penal in nature, provided: imposing the 5% percentage tax under the
a. It is favorable to the accused or convict.
b. The accused or convict is not a habitual
delinquent as defined in Art. 22 of the Revised No.
Penal Code.
The court held that even though the RMOs No
4. If the laws are of an emergency nature and were issued in accordance with the power of the
are authorized by the police power of the CIR, they cannot issue administrative rulings or
government. (Santos vs. Alvarez 44 O.G. 4259) circulars not consistent with the law sought to be
applied. It should remain consistent with the law
5. If the law is curative (necessarily retroactive they intend to carry out. Only Congress can
for the precise purpose to cure errors or repeal or amend the law.
irregularities). This kind of law to be valid must
not impair vested rights nor affect final In the NIRC, the term lending investor includes
judgments. (Frivaldo vs. Comelec and Lee G.R. all persons who make a practice of lending
120295, June 28, 1996) money for themselves or others at
interest. A pawnshop, on the other hand, is
Construction / Interpretation of tax laws:If the defined under Section 3 of P.D. No. 114 as a
question presented in the interpretation of a tariff person or entity engaged in the business of
law is one of doubt, the doubt would be resolved lending money on personal property delivered
in favor of the importer, as duties are never as security for loans.
imposed upon citizens upon vague and doubtful
interpretation. (Hart Ranft vs. Wiegman, 129 While it is true that pawnshops are engaged in
U.S., 609; Zamboanga Mutual Bldg. & Loan the business of lending money, they are not
Association vs. Rafferty, 24 Phil., considered lending investors for the purpose of
408.)chanrobles virtual law library imposing the 5% percentage taxes citing the
following reasons:

1. Pawnshops and lending investors were

Non-retroactivity of BIR Rulings: subjected to different tax treatments as per the

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2. Congress never intended pawnshops to be Francia vs. IAC: Government and taxpayer
treated in the same way as lending investors. are not mutually creditors and debtors of each
other under Article 1278 of the Civil Code and a
3. Section 116 of the NIRC of 1977, as amended claim for taxes is not such a debt, demand,
by E.O. No. 273, subjects to percentage tax contract or judgment as is allowed to be set-off.
dealers in securities and lending investors
only. There is no mention of pawnshops. Panty: Francia contends that his tax delinquency
of a certain amount has been extinguished by
legal compensation. He claims that the
4. The BIR had ruled several times prior to the government owed him a much larger amount
issuance of the RMOs that pawnshops were not when a portion of his land was expropriated on
subject to the 5% percentage tax imposed by October 15, 1977. Hence, his tax obligation had
Section 116 of the NIRC of 1977. As Section been set-off by operation of law.

116 of the NIRC of 1977 was practically lifted There is no legal basis for the contention. We
from Section 175 of the NIRC of 1986, and there have consistently ruled that there can be no off-
being no change in the law, the interpretation setting of taxes against the claims that the
thereof should not have been altered. (CIR vs. taxpayer may have against the government. A
MJ Lhuiller) person cannot refuse to pay a tax on the ground
that the government owes him an amount equal
to or greater that the tax being collected. The
collection of tax cannot await the results of a
Set-off of taxes: lawsuit against the government.

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