TAXATION

FINALS REVIEWER
PROF. LOREBETTE GRANDEA
1ST SEMESTER SY 2016-2017

C. Situs of Taxation and Double Taxation

1. Meaning of situs

- Situs of taxation literally means the place of taxation. The basic rule is that the state where the
subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in
the state which has jurisdiction or which exercises dominion over the subject in question. Within
the territorial jurisdiction, the taxing authority may determine situs.

- Factors that Determine Situs:

1. Nature of the tax;

2. Subject matter of the tax (person, property, act or activity)
3. Possible protection and benefit that may accrue both to the government and the taxpayer;
4. Citizenship of the taxpayer
5. Residence of the taxpayer
6. Source of income

2. Situs of subjects of taxation

KIND OF TAX SITUS

Personal or Community Tax Residence or domicile of the taxpayer

Real Property Tax Location of the property (lex rei sitae)

Personal Property Tax TANGIBLE: where it is physically located or permanently
kept (Lex Rei Sitae) although the owner resides in another
jurisdiction.

INTANGIBLE: General Rule: Domicile of the owner.

Mobilia sequuntur personam (movables follow the person)

Exceptions:

1. When property has acquired a business situs in

another jurisdiction; or
2. When the law provides for the situs of the subject of
tax (eg. Sec 104, NIRC)
Business Tax VAT- Where transaction is made
Sale of Real Property- where the real property is located
Personal Property- Where the personal property was sold
Excise or Privilege Tax Where the act is performed or where occupation is pursued

Sales Tax Where the sale is consummated

REVIEWER BY: ELAH V

1
 Income Tax Consider: (1) citizenship, (2) residence,
(3) source of income (Sec 42, 23, NIRC of 1997)

Filipino Resident- Taxable within and outside Philippines

Filipino Non-Resident- Taxable within Phil. But not outside
Phil
Alien resident- Taxable within Phil. But not outside Phil
Alien Non-Resident- Taxable within Phil. But not outside
Phil
Transfer Tax Residence or citizenship of the taxpayer
or location of the property
Donor’s Tax Location of the property
and the citizenship of the donor (Sec 98, NIRC 1997)
Estate Tax Location and citizenship of the decedent.(Sec 85, NIRC)

Franchise Tax state which granted the franchise

Sec. 42, 104

** the following intangible properties are considered as properties with a situs in the Philippines:
a. Franchise which must be exercised in the Philippines
b. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws.
c. Shares, obligations or bonds issued by any foreign corporation 85% of business which is located
in the Philippines
d. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations or
bonds have acquired a business situs in the Philippines; and
e. Shares or rights in any partnership business or industry established in the Philippines.

CIR v. British Overseas Airway Corp., supra.

The source of an income is the property, activity or service that produced the income. 8 For the source
of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The site of the source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, 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.

REVIEWER BY: ELAH V

2
 - An international airline, like NOAC, which has appointed a ticket sales agent in the Philippines
and which allocates fares received to various airlines on the basis of their participation in the
services rendered, although BOAC does not operate any airplane in the Philippines, is a resident
foreign corporation subject to tax on income received from Philippine sources.

CIR v. Japan Airlines, supra.

"The absence of flight operations to and from the Philippines is not determinative of the source of
income or the situs of income taxation. x x x The test of taxability is the `source'; and the source of an
income is that activity x x x which produced the income (Howden & Co., Ltd. vs. Collector of Internal
Revenue, 13 SCRA 601 [1965]). Unquestionably, the passage documentations in these cases were sold
in the Philippines and the revenue therefrom was derived from a business activity regularly pursued
within the Philippines. x x x The word `source' conveys one essential Idea, that of origin, and the
origin of the income herein is the Philippines

- JAL made PAL its sales ticket agent in the Philippines. For the source of income to be
considered coming from the Philippines, it is sufficient that the income is derived from the
activities within this country regardless of the absence of flight operations within Philippine
territory.

Wells Fargo Bank v. Collector, 70 Phil 325 (1940)

- The actual situs of the shares of stock is in the Philippines, the corporation being domiciled
therein. And besides, the certificates of stock have remained in this country up to the time
when the decedent died in California, and they were in possession of Syrena Mckee. For all
practical purposes, then, Syrena Mckee had legal title to the certificates of stock held in trust
for the true owner thereof.
-
- In other words, the owner residing in California has extended here her activities with
respect to her intangibles so as to avail herself of the protection and benefits of the Philippine
Laws. Accordingly, the jurisdiction of the Philippine government to tax must be upheld.
-
- In cases where the owner of intangibles confines his activity to the place of his domicile it has
been found convenient to substitute a rule for a reason by saying that his intangibles are taxed at
their situs and not elsewhere, or perhaps less artificially, by invoking the maxim mobilia sequuntur
personam. Which means only that it is the identify owner at his domicile which gives jurisdiction
to tax. But when the taxpayer extends his activities with respect to his intangibles, so as to avail
himself of the protection and benefit of the laws of another state, in such a way as to bring his
person or properly within the reach of the tax gatherer there, the reason for a single place of
taxation no longer obtains, and the rule even workable substitute for the reasons may exist in any
particular case to support the constitutional power of each state concerned to tax. Whether we
regard the right of a state to tax as founded on power over the object taxed.

Through dominion over tangibles or over persons whose relationships are source of intangibles
rights, or on the benefit and protection conferred by the taxing sovereignty, or both, it is
undeniable that the state of domicile is not deprived, by the taxpayer's activities elsewhere, of its
constitutional jurisdiction to tax, and consequently that there are many circumstances in which
more than one state may have jurisdiction to impose a tax and measure it by some or all of the
taxpayer's intangibles. Shares or corporate stock be taxed at the domicile of the shareholder and
also at that of the corporation which the taxing state has created and controls; and income may be

REVIEWER BY: ELAH V

3
 taxed both by the state where it is earned and by the state of the recipient's domicile. Protection,
benefit, and power over the subject matter are not confined to either state.

Tan v. del Rosario, supra.

- All subjects of taxation similarly situated are to be treated alike both in privileges confirmed
and liabilities imposed.

The view can easily become myopic, however, when the law is understood, as it should be, as
only forming part of, and subject to, the whole income tax concept and precepts long obtaining under
the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all
embracing term used in the Tax Code, and it practically covers all persons who derive taxable
income.

The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence
of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income
tax liability on their income from all sources) and of the generally accepted and internationally
recognized income taxable base (that can subject non-resident aliens and foreign corporations to
income tax on their income from Philippine sources). In the process, the Code classifies taxpayers
into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement
and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).

3. Multiplicity of Situs, Collector v. de Lara, 102 Phil 813 (1958)

- General rule that personal property, like shares of stock in the Phil., is taxable at the domicile of
the owner (Miller) under the doctrine of mobilia sucuuntur persona.
- The decedent, being a non –resident of the Phil. The only property subject to estate and
inheritance taxes are those shares of stock issued by Phil. Corps.
- Under the Tax Code section 122, the decedent is entitled to tax exemption granted to non0
residents under the provision of multiple taxation, which otherwise subject the decedent’s
intangible property to the inheritance tax, on in his place of residence and domicile and the place
where those properties are found.
-
- Republic Act No. 1253; When estate of decedent entitled to benefits of the act.- In as much the
decedent not only suffered deprivations of the war, but was killed by the Japanese military forces,
his estate is entitled to the benefits of RA 153, which passed for the benefit of veterans, guerillas,
or victims of Japanese atrocities. Consequently, the interest and other increments imposed on the
decedent’s estate should not be paid.
-
- The Supreme Court did not subject to estate and inheritance taxes the shares of stock issued by
Philippine corporations which were left by a non-resident alien after his death. Considering that he
is a resident of a foreign country, his estate is entitled to exemption from inheritance tax on the
intangible personal property found in the Philippines. This exemption is granted to non-residents
to reduce the burdens of multiple taxation, which otherwise would subject a decedent’s intangible
personal property to the inheritance tax both in his place of residence and domicile and the place
where those are found.

This is, therefore, an exception to the decision of the Supreme Court in Wells Fargo v. CIR. This
has since been incorporated in Sec. 104 of the NIRC.

REVIEWER BY: ELAH V

4
Multiplicity of situs, or the taxation of the same income or intangible subjects in several taxing
jurisdictions, arises from various factors:
1. The variance in the concept of domicile for tax purposes;
2. Multiple distinct relationships that may arise with respect to intangible personal
property; or
3. The use to which the property may have been devoted all of which may receive the
protection of the laws of jurisdictions other than the domicile of the owner thereto.

The remedy to avoid or reduce the consequent burden in case of multiplicity of situs is either to:
1. Provide exemptions or allowance of deduction or tax credit for foreign taxes; or
2. Enter into tax treaties with other States.

4. Double Taxation

a. Meaning

- Means taxing twice the same taxpayer for the same tax period upon the same thing or activity,
when it should be taxed but once, for the same purpose and with the same kind of character tax.

CIR v. S.C. Johnson and Son, Inc., 309 SCRA 87 (1999)

- The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for
royalties) would derogate from the design behind the most favored nation clause to grant equality
of international treatment since the tax burden laid upon the income of the investor is not the same
in the two countries. The similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the need for equality of
treatment.
- We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching
tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-
West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate
granted under the latter treaty for the reason that there is no payment of taxes on royalties under
similar circumstances.

- International juridical double taxation is defined as the imposition of comaparable taxes in two or
more states on the same subject matter and for identical periods.

- Double taxation usually take splace when a person is resident of a contracting state and derives
income from, or owns capital in, the other contracting state and both states impose tax on that
income or capital.

b. Double taxation in its broad sense

Villanueva v. City of Iloilo, supra.

- The contention that the plaintiffs-appellees are doubly taxed because they are paying the real estate
taxes and the tenement tax imposed by the ordinance in question is also devoid of merit. It is a
well-settled rule that a license tax may be levied upon a business or occupation although the land
or property used in connection therewith is subject to property tax. The State may collect an ad
valorem tax on property used in a calling, and at the same time impose a license tax on that
calling, the imposition of the latter kind of tax being in no sense a double tax.

REVIEWER BY: ELAH V

5
 In order to constitute double taxation in the objectionable or prohibited sense the same property
must be taxed twice when it should be taxed but once; both taxes must be imposed on the same
property or subject-matter, for the same purpose, by the same State, Government, or taxing
authority, within the same jurisdiction or taxing district, during the same taxing period, and they
must be the same kind or character of tax. It has been shown that a real estate tax and the
tenement tax imposed by the ordinance, although imposed by the same taxing authority, are not
of the same kind and character.

At all events, there is no constitutional prohibition against double taxation in the Philippines.

ELEMENTS:
• Taxing twice
• By the same taxing authority
• Within the same jurisdiction or taxing district
• For the same purpose
• In the same taxing period
• The same subject or object
• Of the same kind or character of tax.

b. Constitutionality of double taxation

City of Baguio v. de Leon, supra.

- The argument against double taxation may not be invoked where one tax is imposed by the state
and the other imposed by the city, it being widely recognized that there is nothing inherently
obnoxious in the requirement that license fees or taxes be exacted with respect to the same
occupation, calling or activity by both the state and a political subdivision thereof. Where congress
has clearly expressed its intention, the statute must be sustained even though double taxation
results.

Pepsi Cola Bottling v. City of Butuan, supra.

- An ordinance imposing sales tax on agents/consignee selling merchandise from outside dealers
does not amount to double taxation. Double taxation, in general, is not forbidden by our
fundamental law. However, the ordinance is arbitrary to other member of the same taxable class
hence the law violates the rule of uniformity in taxation. There is no constitutional prohibition
against double taxation in the Philippines. It is something not favored but is permissible, provided
that the other constitutional requirements is not thereby violated

Sanchez v. Collector, 97 Phil 687 (1955)

- A license tax may be levied upon a business or occupation although the land or property used
therein is subject to property tax. The state may collect an ad volarem tax on property used in a
calling, and at the same time impose a license tax on the pursuit of that calling, the imposition of
the later kind of tax that being no sense as double tax.

City of Mla. v. Interisland Gas Service, 99 Phil 847 (1956)

REVIEWER BY: ELAH V

6
 - There is no double taxation because 1) the fees paid by the defendant under Ordinance No. 3259
— for the storage, installation, use and transportation of compressed inflammable gases — was
charged by way of license fees, in the exercise of the police power of the State, not under its
inherent power of taxation; and (2) double taxation is not prohibited in our Constitution.

Cpa. General de Tabacos v. City of Mla., supra.

- Both license fee and a tax may be imposed on the same business or occupation, or for selling the
same article, this is not being a violation of the rule against double taxation.

That Tavacalera is being subjected to double taxation is more apparent than real. As already
stated,what is collected under Ordinance no. 3358 is a license fee

D. Means of Avoiding and Minimizing the Burden of Taxation

1. Shifting of tax burden

Shifting- the transfer of the burden of a tax by the original payer or the one on whom the tax was
assessed or imposed to someone else. What is transferres is not the payment of the tax but the
burden of the tax.

All indirect taxes may be shifted; direct taxes cannot be shifted.

a. Ways of shifting the tax burden

1) FORWARD SHIFTING

- When the burden of the tax is transferred from a factor of production through the
factors of distribution until it finally settles on the ultimate purchaser or consumer.

Example:
- Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to
the retailer, who also shifts it to the final purchaser or consumer
-VAT, Percentage Tax

2) BACKWARD SHIFTING
- When the burden of the tax is transferred from the consumer or purchaser through the
factors of distribution to the factors of production.

Example:
- Consumer or purchaser may shift tax imposed on him to retailer by purchasing only after
the price is reduced, and from the latter to the wholesaler, or finally to the manufacturer or
producer.

3) ONWARD SHIFTING
- When the tax is shifted two or more times either forward or backward
Example:
- Thus, a transfer from the seller to the purchaser involves one shift; from the producer to
the wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the
purchaser by the retailer, we have three shifts in all.

REVIEWER BY: ELAH V

7
 b. Taxes that can be shifted
1. VAT
2. Percentage Tax
3. Excise Tax

Sec. 105-VAT

Only indirect taxes may be shifted: VAT, professional tax, amusement tax, customs duties

c. Meaning of impact and incidence of taxation

Impact of taxation is the point on which a tax is originally imposed. In so far as the law is concerned, the
taxpayer is the person who must pay the tax to the government. He is also termed as the statutory
taxpayer-the one on whom the tax is formally assessed. He is the subject of the tax.

Incidence of taxation is that point on which the tax burden finally rests or settles down. It takes place
when shifting has been effected from the statutory taxpayer to another.

The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is
the result. Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the
setting or coming to rest of the tax. (e.g. impact in a sales tax is on the seller who shifts the burden to the
customer who finally bears the incidence of the tax.

2. Tax evasion

- Is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It
is also known as “tax dodging; deliberate reduction of income that has been received.

Elements of tax evasion

Tax evasion connotes the integration of three factors:

1. The end to be achieved. Example: the payment of less than that known by the taxpayer to be
legally due, or in paying no tax when such is due.
2. An accompanying state of mind described as being “evil, in bad faith, willful, or deliberate and
not accidental.”
3. A course of action (or failure of action) which is unlawful.

Republic v. Gonzales, 13 SCRA 633 (1965)

- Failure to declare true income for 2 consecutive years is evidence of fraud.

- The provision relied upon by the appellant plainly contemplates limiting the exemption from the
licenses, fees and taxes enumerated therein to the right to establish Government agencies,
including concessions, and to the merchandise or services sold or dispensed by such agencies. The
income tax, which is certainly not on the right to establish agencies or on the merchandise or
services sold or dispensed thereby, but on the owner or operator of such agencies, is logically
excluded

REVIEWER BY: ELAH V

8
 - Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from
the circumstances of the case. The failure of the appellant to declare for taxation purposes his true
and actual income derived from his furniture business for two consecutive years is an indication of
his fraudulent intent to cheat the Government of its taxes.

Sec. 254

Attempt to Evade or Defeat Tax-Any person willfully attempts in any manner to evade or defeat any tax
imposed under this code of the payment thereon shall, in addition to other penalties provided by law,
upon conviction thereof, be punished by a fine of not less then Php 30,000.00 but not more than Php
100,000.00 and suffer imprisonment of not less than 2 years but not more than 4 years. Provided, that the
conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the
collection of taxes.

3. Tax avoidance

- The exploitation by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income in order to avoid or reduce tax liability. It is politely called
“tax minimization” and is not punishable by law.

Ways of avoiding tax

1. Shifting
2. Capitalization
3. Evasion
4. Exemption
5. Transformation- method of escape in taxation whereby the manufacturer or producer
upon whom the tax has been imposed pays the tax and endeavors to recoup himself by
improving hisprocess of production thereby turning out his units of products at a lower
cost. The taxpayer escapes by a transformation of the tax into a gain through the medium
production.
6. Avoidance

Note: With the exception of evasion, all are legal means of avoiding taxes.

Delpher Traders Corp. v. IAC, 157 SCRA 349 (1988)

- The Supreme Court upheld the estate planning scheme resorted to by the Pacheco family in
converting their property to shares of stock in a corporation which they themselves owned and
controlled. By virtue of the deed of exchange, the Pacheco co-owners saved on inheritance taxes.
The Supreme Court said the records do not point to anything wrong and objectionable about this
estate planning scheme resorted to. The legal right of the taxpayer to decrease the amount of what
otherwise could be his taxes or altogether avoid them by means which the law permits cannot be
doubted.

Yutivo v. CTA, 1 SCRA 160 (1961)

- A corp. cannot be said to have been organized as a tax evasion device when there was no tax to
evade.

REVIEWER BY: ELAH V

9
 - Fraudulent tax evasion. The intention to minimize taxes, when used in the context of fraud, must
be proven by clear and convincing evidence amounting to more than mere preponderance. It
cannot be justified by mere speculation. This is because fraud is never lightly to be presumed.

- Concept of Tax Evasion. Tax evasion connotes fraud through the use of pretenses and forbidden
devices to lessen or defeat tax.

- A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or
altogether avoid them by means which the law permits. Any legal means used by the taxpayer to
reduce taxes are all right. Therefore, a man may perform an act that he honestly believes to be
sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter
found to be insufficient.

- Mere understatement of tax in itself does not prove fraud.

4. Exemption from taxation

a. meaning of exemption from taxation

- It is the grant of immunity to particular persons or corporations or to persons or corporations of a

particular class from a tax which persons and corporations generally within the same state or
taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial
charge or burden to which others are subjected. It is strictly construed against the taxpayer.

- Taxation is the rule; exemption is the exception. He who claims exemption must be able to justify
his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and too
categorical to be misinterpreted.” If not expressly mentioned in the law, it must at least be within
its purview by clear legislative intent.

Principle Governing Exemptions

 In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris
against the taxpayer.
 One who claims exemption should prove by convincing proof that he is exempted.
 Taxation is the rule and exemption is the exemption
 Exemption is not presumed
 Constitutional grants of tax exemption are self executing
 Tax exemption are personal and cannot be delegated.
 Exemption generally covers direct tax, unless otherwise provided.
 Exemption is allowed only if there is a clear provision there for.
 It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis.
 Exemptions are not presumed, but when public property is involved, exemption is the rule and
taxation is the exemption.

Greenfield v. Meer, 77 Phil 394 (1946)

- with the passing of LGC which grant taxing power to the Local Government, all exemptions
granted to all persons, whether natural or juridical, including those which in the future might be
granted, are withdrawn unless the law granting the exemption expressly states that the exemption
also applies to local taxes.

REVIEWER BY: ELAH V

10
PLDT v. City of Davao, 363 SCRA 522 (2001)

- Tax exemption. The tax code provision withdrawing the tax exemption was not construed as
prohibiting future grants of exemptions from all taxes.

- The grant of taxing powers to local government units under the Constitution and the Local
Government Code does not affect the power of Congress to grant exemptions to certain persons,
pursuant to a declared national policy. The legal effect of the Constitution grant to local
governments simply means that in interpreting statutory provisions on municipal taxing powers,
doubts must be resolved in favor of the municipal corporations.

- The tax exemption must be expressed in the statutue in clear language that leaves no doubt of the
intention of the legislature to grant such exemption. And, even if it is granted, the exemption must
be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

PLDT v. City of Davao, G.R. 143867, March 25, 2003

- 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.

- . It is next contended that, in any event, a special law prevails over a general law and that the
franchise of petitioner giving it tax exemption, being a special law, should prevail over the LGC,
giving local governments taxing power, as the latter is a general law. Petitioner further argues
that as between two laws on the same subject matter which are irreconcilably inconsistent, that
which is passed later prevails as it is the latest expression of legislative will.

i. compared with tax remission, condonation

- There is a tax condonation or remission when the State desists or refrains from exacting, inflicting
or enforcing something as well as to reduce what has already been taken. The condonation of a tax
liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only
when expressed in the law.

Tax exemption, on the other hand, is the grant of immunity to particular persons or corporations of
a particular class from a tax of which persons and corporations generally within the same state or
taxing district are obliged to pay. Tax exemptions are not favored and are construed strictissimi
juris against the taxpayer.

Juan Luna Subd. V. M. Sarmiento, 91 Phil 371 (1952)

- The word “remit” means to desist or refrain from exacting, inflicting or enforcing something as
well as to restore what has already been taken. The remission of taxes due and payable to the
exclusion of taxes already collected does not constitute unfair discrimination. Such a set of taxes is
a class by itself and the law would be open to attack as class legislation only if all taxpayers
belonging to one class were not treated alike.

REVIEWER BY: ELAH V

11
Surigao Corp. Min. v. Collector, 9 SCRA 728 (1963)

- Condonation of tax liability. The condonation of a tax liability is equivalent and is in the nature of
tax exemption. Being so, it should be sustained only when expressed in explicit terms, and it
cannot ne extended beyond the plain meaning of those terms.

- Where the law clearly refers to the condonation of unpaid taxes, it is held that t cannot be extended
to authorize the refund of paid taxes.

- In suit for the recovery of the payment of taxes as having been illegally or erroneously collected,
the burden is upon the taxpayer to establish the facts which show the illegality of the tax or that the
determination thereof is erroneous.

ii. tax amnesty

- A tax amnesty partakes of an absolute forgiveness or waiver by the Government of its right to
collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give
tax evaders, who wish to relent and are willing to reform a chance to do so and become a part of
the new society with a clean slate.

Commissioner v. CA and ROH Auto, 240 SCRA 368 (1995)

- EO 41 has been designed to be in the nature of a general grant of tax amnesty subject only to the
cases specifically excepted by it.

- We agree with both the CA and the CTA that EO41 is quite explicit and requires hardly anything
beyond a simple application of its provisions. If, as the commissioner argues, EO41 had not been
intended to include 1981-1985 tax liabilities already assessed prior to 23 August 1986, the law
could have simply so provided in its exclusionary clauses.it did not.

People v. Castaneda, 165 SCRA 327 (1988)

- Compliance with all requirements for availmnet of tax amnesty under PD370 would have the
effect of condoning not only the income tax liabilities but also all internal revenue taxes, including
increments or penalties on account of non-payment as well as all criminal, civil or administrative
liabilities.

- Construction of tax amnesty. Still further, a tax amnesty much like a tax exemption is never
favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax
exemtion must be construed strictly against the taxpayer and liberally in favor of the taxing
authority. Valencia’s payment of the special 15% tax must be regarded as legally ineffective.

Pascual v. CIR, 166 SCRA 560 (1988)

- 2 isolated transactions is not a case of partnership, hence petitioners are not liable for corporate
income tax. As they have availed of the benefits of tax amnesty as individual taxpayers in these
transactions, they are relieved of any further tax liability arising therefrom.

REVIEWER BY: ELAH V

12
Republic v. IAC, 196 SCRA 335 (1991)

- Tax amnesty defined. Even assuming that the deficiency tax assessment of P17117.08 against the
Pastor spouses were correct, since the latter have already paid almost the equivalent amount to the
Government by way of amnesty taxes under PD No. 213, and were granted not merely an
exemption, but an amnesty for their past tax failings, the Government is estopped from collecting
the difference between the deficiency tax assessment and the amount already paid by them as
amnesty tax. A tax amnesty, being a general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or
tax law, partakes of an absolute forgiveness or waiver by the Government of its right to collect
what otherwise would be due it and in this sense, prejudicial thereto, particularly to give tax
evaders, who wish to repent and are willing to reform a chance to do so and thereby become a part
of the new society with a clean slate.

CIR v. Marubeni Corp., 372 SCRA 576 (2001)

- EOS 41 and 61 are tax amnesty issuances. 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 tax laws. It partakes of an absolute forgiveness or 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. If granted, the terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority. For the right of
taxation is inherent in government. The State cannot strip itself of the most essential power of
taxation by doubtful words. He who claims an exemption (or an amnesty) from the common
burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must
be resolved in favor of the state.

iii. VAT zero-rating, Sec. 106 (A) (2)

R.A. 7716 (An act restructuring the value added tax (vat) system, widening its tax based and enhancing
its administration and for these purposes amending and repealing the relevant provisions of the national
internal revenue code, as amended, and for other purposes.)
"(b) transactions subject to zero-rate. — The following services performed in the Philippines by VAT-
registered persons shall be subject to 0%:

"(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP).

"(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).

"(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero
rate.

"(4) Services rendered to vessels engaged exclusively in international shipping; and

REVIEWER BY: ELAH V

13
"(5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing
goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

Sec. 106 (A)(2) The following sales by VAT-registered persons shall be subject to zero percent (0%)
rate:

(a) Export Sales. - The term "export sales" means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence
or determine the transfer of ownership of the goods so exported and paid for in
acceptable foreign currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing, packing
or repacking in the Philippines of the said buyer's goods and paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export
sales exceed seventy percent (70%) of total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Executive Order NO. 226, otherwise known as the
Omnibus Investment Code of 1987, and other special laws.

(b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale" means sale
to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in
the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

(c) Sales to persons or entities whose exemption under special laws or international agreements to which
the Philippines is a signatory effectively subjects such sales to zero rate.

iii. exclusions, deductions, Sec. 32 (B), 34

EXCLUSION
 Exclusion refers to income received or earned but is not taxable as income because it is exempted
by law or by treaty. Such tax-free income is not to be included in the income tax return unless
information regarding it is specifically called for.

NIRC Sec. 32 (B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this title:

1. Proceeds from life insurance

2. Amount received by insured as return of premium
3. Gifts, bequests and devises
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Income derived by foreign government
8. Income derived by the Philippine Government or its political subdivisions

REVIEWER BY: ELAH V

14
 9. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational,
artistic, literary or civic achievement.
10. Prizes and awards in sports competitions sanctioned by the national sports associations
11. 13th month pay and other benefits not exceeding P30,000.00. Applies both to public and private
employees.
12. GSIS, SSS, Medicare and other contributions
13. Gains from the sale of bonds, debentures or other certificate of indebtedness. 5 eyars or more. If
maturity is less than 5 years, it is taxable.
14. Gains from redemption of shares in mutual fund. It must be emanate from the mutual fund.

DEDUCTIONS FROM GROSS INCOME

 Deductions are items or amounts which the law allows to be deducted under certain conditions
from gross income in order to arrive at taxable income.

NIRC SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income
arising from personal services rendered under an employer-employee relationship where no deductions
shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income
subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall
be allowed the following deductions from gross income;
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable and other contributions
9. Research and development
10. Pension trusts
11. Premium payments on health and/or hospitalization insurance of an individual taxpayer

Deduction v. exemption
Deduction is an amount allowed by law to be subtracted from gross income to arrive at taxable
income. Exemption from taxation is the grant of immunity to particular persons or corporations or to
persons or corporations of a particular class from a tax which others generally within the same taxing
district are obliged to pay.

Deduction v. exclusion
Deduction is an amount allowed by law to be subtracted from gross income to arrive at taxable
income. Exclusion refers to income received or earned but is not taxable as income because exempted by
law or by treaty. Such tax-free income is not to be included in the income tax return unless information
regarding it is specifically called for. [Section 61, Revenue Regulation 2]

Basic principles governing deductions

1. The taxpayer seeking a deduction must point to some specific provisions of the statute
authorizing the deduction; and
2. He must be able to prove that he is entitled to the deduction authorized or allowed.

Kinds of deductions
1. Itemized deduction which is available to individual and corporate taxpayers

REVIEWER BY: ELAH V

15
 2. Optional standard deduction which is available to individual taxpayers only, except a non-
resident alien.
3. Special deductions which is available, in addition to the itemized deductions, to certain
corporations, i.e. insurance companies and propriety educational corporations.

Time within which to claim deduction

1. As a rule, if a taxpayer does not, within a year, deduct certain of his expenses, losses, interests,
taxes, or other charges, he cannot deduct them from the income of the next or any succeeding
year.
2. If he keeps his books on the cash receipts basis, the expenses are deductible in the year they are
paid.
3. If on the actual basis, then in the year they are incurred, whether paid or not.

Who may not avail of deductions form gross income?

1. Citizens and resident aliens whose income is purely compensation income.
* They are allowed personal and additional exemptions and deduction for premium payments on
health and hospitalization insurance.
2. Non-resident aliens not engaged in trade or business in the Philippines
3. Non-resident foreign corporations.

Some rules on deduction

 Itemized deduction may apply to corporate tax payer as well as individual taxpayer.
 A corporation may avail only of the deduction from (1) to (10): premium payments on health
and/or hospitalization insurance is deductible only by an individual taxpayer.
 A corporation may avail only of the itemized deductions: an individual, except a non-resident
alien, may elect the itemized deductions or the optional standard deduction.
 Thus, the optional standard deduction is not available to corporations.
 An individual earning purely compensation income is not allowed itemized deductions, except
premium payments on health and/or hospitalization insurance. In addition, he is also granted
personal and additional exemptions.
 An individual, who earns income other than purely compensation income, is allowed personal
additional exemptions in addition to the itemized deductions or the optional standard deductions.

Two kinds of deduction available to individuals, except a non-resident alien

1. Itemized deduction
2. Optional standard deduction

Note: Optional standard deduction is not available to corporations.

b. Kinds of tax exemption

Express or implied, total or partial

Kinds of Tax Exemption According to Manner of Creation

1) Express or affirmative exemption

When certain persons, property or transactions are, by express provision, exempted from all certain taxes,
either entirely or in part, may be made by provisions of the Constitution, statutes, treaties, ordinances,
franchises, or contracts.

REVIEWER BY: ELAH V

16
2) Implied exemption or exemption by omission
When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other
classes.. Every tax statute, in a very real sense, ameks eemptions since all those not mentioned are
deemed exempted. The omission amy be either accidental or intentional.

Exemptions are not presumed, but when public property is involved, exemption is the rule, and taxation
the exemption.

3) Contractual
Agreed to by the taxing authority in contracts lawfully entered into them under enabling laws.
(i.e.: treaty, licensing ordinance)

The legislature of a State may, in the absence of special restrictions in its constitution, make a
valid contract with a corp. in respect to taxation, and that such contract can be enforced against the State
at the instance of the corporation. In the real sense of the term and where the non-impairment clause of
the Constitution can rightly be invoked, this includes those agreed to by the taxing authority in contracts,
such as those contained in government bonds or debentures, lawfully entered into by them under enabling
laws in which the government, acting in its private capacity, shed its cloak of authority and waives its
governmental immunity.

These contractual tax exemptions, however, are not to be confused with tax exemptions granted
under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution.

Kinds of Tax Exemption According to Scope or Extent

1) TOTAL—when certain persons, property or transactions are exempted, expressly or impliedly from all
taxes.
2) PARTIAL—when certain persons, property or transactions are exempted, expressly or impliedly from
certain taxes, either entirely or in part.

Exemption from direct tax, from indirect tax

A law granting exemption from direct tax does not exempt the subject form indirect tax.

Does the provision in a statute granting exemption from all taxes include indirect taxes?
 No. As a general rule, indirect taxes are not included in the grant of such exemption unless it is
expressly stated.

REVIEWER BY: ELAH V

17
Atlas Fertilizer v. Commissioner, 100 SCRA 556( 1980)

- The approval by the Sec. of Finance of the corporation application for tax exemption under RA
3050 can be presumed as proof that the articles imported by the taxpayer will be used exclusively
by the taxpayer for the purpose for which the application ws filed.

- Considering the administrative requirements before articles under tax-free importation may be
withdrawn from customs custody, it can be presumed, from an importer’s having been
successfully withdrawn its merchandise from custom’s warehouse, it having an approved
certificate of tax exemption previously granted by the Secretary of Finance, that the authority to
import the goods in question as tax-free was legally secured.

- A taxpayer which has an approved certificate of exemption under RA 901 which grants partial tax
exemption who applies for similar tax exemption under RA 3050 which grants complete tax
exemption on imports cannot be said to have abandoned its partial tax exemption for articles
imported under RA 901. It is entitled to full tax exempt status.

Commissioner v. Phil. Ace Line, 25 SCRA 912 (1968)

- NATURE OF TAX EXEMPTION. Every tax exemption implies a waiver of the right to collect
what otherwise would be due to the government. In this sense, it is prejudicial thereto.

- RATIONALE OF TAX EXEMPTION. The avowed purpose of a tax exemption is some public
benefit or interest, which the lawmaking body considers sufficient to offset the monetary loss
entailed in the grant of the exemption.

- There is no constitutional injunction against granting tax exemptions to particular persons. It is not
unusual to grant to specific individuals or entities legislative franchise with tax exemptions. What
the fundamental law forbids is the denial of equal protection, such as through unreasonable
discrimination or classification.

- There is no difference between grant of tax exemption to end users and the extension of the grant
to those whose contracts of purchase and sale were made before said date under the Reparation
law.

Com. v. RTN Mining, 202 SCRA 137 (1991); 207 SCRA 549 (1992)

- (1991). All doubts must be resolved in favor of the taxing authority and that tax exemptions ( or
tax refunds for that matter) must be strictly construed and can only be given force when the grant
is clear and categorical.

- (1992). In Insular Lumber Co. v CTA, the Court held that the authorized partial refund under Sec.
5 of RA No. 1435 partakes of the nature of a tax exemption and therefore cannot be allowed unless
granted in the most explicit and categorical language. Since the grant of refund privileges must be
strictly construed against the taxpayer, the basis for the refund shall be the amounts deemed paid
under Sec. 1 and 2 of RA No. 1435.

REVIEWER BY: ELAH V

18
Caltex v. COA, supra.

- Tax exemptions as a general rule are construed strictly against the grantee and liberally in favor of
the taxing authority. The burden of proof rests upon the party claiming exemption to prove that it
is in fact covered by the exemption so claimed. The party claiming exemption must therefore be
expressly mentioned in the exempting law or at least be within its purview by clear legislative
intent.

c. Nature of the power to grant tax exemption

1. National government
The power to grant tax exemptions is an attribute of sovereignty for the power to
prescribe who or what persons or property shall be taxed implies the power to prescribe who or
what persons or property shall be taxed implies the power to prescribe who or what persons or
property shall not be taxed.

2. Local governments
Municipal corporations are clothed with no inherent power to tax or to grant tax exemptions. But
the moment the power to impose a particular tax is granted, they also have the power to grant
exemptions therefrom unless forbidden by some provision of the Constitution or the law.

The legislature may delegate its power to grant tax exemptions to the same extent that it may
exercise the power to exempt.

Basco v. PAGCOR, supra.

- The power to tax of municipal corporations must always yield to a legislative act of Congress
which is superior, having been passed by the State itself. Municipal corporations are mere
creatures of Congress which has the power to create and abolish municipal corporations due to its
general legislative powers. If Congress can grant the power to tax, it can also provide for
exemptions or even take back the power.

- Congress has the power of control over local governments; if Congress can grant a municipal
corporation the power to tax certain matters, it can also provide for exemptions or even take back
the power.

Maceda v. Macaraig, (1993) supra.

- In the case of property owned by the state or a city or other public corporations, the express
exception should not be construed with the same degree of strictness that applies to exemptions
contrary to the policy of the state, since as to such property “exception is the rule and taxation the
exception.”

d. Rationale for tax exemption

Rationale for granting tax exemptions

• Its avowed purpose is some public benefit or interest which the lawmaking body considers sufficient to
offset the monetary loss entailed in the grant of the exemption.

REVIEWER BY: ELAH V

19
• The theory behind the grant of tax exemptions is that such act will benefit the body of the people. It is
not based on the idea of lessening the burden of the individual owners of property.

Davao Light v. Com., 22 SCRA 122 (1972)

- The provisions of Sec. 2 of RA 358 granting tax exemption to the NPC, taken in the light of the
existing legislation affecting the NPC, notably RA 357, must be construed as intended to benefit
only the NPC, the lawmakers expecting that by relieving said corporation of tax obligations, the
NPC would be enabled to pay easily its indebtedness it is certain to incur. In granting such tax
exemption, the government actually waived its right to collect taxes from the NPC in order to
facilitate the liquidation by said corporation of its liabilities, and the consequential release by the
government itself from its obligation in the transactions entered into by the President on behalf of
the NPC.

Tan Kim Kee v. CTA, 7 SCRA 670 (1963)

- The legislative intent to increase revenue by widening the coverage of taxable subjects is evident
under RA 1612, and by it the exempt agricultural products I sevident under RA 1612, and by it the
exempt agricultural products were only those that remain in their original form, and have not
undergone the process of manufacture.

NPC v. RTC Presiding Judge, Cagayan de Oro, 190 SCRA 477 (1990)

- Pet. Alleges that what has been withdrawn is its exemption from taxes, duties and fees which are
payable to the national government while its exemption from taxes, duties and fees payable to
government branches, agencies and instrumentalities remains unaffected. Considering that real
property taxes are payable to the local government, NAPOCOR maintains that it is exempt
therefrom. We find the above argument untenable. It reads into the law a distinction that is not
there. It is contrary to the clear intent of the law to withdraw from all units of government;
including GOCC their exemptions from all kinds of taxes. Had it been otherwise, then the law
would have said so. Not having distinguished as to the kinds of tax exemptions withdrawn, the
plain meaning is that all tax exemptions are covered. Where the law does not distinguish, neither
must we. Xxx Moreover, PD 1931 entitled “DIRECTING THE RATIONALIZATION OF DUTY
AND TAX EXEMPTION PRIVILEGES GRANTED TO GOCC AND OTHER UNITS OF
GOVERNMENT’ which was passed on June 11, 1984, categorically states: “WHEREAS. PD
1177 has already expressly repealed the grant of tax privileges to any GOCC and all other units of
government. Thus, any dubiety on NAPOCOR’s liability to pay taxes, duties and fees should be
considered unequivocably resolved by the above provision.

Chavez v. PCGG, supra.

- In a compromise agreement between the Philippine Government, represented by the PCGG, and
the Marcos heirs, the PCGG granted tax exemptions to the assets which will be apportioned to the
Marcos heirs. The Supreme Court ruled that the PCGG has absolutely no power to grant tax
exemptions, even under the cover of its authority to compromise ill gotten wealth cases. The grant
of tax exemptions is the exclusive prerogative of Congress.

- In fact, the Supreme Court even stated that Congress itself cannot grant tax exemptions in the case
at bar because it will violate the equal protection clause of the Constitution.

REVIEWER BY: ELAH V

20
Davao Gulf v. CIR, 293 SCRA 76 (1998)

- A tax cannot be imposed unless it is supported by the clear and express language of a statute; on
the other hand, once the tax is unquestionably imposed, “a claim of exemption from tax payments
must be clearly shown and based on language in the law too plain to be mistaken.” Since the
partial refund authorized under Sec. 5, RA 1435, is in the nature of a tax exemption, it must be
construed strictissimi juris against the grantee. Hence, petitioner’s claim for refund based on
specific taxes it actually paid must expressly be granted in a statute stated in a language too clear
to be mistaken.

Maceda v. Macaraig, (1993) supra.

- The NPC is tax-exempt from all forms of taxes based on the history of statutes granting it tax
exemption privileges. One common theme in all these laws is that the NPC must be enabled to pay
its indebtedness, at any one time, and US$4 Billion in total foreign loans at any one time. The
NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved. By virtue
of PD 938, NPC’s capital stock was raised to P8Billion. It must be remembered that to pay for the
government share in its capital stock PD 758 was issued mandating that P200 M would be
appropriated annually to cover the said unpaid subscription of the Government in NPC’s
authorized capital stock. And significantly one of the sources of this annual appropriation of P200
m is TAX MONEY accruing to the General Fund of the Government. It does not stand to reason
then that former Pres. Marcos would order P200 M to be taken partially or totally from tax money
to be used to pay the Government subscription in the NPC, on one hand, and then order the NPC
to pay all its indirect taxes, on the other.

Tolentino v. Sec. of Finance,(1995) supra.

- By granting exemptions, the State does not forever waive the exercise of its sovereign prerogative.
Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, “even nondiscriminatory taxation of constitutionality guaranteed freedom is
unconstitutional.” With respect to the first contention, it would suffice to say that since the law
granted the press privilege, the law could take back the privilege anytime without offense to the
Constitution. The reason is simple: by granting exemptions, the State does not forever waive the
exercise of its sovereign prerogative.

e. Nature of tax exemption

1. It is a mere personal privilege of the grantee.

2. It is generally revocable by the government unless the exemption is founded on a contract which
is contract which is protected from impairment.
3. It implies a waiver on the part of the government of its right to collect what otherwise would be
due to it, and so is prejudicial thereto.
4. It is not necessarily discriminatory so long as the exemption has a reasonable foundation or
rational basis.
5. It is not transferable except if the law expressly provides so.

REVIEWER BY: ELAH V

21
Tolentino v. Sec. of Finance, (1995) supra.

- “ 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 for
taxation, or exemption infringe no constitutional limitation. “

PLDT v. City of Davao, (2001) supra.

- The fact is that the term exemption in Sec. 23 is too general. A cardinal rule in StaCon is that
legislative intent must be ascertained from a consideration of the statute as a whole and not merely
of a particular provision.

- In sum, it does not appear that, in approving sec. 23 of RA No. 7925, Congress intended it to
operate as a blanket tax exemption to all telecommunications entities. Applying the rule of strict
construction of laws granting tax exemptions and the rule that doubts should be resolved in favor
of municipal corporations in interpreting statutory provisions on municipal taxing powers, we hold
that 23 of RA 7925 cannot be considered as having amended petitioners franchise so as to entitle it
to exemption from the imposition of local franchise taxes.

Maceda v. Macaraig, (1991) supra.

- The rule of strict construction of statutes granting tax exemptions does not apply in the case of
exemptions in favor of a governmental political subdivision or instrumentality.

Phil. Acetylene v. Commissioner, supra.

- A tax exemption must be strictly construed. An exemption will not be considered conferred unless
the terms under which it is granted clearly and distinctly show that such was the intention of the
parties.

Wonder Mech v. CTA, 64 SCRA 555 (1975)

- There is no way to dispute the cardinal rule in taxation that exemptions therefrom are highly
disfavored in law and he who claims tax exemption must be able to justify his claim or right.

- Tax exemption must be clearly expressed and cannot be established by implication. Exemption
from a common burden cannot be permitted to exist upon vague implication.

Atlas Fertilizer v. Com., supra.

- The Secretary of Finance was convinced that the equipment imported were not only needed for
exclusive use in the manufacture of fertilizer but the same were actually used therefore thus
approving the application for exemption without adducing evidence that he is entitled for
exemption.

f. Laws granting tax exemption, incentives

i. Constitution
Sec. 28 (3), Art. VI and Sec. 4 (3, 4), Art. XIV, 1987 Constitution

Sec. 28 (3), Art. VI, Constitution .” (Property Tax Exemption).

REVIEWER BY: ELAH V

22
“Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from taxation

Sec. 4 (3, 4), Art. XIV, 1987 Constitution (Income tax, Property Tax, and Donor’s Tax exemption)
“All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or
cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner
provided by law.” Sec.4, (3)

“Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used
actually, directly, and exclusively for educational purposes shall be exempt from tax. Sec. 4, (4)

Abra Valley v. Aquino, supra.

- The test of exemption from taxation is the use of the property for the purpose mentioned in the
Constitution. The term “exclusively uses” does not necessarily means total or absolute use for
religious, charitable, educational purposes. Even if the property is incidentally and necessarily
used for the accomplishment of the said purposes, tax exemption will apply.

ii. tax statutes

Sec. 30, 32 (B), 106, 199 Exemption Granted by NIRC (R.A. 7716)

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as
a fraternal organization operating under the lodge system, or mutual aid association or a nonstock
corporation organized by employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or association, or nonstock corporation or their
dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the
net income of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

(H) A nonstock and nonprofit educational institution;

REVIEWER BY: ELAH V

23
(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like organization of a purely local character, the income of
which consists solely of assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back to them the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed
under this Code.

NIRC Sec. 32 (B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this title:

1. Proceeds from life insurance

2. Amount received by insured as return of premium
3. Gifts, bequests and devises
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Income derived by foreign government
8. Income derived by the Philippine Government or its political subdivisions
9. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational,
artistic, literary or civic achievement.
10. Prizes and awards in sports competitions sanctioned by the national sports associations
11. 13th month pay and other benefits not exceeding P30,000.00. Applies both to public and private
employees.
12. GSIS, SSS, Medicare and other contributions
13. Gains from the sale of bonds, debentures or other certificate of indebtedness. 5 eyars or more. If
maturity is less than 5 years, it is taxable.
14. Gains from redemption of shares in mutual fund. It must be emanate from the mutual fund

Sec. 106 (A)(2) The following sales by VAT-registered persons shall be subject to zero percent (0%)
rate:
(a) Export Sales. - The term "export sales" means:
(b) Foreign Currency Denominated Sale. -
(c) Sales to persons or entities whose exemption under special laws or international agreements to which
the Philippines is a signatory effectively subjects such sales to zero rate.

NIRC SEC. 199. Documents and Papers Not Subject to Stamp Tax

(a) Policies of insurance or annuities made or granted by a fraternal or beneficiary society, order,
association or cooperative company, operated on the lodge system or local cooperation plan and
organized and conducted solely by the members thereof for the exclusive benefit of each member and not
for profit.

REVIEWER BY: ELAH V

24
(b) Certificates of oaths administered to any government official in his official capacity or of
acknowledgment by any government official in the performance of his official duties, written appearance
in any court by any government official, in his official capacity; certificates of the administration of oaths
to any person as to the authenticity of any paper required to be filed in court by any person or party
thereto, whether the proceedings be civil or criminal; papers and documents filed in courts by or for the
national, provincial, city or municipal governments; affidavits of poor persons for the purpose of proving
poverty; statements and other compulsory information required of persons or corporations by the rules
and regulations of the national, provincial, city or municipal governments exclusively for statistical
purposes and which are wholly for the use of the bureau or office in which they are filed, and not at the
instance or for the use or benefit of the person filing them; certified copies and other certificates placed
upon documents, instruments and papers for the national, provincial, city, or municipal governments,
made at the instance and for the sole use of some other branch of the national, provincial, city or
municipal governments; and certificates of the assessed value of lands, not exceeding Two hundred pesos
(P200) in value assessed, furnished by the provincial, city or municipal Treasurer to applicants for
registration of title to land.

Sec. 159 and 234, R. A. 7160(Exemption Granted by the Local Taxing Authority)

Sec. 159, R.A. 7160. Community Tax Exemptions

SEC. 159. Exemptions. – The following are exempt from the community tax:
(1) Diplomatic and consular representatives; and
(2) Transient visitors when their stay in the Philippines does not exceed three (3) months

Real Property Tax Exemption R.A. 7160 (Local Government Code)

Section 234. Exemption From Real Property Tax

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted for consideration or otherwise to a taxable
person.
(b) Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-
profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and
exclusively used for religious, charitable, or educational purposes.
(c) All machineries and equipment that are actually, directly and exclusively use by local water
utilities and
government-owned or controlled corporations engaged in supply and distribution of water and/or
generation and transmission of electric power.
(d) All real property owned by duly registered cooperatives as provided for under Republic Act No.
6938.
(e) Machinery and equipment used for pollution control and environmental protection.

Sec. 105, Tariff and Customs Code (TCC)

iv. special laws

R. A. 7549. An act exempting all prizes and awards gained from local and international sports
tournaments and competitions from the payment of income and other forms of taxes and for other
purposes

SECTION 1. All prizes and awards granted to athletes in local and international sports tournaments and
competitions held in the Philippines or abroad and sanctioned by their respective national sports

REVIEWER BY: ELAH V

25
associations shall be exempt from income tax: provided, that such prizes and awards given to said athletes
shall be deductible in full from the gross income of the donor: provided, further, that the donors of said
prizes and awards shall be exempt from the payment of donor's tax.

The benefits herein provided shall cover the XVIth Southeast Asian Games (SEA Games) held in Manila
from November 25 to December 5, 1991.

Com. v. Phil Ace Line, supra.

- Goods obtained by the respondent shall be subject to compensating tax since sec. 14 of R.A. 1789
exempts only custom duties, consular fees and the special import tax.

- R.A. 1789- An act prescribing the national policy in the procurement and utilization of reparations
and development loans from japan, creating a reparations commission to implement the policy,
providing funds therefor, and for other purposes.

- Section 14. Exemption from Tax. All reparations goods obtained by the government shall be
exempt from the payment of all duties, fees and taxes. Reparations goods obtained by private
parties shall be exempt only from the payment of customs duties, consular fees and the special
import tax.

iv. treaties
RP-US Tax Treaty
RP-Germany Tax Treaty

Com. v. S. C. Johnson, supra.

- Respondent was subjected to 25% withholding tax on royalty payments which he contested
claiming that it is entitled to “The Most Favored Nation” Tax Rate of 10% on royalties as provided
in the RP-US Tax treaty in relation to the RP-West Germany Tax Treaty.

- According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for
a 20 percent matching credit in the former convention and private respondent cannot invoke the
concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty.
Petitioner's position is explained thus:

- Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on
income from sources within the Philippines is allowed as a credit against German income and
corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or
15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit
shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a German
resident from sources within the Philippines arising from the use of, or the right to use, any patent,
trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount
of said royalty under certain conditions. The rate of 10% is imposed if credit against the German
income and corporation tax on said royalty is allowed in favor of the German resident. That means
the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the
income and corporation tax of West Germany. The clear intent of the "matching credit" is to soften
the impact of double taxation by different jurisdictions.

REVIEWER BY: ELAH V

26
 - The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West
Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under
similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the
"most favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in
interpreting the provisions of the RP-US Tax Treaty.

Reagan v. CIR, 30 SCRA 968 (1969)

- The Clark Air Force Base is not a foreign soil or territory for purposes of income tax legislation.
There is nothing in the Military Bases Agreement that lends support to such assertion. It has not
become foreign soil or territory. The Philippine’s jurisdictional rights therein, certainly not
excluding the power to tax, have been preserved.

- The exemption from foreign sources under Art. XII of the Agreement does not cover income
derived from US bases. The exemption clause in the Military Bases Agreement by virtue of which
a “national of the US serving in or employed in the Philippines in connection with the
construction, maintenance, operation or defense of the bases and residing in the Philippines only
by reason of such employment” is not to be taxed on his income “unless derived from Philippine
sources or sources other than the US sources,” does not apply to income derived in the bases
which are clearly derived in the Philippines. For income tax purposes, The Clark Air Force Base is
not outside Philippine territory.

Com. v. PJ Kiener, 65 SCRA 142 (1975)

- Oil. Products used for the operation of construction equipment in US bases are not tax-
exempt.- Nonetheless, private respondents would unwrap a thesis that if Sec. 13-9 of the “General
Conditions” intended to refer only to “materials” or “supplies” which form part and/or
incorporated into the project, the said section would have so stated, just like when it provided that
“Only equipment which will be incorporated in the construction” are tax free. They would thus
seize the absence of such proviso as recognition of the tax-exemption of those “materials” or
“supplies” not necessarily incorporated in the construction. The argument misses the point. In its
textual completeness, Section 13-9 provides: “Only equipment which will incorporated in the
construction can be imported tax free on certification of the Engineer.” It deals centrally on the
importation of equipment. The Government had conceded the privilege of exemption to this item
because the same may not be “economically procurable in terms of price and quality within the
Philippines.” To assure, however, that the privilege is not abused or circumvented, the
Government has stipulated in Sec. 13-9 of the “Genereal Conditions” that the equipment “must be
incorporated in the construction….” It was intended by the Government as an open restraint
against possible detour of the revenue and customs law.

g. Construction of statutes granting tax exemption

general rule

1) Rule when legislative intent is clear

Tax statutes are to receive a reasonable construction with a view to carrying out their
purpose and intent. They should not be construed as to permit the taxpayer easily to evade the
payment of taxes.

2) Rule when there is doubt

REVIEWER BY: ELAH V

27
 No person or property is subject to taxation unless within the terms or plain import of a
taxing statute. In every case of doubt, tax statutes are construed strictly against the government
and liberally in favor of the taxpayer. Taxes, being burdens, are not to be presumed beyond what
the statute expressly and clearly declares.

3) Provisions granting tax exemptions

Such provisions are construed strictly against the taxpayer claiming tax exemption

i. general rule

• In the construction of tax statutes, exemptions are not favored and are construed strictissimi
juris against the taxpayer. The fundamental theory is that all taxable property should bear its share
in the cost and expense of the government.

• Taxation is the rule and exemption.

• He who claims exemption must be able to justify his claim or right thereto by a grant express in
terms “too plain to be mistaken and too categorical to be misinterpreted.” If not expressly
mentioned in the law, it must be at least within its purview by clear legislative intent.

PLDT v. City of Davao, (2001) supra.

Com. v. CA and YMCA, 298 SCRA 83 (1998)

- Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption from
taxation should be manifest and unmistakable from the language of the law on which it is based.
Thus, the claimed exemption “must expressly be granted in a statute stated in a language too clear
to be mistaken”

- Tax exemption claimed by the YMCA is expressly disallowed by the very wording of the last
paragraph of then Section 27 of the NIRC; Court is duty-bound to abide strictly by iots literal
meaning and to refrain from resorting to any convulated attempt at construction.

Misamis Oriental Assoc. v. DOF, 238 SCRA 63 (1994)

- In interpreting Sec. 103 (a) and (b) of the NIRC, the Commissioner of Internal Revenue gave it a
strict construction consistent with the rule hat tax exemptions must be strictly construed against the
taxpayer and liberally in favor of the state. Indeed, even Dr. Kintanar said that his classification of
copra as food was based on the broader definition of fod which includes agricultural commodities
and other components used in the manufacture/processing of food.

Com. of Customs v. Phil Acetylene Company, 39 SCRA 70 (1971)

- One of the established rules of statutory construction is that tax exemptions are held strictly
against the taxpayer, and if not expressly mentioned in the law, must at least be within its purview
by clear legislative intent.

REVIEWER BY: ELAH V

28
Mla. Electric Co. v. Vera (Tabios), 67 SCRA 352 (1975)

- One who claims to be exempt from the payment of a particular tax must do so under clear and
unmistakable terms found in the statute. Tax exemptions are strictly construed against the
taxpayer, they being highly disfavored and may almost be said “to be odious to the law.” He who
claims an exemption must be able to point to some positive provision of law creating the right; it
cannot be allowed to exist upon a mere vague implication or interference.

Benguet Corp. v. CBAA, supra.

- Bunkhouses used by employees of a mining company have not been exempted from realty taxation
under the Real Property Tax Code. If we are to sanction this interpretation, then necessarily all real
properties exempt by any law would be covered, and there would be no need for the legislature to
specify “Real Property Tax Code, as amended”, instead of stating clearly “realty tax exemption
laws”. Indubitably, the intention is to limit the application of the exception clause only to those
conferred by the Real Property Tax Code. This is not only a logical construction of the provisions
but more so in keeping with the principle of statutory construction that tax exemptions are
construed strictly aganst taxpayers, hence, they cannot be created by mere implication but must be
clearly provided by law. Non-exemption, in case of doubt, is favored.

Davao Gulf v. CIR, supra.

- A tax cannot be imposed unless it is supported by the clear and express language of a statute; on
the other hand, once the tax is unquestionably imposed, “a claim of exemption from tax payments
must be clearly shown and based on language in the law too plain to be mistaken.” Since the
partial refund authorized under Sec. 5, RA 1435, is in the nature of a tax exemption, it must be
construed strictissimi juris against the grantee. Hence, petitioner’s claim for refund based on
specific taxes it actually paid must expressly be granted in a statute stated in a language too clear
to be mistaken.

ii. exceptions

1. When the law itself expressly provides for a liberal construction thereof.
2. In cases of exemptions granted to religious, charitable and educational institutions or to the
government or its agencies or to public property because the general rule is that they are exempted from
tax.

Maceda v. Macaraig, supra., supra.

- Petitioner cannot invoke the rule of strictissimi juris with respect to the interpretation of statutes
granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of
exemptions in favor of a political subdivision or instrumentality of the government.

grant to government and other entities

- Strict interpretation does not apply to the government and its agencies. The rule here is exemption
and the exemption is taxation.

REVIEWER BY: ELAH V

29
E. Sources, Application, Interpretation and Administration of Tax Laws

1. Sources of tax laws

The Constitution, NIRC, TCC, LGC

tax ordinance/local tax codes, Tuzon v. CA, 212 SCRA 739 (1992)

- If the resolution is to be considered as a tax ordinance, it must be shown to have been enacted in
accordance with the requirements of the Local Government Code. These would include the
holding of a public hearing on the measure and its subsequent approval by the Secretary of
Finance, in addition to the usual requisites for publication of ordinances in general.

treaties, Tanada v. Angara, supra.

- International Agreements must be performed in good faith. “A treaty engagement is not a mere
moral obligation but creates a legally binding obligation on the parties”.

special laws, SC/CTA/CA decisions

revenue rules and regulations, rulings and opinions

a. validity of revenue rules and regulations

RMO 1-99

Tan v. del Rosario, supra.

Com. v. CA, supra.

Umali v. Estanislao, 209 SCRA 446 (1992)

- Court rules that Rep. Act 7167 took effect on 30 January 1992 which is after fifteen (15) days
following its publication on 14 January 1992 in the “Malaya”.

- The court is of the considered view that Rep. Act 7161 should cover or extend to compensation
income earned or received during calendar year 1991.

La Suerte v. CTA, 134 SCRA 29 (1985)

- When an administrative agency renders an opinion by means of a circular or memorandum, it

merely interprets existing law and no publication is therefore necessary for its validity.
Construction by an executive branch of the government of a particular law, although not binding
upon courts, must be given weight as the construction came from the branch of the government
which is called upon to implement the law. The promulgation of Revenue memorandum Circular
No. 30-67 being in accordance with the Revised Administrative Code, having been issued by the
CIR with the approval of the Secretary of Finance for the implementation of the Tobacco
Inspection Law, has therefore the force and effect of law.

- An internal administrative memorandum or circular issued by the BIR which constitutes a mere
legal opinion on how the law (concerning collection of tobacco inspection fees) should be
construed does not need to be published in the Official Gazette.

REVIEWER BY: ELAH V

30
Com. v. CA, 261 SCRA 236 (1996)

- The authority of the Minister of Finance, in conjunction with the Commissioner of Internal
Revenue, to promulgate rules and regulations for the effective enforcement of internal revenue
rules cannot be converted. Neither can it be disputed that such rules and regulations, as well as
administrative opinions and rulings, ordinarily should deserve weight and respect by the courts.
Much more fundamental than either of the above, however, is that all issuances must not override,
but must remain consistent with, the law they seek to apply and implement. Administrative rules
and regulations are intended to carry out, neither to supplant nor to modify, the law.

b. effectivity of revenue rules and regulations

RMC 20-86

Revenue Memorandum Circular 20-86 was issued to govern the drafting, issuance and implementation of
revenue tax issuances including:
1. Revenue Regulations;
2. Revenue and Memorandum Orders; and
3. Revenue Memorandum Circulars and Revenue Memorandum Orders.

• Except when the law otherwise expressly provides, the aforesaid revenue tax issuances shall not
begin to be operative until after due notice thereof may be fairly assumed.

• Due notice of said issuances may be fairly presumed only after the following procedures have
been taken:
1. Copies of tax issuance have been sent through registered mail to the following business and
professional organizations:
a. Philippine Institute of Certified Public Accountants;;
b. Integrated Bar of the Philippines;
c. Philippine Chamber of Commerce and Industry;
d. American Chamber of Commerce;
e. Federation of Filipino-Chinese Chamber of Commerce; and
f. Japanese Chamber of Commerce and Industry in the Philippines.
*however, other persons or entities may request a copy of the said issuances.

2. The Bureau of Internal Revenue shall issue a press release covering the highlights and features of
the new tax issuance in any newspaper of general circulation.

3. Effectivity date for enforcement of the new issuance shall take place thirty (30) days from the
date the issuance has been sent to the above-enumerated organizations.

c. nature of rulings, effects of a void ruling

• Administrative rulings, known as BIR rulings, are the less general interpretation of tax laws being issued
from time to time by the Commissioner of Internal Revenue. They are usually rendered on request of
taxpayers to clarify certain provisions of a tax law. These rulings may be revoked by the Secretary of
Finance if the latter finds them not in accordance with the law.

• The Commissioner may revoke, repeal or abrogate the acts or previous rulings of his predecessors in
office because the construction of the statute by those administering it is not binding on their successors
if, thereafter, such successors are satisfied that a different construction of the law should be given.

REVIEWER BY: ELAH V

31
• Rulings in the forms of opinion are also given by the Secretary of Justice who is the chief legal officer
of the Government.

Sec. 4, 244-246

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or
portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

SEC. 244. Authority of Secretary of Finance to Promulgate Rules and Regulations. - The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code.

SEC. 245. Specific Provisions to be Contained in Rules and Regulations. - The rules and
regulations of the Bureau of Internal Revenue shall, among other things, contain provisions
specifying, prescribing or defining:
(a) The time and manner in which Revenue Regional Director shall canvass their respective
Revenue Regions for the purpose of discovering persons and property liable to national internal
revenue taxes, and the manner in which their lists and records of taxable persons and taxable
objects shall be made and kept;
(b) The forms of labels, brands or marks to be required on goods subject to an excise tax, and the
manner in which the labelling, branding or marking shall be effected;
(c) The conditions under which and the manner in which goods intended for export, which if not
exported would be subject to an excise tax, shall be labelled, branded or marked;
(d) The conditions to be observed by revenue officers respecting the institutions and conduct of
legal actions and proceedings;
(e) The conditions under which goods intended for storage in bonded warehouses shall be
conveyed thither, their manner of storage and the method of keeping the entries and records in
connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made
by them in connection with their supervision of such houses;
(f) The conditions under which denatured alcohol may be removed and dealt in, the character and
quantity of the denaturing material to be used, the manner in which the process of denaturing shall
be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be
given, the books and records to be kept, the entries to be made therein, the reports to be made to
the Commissioner, and the signs to be displayed in the business or by the person for whom such
denaturing is done or by whom, such alcohol is dealt in;
(g) The manner in which revenue shall be collected and paid, the instrument, document or object
to which revenue stamps shall be affixed, the mode of cancellation of the same, the manner in
which the proper books, records, invoices and other papers shall be kept and entries therein made
by the person subject to the tax, as well as the manner in which licenses and stamps shall be
gathered up and returned after serving their purposes;
(h) The conditions to be observed by revenue officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts and

REVIEWER BY: ELAH V

32
 such other rules and regulations which the Commissioner may consider suitable for the
enforcement of the said Title III;
(i) The manner in which tax returns, information and reports shall be prepared and reported and the
tax collected and paid, as well as the conditions under which evidence of payment shall be
furnished the taxpayer, and the preparation and publication of tax statistics;
(j) The manner in which internal revenue taxes, such as income tax, including withholding tax,
estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and documentary
stamp taxes shall be paid through the collection officers of the Bureau of Internal Revenue or
through duly authorized agent banks which are hereby deputized to receive payments of such taxes
and the returns, papers and statements that may be filed by the taxpayers in connection with the
payment of the tax:

Provided, however, That notwithstanding the other provisions of this Code prescribing the place of
filing of returns and payment of taxes, the Commissioner may, by rules and regulations, require
that the tax returns, papers and statements that may be filed by the taxpayers in connection with
the payment of the tax. Provided, however, That notwithstanding the other provisions of this Code
prescribing the place of filing of returns and payment of taxes, the Commissioner may, by rules
and regulations require that the tax returns, papers and statements and taxes of large taxpayers be
filed and paid, respectively, through collection officers or through duly authorized agent banks:
Provided, further, That the Commissioner can exercise this power within six (6) years from the
approval of Republic Act No. 7646 or the completion of its comprehensive computerization
program, whichever comes earlier: Provided, finally, That separate venues for the Luzon, Visayas
and Mindanao areas may be designated for the filing of tax returns and payment of taxes by said
large taxpayers.
For the purpose of this Section, "large taxpayer" means a taxpayer who satisfies any of the
following criteria;
(1) Value-Added Tax (VAT). - Business establishment with VAT paid or payable of at least One
hundred thousand pesos (P100,000) for any quarter of the preceding taxable year;
(2) Excise Tax. - Business establishment with excise tax paid or payable of at least One million
pesos (P1,000,000) for the preceding taxable year;
(3) Corporate Income Tax. - Business establishment with annual income tax paid or payable of at
least One million pesos (P1,000,000) for the preceding taxable year; and
(4) Withholding Tax. - Business establishment with withholding tax payment or remittance of at
least One million pesos (P1,000,000) for the preceding taxable year.
Provided, however, That the Secretary of Finance, upon recommendation of the Commissioner,
may modify or add to the above criteria for determining a large taxpayer after considering such
factors as inflation, volume of business, wage and employment levels, and similar economic
factors.
The penalties prescribed under Section 248 of this Code shall be imposed on any violation of the
rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, prescribing the place of filing of returns and payments of taxes by large taxpayers.

SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the
rules and regulations promulgated in accordance with the preceding Sections or any of the rulings
or circulars promulgated by the Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the taxpayers, except in the following
cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or

REVIEWER BY: ELAH V

33
 (c) Where the taxpayer acted in bad faith.

Sec. 511 and 519, TCC

CIR v. CA, 267 SCRA 557 (1997)

- As a matter of principle, the SC will not set aside the conclusion reached by the CTA which is, by
the very nature of its functins, dedicated exclusively to the study and consideration of tax problems
and has necessarily developed an expertise on the subject unless there has been an abuse or
improvident exercise of authority.

Misamis Oriental v. DOF, supra.

- In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering
copra a s an “agricultural food product” within the meaning of Sec. 103 (b) of the NIRC. As the SolGen
contends, “copra per se is not food, that is, it is not intended for human consumption. Simply stated,
nobody eats copra as food.” That previous Commissioners considered it so is not reason for holding that
the present interpretation is wrong. The CIR is not bound by the ruling of his predecessors. To the
contrary, the overruling of decisions is inherent in the interpretations of laws.

2. Interpretation of Tax Laws

a. nature of internal revenue laws

1) Internal revenue laws are not political in nature.

2) Tax laws are civil and not penal in nature.

Civil not penal in nature

Tax laws are civil and not penal in nature, although there are penalties provided for their
violation.
The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment
of taxes or to punish evasion or neglect of duty in respect thereof.

Not political in nature

Internal revenue laws are not political in nature. They are deemed to be laws of the occupied
territory and not of the occupying enemy.

Thus, our tax laws continued in force during the Japanese occupation

Hilado v. Collector, 100 Phil 288 (1956)

- It is well known that our internal revenue laws are not political in nature and, as such, continued in
force during the period of enemy occupation and in effect were actually enforced by the
occupation government. Income tax returns that were filed during that period and income tax
payments made were considered valid and legal. Such tax laws are deemed to be the laws of the
occupied territory and not of the occupying enemy.

Republic v. Oasan, 99 Phil 934 (1956)

- The war profits tax is not subject to the prohibition on ex post facto laws as the latter applies only
to criminal or penal matters. Tax laws are civil in nature.

REVIEWER BY: ELAH V

34
Misamis Oriental v. DOF, supra

- Moreover, as the government agency charged with the enforcement of the law, the opinion of the
CIR, in the absence of any showing that it is plainly wrong, is entitled to great weight. Indeed, the
ruling was made by the CIR in the exercise of his power under Sec. 245 of the NIRC to make
rulings or opinions in connection with the implementation of the provisions of internal revenue
law, including rulings on the classification of artivles for sales tax and similar purpose.

b. construction of tax laws

i. rule when legislative intent is clear

Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent.
They should not be construed as to permit the taxpayer easily to evade the payment of taxes.

Umali v. Estanislao, supra.

- And then, RA 7167 says that the increased personal exemptions that it provides for shall be
available thenceforth, that is, after RA 7167 shall have become effective. In other words, these
exemptions are available upon the filing of personal income tax returns which is, under the NIRC,
done not later than the 15th day of April after the end of a calendar year. Thus, under RA 7167,
which became effective, as aforestated, on 30 January 1992, the increased exemptions are literally
available on or before 15 April 1992. But these increased exemptions can be available on 15 April
1992 only in respect of compensation income earned or received during the calendar year 1991.

Lorenzo v. Posadas, supra.

- But legislative intent that a tax statute should operate retroactively should be perfectly clear. “A
statute should be considered as prospective in its operation, whether it enacts, amends, or repeals
an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have
a retroactive effect.

ii. rule when there is doubt

Collector v. La Tondena, 5 SCRA 665 (1962)

- In every case of doubt, tax statutes are construed most strongly against the Government and in
favor of the citizens, because burdens are not to be imposed beyond what the statutes expressly
and clearly import.

Lorenzo v. Posadas, supra.

iii. rule when language is plain

When the language of the law is plain, the word should be given its ordinary meaning. The rule of strict
construction as against the government is not applicable where the language of the tax statue is plain and
there is no doubt as to the legislative intent. In such case, the words employees are to be given their
ordinary meaning.

REVIEWER BY: ELAH V

35
 c. application of tax laws, revenue regulations, rulings the effects of repeal

i. application of tax laws

General rule: Tax laws are prospective in operation because the nature and amount to the tax could not be
foreseen and understood by the taxpayer at the time the transactions which the law seeks to tax was
completed

Exception: While it is not favored, a statute may nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative intent. But a tax law should not be given retroactive
application when it would be harsh and oppressive.

Art. 2, NCC

Laws shall take effect after fifteen days following the completion of their publication in the Offi cial
Gazette, unless it is otherwise provided. This Code shall take effect one year after such publication. (1a)

Umali v. Estanislao, supra.

- Court rules that Rep. Act 7167 took effect on 30 January 1992 which is after fifteen (15) days
following its publication on 14 January 1992 in the “Malaya”.

Lorenzo v. Posadas, supra.

- The right of the state to an inheritance tax accrues at the moment of death, and hence is ordinarily
measured as to any beneficiary by the value at that time of such property passes to him.
Subsequent appreciation or depreciation is immaterial.

Hijo Plantation v. CB, 164 SCRA 192 (1988)

- Regulations found to be in consonance and in harmony with the general purposes and objects of
the law have uniformly been held to have the force of law. Upon other hand, should the regulation
conflict with the law, the validity of the regulation cannot be sustained.

CIR v. Filipinas Cia de Seguros, 107 Phil 1055 (1960)

- Even though the primary purpose of the proviso is to limit restrain the general language of a
statute, the legislature, unfotunately, does not always use it with technical correctness;
consequently, where its use creates an ambiguity, it is the duty of the court to ascertain the
legislative intention, through resort to usual rules of construction applicable to statutes, generally
an give it effect even though the statute is thereby enlarged, or the proviso made to assume the
force of an independent enactment and although a proviso as such has no existence apart from
provision which it is designed to limit or to qualify

Cebu Portland v. Collector, 25 SCRA 789 (1968)

- Petitioner contends that since the purpose of RA 1299, which became effective on June 16, 1955,
amending section 246 of the NIR, was merely to clarify the meaning of minerals and mineral
products in said section, the section should be construed as if it had been originally passed in its
amended form, so that cement should be considered as mineral product even before the enactment
of RA 1299, and therefore exempt from the sales or percentage tax. Held: It is a settled rule in

REVIEWER BY: ELAH V

36
 statutory construction that a statute operates prospectively only and never retroactively, unless the
legislative intent to the contrary is made manifest either by the express terms of the statute or by
necessary implication. In every case of doubt, the doubt must be resolved against the retrospective
effect. There is nothing in the context of the provision in question that would manifest the
Legislature’s intention to have the provision apply to taxes due in the past. On the other hand, the
use of the word “shall” gives the unmistakable impression that the lawmakers intended this
enactment to be effective only in future. Furthermore, careful perusal of the explanatory note to
House Bill. No. 3251, later approved as RA 1299, and the portions of the record of the discussions
inn Congress, reveals nothing that would suggest that the amendment was enacted to operate
retrospectively.

Comm. v. RTN Mining, supra.

ii. application of revenue regulations, rulings

Sec. 246

Revocation, modification of revenue of any rules and regulations promulgated by the Sec. of Finance or
CIR shall not have retroactive effect if it will be prejudicial to the taxpayer, except:
1. where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the BIR
2. where the facts subsequently gathered by the BIR are materially different from the facts
on which the ruling is based
3. where the taxpayer acted in bad faith

Comm. v. CA, supra.

Comm. v. Mega General, 166 SCRA 166 (1988)

- Rulings or circulars promulgated by the CIR can not have any retroactive application, where to do
so, as it did in the case at bar, would prejudice the taxpayer.

ABS-CBN v. CTA, 108 SCRA 142 (1981)

- The principle of legislative approval of administrative interpretation by re-enactment clearly

obtains in this case. It provides that “the re-enactment of a statute substantially unchanged is
persuasive indication of the adoption by congress of a prior executive construction.” Note should
be taken of the fact that this case involves not a mere opinion of the Commissioner or ruling
rendered on a mere query but a Circular formally issued to “all internal revenue officials” by the
then Commissioner of Internal Revenue.

Comm. v. Telefunken, 249 SCRA 401 (1995)

- Under Sec. 246 of the NIRC, rulings of the BIR may not be given retroactive effect, if the same is
prejudicial to the taxpayer.

d. mandatory and directory provisions

REVIEWER BY: ELAH V

37
Roxas v. Rafferty, supra.

- The omission to follow mandatory provisions renders invalid the act or proceeding to which it
relates while the omission to follow directory provisions does not involve such consequence.

Aragon v. George, 85 Phil 246 (1949)

- Notice of Tax sales to the delinquent taxpayers and landowners in particular and to the public in
general is an essential and indispensable requirement of the law, the nonfulfillment of which
vitiates and nullifies the sale.

Tiongco v. PVB, 212 SCRA 176 (1992)

- Notice to delinquent landowners and to the public; In auction sales of property for ax delinquency,
notice to the delinquent landowners and to the public in general is an essential and indispensable
requirement of law, the non-fulfillment of which vitiates the same.

Pecson v. CA, 222 SCRA 580 (1993)

- As a property owner and a school teacher at that, he should know that if an owner fails to pay the
real estate taxes on a property, the said property shall be sold at public auction to recover the
delinquent taxes. When petitioners’ property was sold at a public auction in December, 1980, the
tax delinquency must have accumulated for several years.

3. Enforcement, Administration of Tax Laws

AGENCIES INVOLVED IN TAX ADMINISTRATION

1. BIR
2. Bureau of Customs
3. Provincial, city, and municipal assessors and treasurers

POWERS AND DUTIES OF THE BIR

1. Assessment and collection of all national internal revenue taxes, fees and charges
2. Give effect to and administer the supervisory and police power conferred to it by the Tax Code or other
laws
3. Enforcement of all forfeitures, penalties and fines in connection therewith
4. Execution of judgments in all cases decided in its favor by the Court of TaxAppeals and the ordinary
courts

REVIEWER BY: ELAH V

38