TAXATION “the power to tax is not the

power to destroy while the court sits.”

GENERAL PRINCIPLES OF TAXATION Reconcile the
statements. In the
TAXATION, IN GENERAL alternative, what are the implications that flow from the above
statements ? SUGGESTED
â 1. State briefly and concisely the nature of ANSWERS: Marshall’s view refers to a valid tax while the Holmes’ view
taxation. Alternatively, define taxation. refers to an invalid tax. a. The
SUGGESTED ANSWER: The inherent power of the sovereign imposition of a valid tax could not be judicially restrained merely
exercised through the legislature to impose burdens upon because it would prejudice taxpayer’s
subjects and objects within its jurisdiction for the purpose of raising property. b. An illegal tax could be
revenues to carry out the legitimate objects of government. judicially declared invalid and should not work to prejudice a
taxpayer’s property.
âââ 2. What is the nature of the State’s power to tax ? Explain â 5. Discuss briefly the basis/bases, or rationale of
briefly. taxation. SU
SUGGESTED ANSWER: The nature of the state’s power to tax is GGESTED ANSWER: a. Reciprocal duties of protection and
two-fold. It is both an inherent power and a legislative support between
power. It is inherent in nature being an attribute of the state and its citizens and residents. Also called “symbiotic
sovereignty. This is so, because without the taxes, the state’s existence relation” between the state and its citizens.
would be imperiled. There is thus, no need for a constitutional grant b. Jurisdiction by the state over persons and property
for the state to exercise this within its territory.
power. â 6. Discuss briefly but comprehensively the objectives or
It is a legislative power because it involves the promulgation of purposes of taxation.
rules. Taxation is a set of rules, how much is the tax to be paid, who SUGGESTED ANSWER: The purposes or objectives of taxation
pays the tax, to whom it should be paid, and when the tax should be are the following: a.
paid. The primary purpose:
â 3. What is the underlying theory of taxation ? Explain 1) Revenue purpose.
briefly. b. The secondary purposes
SUGGESTED ANSWER: Taxes are the lifeblood of the 1) Sumptuary or regulatory purpose.
nation. Without revenue raised from taxation, the government 2) Compensatory purpose.
will not survive, resulting in detriment to society. Without taxes, the 3) To implement the power of eminent domain.
government would be paralyzed for lack of motive power to activate
and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et 7. Distinguish a tax from a license fee. SUGGESTED
al., 158 SCRA 8, 16-17) ANSWER: The following are the
â 4. Marshall said that, “the power to tax involves the distinctions: a. Purpose: Tax imposed for revenue while
power to destroy.” On the other hand, Holmes stated that license fee for regulation. Tax for general public purposes while
license fee for regulatory purposes SUGGESTED ANSWER: The sumptuary purpose of taxation is to
only. b. Bas promote the general welfare and to protect the health, safety or morals
is: Tax imposed under power of taxation while license fee under police of the inhabitants. It is in the joint exercise of the power of taxation and
power. c. police power where regulatory taxes are collected.
Amount: In taxation, no limit as to amount while license fee limited Taxation may be made the implement of the state’s police
to cost of the license and the expenses of police surveillance and power. The motivation behind many taxation measures is the
regulation. implementation of police power goals. [Southern Cross Cement
d. Time of payment: Taxes normally paid after Corporation v. Cement Manufacturers Association of the Philippines, et
commencement of business while license fee al., G. R. No. 158540, August 3, 2005) The reader should note that the
before. e. Effect of payment: Failure to pay a August 3, 2005 Southern Cross case is the decision on the motion for
tax does not make the business illegal while failure to pay license fee reconsideration of the July 8, 2004 Southern Cross decision.
makes business illegal. f. Surrender: Taxes, being the The so-called “sin taxes” on alcohol and tobacco manufacturers
lifeblood of the state, cannot be surrendered except for lawful help dissuade the consumers from excessive intake of these potentially
consideration while a license fee may be surrendered with or without harmful products. (Southern Cross Cement Corporation v. Cement
consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Manufacturers Association of the Philippines, et al., G. R. No. 158540,
Commercial Company v. Romualdez, et al., 49 Phil. 924) August 3, 2005)
â 8. How may the power to tax be utilized to carry out the
social justice program of our government 10. Taxation distinguished from police power. Taxation is
? SUGGESTED ANSWER: The compensatory distinguishable from police power as to the means employed to
purpose of taxation is to implement the social justice provisions of the implement these public goals. Those doctrines that are unique to
constitution through the progressive system of taxation, which would taxation arose from peculiar considerations such as those especially
result to equal distribution of wealth, etc. punitive effects (Southern Cross Cement Corporation v. Cement
Progressive income taxes alleviate the margin between rich and Manufacturers Association of the Philippines, et al., G. R. No. 158540,
poor. (Southern Cross Cement Corporation v. Cement Manufacturers August 3, 2005) as the power to tax involves the power to destroy and
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) the belief that taxes are lifeblood of the state. (Ibid.) taxes being the
In recent years, the increasing social challenges of the times lifeblood of the government, their prompt and certain availability is of
expanded the scope of the state activity, and taxation has become a the essence.”
tool to realize social justice and the equitable distribution of wealth, These considerations necessitated the evolution of taxation as a
economic progress and the protection of local industries as well as distinct legal concept from police power. (Ibid.)
public welfare and similar objectives. (Batangas Power Corporation
v. Batangas City, et al., G. R. No. 152675, and companion case, April 28, 11. How the power of taxation may be used to implement
2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. power of eminent domain. Tax measures are but ”enforced
149110, April 9, 2003) contributions exacted on pain of penal sanctions” and “clearly imposed
for public purpose.” In most recent years, the power to tax has indeed
9. Explain the sumptuary purpose of taxation. become a most effective tool to realize social justice, public welfare, and
the equitable distribution of wealth. (Commissioner of Internal Revenue g. Levied for a public purpose.
v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) h. Paid at regular periods or intervals.
Establishments granting the 20% senior citizens discount may
claim the discounts granted to senior citizens as tax deduction based 14. State the requisites of a valid tax. SUGGESTED
on the net cost of the goods sold or services rendered: Provided, That ANSWER: a. A valid tax
the cost of the discount shall be allowed as deduction from gross should be within the jurisdiction of the taxing authority.
income for the same taxable year that the discount is b. That the assessment and collection of certain kinds (The
granted. Provided, further, That the total amount of the claimed tax same as the inherent limitations of the power of taxation) should be
deduction net of value added tax if applicable, shall be included in their for a public purpose.
gross sales receipts for tax purposes and shall be subject to proper c. The rule of taxation should be uniform.
documentation and to the provisions of the National Internal Revenue d. That either the person or property of taxes
Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et guarantees against injustice to individuals, especially by way or notice
al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act and opportunity for hearing be provided.
of 2003, Sec. 4 (a)] e. The tax must not impinge on the inherent and
Constitutional limitations on the power of
â 12. What are the three basic principles of a sound tax taxation.
system? Explain each â15. What are
briefly. SUGGESTED ANSWER: The the classes or kinds of taxes according to the subject matter or object
canons of a sound tax system, also known as the characteristics or, ? SUGGESTED
principles of a sound tax system, are used as a criteria in order to ANSWER: a. Personal,
determine whether a tax system is able to meet the purposes or poll or capitalization – imposed on all residents, whether citizen or
objectives of taxation. They are: not. Example – Community Tax.
a. Fiscal adequacy. b. Property - Imposed on property. Example – Real
b. Administrative feasibility. property
c. Theoretical justice. tax.
c. Excise – imposed upon the performance of an act, the
â 13. What are the elements or characteristics of a tax enjoyment of a privilege or the engaging in an occupation. Example –
? SUGGESTED income tax, estate tax.
ANSWER: a. Enforced ââ16. What are the kinds of taxes classified as to who bears the
contribution. burden ? Explain each briefly. SUGGESTED
b. Generally payable in money. ANSWER: Based on the possibility of shifting the incidence of taxation,
c. Proportionate in character. or as to who shall bear the burden of taxation, taxes may be classified
d. Levied on persons, property or exercise of a right or into:
privilege. a. Direct taxes. Those that are extracted from the very
e. Levied by the state having jurisdiction. person who, it is intended or desired, should pay them (Commissioner
f. Levied by the legislature. of Internal Revenue v. Philippine Long Distance Telephone Company, G.
R. No. 140230, December 15, 2005); they are impositions for which a
taxpayer is directly liable on the transaction or business he is engaged
in, (Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, supra) which liability cannot be shifted or
transferred to another. Example – income tax, estate tax, donor’s tax,
etc.
b. Indirect taxes are those that are demanded in the first
instance, from, or are paid by, one person in the expectation and
intention that he can shift the burden to (Commissioner of Internal
Revenue v. Philippine Long Distance Telephone Company, supra) to
someone else not as a tax but as part of the purchase
price. (Commissioner, of Internal Revenue v. American Express
International, Inc. (Philippine Branch), G. R. No. 152609, June 29,
2005 citing various cases and authorities) Example – value added tax
(VAT), documentary stamp tax, excise tax, percentage tax, etc.
ââ17. Silkair (Singapore) PTE, Ltd., an international
carrier, purchased aviation gas from Petron Corporation, which it uses
for its operations. It now claims for refund or tax credit for the excise
taxes it paid claiming that it is exempt from the payment of excise
taxes under the provisions of Sec. 135 of the NIRC of 1997 which
provides that petroleum products are exempt from excise taxes when
sold to “Exempt entities or agencies covered by tax treaties,
conventions, and other international agreements for their use and
consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from
similar taxes petroleum products sold to Philippine carriers, entities or
agencies”
Silkair further anchors its claim on Article 4(2) of the Air
Transport Agreement between the Government of the Republic of
the Philippines and the Government of the Republic of Singapore (Air
Transport Agreement between RP and Singapore) which reads: “Fuel,
lubricants, spare parts, regular equipment and aircraft stores
introduced into, or taken on board aircraft in the territory of one
Contracting party by, or on behalf of, a designated airline of the other
Contracting Party and intended solely for use in the operation of the
agreed services shall, with the exception of charges corresponding to
the service performed, be exempt from the same customs duties,
inspection fees and other duties or taxes imposed in the territories of
the first Contracting Party , even when these supplies are to be used
on the parts of the journey performed over the territory of the
Contracting Party in which they are introduced into or taken on
board. The materials referred to above may be required to be kept
under customs supervision and control.”
Silkair likewise argues that it is exempt from indirect taxes
because the Air Transport Agreement between RP and Singapore
grants exemption “from the same customs duties, inspection fees
and other duties or taxes imposed in the territory of the first
Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291,
May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or
refund by the National Power Corporation (NPC) on the ground that
the NPC is exempt even from the payment of indirect taxes.
Is Silkair entitled to the tax refund or credit it seeks ? Reason
out your answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or
credit for the following reasons:
a. The excise tax on aviation fuel is an indirect tax. The
proper party to question, or seek a refund of, an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and
who paid the same even if he shifts the burden thereof to
another. (Philippine Geothermal, Inc. v. Commissioner of Internal
Revenue, G.R. No. 154028, July 29, 2005, 465 SCRA 308, 317-
318) The NIRC provides that the excise tax should be paid by the
manufacturer or producer before removal of domestic products
from place of production. Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section
135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement
between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of
the tax, the additional amount billed to Silkair for jet fuel is not a tax
but part of the price which Silkair had to pay as a purchaser. [Philippine
Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127 Phil. 461,
470 (1967)]
b. Silkair could not seek refuge under Maceda v. Macaraig,
Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which upheld the
claim for tax credit or refund by the National Power Corporation (NPC)
on the ground that the NPC is exempt even from the payment of
indirect taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, G.R. No. 140230, December 15, 2005, 478 SCRA
61 the Supreme Court clarified the ruling in Maceda v. Macaraig,
Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held
that an exemption from “all taxes” granted to the National Power
Corporation (NPC) under its charter includes both direct and indirect
taxes.
An exemption from “all taxes” excludes indirect taxes, unless
the exempting statute, like NPC’s charter, is so couched as to include
indirect tax from the exemption. The amendment under Republic Act
No. 6395 enumerated the details covered by NPC’s
exemption. Subsequently, P.D. 380, made even more specific the
details of the exemption of NPC to cover, among others, both direct
and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 [NPC’s amended charter]
amended the tax exemption by simplifying the same law in general
terms. It succinctly exempts NPC from “all forms of taxes, duties,
fees…” The use of the phrase “all forms” of taxes demonstrates the
intention of the law to give NPC all the tax exemptions it has been
enjoying before.
The exemption granted under Section 135 (b) of the NIRC of
1997 and Article 4(2) of the Air Transport Agreement between RP and
Singapore cannot, without a clear showing of legislative intent, be
construed as including indirect taxes. Statutes granting tax
exemptions must be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority, and if an exemption is
found to exist, it must not be enlarged by construction. (Silkair
(Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No.
173594, February 6, 2008)
â 18. What are the different kinds of taxes classified as to
purpose ? SUGGESTED
ANSWER: a. General
, fiscal or revenue – imposed for the purpose of raising public funds
for the service of the government. b. Special
or regulatory – imposed primarily for the regulation of useful or non-
useful occupation or enterprises and secondarily only for the raising of
public funds.
LIMITATIONS OR RESTRICTIONS ON THE POWER
1. Purpose for the limitations on the power of taxation.
The inherent and constitutional limitations to the power of taxation are
safeguards which would prevent abuse in the exercise of this otherwise
unlimited and plenary power.
The limitations also serve as a standard to measure the validity of
a tax law or the act of a taxing authority. A violation of the limitations
serves to invalidate a tax law or act in the exercise of the power to tax.
INHERENT LIMITATIONS
ââ 1. What are the inherent limitations on the power of taxation
?
SUGGESTED ANSWERS:
a. Public purpose. The revenues collected from taxation
should be devoted to a public purpose.
b. No improper delegation of legislative authority to
tax. Only the legislature can exercise the power of taxes unless the same
is delegated to some other governmental body by the constitution or
through a law which does not violate any provision of the constitution.
c. Territoriality. The taxing power should be exercised only
within territorial boundaries of the taxing authority.
d. Recognition of government exemptions; and
e. Observance of the principle of comity. Comity is the
respect accorded by nations to each other because they are equals. On
the other hand taxation is an act of sovereign. Thus, the power should
be imposed upon equals out of respect.
Some authorities include no double taxation.
ââ 2. What are the principles to consider in the determination
of whether tax revenues are devoted for a public purpose ?
SUGGESTED ANSWER:
a. The tax revenues are for a public purpose if utilized for
the benefit of the community in general. An alternative meaning
is that tax proceeds should be utilized only to attain the objectives of
government.
b. Inequalities resulting from the singling out of one
particular class for taxation or exemption infringe no constitutional
limitation.
REASON: It is inherent in the power to tax that the legislature is
free to select the subjects of taxation.
BASIS: The lifeblood theory.
c. An individual taxpayer need not derive direct
benefits from the tax.
REASON: The paramount consideration is the welfare of the
greater portion of the population.
d. A tax may be imposed, not so much for revenue
purposes, but under police power for the general welfare of the
community. This would still be for a public purpose.
e. Public purpose continually expanding. Areas
formerly left to private initiative now lose their boundaries and may be
undertaken by the government if it is to meet the increasing social
challenges of the times.
f. Tax revenue must not be used for purely private
purposes or for the exclusive benefit of private persons.
g. Private persons may be benefited but such benefit should
be merely incidental as its main object is the benefit of the community
in general.
h. Determined at the time of enactment of tax law and not
at the time of implementation.
i. There is a presumption of public purpose even if the tax
law does not specifically provide for its purpose. (Santos & Co., v.
Municipality of Meycauayan, et al., 94 Phil. 1047)
j. Public use is no longer confined to the traditional notion of
use by the public but held synonymous with public interest, public
benefit, public welfare, and public convenience. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647,
April 16, 2005)
ââ 3. A law was enacted imposing a tax on manufacturers of
coconut oil, the proceeds of which are to be used exclusively for the
protection and promotion of the coconut industry, namely, to
improve the working conditions in coconut mills and to conduct
research on the use of coconut oil for motor fuel. Some of the
manufacturers of coconut oil challenge the validity of the law,
contending that the tax is to be used for a private purpose, and
therefore, the law violates the rule that public revenues shall not be
appropriated for anything but a public purpose. Decide with
reason.
SUGGESTED ANSWER: The levy is for a public purpose. It cannot
be denied that the coconut industry is one of the major industries
supporting the national economy. It is, therefore, the state’s concern
to make it a strong and secure source not only of the livelihood of the
significant segment of the population, but also
of export earnings, the sustained growth of which is one of the
imperatives of economic growth. (Philippine Coconut Producers
Federation, Inc. (Cocofed v. Presidential Commission on Good
Government, 178 SCRA 236, 252)
ââ 4. Requisites for taxpayers, concerned citizens, voters or
legislators to have locus standi to sue.
a. In general, the case should involve constitutional
issues. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et
al., G. R. No. 171396, May 3, 2006)
b. For taxpayers, there must be a showing:
 1) That tax money is “being extracted and spent a. Only those who shall be directly affected by such
in violation of specific constitutional protections against executive encroachment, such as for example employees who would
abuses of legislative power.” (Flast v. Cohen, 392 U.S. 83) find themselves subject to disciplinary powers that may be imposed
2) That public money is being deflected to under the questioned Executive Order as they have a direct and specific
any improper purpose (Pascual v. Secretary of Public Works, interest in raising the substantive issue therein (Automotive Industry
110 Phil. 33) or a claim of illegal disbursement of public Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No.
funds or that the tax measure is unconstitutional. (David, 157509, January 18, 2005) or employees who are going to be demoted,
supra) transferred or otherwise affected by any personnel action subject o the
3) A taxpayer is allowed to sue where there is rule on exhaustion of administrative remedies.
a claim that public funds are illegally disbursed, or that b. Moreover, and if at all, only Congress, can claim any injury
public money is being deflected to any improper purpose, or from the alleged executive encroachment of the legislative function to
that there is a wastage of public funds through the enforcement amend, modify and/or repeal laws. (Automotive Industry Workers
of an invalid or unconstitutional law. (Abaya v. Ebdane, G. Alliance (AIWA),etc., et al., supra, citing Gonzales v. Narvasa, G. R. No.
R. No. 167919, February 14, 2007; Garcia v. Enriquez, 140835, August 14,2000, 337 SCRA 733, 741)
Jr. G.R. No. 112655 December 9, 1993, Minute Resolution)
A taxpayer’s suit is properly brought only when 6. Locus standi being merely a matter of procedure, have
there is an exercise of the spending or taxing power been waived in certain instances where a party who is not personally
of Congress. (Automotive Industry Workers injured may be allowed to bring suit. The following are examples of
Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. instances where suits have been brought by parties who have not have
No. 157509, January 18, 2005 citing Gonzales v. been personally injured by the operation of a law or any other
Narvasa, G. R. No. 140835, August 14, 2000, 337 government act but by concerned citizens, taxpayers or voters who
SCRA 733, 741) actually sue in the public interest:
c. For voters, there must be a showing of obvious interest a. Taxpayer’s suits to question contracts entered into by the
in the validity of the election law in question. national government or government-owned or controlled corporations
d. For concerned citizens, there must be a showing that the allegedly in contravention of the law.
issues raised are of transcendental importance which must be settled b. A taxpayer is allowed to sue where there is a claim that
early. public funds are illegally disbursed, or that public money is being
e. For legislators, there must be a claim that the official deflected to any improper purpose, or that there is a wastage of public
action complained of infringes upon their prerogatives as funds through the enforcement of an invalid or unconstitutional
legislators. (David, et al., v. President Gloria Macapagal-Arroyo, etc., law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)
et al., G. R. No. 171396, May 3, 2006)
â 7. The VAT law provides that, the President, upon the
5. Only those directly affected have locus standi to impugn recommendation of the Secretary of Finance, shall, effective January
the alleged encroachment by the executive department into the 1, 2006, raise the rate of value-added tax to twelve percent (12%) after
legislative domain of Congress. any of the following conditions have been satisfied. “(i) value-added
tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1 ½%).”
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of
legislative power but only of the discretion as to the execution of the
law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power
when it describes what job must be done, who must do it, and what is
the scope of his authority. In the above case the Secretary of Finance
becomes merely the agent of the legislative department, to determine
and declare the even upon which its expressed will takes place. The
President cannot set aside the findings of the Secretary of Finance, who
is not under the conditions acting as the execute alter ego or
subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R.
No. 168056, September 1, 2005 and companion cases citing various
cases]]
8. Instances of proper delegation: When taxing power could
be delegated: Exceptions to the rule on non-delegation:
a. Delegation of tariff powers by Congress to the President
under the flexible tariff clause, Section 28 (2), Article VI of the
Constitution.
b. Delegation of emergency powers to the President under
Section 23 (2) of Article VI of the Constitution.
c. The delegation to the President of the Philippines to enter
into executive agreements, and to ratify treaties which may contain tax
exemption provisions subject to the concurrence by the Senate in the
ratification made by the President.
d. Delegation to the people at large.
e. Delegation to administrative bodies [Abakada Guro Party
List (Formerly AASJS), etc., v, Ermita, et al., G. R. No.168056, September
1, 2005], which is referred to as subordinate legislation.
In this instance, there is a requirement that the law is complete
in all aspects so what is delegated is merely the implementation of the
law or there exists sufficiently determinate standards to guide the
delegate and prevent a total transference of the taxing power.
9. “Paradigm shift” from exclusive Congressional power to
direct grant of taxing power to local legislative bodies. The power to
tax is no longer vested exclusively on Congress; local legislative bodies
are now given direct authority to levy taxes, fees and other charges
pursuant to Article X, section 5 of the 1987 Constitution. (Batangas
Power Corporation v. Batangas City, et al. G. R. No. 152675, and
companion case, April 28, 2004 citing National Power Corporation v. City
of Cabanatuan, G. R. No. 149110, April 9, 2003)
Local government legislation, “is not regarded as a transfer of
general legislative power, but rather as the grant of authority to
prescribe local regulations, according to immemorial practice, subject,
of course, to the interposition of the superior in cases of
necessity.” (People v. Vera, 65 Phil. 56)
10. Taxing power of the local government is limited. The
taxing power of local governments is limited in the sense that Congress
can enact legislation granting tax exemptions.
While the system of local government taxation has changed with
the onset of the 1987 Constitution, the power of local government
units to tax is still limited.
While the power to tax by local governments may be exercised
by local legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority conferred by
Section 5, Article X of the Constitution, the basic doctrine on local
taxation remains essentially the same, “the power to tax is [still]
primarily vested in the Congress.” (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring
to Mactan Cebu International Airport Authority, v. Marcos, G.R. No.
120082, September 11, 1996, 261 SCRA 667, 680)
 11. Further amplification by Bernas of the local
government’s power to tax. “What is the effect of Section 5 on the
fiscal position of municipal corporations? Section 5 does not change
the doctrine that municipal corporations do not possess inherent
powers of taxation. What it does is to confer municipal corporations a
general power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a statutory grant of these
powers. The power of the legislative authority relative to the fiscal
powers of local governments has been reduced to the authority to
impose limitations on municipal powers. Moreover, these limitations
must be “consistent with the basic policy of local autonomy.” The
important legal effect of Section 5 is thus to reverse the principle that
doubts are resolved against municipal corporations. Henceforth, in
interpreting statutory provisions on municipal fiscal powers, doubts
will be resolved in favor of municipal corporations. It is understood,
however, that taxes imposed by local government must be for a public
purpose, uniform within a locality, must not be confiscatory, and must
be within the jurisdiction of the local unit to pass.” (Quezon City, et al.,
v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA
169)
12. Reconciliation of the local government’s authority to
tax and the Congressional general taxing power. Congress has the
inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of local governments,
such as provinces and cities for example Quezon City, to tax is
prescribed by Section 151 in relation to Section 137 of the LGC which
expressly provides that notwithstanding any exemption granted by any
law or other special law, the City or a province may impose a franchise
tax. It must be noted that Section 137 of the LGC does not prohibit
grant of future exemptions.
The Supreme Court in a series of cases has sustained the power
of Congress to grant tax exemptions over and above the power of the
local government’s delegated power to tax. (Quezon City, et al., v. ABS-
CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA
16)
“Indeed, the grant of taxing powers to local government units
under the Constitution and the LGC does not affect the power of
Congress to grant exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the constitutional grant to
local governments simply means that in interpreting statutory
provisions on municipal taxing powers, doubts must be resolved in
favor of municipal corporations.” [Ibid., referring to Philippine Long
Distance Telephone Company, Inc. (PLDT) vs. City of Davao]
âââ 13. General principles of income taxation in the
Philippines or the source rule of income taxation as provided in the
NIRC of 1997.
a. A citizen of the Philippines residing therein is taxable
on all income derived from sources within and without the
Philippines;
b. A nonresident citizen is taxable only on income derived
from sources within the Philippines;
c. An individual citizen of the Philippines who is working and
deriving income abroad as an overseas contract worker is taxable only
on income from sources within the Philippines: Provided, That
a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall
be treated as an overseas contract worker;
d. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources within the
Philippines;
e. A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and
f. A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived from
sources within the Philippines. (Sec. 23, NIRC of 1997, emphasis
supplied)
ââ14. Juliane a non-resident alien appointed as a commission
agent by a domestic corporation with a sales commission of 10% all
sales actually concluded and collected through her efforts. The local
company withheld the amount of P107,000 from her sales commission
and remitted the same to the BIR.
She filed a claim for refund alleging that her sales commission is
not taxable because the same was a compensation for her services
rendered in Germany and therefore considered as income from
sources outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor which
determines the source of income of personal services is not the
residence of the payor, or the place where the contract for service is
entered into, or the place of payment, but the place where the services
were actually performed.
Since the activity of securing the sales were in Germany, then the
income did not originate from sources from within the
Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No.
153793, August 29, 2006)
ââ 15. Ensite, Ltd.. is a Canadian corporation not doing
business in the Philippines. It holds 40% of the shares of Philippine
Stamping Plant, Inc.,., a Philippine company while the 60% is owned
by Fred Corporation, a Filipino-owned Philippine corporation. Ensite
Co. also owns 100% of the shares of Susanto Co., an Indonesian
company which has a duly licensed Philippine branch. Due to
worldwide restructuring of the Ensite Ltd.,. group, Ensite Ltd.,.
decided to sell all its shares in Philippine Stamping Plant, Inc. and
Susanto Co. The negotiations for the buy-out and the signing of the
Agreement of Sale were all done in the Philippines. The Agreement
provides that the purchase price will be paid to Ensite Ltd’s bank
account in the U.S. and that title to the Philippine Stamping Plant,
Inc. and Susanto Co. shall be transferred to General Co., in Toronto
Canada where stock certificates will be delivered. General Co. seeks
your advice as to whether or not it will subject the payments of the
purchase price to withholding tax. Explain your
advice. SUGGESTED ANSWER: The payments of the
purchase price will be subject to withholding tax. Considering that all
the activities (sales) occurred within the Philippines, the income is
considered as income from within, subject to Philippine income
taxation. Ensite, Ltd. being a foreign corporation is to be taxed on its
income derived from sources within the
Philippines.
ââ 16.Ensite, Ltd. is a Canadian corporation, which has a
duly licensed Philippine branch engage in trading activities in the
Philippines. Ensite, Ltd.. also invested directly in 40% of the shares
of stock of Philippine Stamping Plant, Inc.., a Philippine
corporation. These shares are booked in the Head Office of Ensite,
Ltd.. and are not reflected as assets of the Philippine branch. In 2009,
Philippine Stamping Plant, Inc.. declared dividends to its
stockholders. Before remitting the dividends to Ensite Ltd.,.,
Philippine Stamping Plant, Inc. Co. seeks your advice as to whether it
will subject the remittance to withholding tax. There is no need to
discuss WT rates, if applicable. Focus your discussion on what is the
issue. SUGGESTED
ANSWER: Philippine Stamping Plant, Inc.. should subject the
remittance to withholding tax.. Since Philippine Stamping Plant. is a
Philippine corporation, its shares of stock have obtained a business
situs in the Philippines, hence the dividends are considered as income
from within. Ensite. Ltd., being a foreign corporation, should be
subject to tax on its income from within.
ââ 17. Philippine Stamping Plant, Inc., a Philippine corporation,
has an executive Larry who is a Filipino citizen. Philippine Stamping
Plant, Inc,. has a subsidiary in Malaysia (Kuala Lumpur
Manufacturing, Inc.) and will assign Larry for an indefinite period to
work full time for Kuala Lumpur Manufacturing, Inc.. Larry will bring
his family to reside in Malaysia and will lease out his residence in the
Philippines. The salary of Larry will be shouldered 50% by Philippine
Stamping Plant, Inc.. while the other 50% plus housing, cost of living
and educational allowances of Larry’s dependents will be shouldered
by Kuala Lumpur Manufacturing, Inc.. Philippine Stamping Plant,
Inc.. will credit the 50% of Larry’s salary to his Philippine bank
account. Larry will sign the contract of employment in the
Philippines. He will also be receiving rental income for the lease of
his Philippine
residence.
Are these salaries, allowances and rentals subject to Philippine
income tax? Explain briefly. SUGGESTED
ANSWER: The salaries and allowances of Larry, being derived from
labor or personal services rendered outside of the Philippines is
considered as income from without. Since Larry is an OCW, then he is
to be taxed only on his income derived from within the Philippines such
as the rentals on his Philippine residence, and not on his income from
without.
ââ18. Obama Airlines, Inc., a foreign airline company which
does not maintain any flight to and from the Philippines sold air tickets
in the Philippines, through a general sales agent, relating to the
carriage of passengers and cargo between two points, both outside the
Philippines.
a. Is Obama, Inc., subject to income taxes on the sale of the
tickets ?
SUGGESTED ANSWER: Yes. The source of income which is taxable
is that “activity” which produced the income. The ”sale of tickets” in the
Philippines is the activity that determines whether such income is
taxable in the Philippines.
The tickets exchanged hands here and payments for fares were
also made here in Philippine currency. The situs of the source of
payments is the Philippines. the flow of wealth proceeded from and
occurred, within the Philippine territory, enjoying the protection
accorded by the Philippine Government. In consideration of such
protection, the flow of wealth should share the burden of supporting the
government. [Commissioner of Internal Revenue v. British Overseas
Airways Corporation (BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in the Philippines
are engaged in or doing business in the Philippines and their income
from sales of passage documents here is income from within the
Philippines. Thus, the off-line air carrier liable for the 32% (now 30%)
tax on its taxable income. [South African Airways v. Commissioner of
Internal Revenue, G.R. No. 180356, February 16, 2010
citing Commissioner of Internal Revenue v. British Overseas Airways
Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987,
149 SCRA 395]
b. Supposing that Obama, Inc., sells tickets outside of the
Philippines for passengers it carry from Gold City, South Africa to the
Philippines but returns to South Africa without any cargo or
passengers. Would it then be subject to any Philippine tax on such
sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not
subject to any income tax because the activity which generated the
income (the sale of the tickets) was performed outside of the
Philippines.
It is not subject to the carrier’s tax based on gross Philippine
billings because there were no lifts that originated from the
Philippines. “Gross Philippine Billings” refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment
of the ticket or passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)]
c. Would your answer be the same if Obama, Inc. sold
tickets outside of the Philippines for travelers who are going to picked
up by Obama, Inc., planes from the Diosdado Macapagal Intl. Airport
at Clark, Angeles, Pampanga, bound for Nairobi, Kenya ? Reason out
your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be
subject to the carrier’s tax based on Gross Philippine Billings. (GPB).
“Gross Philippine Billings” refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment h. Presidential power to grant reprieves, commutations and
of the ticket or passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)] pardons and remittal of fines and forfeiture after conviction by final
The place of sale is irrelevant; as long as the uplifts of judgment.
passengers and cargo occur from the Philippines, income is included in
GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. 3. The specific or direct constitutional limitation.
No. 180356, February 16, 2010) a. No imprisonment for non-payment of a poll tax;
b. Taxation shall be uniform and equitable;
19. No improper delegation of legislative authority to c. Congress shall evolve a progressive system of taxation;
tax. The power to tax is inherent in the State, such power being d. All appropriation, revenue or tariff bills shall originate
inherently legislative, based on the principle that taxes are a grant of exclusively in the House of Representatives, but the Senate may propose
the people who are taxed, and the grant must be made by the and concur with amendments;
immediate representatives of the people; and where the people have e. The President shall have the power to veto any particular item
laid the power, there it must remain and be exercised. (Commissioner or items in an appropriation, revenue, or tariff bill, but the veto shall not
of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274- affect the item or items to which he does not object;
75, July 21, 2008) f. Delegated power of the President to impose tariff rates,
import and export quotas, tonnage and wharfage dues:
CONSTITUTIONAL LIMITATIONS 1) Delegation by Congress
2) through a law
1. Constitutional limitations on the power of taxation . The 3) subject to Congressional limits and restrictions
general or indirect constitutional limitations as well as the specific or 4) within the framework of national development program.
direct constitutional limitations. g. Tax exemption of charitable institutions, churches,
parsonages and convents appurtenant thereto, mosques, and all lands,
2. The general or indirect constitutional limitations on the buildings and improvements of all kinds actually, directly and exclusively
power of taxation are: used for religious, charitable or educational purposes;
a. Due process clause; h. No tax exemption without the concurrence of majority
b. Equal protection clause; vote of all members of Congress;
c. Freedom of the press; i. No use of public money or property for religious purposes
d. Religious freedom; except if priest is assigned to the armed forces, penal institutions,
e. No taking of private property without just compensation; government orphanage or leprosarium;
f. Non-impairment clause; j. Money collected on tax levied for a special purpose to be
g. Law-making process: used only for such purpose, balance if any, to general funds;
1) Bill should embrace only one subject expressed in k. The Supreme Court's power to review judgments or orders
the title thereof; of lower courts in all cases involving the legality of any tax, impose,
2) Three (3) readings on three separate days; assessment or toll or the legality of any penalty imposed in relation to
3) Printed copies in final form distributed three (3) days the above;
before passage.
 l. Authority of local government units to create their own
sources of revenue, to levy taxes, fees and other charges subject to
guidelines and limitations imposed by Congress consistent with the basic
policy of local autonomy;
m. Automatic release of local government's just share in
national taxes;
n. Tax exemption of all revenues and assets of non-stock,
non-profit educational institutions used actually, directly and exclusively
for educational purposes;
o. Tax exemption of all revenues and assets of proprietary or
cooperative educational institutions subject to limitations provided by
law including restrictions on dividends and provisions for reinvestment
of profits;
p. Tax exemption of grants, endowments, donations or
contributions used actually, directly and exclusively for educational
purposes subject to conditions prescribed by law.
5. Equal protection of the law clause is subject to
reasonable classification. If the groupings are characterized by
substantial distinctions that make real differences, one class may be
treated and regulated differently from another. The classification must
also be germane to the purpose of the law and must apply to all those
belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R.
No. 127410, January 20, 1999)
ââ 6. Requisites for valid classification. All that is required of
a valid classification is that it be reasonable, which means
that a. the classification should be based on substantial
distinctions which make for real differences,
b. that it must be germane to the purpose of the law;
c. that it must not be limited to existing conditions only;
and
d. that it must apply equally to each member of the class.
The standard is satisfied if the classification or distinction is based
on a reasonable foundation or rational basis and is not palpably
arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R.
No. 166715, August 14, 2008]
7. Equal protection does not demand absolute
equality. It merely requires that all persons shall be treated alike,
under like circumstances and conditions, both as to the privileges
conferred and liabilities enforced. (Santos v. People, et al, G. R. No.
173176, August 26, 2008)
It is imperative to duly establish that the one invoking equal
protection and the person to which she is being compared were indeed
similarly situated, i.e., that they committed identical acts for which
they were charged with the violation of the same provisions of the
NIRC; and that they presented similar arguments and evidence in their
defense - yet, they were treated differently. (Santos, supra)
8. Tests to determine validity of classification. The United
States Supreme Court has established different tests to determine the
validity of a classification and compliance with the equal protection
clause. The recognized tests are:
a. The traditional (or rational basis) test.
b. The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class)
test.
9. The traditional (or rational basis) test used in order to
determine the validity of classification. The classification is valid if it
is rationally related to a constitutionally permissible state interest.
The complainant must prove that the classification is “invidous,”
“wholly arbitrary,” or ”capricious,” otherwise the classification is
presumed to be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S.
61; McGowan v. Maryland, 366 U.S. 420; United States Railroad
Retirement Board v. Fritz, 449 U.S. 166)
10. The strict scrutiny (or compelling interest) test used in
order to determine the validity of the classification. Government
regulation that intentionally discriminates against a “suspect class”
such as racial or ethnic minorities, is subject to strict scrutiny and
considered to violate the equal protection clause unless found
necessary to promote a compelling state interest.
A classification is necessary when it is narrowly drawn so that no
alternative, less burdensome means is available to accomplish the
state interest.
Thus, it was held that denial of free public education to the
children of illegal aliens imposes an enormous and lasting burden
based on a status over which the children have no control is violative
of equal protection because there is no showing that such denial
furthers a “substantial” state goal. (Plyler v. Doe, 457 U.S. 202)
11. The intermediate level of scrutiny (or quasi-suspect
class) test used in order to determine the validity of he
classification. Classification based on gender or legitimacy are not
“suspect,” but neither are they judged by the traditional or rational
basis test.
Intentional discriminations against members of a quasi-suspect
class violate equal protection unless they are substantially related to
important government objectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows,
but not widowers, has been held valid for it furthers the state policy of
cushioning the financial impact of spousal loss upon the sex for whom
that loss usually imposes a heavier burden. (Kahn v. Shevin, 416 U.S.
351)
12. Equality and uniformity of taxation may mean the same
as equal protection. In such a case, the terms would mean that all
subjects and objects of taxation which are similarly situated shall be
subject to the same burdens and granted the same privileges without
any discrimination whatsoever.
13. It is inherent in the power to tax that the State be free to
select the subjects of taxation, and it has been repeatedly held that,
"inequalities which result from a singling out of one particular class of
taxation, or exemption, infringe no constitutional
limitation." (Commissioner of Internal Revenue, et al., v. Santos, et
al., 277 SCRA 617)
ââ 9. Benjie is a law-abiding citizen who pays his real estate
taxes promptly. Due to a series of typhoons and adverse economic
conditions, an ordinance is passed by Soliman City granting a 50%
discount for payment of unpaid real estate taxes for the preceding
year and the condonation of all penalties on fines resulting from the
late payment.
Arguing that the ordinance rewards delinquent tax payers and
discriminates against prompt ones, Benjie demands that he be
refunded an amount equivalent to one-half of the real property taxes
he paid. The municipal attorney rendered an opinion that Benjie
cannot be reimbursed because the ordinance did not provide for such
reimbursement. Benjie files suit to declare the ordinance void on the
ground that it is a class legislation. Will his suit prosper ? Explain your
answer briefly.
SUGGESTED ANSWER: No. There is no class legislation because
there is no violation of the equal protection suit. There is a valid
classification between those who already paid their taxes and those
who have not. Furthermore, the taxing authority has the prerogative
to select the subjects and objects of taxation, including granting a 50%
discount in the payment of unpaid real estate taxes, and the
condonation of all penalties on fines resulting from late payment.
10. The rewards law to tax collectors does not violate
equal protection. The equal protection clause recognizes a valid
classification, that is, a classification that has a reasonable foundation
or rational basis and not arbitrary. With respect to RA 9335, it’s
expressed public policy is the optimization of the revenue-generation
capability and collection of the BIR and the BOC. Since the subject of
the law is the revenue- generation capability and collection of the BIR
and the BOC, the incentives and/or sanctions provided in the law
should logically pertain to the said agencies. Moreover, the law
concerns only the BIR and the BOC because they have the common
distinct primary function of generating revenues for the national
government through the collection of taxes, customs duties, fees and
charges.
 Indubitably, such substantial distinction is germane and
intimately related to the purpose of the law. Hence, the classification
and treatment accorded to the BIR and the BOC under RA 9335 fully
satisfy the demands of equal protection. (ABAKADA Guro Party List,
etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)
11. The prosecution of one guilty person while others
equally guilty are not prosecuted, however, is not, by itself, a denial
of the equal protection of the laws. Where the official action purports
to be in conformity to the statutory classification, an erroneous or
mistaken performance of the statutory duty, although a violation of the
statute, is not without more a denial of the equal protection of the
laws.
The unlawful administration by officers of a statute fair on its
face, resulting in its unequal application to those who are entitled to
be treated alike, is not a denial of equal protection unless there is
shown to be present in it an element of intentional or purposeful
discrimination. This may appear on the face of the action taken with
respect to a particular class or person, or it may only be shown by
extrinsic evidence showing a discriminatory design over another not to
be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)
12. Equal protection should not be used to protect
commission of crime. While all persons accused of crime are to be
treated on a basis of equality before the law, it does not follow that
they are to be protected in the commission of crime. It would be
unconscionable, for instance, to excuse a defendant guilty of murder
because others have murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal
laws as to some persons should be converted into a defense for others
charged with crime, the result would be that the trial of the district
attorney for nonfeasance would become an issue in the trial of many
persons charged with heinous crimes and the enforcement of law
would suffer a complete breakdown. (Santos v. People, et al, G. R. No.
173176, August 26, 2008)
â 13. Illustration of double taxation in local taxation. there is
indeed double taxation if Coca-Cola is subjected to the taxes under
both Sections 14 and 21 of Tax Ordinance No. 7794, since these are
being imposed: (1) on the same subject matter – the privilege of doing
business in the City of Manila; (2) for the same purpose – to make
persons conducting business within the City of Manila contribute to
city revenues; (3) by the same taxing authority – City of Manila; (4)
within the same taxing jurisdiction – within the territorial jurisdiction
of the City of Manila; (5) for the same taxing periods – per calendar
year; and (6) of the same kind or character – a local business tax
imposed on gross sales or receipts of the business. (The City of Manila,
et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845, August
4, 2009)
14. A lawful tax on a new subject, or an increased tax on an
old one, does not interfere with a contract or impairs its
obligation, within the meaning of the constitution. (Tolentino v.
Secretary of Finance, et al., and companion cases, 235 SCRA 630)
15. The withdrawal of a tax exemption should not be
construed as prohibiting future grants of exemption from all
taxes. (Philippine Long Distance Telephone Company, Inc., v. City of
Davao, et al., etc., G. R. No. 143867, August 22, 2001)
16. Tax exemptions in franchises are always subject to
withdrawal. A legislative franchise is granted with the express
condition that it is subject to amendment, alteration, or repeal. (1987
Constitution, Art. XII, Sec. 11)
It is enough to say that the parties to a contract cannot, through
the exercise of prophetic discernment, fetter the exercise of the taxing
power of the State. For not only are existing laws read into contracts in
order to fix obligations as between parties, but the reservation of
essential attributes of sovereign power is also read into contracts as a
basic postulate of the legal order. The policy of protecting contracts
against impairment presupposes the maintenance of a government
which retains adequate authority to secure the peace and good order
of society. (Smart Communications, Inc. v. The City of Davao, etc., et al.,
G. R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
2001 made the observation that since Smart’s franchise was granted
after the effectivity of the Local Government Code that its tax exemption
privilege was reinstated. However, Smart Communications, Inc. v. The
City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 is
explicit in its holding that Smart is not entitled to a tax exemption.
â 17. When withdrawal of a tax exemption impairs the
obligation of contracts. The Contract Clause has never been thought
as a limitation on the exercise of the State’s power of taxation save
only where a tax exemption has been granted for a valid consideration.
(Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No.
155491, September 16, 2008) citing Tolentino v. Secretary of
Finance, G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685) The
author opines that since practically all franchises granted to
telecommunications companies are similarly worded that the above
doctrine finds application to the others)
18. The primary reason for the withdrawal of tax exemption
privileges granted to government owned and controlled
corporations and all other units of government was that such privilege
resulted to serious tax base erosion and distortions in the tax treatment
of similarly situated enterprises, hence resulting in the need for these
entities to share in the requirements of development, fiscal or
otherwise, by paying the taxes and other charges due them. (Philippine
Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)
19. National Power Corporation (NPC) is of the insistence
that it is not subject to the payment of franchises taxes imposed by the
Province of Isabela because all of its shares are owned by the Republic
of the Philippines. It is thus, an instrumentality of the National
Government which is exempt from local taxation. As such it is not a
private corporation engaged in “business enjoying franchise”
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone
Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
2001, upheld the authority of the City of Davao, a local government
unit, to impose and collect a local franchise tax because the Local
Government Code has withdrawn all tax exemptions previously enjoyed
by all persons and authorized local government units to impose a tax on
business enjoying a franchise tax notwithstanding the grant of tax
exemption to them.
20. “In lieu of all taxes” in the franchise of ABS-CBN does
not exempt it from local franchise taxes. It does not expressly provide
what kind of taxes ABS-CBN is exempted from. It is not clear whether
the exemption would include both local, whether municipal, city or
provincial, and national tax. Whether the “in lieu of all taxes provision”
would include exemption from local tax is not unequivocal.
The right to exemption from local franchise tax must be clearly
established and cannot be made out of inference or implications but
must be laid beyond reasonable doubt. Verily, the uncertainty in the
“in lieu of all taxes” provision should be construed against ABS-
CBN. ABS-CBN has the burden to prove that it is in fact covered by the
exemption so claimed but has failed to do so. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
2008)
NOTES AND COMMENTS: This is practically the same holding in
an earlier case involving another telecommunications company Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all
franchises granted to telecommunications companies are similarly
worded that the above doctrine finds application to the others.)
â 21. “In lieu of all taxes” refers to national internal revenue
taxes and not to local taxes. The “in lieu of all taxes” clause applies
only to national internal revenue taxes and not to local taxes. As
appropriately pointed out in the separate opinion of Justice Antonio T.
Carpio in a similar case involving a demand for exemption from local
franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only
to taxes, other than income tax, imposed under the National Internal
Revenue Code. The "in lieu of all taxes" clause does not apply to local
taxes. The proviso in the first paragraph of Section 9 of Smart's
franchise states that the grantee shall "continue to be liable for income
taxes payable under Title II of the National Internal Revenue Code."
Also, the second paragraph of Section 9 speaks of tax returns filed and
taxes paid to the "Commissioner of Internal Revenue or his duly
authorized representative in accordance with the National Internal
Revenue Code." Moreover, the same paragraph declares that the tax
returns "shall be subject to audit by the Bureau of Internal Revenue."
Nothing is mentioned in Section 9 about local taxes. The clear intent is
for the "in lieu of all taxes" clause to apply only to taxes under the
National Internal Revenue Code and not to local taxes. Even with
respect to national internal revenue taxes, the "in lieu of all taxes"
clause does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's
franchise to also apply to local taxes, Congress would have expressly
mentioned the exemption from municipal and provincial taxes.
Congress could have used the language in Section 9(b) of Clavecilla's
old franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description
levied, established or collected by any authority
whatsoever, municipal, provincial or national, from which the grantee
is hereby expressly exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local
taxes. Congress used the "in lieu of all taxes" clause only in reference
to national internal revenue taxes. The only interpretation, under the
rule on strict construction of tax exemptions, is that the "in lieu of all
taxes" clause in Smart's franchise refers only to national and not to
local taxes. [Smart Communications, Inc. v. The City of Davao, etc., et
al., G. R. No. 155491, September 16, 2008 citing Philippine Long
Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594
(2003)]
NOTES AND COMMENTS: The author opines that the above
finds application to all telecommunications companies.
22. The “in lieu of all taxes” clause in the franchise of ABS-
CBN has become functus officio with the abolition of the franchise tax
on broadcasting companies with yearly gross receipts exceeding Ten
Million Pesos. The clause “in lieu of all taxes” does not pertain to VAT
or any other tax. It cannot apply when what is paid is a tax other than
a franchise tax. Since the franchise tax on the broadcasting companies
with yearly gross receipts exceeding ten million pesos has been
abolished, the “in lieu of all taxes” clause has now become functus
officio, rendered inoperative. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in
an earlier case involving another telecommunications company. Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008. The author opines that since practically all
franchises granted to telecommunications companies are similarly
worded that the above doctrine finds application to the others.)
ââ 23. Double taxation in its generic sense, this means taxing
the same subject or object twice during the same taxable period. In its
particular sense, it may mean direct duplicate taxation, which is
prohibited under the constitution because it violates the concept of
equal protection, uniformity and equitableness of taxation. Indirect
duplicate taxation is not anathematized by the above constitutional
limitations.
ââ 24. Elements of direct duplicate taxation:
a. Same
1) Subject or object is taxed twice
2) by the same taxing authority
3) for the same taxing purpose
4) during the same taxable period
 b. Taxing all of the subjects or objects for the first time
without taxing all of them for the second time.
If any of the elements are absent then there is indirect duplicate
taxation which is not prohibited by the constitution.
NOTES AND COMMENTS:
a. Presence of the 2nd element violates the equal protection
clause. If only the 1stelement is present, taxing the same subject or
object twice, by the same taxing authority, etc., there is no violation of
the equal protection clause because all subjects and objects that are
similarly situated are subject to the same burdens and granted the same
privileges without any discrimination whatsoever,
The presence of the 2nd element, taxing all of the subjects and
objects for the first time, without taxing all for the second time, results
to discrimination among subjects and objects that are similarly situated,
hence violative of the equal protection clause.
25. Double taxation a valid defense against the legality of a tax
measure if the double taxation is direct duplicate taxation, because it
would violate the equal protection clause of the constitution.
26. When an item of income is taxed in the Philippines and
the same income is taxed in another country, this would be known as
international juridical double taxation which is the imposition of
comparable taxes in two or more states on the same taxpayer in respect
of the same subject matter and for identical grounds. (Commissioner of
Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No.
127105, June 25, 1999)
ââ 27. Methods for avoiding double taxation (indirect duplicate
taxation).
a. Tax treaties which exempts foreign nationals from local
taxation and local nationals from foreign taxation under the principle of
reciprocity.
b. Tax credits where foreign taxes are allowed as deductions
from local taxes that are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.
28. Tax credit generally refers to an amount that is subtracted
directly from one’s total tax liability, an allowance against the tax itself,
or a deduction from what is owned.
A tax credit reduces the tax due, including –whenever applicable –
the income tax that is determined after applying the corresponding tax
rates to taxable income. (Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)
29. A tax deduction is defined as a subtraction fro income for
tax purposes, or an amount that is allowed by law to reduce income prior
to the application of the tax rate to compute the amount of tax which is
due.
A tax deduction reduces the income that is subject to tax in order
to arrive at taxable income. (Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)
â 30. The petitioners allege that the R-VAT law is constitutional
because the Bicameral Conference Committed has exceeded its
authority in including provisions which were never included in the
versions of both the House and Senate such as inserting the stand-by
authority to the President to increase the VAT from 10% to 12%;
deleting entirely the no pass-on provisions found in both the House
and Senate Bills; inserting the provision imposing a 70% limit on the
amount of input tax to be credited against the output tax; and
including the amendments introduced only by Senate Bill No. 1950
regarding other kinds of taxes in addition to the value-added
tax. Thus, there was a violation of the constitutional mandate that
revenue bills shall originate exclusively from the House of
Representatives.
Are the contentions of such weight as to constitute grave abuse
of discretion which may invalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuse of discretion
because all the changes and modifications made by the Bicameral
Conference Committee were germane to subjects of the provisions
referred to it for reconciliation.
 The Bicameral Conference Committee merely exercised the Mode of generally payable in payable in money,
judicially recognized long-standing legislative practice of giving said Payment money property or service
conference committee ample latitude for compromising differences Assignability not assignable assignable
between the Senate and the House. [Abakada Guro Party List (etc.) v. Payment unless it becomes a may be a subject
Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion debt is not subject
cases] to compensation or
set-off
31. The VAT while regressive is NOT violative of the mandate to Interest does not draw draws interest if
evolve a progressive system of taxation. Do you agree ? The mandate interest unless stipulated or
to Congress is not to prescribe but to evolve a progressive system of delinquent delayed
taxation. Otherwise, sales taxes which perhaps are the oldest form of Authority imposed by public can be imposed by
indirect taxes, would have been prohibited with the proclamation of the authority private individuals
constitutional provision. Sales taxes are also regressive. . [Abakada Prescription Prescriptive periods debt under the Civil
Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September for tax under NIRC Code
1, 2005 and companion cases citing Tolentino v. Secretary of Finance, et
al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]
WARNING: Do not use the above arrangement in answering Bar
questions.
32. All revenues and assets of non-stock, non-profit
educational institutions that are actually, directly and exclusively used
2. Compensation takes place by operation of law, where the
for educational purposes shall be exempt from taxation.
local government and the taxpayer are in their own right reciprocally
debtors and creditors of each other, and that the debts are both due and
33. Revenues and assets of proprietary educational
demandable, in consequence of Articles 1278 and 1279 of the Civil
institutions, including those which are cooperatively owned, may be
Code. (Domingo v. Garlitos, 8 SCRA 443)
entitled to exemptions subject to limitations provided by law including
restrictions on dividends and provisions for reinvestments. There is no
ââ 3. May there be compensation or set-off between a national
law at the present which grants exemptions, other the exemptions
tax and a debt ? Reason out your
granted to cooperatives.
answer. SUGGESTED ANSWER: As a general
rule, there could be no compensation or set-off between a tax and a
OTHER CONCEPTS
debt for the following
reasons:
ââ1. Distinguish tax from debt.
a. Lifeblood
TAX DEBT theory. b. Ta
Basis based on law based on contract or xes are not contractual obligations but arise out of a duty to, and are
judgment the positive acts of government, to the making and enforcing of which
Failure to Pay may result in no imprisonment the personal consent of the individual taxpayer is not
imprisonment required. (Republic v. Mambulao Lumber Co., 4 SCRA
622) c. Taxes cannot be the e. While judgment should be rendered in favor of Republic for
subject of compensation because the government and taxpayer are unpaid taxes, judgment ought at the same time to issue for Sampaguita
not mutually creditors and debtors of each other and a claim for taxes Pictures commanding payment to the latter by the Republic of the
is not such a debt, demand, contract or judgment as is allowed to be value of the backpay certificates which the Republic received. (Republic
set-off. v. Ericta, 172 SCRA 623)
Thus, it is correct to say that the offsetting of a taxpayer’s tax ââ 5. Gilbert obtained a judgment for a sum of money
refund with its alleged tax deficiency is unavailing under Art. 1279 of against the municipality of Camiling. The judgment has become final
the Civil Code. (South African Airways v. Commissioner of Internal although execution has not issued. Upon receiving an assessment for
Revenue, G.R. No. 180356, February 16, 2010 reiterating Caltex municipal sales taxes from the Municipal Treasurer, Gilbert executed
Philippines, Inc. v. Commission on Audit, which applied Francia v. a partial assignment of his judgment sufficient to cover the
Intermediate Appellate Court) assessment in favor of the Municipality. May the Municipal
Treasurer validly accept the assignment? Why?
ââ4. Exceptions: When set-off or compensation allowed for SUGGESTED ANSWER: Yes. The parties in this case are mutually
local debtors and creditors of each other, and since both of the claims
taxes. a. Where became overdue, demandable and fully liquidated, compensation
both claims already become overdue and demandable as well as fully takes place by operation of law. Such was the holding in Domingo v.
liquidated. Compensation takes place by operation of law under Art. Garlitos, 8 SCRA 443, a case decided by the Supreme Court whose
1200 in relation to Arts. 1279 and 1290 all of the Civil Code. (Domingo factual antecedents are similar to the
v. Garlitos, 8 SCRA problem.
443) b. Compensation takes place by 6. In
operation of law, where the government and the taxpayer are in their case of doubt, tax laws must be construed strictly against the State and
own right reciprocally debtors and creditors of each other, and that the liberally in favor of the taxpayer because taxes, as burdens which must
debts are both due and demandable. This is in consequence of Article be endured by the taxpayer, should not be presumed to go beyond what
1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA the law expressly and clearly declares. (Lincoln Philippine Life Insurance
443) c. ,The Supreme Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
Court upheld the validity of a set-off between the taxpayer and the 7. Interpretation in the imposition of taxes, is not the
government. In both cases, the claims of the taxpayers therein were similar doctrine as that applied to tax exemptions. The rule in the
certain and liquidated. The claims were certain since there were no interpretation of tax laws is that a statute will not be construed as
doubts or disputes as to their refundability. In fact, the government imposing a tax unless it does so clearly, expressly, and
admitted the fact of over- unambiguously. A tax cannot be imposed without clear and express
payment. (Commissioner of Internal Revenue v. Esso Standard words for that purpose. Accordingly, the general rule of requiring
Eastern, Inc., 172 SCRA 364) d. In case of a tax adherence to the letter in construing statutes applies with peculiar
overpayment, the BIR’s obligation to refund or off-set arises from the strictness to tax laws and the provisions of a taxing act are not to be
moment the tax was paid. REASON: Solutio indebeti. (Commissioner of extended by implication. In answering the question of who is subject
Internal Revenue v. Esso Standard Eastern, Inc 172 SCRA to tax statutes, it is basic that in case of doubt, such statutes are to be
364) construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and clearly
import. [Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008 citing CIR v. Court of
Appeals, 338 Phil. 322, 330-331 (1997)] As burdens, taxes should not
be unduly exacted nor assumed beyond the plain meaning of the tax
laws. (Ibid., citing CIR v. Philippine American Accident Insurance
Company, Inc., G.R. No. 141658, March 18, 2005, 453 SCRA 668)
8. Strict interpretation of tax exemption laws. Taxes are
what civilized people pay for civilized society. They are the lifeblood of
the nation. Thus, statutes granting tax exemptions are
construed stricissimi juris against the taxpayer and liberally in favor of
the taxing authority. A claim of tax exemption must be clearly shown
and based on language in law too plain to be mistaken. Otherwise
stated, taxation is the rule, exemption is the exception. (Quezon City,
et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October
6, 2008 citing Mactan Cebu International Airport Authority v.
Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)
The burden of proof rests upon the party claiming the exemption to
prove that it is in fact covered by the exemption so claimed. (Quezon
City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)
9. Rationale for strict interpretation of tax exemption
laws. The basis for the rule on strict construction to statutory
provisions granting tax exemptions or deductions is to minimize
differential treatment and foster impartiality, fairness and equality of
treatment among taxpayers. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008) He who
claims an exemption from his share of common burden must justify his
claim that the legislature intended to exempt him by unmistakable
terms. For exemptions from taxation are not favored in law, nor are
they presumed. They must be expressed in the clearest and most
unambiguous language and not left to mere implications. It has been
held that “exemptions are never presumed the burden is on the
claimant to establish clearly his right to exemption and cannot be made
out of inference or implications but must be laid beyond reasonable
doubt. In other words, since taxation is the rule and exemption the
exception, the intention to make an exemption ought to be expressed
in clear and unambiguous terms. (Quezon City, supra citing Agpalo,
R.E., Statutory Construction, 2003 ed., p. 302)
10. Why are tax exemptions are strictly construed against
the taxpayer and liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued
existence of the State.
11. In case of a tax overpayment, where the BIR’s obligation
to refund or set-off arises from the moment the tax was paid under the
principle of solutio indebeti. (Commissioner of Internal Revenue v. Esso
Standard Eastern, Inc, 172 SRCA 364)
12. But note Nestle Phil. v. Court of Appeals, et al., G.R. No.
134114, July 6, 2001which held that in order for the rule on solutio
indebeti to apply it is an essential condition that the petitioner must first
show that its payment of the customs duties was in excess of what was
required by the law at the time the subject 16 importations of milk and
milk products were made. Unless shown otherwise, the disputable
presumption of regularity of performance of duty lies in favor of the
Collector of Customs.
13. Strict interpretation of a tax refund that partakes of the
nature of a tax does not apply to tax refund based on erroneous
payment or where there is no law that authorizes collection of the
tax. There is parity between tax refund and tax exemption only when
the former is based either on a tax exemption statute or a tax refund
statute. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are not founded
principally on legislative grace but on the legal principle which
underlies all quasi-contracts abhorring a person’s unjust enrichment at
the expense of another. [Commissioner, supra citing Ramie Textiles,
Inc. v. Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons v. City of
Manila, et al., 117 Phil. 985 (1963)]
The dynamic of erroneous payment of tax fits to a tee the
prototypic quasi-contract, solutio indebiti, which covers not only
mistake in fact but also mistake in law. (Commissioner,
supra citing CIVIL CODE, Arts. 2142, 2154 and 2155)
The Government is not exempt from the application of solutio
indebiti. (Commissioner, supra citing Commissioner of Internal
Revenue v. Fireman’s Fund Insurance Co., G.R. No. L-30644, 9 March
1987, 148 SCRA 315, 324-325; Ramie Textiles, Inc. v. Mathay,
supra; Gonzales Puyat & Sons v. City of Manila, supra)
Indeed, the taxpayer expects fair dealing from the Government,
and the latter has the duty to refund without any unreasonable delay
what it has erroneously collected. (Commissioner,
supra citingCommissioner of Internal Revenue v. Tokyo Shipping Co.,
supra at 338) If the State expects its taxpayers to observe fairness and
honesty in paying their taxes, it must hold itself against the same
standard in refunding excess (or erroneous) payments of such taxes. It
should not unjustly enrich itself at the expense of
taxpayers. [Commissioner, supra citing AB Leasing and Finance
Corporation v. Commissioner of Internal Revenue, 453 Phil. 297 in turn
citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507,
510, 518 (2000)] And so, given its essence, a claim for tax refund
necessitates only preponderance of evidence for its approbation like in
any other ordinary civil case. (Commissioner, supra)
14. Tax refunds premised upon a tax exemption strictly
construed, Tax exemption is a result of legislative grace. And he who
claims an exemption from the burden of taxation must justify his claim
by showing that the legislature intended to exempt him by words too
plain to be mistaken. [Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao
Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue and
Court of Tax Appeals, 119 Phil. 33, 37 (1963)]
The rule is that tax exemptions must be strictly construed such
that the exemption will not be held to be conferred unless the terms
under which it is granted clearly and distinctly show that such was the
intention. [Commissioner, supra citing Phil. Acetylene Co. v.
Commission of Internal Revenue, et al., 127 Phil. 461, 472
(1967); Manila Electric Company v. Vera, G.R. No. L-29987, 22 October
1975, 67 SCRA 351, 357-358; Surigao Consolidated Mining Co. Inc. v.
Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax
exemption or tax refund. In such case, the rule of strict interpretation
against the taxpayer is applicable as the claim for refund partakes of
the nature of an exemption, a legislative grace, which cannot be
allowed unless granted in the most explicit and categorical
language. The taxpayer must show that the legislature intended to
exempt him from the tax by words too plain to be mistaken.
[Commissioner, supra with a note to see Surigao Consolidated Mining
Co. Inc. v. CIR, supra at 732-733; Philex Mining Corp.
v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999); Davao
Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil. 891-
892 (1998); . Commissioner of Internal Revenue v. Tokyo Shipping Co.,
Ltd., 314 Phil. 220, 228 (1995)]
15. Effect of a BIR reversal of a previous ruling interpreting a law
as exempting a taxpayer. A reversal of a BIR ruling favorable to a
taxpayer would not necessarily create a perpetual exemption in his
favor, for after all the government is never estopped from collecting
taxes because of mistakes or errors on the part of its agents. (Lincoln
Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et
al., 293 SCRA 92, 99)
16. A tax amnesty is a general pardon or intentional
overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or a tax law.
It partakes of an absolute waiver by the government of its right
to collect what is due it and to give tax evaders who wish to relent a
chance to start with a clean slate. A tax amnesty, much like a tax
exemption, is never favored nor presumed in law. The grant of a tax
amnesty, similar to a tax exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing authority. (Philippine
Banking Corporation, etc., v. Commissioner of Internal Revenue, G. R.
No. 170574, January 30, 2009)
17. The purpose of tax amnesty is to
a. give tax evaders who wish to relent a chance to start a
clean slate, and to
b. give the government a chance to collect uncollected tax
from tax evaders without having to go through the tedious
process of a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No.
102967, February 10, 2000)
18. Tax amnesty distinguished from tax exemption.
a. Tax amnesty is an immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes (People v.
Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax
exemption is an immunity from civil liability only. It is an immunity or
privilege, a freedom from a charge or burden to which others are
subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax periods, hence of
retroactive application (Castaneda, supra) WHILE tax exemption has
prospective application.
19. Tax avoidance is the use of legally permissible means to
reduce the tax while tax evasion is the use of illegal means to escape the
payment of taxes.
20. Tax evasion connotes the integration of three factors:
a. The end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax
when it is shown that a tax is due;
b. an accompanying state of mind which is described as
being “evil” on “bad faith,” “willful,” or ”deliberate and not accidental”;
and
c. a course of action or failure of action which is
unlawful. (Commissioner of Internal Revenue v. The Estate of Benigno P.
Toda, Jr., , etc., G. R. No. 147188, September 14, 2004)
âââ21. Tax avoidance distinguished from tax evasion.
a. Tax avoidance is legal while tax evasion is illegal.
b. The objective of tax avoidance in most instances is merely
to reduce the tax that is due while is tax evasion the object is to entirely
escape the payment of taxes.
c. Tax evasion warrants the imposition of civil, administrative
and criminal penalties while tax avoidance does not.
22. Tax sparing is a provision in some tax treaties which
provides that the state of residence allows as credit the amount that
would have been paid, as if no reduction has been made. (Vogel, Klaus
on Double Taxation Conventions, Third Edition, p.1255 cited in Segarra,
Venice H, Tax Treaties: Trick or treat ?, Philippine Daily Inquirer,
December 6, 2002, p. C5)
There may be instances where a particular income is exempt
from taxation in order to encourage foreign investments which may
lead to economic development. If the tax credit method is used, there
would be no more tax to credit since there is no more tax to credit as
a result of the tax exemption. Consequently, when the tax method
credit method is applied to these items of income, such incentives are
siphoned off since, in effect, the tax benefits are cancelled
out. (Ibid.) Thus, the need for the tax sparing provision.