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I. GENERAL PRINCIPLES motive power to activate and operate it.

Hence, despite the natural reluctance to


POWER OF TAXATION surrender part of one's hard-earned
TAXATION LAW income to the taxing authorities, every
person who is able to must contribute
TAXATION – power by which the his share in the running of the
sovereign through its law-making body government. (CIR v. Algue, Inc.)
raises revenue to defray the necessary
expenses of government from among 2. Necessity Theory
those who in some measure are The power to tax is an attribute of
privileged to enjoy its benefits and must sovereignty emanating from necessity. It
bear its burdens. is a necessary burden to preserve the
Two Fold Nature of the Power of State's sovereignty and a means to give
Taxation the citizenry an army to resist an
1. It is an inherent attribute of
aggression, a navy to defend its shores
sovereignty from invasion, a corps of civil servants to
2. It is legislative in character serve, public improvements designed for
the enjoyment of the citizenry and those
TAXES – enforced proportional which come within the State's territory,
contributions from the persons and and facilities and protection which a
property levied by the law-making body government is supposed to provide.
of the State by virtue of its sovereignty (Phil. Guaranty Co., Inc. v. CIR)
in support of government and for public
needs. 3. Benefits-Protection / Reciprocity
Theory
CHARACTERISTICS OF TAXES Taxation is described as a symbiotic
1. forced charge; relationship whereby in exchange of the
2. pecuniary burden payable in money; benefits and protection that the citizens
3. levied by the legislature; get from the Government, taxes are
4. assessed with some reasonable rule paid. (CIR v. Algue, Inc.)
of apportionment; (see theoretical Note: While taxes are intended for
justice) general benefits, special benefits to
5. imposed by the State within its taxpayers are not required. The
jurisdiction; Government renders no special or
6. levied for a public purpose. commensurate benefit to any particular
person or property.
REQUISITES OF A VALID TAX
1. should be for a public purpose IS THE POWER TO TAX THE POWER TO
2. the rule of taxation shall be uniform DESTROY?
3. that either the person or property 1. “Power to tax is the power to
taxed be within the jurisdiction of destroy” (Marshall Dictum) – refers to
the taxing authority the unlimitedness and the degree or
4. that the assessment and collection vigor with which the taxing power may
of certain kinds of taxes guarantees be employed to raise revenue.
against injustice to individuals, - the financial needs of the State may
especially by way of notice and outrun any human calculation, so the
opportunity for hearing be provided power to meet those needs by taxation
5. the tax must not impinge on the must not be limited even though taxes
inherent and Constitutional become burdensome or confiscatory.
limitations on the power of taxation 2. “Power to tax is not the power to
destroy while the Supreme Court sits”
THEORIES AND BASES OF TAXATION (Holmes Dictum) – the power to tax
1. Lifeblood Theory knows no limit except those expressly
Taxes are what we pay for civilized stated in the Constitution.
society. Without taxes, the government Marshall and Holmes Dictum
would be paralyzed for lack of the
Reconciled 3. Theoretical Justice – based on the
Although the power to tax is almost taxpayer’s ability to pay; must be
unlimited, it must not be exercised in an progressive. (Ability to Pay Theory)
arbitrary manner. If the abuse is so DOMAIN
great so as to destroy the natural and
fundamental rights of people, it is the CONSTRUCTION OF TAX LAWS
duty of the judiciary to hold such an act
unconstitutional. 1. Public purpose is always presumed.
2. If the law is clear, apply the law in
PURPOSES AND OBJECTIVES OF TAXATION accordance to its plain and simple
1. Revenue – basically, the purpose of tenor.
taxation is to provide funds or 3. A statute will not be construed as
property with which the State imposing a tax unless it does so
promotes the general welfare and clearly, expressly and
protection of its citizens. unambiguously.
2. Non-Revenue (Key: PR 4. In case of doubt, it is construed most
EP) strongly against the Government,
a. Promotion of general welfare and liberally in favor of the
b. Regulation taxpayer.
c. Reduction of social inequality 5. Provisions of a taxing act are not to
d. Encourage economic growth be extended by implication.
e. Protectionism 6. Tax laws operate prospectively
unless the purpose of the legislature
POWER OF JUDICIAL REVIEW IN TAXATION to give retrospective effect is
expressly declared or may be
As long as the legislature, in implied from the language used.
imposing a tax, does not violate 7. Tax laws are special laws and prevail
applicable constitutional limitations or over a general law.
restrictions, it is not within the province
of the courts to inquire into the wisdom NATURE OF TAX LAWS
or policy of the exaction, the motives 1. Not political in character
behind it, the amount to be raised or the 2. Civil in nature, not subject to ex
persons, property or other privileges to post facto law prohibitions
be taxed. 3. Not penal in character
The court’s power in taxation is
limited only to the application and
interpretation of the law. TAXES ARE PERSONAL TO THE TAXPAYER
Note: The principle of judicial 1. A corporation’s tax delinquency
noninterference cannot be enforced against its
extends to the stockholders. (Corporate Entity
administrative realm. Doctrine)
Exception: Stockholders may be
ASPECTS OF TAXATION held liable for unpaid taxes of a
1. Levy or imposition of the tax (tax dissolved corporation:
legislation) a. if it appears that the corporate
2. Enforcement or tax administration assets have passed into their
(tax administration) hands or
b. when the stockholders have
BASIC PRINCIPLES OF A SOUND TAX SYSTEM unpaid subscriptions to the
(KEY: FAT) capital of the corporation
1. Fiscal Adequacy – sufficiency to
meet government expenditures and
2. Estate taxes are obligations that
must be paid by the executor or
other public needs.
administrator out of the net assets
2. Administrative Feasibility/
and cannot be assessed against the
Convenience – capability of being
heirs.
effectively enforced.
Exception: If prior to the payment 5. As to taxing authority:
of the estate tax due, the properties a. National Tax – levied by the
of the deceased are distributed to National Government
the heirs, then the latter is b. Local Tax – levied by the local
subsidiary liable for the payment of government
such portion of the estate tax as his 6. As to rate:
distributive share bears to the total a. Progressive Tax – rate or
value of the net estate. (Sec. 9, amount of tax increases as the
Rev. Regs. No. 2-2003; see CIR vs. amount of the income or earning
Pineda G.R. No. L-22734. to be taxed increases.
September 15, 1967)) b. Regressive Tax – tax rate
CLASSIFICATION OF TAXES decreases as the amount of
1. As to subject matter: income to be taxed increases.
a. Personal Tax – taxes are of fixed c. Proportionate Tax – based on a
amount upon all persons of a fixed proportion of the value of
certain class within the the property assessed.
jurisdiction without regard to IMPOSITIONS NOT STRICTLY CONSIDERED AS
property, occupation or business TAXES
in which they may be engaged. 1. Toll – amount charged for the cost
b. Property Tax – assessed on and maintenance of the property
property of a certain class used.
c. Excise Tax – imposed on the 2. Penalty – punishment for the
exercise of a privilege commission of a crime.
d. Customs Duties – duties charged 3. Compromise Penalty – amount
upon the commodities on their collected in lieu of criminal
being imported into or exported prosecution in cases of tax
from a country. violations.
2. As to burden:
a. Direct Tax – both the incidence 4. Special Assessment – levied only on
of or liability for the payment of land based wholly on benefit
the tax as well as the impact or accruing thereon as a result of
burden of the tax falls on the improvements or public works
same person. undertaken by government within
b. Indirect Tax - The incidence of the vicinity.
or liability for the payment of 5. License or Fee – regulatory
the tax falls on one person but imposition in the exercise of the
the burden thereof can be police power.
shifted or passed on to another. 6. Margin Fee – exaction designed to
3. As to purpose: stabilize the currency.
a. General Tax – levied for the 7. Debt – a sum of money due upon
general or ordinary purposes of contract or one which is evidenced
the Government by judgment.
b. Special Tax – levied for special 8. Subsidy – a legislative grant of
purposes money in aid of a private enterprise
4. As to manner of computation: deemed to promote the public
a. Specific Tax – the computation welfare.
of the tax or the rates of the tax 9. Customs duties and fees – duties
is already provided for by law. charged upon commodities on their
b. Ad Valorem Tax – tax upon the being transported into or exported
value of the article or thing from a country.
subject to taxation; the
intervention of another party is
10. Revenue – a broad term that
includes taxes and income from
needed for the computation of
other sources as well.
the tax.
11. Impost – in its general sense, it 3. International comity
signifies any tax, tribute or duty. In 4. Non-delegability of the taxing power
its limited sense, it means a duty on 5. Tax Exemption of the government
imported goods and merchandise.
(1) TESTS IN DETERMINING PUBLIC PURPOSE
TAX OR A LICENSE FEE a. Duty Test – whether the thing to be
If the purpose is primarily revenue furthered by the appropriation of
or if revenue is, at least, one of the real public revenue is something, which
and substantial purposes, then the is the duty of the State, as a
exaction is a tax. If the purpose is government, to provide.
regulatory in nature, it is a license. b. Promotion of General Welfare Test
(PAL v. Edu) – whether the proceeds of the tax
will directly promote the welfare of
COMPENSATION OR SET-OFF the community in equal measure.
General Rule: Taxes cannot be the
subject of compensation or set-off. (2) NON-DELEGABILITY OF THE TAXING
POWER
Reasons: General Rule: The power of taxation is
1. lifeblood theory peculiarly and exclusively exercised by
2. taxes are not contractual the legislature.
obligation but arise out of duty - refers to tax legislation
to the government
3. the government and the Exceptions to Non-delegability:
taxpayer are not mutually 1. Flexible Tariff Clause: Authority of
creditors and debtors of each the President to fix tariff rates,
other. (Francia v. IAC) import and export quotas, tonnage
and wharfage dues, and other duties
Exception: When both obligations are or imposts. (Art. VI, Sec.28(2), 1987
due and demandable as well as fully Constitution)
liquidated and all the requisites for a 2. Power of local government units to
valid compensation are present, levy taxes, fees, and charges. (Art.
compensation takes place by operation X, Sec. 5, 1987 Constitution)
of law. (Domingo v. Garlitos) 3. Delegation to administrative
agencies for implementation and
TAXPAYERS AND PUBLIC OFFCIALS HAVE LOCUS collection.
STANDI - merely refers to tax administration
REQUISITES FOR TAXPAYERS’ SUIT or implementation
a. The tax money is being
extracted and spent in violation of (3) SITUS OR TERRITORIALITY OF TAXATION
specific constitutional protections The power to tax is limited only to
against abuses of legislative power. persons, property or businesses within
b. That public money is being the jurisdiction or territory of the taxing
deflected to any improper purpose power.
(Pascual vs Secretary of Public FACTORS THAT DETERMINE THE SITUS:
Works) a. Kind or classification of the tax
c. That the petitioner seeks to being levied
restrain respondents from wasting b. Situs of the thing or property
public funds through the enforcement taxed
of an invalid or unconstitutional law c. Citizenship of the taxpayer
d. Residence of the taxpayer
LIMITATIONS ON THE TAXING e. Source of the income taxed
POWER f. Situs of the excise, privilege,
A. INHERENT LIMITATIONS (KEY: SPINE) business or occupation being taxed
1. Territoriality or Situs of taxation
2. Public purpose of taxes
intangible properties are deemed
APPLICATION OF SITUS OF TAXATION with a situs in the Philippines:
Kind of Tax Situs (1) franchise which must be
Personal or exercised in the Philippines;
Community tax (2) shares, obligations or bonds
Residence or issued by any corporation
domicile of the organized or constituted in the
taxpayer
Real property tax Location of property
Philippines in accordance with
(Lex rei sitae) its laws;
(3) shares, obligations or bonds by
Personal property any foreign corporation eightyfive
tax percent (85%) of the
-tangible: where it business of which is located in
is physically located the Philippines;
or permanently kept (4) shares, obligations or bonds
(Lex rei sitae) issued by any foreign corporation
-intangible: subject
to Sec. 104 of the
if such shares, obligations or
NIRC and the bonds have acquired a business
principle of mobilia situs in the Philippines; and
sequuntur personam (5) shares or rights in any
partnership, business or industry
Business tax Place of business established in the Philippines.
Excise or Privilege (Sec. 104, 1997 NIRC).
tax
(4) EXEMPTION OF THE GOVERNMENT
Where the act is
performed or where
As a matter of public policy, property
occupation is of the State and of its municipal
pursued subdivisions devoted to government uses
and purposes is deemed to be exempt
Sales tax Where the sale is from taxation although no express
consummated provision in the law is made therefor.
Income Tax Consider General Rule: The Government is tax
(1) citizenship, exempt.
(2) residence, and - However, it can also tax itself.
(3) source of income
(Sec. 42, 1997 NIRC)
RULES:
Transfer tax Residence or 1. Administrative Agencies
citizenship of the A. Governmental function - tax
taxpayer or location exempt unless when the law
of property expressly provides for tax. (Sec.
32 B7)
Franchise Tax State which granted B. Proprietary function – taxable
the franchise unless exempted by law. (Sec.
27C)
SITUS OF TAXATION OF INTANGIBLE PERSONAL 2. GOCCs
PROPERTY General Rule: Income is taxable at
General Rule: Domicile of the owner the rate imposed upon corporations
pursuant to the principle of the mobilia or associations engaged in a similar
sequuntur personam or movables follow business, industry, or activity.
the person. Exception: GSIS, SSS, PHIC, PCSO
Exceptions: and PAGCOR. (Sec. 27(C), NIRC)
1. When the property has acquired a 3. Government Educational Institutions
business situs in another jurisdiction; A. Property or real estate tax –
2. When an express provision of the property actually, directly and
statute provide for another rule. exclusively used for educational
Illustration: For purposes of estate purposes – exempt but income
and donor’s taxes, the following
of whatever kind and character and non-profit institutions,are withdrawn
from any of their properties,
real or personal, regardless of upon effectivity of the
the disposition, is taxable. (Sec. LGC. (Sec. 193, LGC)
30, last par., NIRC)
B. Income received by them as 10. Real property owned by the Republic
such are exempt from taxes. of the Philippines or any of its
However, their income from any political subdivisions except when
of their activities conducted for the beneficial use thereof has been
profit regardless of the granted, for consideration or
disposition, is taxable. (Sec. 30, otherwise, to a taxable person shall
last par., NIRC) be exempt from payment of real
4. Income derived from any public property tax. (Sec. 234, LGC)
utility or from the exercise of any (5) INTERNATIONAL COMITY
essential governmental function These principles limit the authority
accruing to the Government of the of the government to effectively impose
Philippines or to any political taxes on a sovereign state and its
subdivision thereof is not included in instrumentalities, as well as on its
gross income and exempt from property held and activities undertaken
taxation. (Sec. 32(B)(7)(b), NIRC) in that capacity. Even where one enters
5. Donations in favor of governmental the territory of another, there is an
institutions are considered as income implied understanding that the former
on the part of the donee. However, does not thereby submit itself to the
it is not considered as taxable authority and jurisdiction of the other.
income because it is an exclusion
from the computation of gross B. CONSTITUTIONAL LIMITATIONS
income. (Sec.32 (B)(3), NIRC) A. GENERAL OR INDIRECT
6. The amount of all bequests, CONSTITUTIONAL LIMITATIONS
legacies, devises or transfers to or 1. Due Process Clause (Art. III, Sec. 1,
for the use of the Government or 1987 Constitution)
any political subdivision for Requisites:
exclusively public purposes is a. The interests of the public as
deductible from the gross estate. distinguished from those of a
(Sec.86 (A)(3), NIRC) particular class require the
7. Gifts made to or for the use of the intervention of the State.
National Government or any entity (Substantive limitation)
created by any of its agencies which b. The means employed must be
is not conducted for profit, or to any reasonably necessary to the
political subdivision of the said accomplishment of the purpose
Government are exempt from and not unduly oppressive.
donor’s tax. (Sec. 101(A)(2), NIRC) (Procedural limitation)
8. Local government units are The constitutionality of a legislative
expressly prohibited by the LGC taxing act questioned on the ground of
from levying tax upon National denial of due process requires the
Government, its agencies, and existence of an actual case or
instrumentalities, and local controversy.
government units. [Sec. 133 (o),
LGC] 2. Equal Protection Clause (Art. III,
9. Unless otherwise provided in the Sec. 1, 1987 Constitution
Local Government Code (LGC), tax Requisites of a Valid Classification:
exemptions granted to all persons, a. based upon substantial
whether natural or juridical, distinctions
including GOCC, except local water b. germane to the purposes of the
districts, cooperatives duly law
registered under RA No. 6938, nonstock c. not limited to existing conditions
only VII, SEC. 19, 1987 CONSTITUTION)
d. apply equally to all members of 1. Non-Imprisonment For Debt Or
the class NonPayment
3. Freedom Of Speech And Of The Of Poll Tax (Art. III, Sec.
Press (Art. III, Sec. 4, 1987 20, 1987 Constitution)
Constitution)
There is curtailment of press 2. Rule Requiring That Appropriations,
freedom and freedom of thought and Revenue And Tariff Bills Shall
expression if a tax is levied in order Originate Exclusively From The
to suppress this basic right and House Of Representatives (Art. VI,
impose a prior restraint. (Tolentino Sec. 24, 1987 Constitution)
vs. Secretary of Finance, GR No.
115455, August 25, 1994) 3. Uniformity, Equitability And
4. Non-Infringement Of Religious Progressivity Of Taxation (Art. VI,
Freedom And Worship (Art. III, Sec. Sec. 28(1), 1987 Constitution)
5, 1987 Constitution)
A license tax or fee constitutes a Uniformity – all taxable articles or
curtailment of religious freedom if kinds of property of the same class
imposed as a condition for its are taxed at the same rate.
exercise. (American Bible Society
vs. City of Manila, GR No. L-9637, Equitability – the burden falls to
April 30, 1957) those who are more capable to pay.
5. Non-Impairment Of Contracts (Art.
III, Sec. 10, 1987 Constitution) Progressivity – rate increases as the
No law impairing the obligation tax base increases.
of contract shall be passed. (Sec. Q: Is a tax law adopting a regressive
10, Art. III, 1987 Constitution) system of taxation valid?
The rule, however, does not A: Yes. The Constitution does not
apply to public utility franchises or really prohibit the imposition of indirect
right since they are subject to taxes which, like the VAT, are regressive.
amendment, alteration or repeal by The Constitutional provision means
the Congress when the public simply that indirect taxes shall be
interest so requires. (Cagayan minimized. The mandate to Congress is
Electric & Light Co., Inc. v. not to prescribe, but to evolve, a
Commissioner, GR No. 60216, progressive tax system. (EVAT En Banc
September 25, 1985) Resolution, Tolentino, et al vs Secretary
RULES: of Finance, October 30, 1995)
a. When the exemption is bilaterally
agreed upon between the 4. Limitations On The Congressional
government and the taxpayer – it Power To Delegate To The
cannot be withdrawn without President The Authority To Fix
violating the non-impairment Tariff Rates, Import And Export
clause. Quotas, Etc. (Art. VI, Sec. 28(2),
b. When it is unilaterally granted by 1987 Constitution)
law, and the same is withdrawn by
virtue of another law – no violation. 5. Tax Exemption Of Properties
c. When the exemption is granted Actually, Directly And Exclusively
under a franchise – it may be Used For Religious, Charitable And
withdrawn at any time thus, not a Educational Purposes. (Art. VI,
violation of the non-impairment of Sec. 28(3) 7, 1987 Constitution)
contracts The constitutional provision
6. Presidential power to grant (above cited) which grants tax
reprieves, commutations and exemption applies only to property
pardons and remit fines and or realty taxes assessed on such
forfeitures after conviction (ART. properties used actually, directly
exclusively for religious, charitable special purpose. (Art. VI, Sec. 29
and educational purposes. (Lladoc (3), 1987 Constitution)
vs. Commissioner, GR No. L-19201, 5. Internal revenue allotments to local
June 16, 1965) government units. (Art. X, Sec. 6,
The present Constitution 1987 Constitution)
required that for the exemption of
“lands, buildings and DOUBLE TAXATION
improvements”, they should not only DOUBLE TAXATION – taxing the same
be “exclusively” but also “actually” property twice when it should be taxed
and “directly” used for religious and but once.
charitable purposes. (Province of IS DOUBLE TAXATION PROHIBITED IN THE
Abra vs. Hernando, GR No. L-49336, PHILIPPINES?
August 31, 1981) No. There is no constitutional
The test of exemption from prohibition against double taxation. It is
taxation is the use of the property not favored but permissible. (Pepsi Cola
for the purposes mentioned in the Bottling Co. v. City of Butuan, 1968).
Constitution. (Abra Valley College KINDS OF DOUBLE TAXATION
Inc. vs. Aquino, GR No. L-39086, (1) Direct Duplicate Taxation /
June 15, 1988) Obnoxious – double taxation in the
objectionable or prohibited sense.
EXCLUSIVE BUT NOT ABSOLUTE USE This constitutes a violation of
The term “ exclusively used” does substantive due process.
not necessarily mean total or absolute Elements:
use for religious, charitable and a. the same property or subject
educational purposes. If the property is matter is taxed twice when it should
incidentally used for said purposes, the be taxed only once.
tax exemption may still subsist. (Abra b. both taxes are levied for the
Valley College Inc. vs. Aquino, Gr No. L39086, same purpose
June c. imposed by the same taxing
15, 1988) authority
d. within the same jurisdiction
Corollarily, if a property, although e. during the same taxing period
actually owned by a religious, charitable f. covering the same kind or
and educational institution is used for a character of tax.
non- exempt purpose, the exemption (Villanueva vs. City of Iloilo)
from tax shall not attach (2) Indirect Duplicate Taxation – not
ART. XIV, legally objectionable. The absence
SEC 4(3) of one or more of the abovementioned
OTHER SPECIFIC TAX PROVISIONS IN elements makes the
THE CONSTITUTION double taxation indirect.
1. Power of the President to veto any (3) Domestic- this arises when the taxes
particular item or items in an are imposed by the local or national
appropriation, revenue, or tariff bill. government (within the same state)
(Art VI, Sec. 27(2), 1987 (4) International- refers to the
Constitution) imposition of comparable taxes in
2. Necessity of an appropriation before two or more states on the same
money may be paid out of the public taxpayer in respect of the same
treasury. (Art. VI, Sec. 29 (1), 1987 subject matter and for identical
Constitution) periods.
3. Non-appropriation of public money REMEDIES OF DOUBLE TAXATION
or property for the use, benefit, or 1. Tax Sparing Rule – same dividend
support of any sect, church, or earned by a NRFC within the Phil. is
system of religion. (Art. VI, Sec. 29 reduced by imposing a lower rate of
(2), 1987 Constitution) 15% (in lieu of the 35%), on the
4. Treatment of taxes levied for a condition that the country to which
the NRFC is domiliced shall allow a this case, the treaty makes it incumbent
credit against the tax due from the upon the state of residence to allow
NRFC, taxes deemed to have been relief in order to avoid double taxation.
paid in the Phil. (Sec.28 B 5b) (CIR FORMS OF ESCAPE
vs Procter & Gamble) (GR No. FROM TAXATION
66838, Dec. 2, 1991) (1) SHIFTING – the process by which the
2. Tax deductions tax burden is transferred from the
Example: vanishing deduction under statutory taxpayer (impact of taxation)
Section 86(A)(2), NIRC to another (incident of taxation) without
3. Tax credits violating the law.
Instances under the NIRC: IMPACT OF TAXATION – point on which tax is
For VAT purposes, the tax on originally imposed.
inputs or items that go into the INCIDENCE OF TAXATION – point on which
manufacture of finished products the tax burden finally rests or settles
(which are eventually sold) may be down.
credited against or deducted from Illustration: Value added tax. The
the output tax or tax on the finished seller is required by law to pay tax, but
product. the burden is actually shifted or passed
Foreign income taxes may be on to the buyer.
credited against the Phil. Income KINDS OF SHIFTING
tax, subject to certain limitations, a. Forward shifting- when burden of
by citizens, including members of tax is transferred from a factor of
general professional partnerships or production through the factors of
beneficiaries of estates or trusts distribution until it finally settles on
(pro rata), as well as domestic the ultimate purchaser or consumer
corporations. b. Backward shifting- when burden is
A tax credit is granted for estate transferred from consumer through
taxes paid to a foreign country on factors of distribution to the factors
the estate of citizens and resident of production
aliens subject to certain limitations. c. Onward shifting- when the tax is
The donor’s tax imposed upon a shifted 2 or more times either
citizen or a resident shall be forward or backward
credited with the amount of any (2) CAPITALIZATION – a mere increase in
donor’s tax imposed by the authority the value of the property is not income
of a foreign country, subject to but merely an unrealized increase in
certain limitations. capital. No income until after the
4. Tax Exemptions actual sale or other disposition of the
5. Principle of Reciprocity property in excess of its original cost.
6. Treaties with other states EXCEPT: if by reason of appraisal, the
METHODS RESORTED TO BY A TAX TREATY IN cost basis of property increased and the
ORDER TO ELIMINATE DOUBLE TAXATION resultant basis is used as the new tax
FIRST METHOD: The tax treaty sets out base for purposes of computing the
the respective rights to tax by the state allowable depreciation expense, the net
of source or situs and by the state of difference between the original cost
residence with regard to certain classes basis and new basis is taxable under the
of income or capital. In some cases, an economic benefit principle. (BIR Ruling
exclusive right to tax is conferred in one No. 029, March 19, 1998)
of the contracting states; however, for (3) TRANSFORMATION – the manufacturer
other items of income or capital, both or producer upon whom the tax has been
states are given the right to tax although imposed, fearing the loss of his market if
the amount of tax that may be imposed he should add the tax to the price, pays
by the state of source is limited. the tax and endeavors to recoup himself
SECOND METHOD: The state of source is by improving his process of production,
given a full or limited right to tax thereby turning out his units at a lower
together with the state of residence. In cost.
(4) TAX AVOIDANCE – the exploitation by Omnibus Investment Code of 1987
the taxpayer of legally permissible (EO 226), Philippine Overseas
alternative tax rates or methods of Shipping Act (RA 1407 as amended),
assessing taxable property or income, in Fertilizer Industry Act (RA 3050, as
order to avoid or reduce tax liability. amended), Mineral Resources
Example: “estate planning” Development Decree of 1974 (PD 463
(conveyance of property to a family as amended), Cottage Industry Act
corporation for shares) (Delpher Trades (RA 318, as amended) and
Corp. vs. IAC, 157 SCRA 349) exemptions in “Housing for Low
(5) TAX EVASION – use by the taxpayer of Income Group” (PD 1205, as
illegal or fraudulent means to defeat or amended)
lessen the payment of the tax. C. Contractual- agreed to by the
FACTORS IN TAX EVASION taxing authority in contracts
1. the end to be achieved, i.e. payment lawfully entered into by them
of less than that known by the taxpayer under enabling laws
to be legally due, or paying no tax when d. Treaty
it is shown that the tax is due; e. Licensing Ordinance
2. an accompanying state of mind
which is described as being evil, in bad PRINCIPLES GOVERNING TAX EXEMPTION
faith, willful, or deliberate and not a. Exemptions from taxation are
coincidental; and highly disfavored in law and are
3. a course of action which is unlawful. not presumed.
INDICIA OF FRAUD IN TAX EVASION b. He who claims as exemption must
1. Failure to declare for taxation be able to justify his claim by the
purposes true and actual income derived clearest grant of organic or statute
from business for 2 consecutive years law by words too plain to be
(Republic vs Gonzales, L-17962) mistaken. If ambiguous, there is no
2. Substantial under-declaration of exemption.
income tax returns of the taxpayer for 4 c. He who claims exemption should
consecutive years coupled with prove by convincing proof that he
intentional overstatement of deductions is exempted.
(CIR vs Reyes, 104 PHIL 1061) d. Taxation is the rule; tax exemption
is the exception.
(6) TAX EXEMPTION – a grant of e. Tax exemption must be strictly
immunity to particular persons or construed against the taxpayer and
corporations from the obligation to pay liberally in favor of the taxing
taxes. authority.
LEGAL BASIS: No law granting any tax f. Tax exemptions are not presumed.
exemption shall be passed without the g. Constitutional grants of tax
concurrence of a majority of all the exemption are self-executing.
members of Congress (ART VI. SEC 28(4) OF h. Tax exemptions are personal.
THE 1987 CONSTITUTION) THE FOLLOWING PARTAKE THE NATURE OF
TAX EXEMPTION
KINDS OF TAX EXEMPTION 1. Deductions for income tax purposes
1. As to source 2. Claims for refund
A. Constitutional – immunities from 3. Tax amnesty
taxation that originate from the 4. Condonation of unpaid tax liabilities
constitution. NOTE: must be strictly construed
B. Statutory – those which emanate against the taxpayer
from legislation
Examples of Statutory Exemptions WHEN EXEMPTIONS ARE CONSTRUED LIBERALLY
Sec. 27, NIRC IN FAVOR OF GRANTEE
Sec. 105 Tariff and Customs Code 1. When the law so provides for such
Sec. 234 Local Government Code liberal construction.
Special Laws, such as the 2. Exemptions from certain taxes,
granted under special circumstances relent and are willing to reform a
to special classes of persons. chance to do so.
3. Exemptions in favor of the
government, its political subdivisions
or instrumentalities. RULES ON TAX AMNESTY
4. Exemptions to traditional 1. Tax amnesty
exemptees, such as those in favor of a) like tax exemption, it is never
religious and charitable institutions. favored nor presumed
5. If exemptions refer to the public b) construed strictly against the
property taxpayer (must show complete
Q: May a tax exemption be revoked? compliance with the law)
A: Yes. It is an act of liberality which 2.Government not estopped from
could be taken back by the government questioning the tax liability even if
unless there are restrictions. Since amnesty tax payments were already
taxation is the rule and exemption received.
therefrom is the exception, the Reason: Erroneous application and
exemption may be withdrawn by the enforcement of the law by public
taxing authority. (Mactan Cebu officers do not block subsequent
International Airport Authority vs. correct application of the statute. The
Marcos, 261 SCRA 667) government is never estopped by
RESTRICTIONS ON REVOCATION OF TAX mistakes or errors of its agents.
EXEMPTIONS Basis: Lifeblood Theory
a. Non impairment clause. Where the 3.Defense of tax amnesty, like insanity,
exemption was granted to private is a personal defense.
parties based on material Reason: Relates to the circumstances
consideration of a mutual nature, of a particular accused and not the
which then becomes contractual and character of the acts charged in the
is covered by the non-impairment information.
clause of the Constitution.
b. Adherence to form- if the tax DOCTRINE OF IMPRESCRIPTIBILTY
exemption is granted by the As a rule, taxes are imprescriptible
Constitution, its revocation may be as they are the lifeblood of the
effected through Constitutional government. However, tax statutes may
amendment only provide for statute of limitations.
c. Where the tax exemption grant is in
the form of a special law and not by
a general law even if the terms of
the general act are broad enough to
include the codes in the general law
unless there is manifest intent to
repeal or alter the special law
(Province of Misamis Oriental vs
Cagayan Electric Power and Light
Co. Inc)

NATURE OF TAX AMNESTY


1. General or intentional overlooking by
the state of its authority to impose
penalties on persons otherwise guilty
of evasion or violation of a revenue
or tax law.
2. Partakes of an absolute forgiveness of
waiver of the government of its right
to collect.
3. To give tax evaders, who wish to