FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
FUNDAMENTALS OF TAXATION
Taxation, defined
Taxation is the inherent power of the sovereign exercised
through the legislature to impose burdens upon subjects and objects
within its jurisdiction for the purpose of raising revenues to carry out
the legitimate objects of the government.
Taxation is the power by which the sovereign through its law-
making body raises revenue to defray the necessary expenses of the
government (Aban).
It is a means by which the lawmaking body of the state demands
more revenue in order to support its systems and carry out its
legitimate objectives (De Leon).
It is a process or act of imposing a charge by government
authority on property, individuals or transactions to raise money for
public purposes (Black’s Law Dictionary).
Hence, taxation is a:
• As a power: Taxation is a power wielded by the state
through its legislature to demand forced contributions from
the state’s constituents.
• As a process: Taxation is a process on the part of the
government to legislate tax laws, enforce them and collect
money from the people. On the other hand, it is also a
process on the part of the taxpayer when he has to fill out
his tax forms, submit it and pay it. If there is a protest on
the assessment made against him, it is also a process.
• As a means: It is a means for the government to collect
and raise revenues from the people to carry out its
legitimate objects.
NATURE AND CHARACTERISTICS OF TAXATION
The nature and characteristics of power of taxation is two-fold:
1. It is an inherent power of the government; and
2. The power of taxation is inherently legislative
1. It is an inherent power of the government
The power of taxation is considered inherent in a sovereign State
because it is a necessary attribute of sovereignty. Without this power,
no sovereign State can exist nor endure. The power to tax proceeds
upon the theory that the existence of a government is a necessity. No
sovereign State can continue to exist without the means to pay its
expenses, and, for those means, it has the right to compel all citizens
and properly within its limits to contribute; hence, the emergence of
the power to tax.
Also, the power of taxation is an inherent power of the state
because it need not be conferred by the people, nor by any law, nor
by the Constitution for it to exist.
Objects or subjects of taxation
1. Persons – poll taxes cedula (community tax certificate)
2. Property – real property tax
3. Rights – privilege to earn income (income tax) or the
privilege to operate businesses (business tax)
TIO vs. VIDEOGRAM REGULATORY BOARD
A tax does not cease to be valid merely because it
regulates, discourages, or even definitely deters the
activities taxed. The power to impose taxes is one so
unlimited in force and so searching in extent, that the courts
scarcely venture to declare that it is subject to any
restrictions whatever, except such as rest in the discretion
of the authority which exercises it. In imposing a tax, the
legislature acts upon its constituents. This is, in general, a
sufficient security against erroneous and oppressive
taxation.
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PEPSI-COLA vs. MUNICIPALITY OF TANAUAN
The power of taxation is an essential and inherent
attribute of sovereignty, belonging as a matter of right to
every independent government without being expressly
conferred by the people.
CIR vs. HONORABLE SANTOS
It should be pointed out that in imposing the
aforementioned taxes and duties, the State, acting through
the legislative and executive branches, is exercising its
sovereign prerogative. 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
singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation.
REPUBLIC vs. CAGUIOA
The power to tax emanates from necessity; without
taxes, government cannot fulfill its mandate of promoting
the general welfare and well-being of the people. The
enforcement of tax laws and the collection of taxes are the
paramount importance for the sustenance of government
that should be collected without unnecessary hindrance
very precaution must be taken not to unduly suppress it.
PHILIPPINE HEALTH CARE vs. COMMISSIONER
As a general rule, the power to tax is an incident of
sovereignty and is unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse is
to be found only in the responsibility of the legislature which
imposes the tax on the constituency who is to pay it. So
potent indeed is the power that it was once opined that the
power to tax involves the power to destroy.
Principles to remember
• The power to tax involves the power to destroy (Marshall
Doctrine).
CIR vs. SM PRIME HOLDINGS
The power of taxation is sometimes called also the
power to destroy. Taxation is a destructive power which
interferes with the personal and property rights of the
people and takes from them a portion of their property for
support of the government. Therefore, it should be
exercised with caution to minimize injury to the proprietary
rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the hen that lays the
golden egg. And, in order to maintain the general public's
trust and confidence in the Government this power must be
used justly and not treacherously.
• The power to tax is not the power to destroy while this court
sits (Holmes Doctrine).
1. The power to tax is limited by the Constitution.
2. The court may strike down an invalid law If it will
infringe the Constitution.
• The power to tax involves the power to destroy so it must be
exercised with great caution.
2. The power of taxation is inherently legislative
The power of taxation is essentially a legislative function.
Taxation is an attribute of sovereignty. It is the strongest of all powers
of the government. There is a presumption in favor of legislative
determination. Public policy decrees that since upon the prompt
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
collection of revenue depends the very existence of government
itself, whatever determination shall be arrived at by the legislature
should not be interfered with, unless there be a clear violation of
some constitutional inhibition.
It is a legislative power because it involves the promulgation of
rules, which the Constitution has allocated to the legislative
department.
GR: It is a power that is purely legislative and which the central
legislative body cannot delegate to the executive or judicial
department without infringing upon the theory of separation of
powers (Pepsi-Cola vs. Municipality of Tanauan).
EXCS:
1. Delegation to the LGUs
SECTION 5, ARTICLE X of the 1987 CONSTITUTION. Each local
government unit shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local governments.
Principle to remember
• The tax levied must be for a public purpose, uniform and
does not transgress any constitutional provision or is not
repugnant to a controlling statute.
BATANGAS POWER vs. BATANGAS CITY
In recent years, the increasing social challenges of the
times expanded the scope of state activity, and taxation has
become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection
of local industries as well as public welfare and similar
objectives. The power to tax is no longer vested exclusively
on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges pursuant to
Article X, section 5 of the 1987 Constitution. This paradigm
shift results from the realization that genuine development
can be achieved only by strengthening local autonomy and
promoting decentralization of governance.
Considered as the most revolutionary piece of
legislation on local autonomy, the LGC effectively deals with
the fiscal constraints faced by LGUs. It widens the tax base
of LGUs to include taxes which were prohibited by previous
laws.
MANILA ELECTRIC vs. PROVICE OF LAGUNA
Local governments do not have the inherent power to
tax except to the extent that such power might be delegated
to them either by the basic law or by statute. Where there is
neither a grant nor a prohibition by statute, the tax power
must be deemed to exist although Congress may provide
statutory limitations and guidelines.
The basic rationale for the current rule is to safeguard
the viability and self-sufficiency of local government units by
directly granting them general and broad tax powers.
Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional. The
constitutional objective obviously is to ensure that, while the
local government units are being strengthened and made
more autonomous, the legislature must still see to it that:
1. The taxpayer will not be over-burdened or saddled
with multiple and unreasonable impositions;
2. Each local government unit will have its fair share
of available resources;
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3. The resources of the national government will not
be unduly disturbed; and
4. Local taxation will be fair, uniform, and just.
2. Tariff power of the President
SECTION 28(2), ARTICLE VI OF THE 1987 CONSTITUTION. The
Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may
impose, tariff rates, import and export quotas, tonnage and wharfage
dues, and other duties or imposts within the framework of the national
development program of the Government.
ABAKADA vs. ERMITA
There was no undue delegation of legislative power. It
is simply a delegation of ascertainment of facts upon which
enforcement and administration of the increase rate under
the law is contingent. The legislature has made the
operation of the 12% rate contingent upon a specified fact
or condition. It leaves the entire operation or non-operation
of the 12% rate upon factual matters outside of the control
of the executive.
3. Delegation to the administrative bodies
Principles to remember
• The delegation to the administrative bodies must comply
with these two tests:
1. Completeness test – the law must be complete
in itself, setting forth the policies to be executed
or implemented by the executive
2. Sufficiency standards test – the standards
made by law should be sufficiently determinate or
determinable
• The rule-making power delegated to the administrative
bodies must always conform to the law which it seeks to
implement. It cannot expand or go beyond the provisions of
the law.
MACEDA vs. MACARAIG
The standards of the delegated power may be either
express or implied. If the expressed, the non-delegated
objection is easily met. The standard though does not have
to be spelled out specifically. It could be implied from the
policy and purpose of the act considered as a whole.
The observation of petitioner that the approval of the
President was not even required in said EO of the tax
exemption privilege approved by the FIRB is not well taken.
On the contrary, under Section l(f) of EO 93, such tax and
duty exemptions extended by the FIRB must be approved
by the President. In this case, FIRB Resolution No. 17-87
was approved by the respondent Executive Secretary, by
authority of the President in October 1987.
The legislative authority could not or is not expected to
state all the detailed situations wherein the tax exemption
privileges of persons or entities would be restored. The task
may be assigned to an administrative body like the FIRB.
4. Delegation to the people at large – this is done thru
initiative or referendum
5. Emergency powers of the President
Q: May the legislature enact a law to raise revenues even in the
absence of a constitutional provision granting the said body the
power to tax?
Yes. The power to tax can be exercised by the government even
if the Constitution is entirely silent on the subject. There is no need for
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
a constitutional grant for the State to exercise this power. The power
to tax is inherent in the State, being an attribute of sovereignty. This is
so because the State can neither exist nor endure without taxes.
It must be noted that Constitutional provisions relating to the
power of taxation do not operate as grants of power to the
Government, but instead merely constitute as limitations upon a
power which would otherwise be practically without limit.
JURISDICTION
Jurisdiction is a reason why citizens must provide support to the
state so the latter could continue to give protection. By providing
protection to its citizens, the State has the right to demand the
payment of taxes with which to finance its activities so it could
continue to give protection.
The basis or rationale of taxation is also used to explain why
taxation is basically territorial in character because it is only within the
territorial boundaries of the taxing authority where tax laws may be
enforced. This is so because it is only within the confines of its
territory that a country, state or sovereign may give protection.
Territoriality
GR: The power of taxation is territorial in operation and therefore
will apply only within the Philippine jurisdiction.
EXC: If there is privity of relationship between the taxing authority
and the tax subject/object by reason of:
1. Citizenship
2. Residency
3. Source
Situs of taxation
Situs of taxation simply means the place of taxation, which is a
limitation on the power of taxation. However broad the power of
taxation may be as to its character and no matter how searching it is
in its extent, such power is necessarily limited only to persons,
property or business within its jurisdiction or over which it can
exercise dominion.
Basis of situs of taxation
1. The symbiotic relationship between the State and its citizens
2. Jurisdiction, state or political unit that gives protection has
the right to demand support
Factors to determine the situs of taxation
1. Type, kind or classification of tax levied by the government
2. Place of the thing (where the property is located)
3. The residence of the person to be taxed
4. The citizenship of the person to be taxed
5. Source of income (whether earned inside or outside of the
Philippines)
6. Place of the excise, occupation or privilege that is being
taxed by the government
Situs of income tax
1. From sources within the Philippines – all kinds of
taxpayers are subject to income tax on income derived from
sources within the Philippines.
2. From sources without the Philippines – only resident
citizens and domestic corporations are liable to income tax
on income derived from sources without the Philippines
3. Income partly within and partly without the Philippines
– taxable income attributable to sources within the
Philippines may be determined by processes or formulas of
general apportionment prescribed by the Secretary of
Finance. It must be noted that all income earned within the
Philippines by a non-resident citizen, an alien and a foreign
corporation is subject to income tax but not without.
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CIR vs. JAPAN AIRLINES
The source of an income is the property, activity or
service that produced the income. 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. The absence of flight operations to and from
the Philippines is not determinative of the source of income
or the situs of income taxation. The test of taxability is the
source and the source of an income is that activity which
produced the income.
CIR vs. BRITISH AIRWAYS
The source of an income is the property, activity or
service that produced the income. 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.
Unquestionably, the passage documentations in these
cases were sold in the Philippines and the revenue
therefrom was derived from an activity regularly pursued
within the Philippines. And even if the BOAC tickets sold
covered the "transport of passengers and cargo to and from
foreign cities", it cannot alter the fact that income from the
sale of tickets was derived from the Philippines. The word
"source" conveys one essential idea that of origin, and the
origin of the income herein is the Philippines.
Situs of property tax
1. Real property – taxable where the property is located
regardless of the owner’s residence
2. Personal property –
• GR: The movable follows the person (mobilia
sequntur personam). Hence, the situs of taxation
is the domicile of the owner
o Tangible – where the property is
physically located
o Intangible – the domicile of the owner
Situs of excise tax
Excise tax is a tax upon the performance of an act, enjoyment of
a privilege or engaging in an occupation. Hence, its situs of taxation is
the place where the act is performed or where the occupation is
engaged in.
ILOILO BOTTLERS vs. ILOILO CITY
By its nature, the power to levy an excise tax depends
upon the place where the business is done, or the
occupation is engaged in or where the transaction took
place. In this case, it is a tax on the privilege of distributing,
manufacturing or bottling of soft drinks. Even though the
base of operations is at Pavia, the areas of transactions
where it conducts its business are within Iloilo City limits.
The situs for excise tax is the area of transaction, not
necessarily base of operation.
Situs of business tax
Its situs of taxation is the principal place of business.
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
CIR vs. BAIER-NICKEL PAMBANSANG KOALISYON vs. EXECUTIVE
SECRETARY
With respect to rendition of labor or personal service, it
is the place where the labor or service was performed that The coco-levy funds are in the nature of taxes and can
determines the source of income. only be used for public purpose. Taxes are enforced
The faxed documents presented by respondent did not proportional contributions from persons and property, levied
constitute substantial evidence, or that relevant evidence by the State by virtue of its sovereignty for the support of
that a reasonable mind might accept as adequate to the government and for all its public needs. Unlike ordinary
support the conclusion that it was in Germany where she revenue laws, RA 6260 and PD 276 did not raise money to
performed the income producing service which gave rise to boost the government’s general funds but to provide means
the reported monthly sales. She thus failed to discharge the for the rehabilitation and stabilization of a threatened
burden of proving that her income was from sources outside industry, the coconut industry, which is so affected with
the Philippines and exempt from the application of our public interest as to be within the police power of the State.
income tax law. The funds sought to support the coconut industry, one of
the main economic backbones of the country, and to secure
PURPOSES OF TAXATION economic benefits for the coconut farmers and farm
workers.
Purposes of taxation
1. The primary purpose of taxation is to raise revenue to carry COMPARISON WITH OTHER POWERS
out the legitimate objects of the government.
2. The secondary or sumptuary purpose of taxation is to Power of taxation as an implement of police power
promote the general welfare and to protect the health, Police power and the power of taxation are inherent powers of the
safety or morals of inhabitants. State. These powers are distinct and have different tests for validity.
Police power is the power of the State to enact legislation that may
Other purposes of taxation interfere with personal liberty or property in order to promote the
1. Taxation can strengthen anemic enterprises; general welfare while the power of taxation is the power to levy taxes
2. Taxes may be increased in period of prosperity to curb to be used for public purpose. The main purpose of police power is
spending power and halt inflation and lowered in periods of the regulation of a behavior or conduct, while taxation is revenue
slump to expand business and ward off depression; generation. The lawful subjects and lawful means tests are used to
3. Taxes on imports may be increased to protect local determine the validity of a law enacted under the police power. The
industries; power of taxation, on the other hand, is circumscribed by inherent and
4. Taxes on imported goods may be used as a bargaining constitutional limitations.
tool by a country by setting tariff rates first at a relatively
high level before trade negotiations; In distinguishing tax and regulation as a form of police
5. Taxes can discourage certain business (e.g. tobacco and power, the determining factor is the purpose of the
alcohol); and implemented measure:
6. Taxes can also minimize inequity • If generation of revenue is the primary purpose and
regulation is merely incidental, the imposition is a
Public purpose tax. Hence, if the purpose is primarily to raise
One of the requisites for the valid exercise of the power of tax is revenue, then it will be deemed a tax even though
that the tax measure must be for a public purpose. The right of the the measure results in some form of regulation.
legislature to appropriate public funds is correlative with its right to tax • If regulation is the primary purpose, the fact that
and as such the power of taxation may only be exercised for public revenue is incidentally raised does not make the
purposes. imposition a tax. The other way of saying it is, if the
purpose is primarily to regulate, then it is deemed a
PLANTER’S PRODUCTS vs. FERTIPHIL regulation and an exercise of the police power of
the state, even though incidentally, revenue is
An inherent limitation on the power of taxation is public generated.
purpose. Taxes are exacted only for a public purpose. They
cannot be used for purely private purposes or for the Power to Tax Police Power
exclusive benefit of private persons. The reason is that the As to concept Collecting money for Power of the state to
power to tax exists for the general welfare; hence, implicit in the purpose of raising promote public
its power is the limitation that it should be used only for a revenues to carry out welfare by restraining
public purpose. It would be a robbery for the State to tax its the legitimate objects and regulating the
citizens and use the funds generated for a private purpose. of the government use of liberty and
As an old United States case bluntly put it: To lay with one property. It is the
hand, the power of the government on the property of the most pervasive, the
citizen, and with the other to bestow it upon favored least limitable, and
individuals to aid private enterprises and build up private the most demanding.
fortunes, is nonetheless a robbery because it is done under As to purpose Raising revenues Regulation
the forms of law and is called taxation. As to the amount Generally unlimited Amount should not
While the categories of what may constitute a public exceed the cost of
purpose are continually expanding in light of the expansion regulation
of government functions, the inherent requirement that As to the Continuous Promotion of public
taxes can only be exacted for a public purpose still stands. compensation protection in an welfare
Public purpose is the heart of a tax law. When a tax law is organized society
only a mask to exact funds from the public when its true
As to the property Money Property other than
intent is to give undue benefit and advantage to a private
taken money
enterprise, that law will not satisfy the requirement of public
As to the non- Inferior Superior
purpose.
impairment clause
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 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
Q: May the taxing power of the Government be used as an
implement of police power? YES
GEROCHI vs. DEPARTMENT OF ENERY
It is a well-established doctrine that the taxing power
may be used as an implement of police power. The
establishment and maintenance of the Special Trust Fund,
under the last paragraph of Section 34 is well within the
pervasive and non-waivable power and responsibility of the
government to secure the physical and economic survival
and well-being of the community. This feature of the
Universal Charge further boosts the position that it is an
exaction imposed primarily in pursuit of the State's police
objectives. The STF reasonably serves and assures the
attainment and perpetuity of the purposes for which the
Universal Charge is imposed, i.e., to ensure the viability of
the country's electric power industry.
Q: Are royalty fees imposed on petroleum fuel a tax? NO
CHEVRON vs. BASES CONVERSION
The subject royalty fee was imposed primarily for
regulatory purposes, and not for the generation of income
or profits. The Policy Guidelines was issued to ensure the
safety, security, and good condition of the petroleum fuel
industry within the CSEZ. The questioned royalty fees form
part of the regulatory framework to ensure free flow or
movement of petroleum fuel to and from the CSEZ. The fact
that respondents have the exclusive right to distribute and
market petroleum products within CSEZ pursuant to its JVA
with SBMA and CSBTI does not diminish the regulatory
purpose of the royalty fee for fuel products supplied by
petitioner to its client at the CSEZ. Being the administrator
of CSEZ, the responsibility of ensuring the safe, efficient
and orderly distribution of fuel products within the Zone falls
on CDC.
There can be no doubt that the oil industry is greatly
imbued with public interest as it vitally affects the general
welfare In addition, fuel is a highly combustible product
which, if left unchecked, poses a serious threat to life and
property. Also, the reasonable relation between the royalty
fees imposed on a per liter basis and the regulation sought
to be attained is that the higher the volume of fuel entering
CSEZ, the greater the extent and frequency of supervision
and inspection required to ensure safety, security, and
order within the Zone.
Q: Is a special assessment considered a tax? NO
Being a special assessment, the proceeds thereof may be
devoted only to the specific purpose for which the assessment was
authorized. It is predicated on the doctrine that the property against
which it is levied derives some special benefit from the improvement.
It is not a tax measure intended to raise revenues for the government.
Consequently, once it has been determined that no benefit accrues or
inures to the property owners paying the assessment, or that the
proceeds from the said assessment are being misapplied to the
prejudice of those against whom it has been levied, then the authority
to insist on payment of the said assessment ceases.
REPUBLIC vs. BACOLOD MURCIA
The levy for the Philsugin Fund is not so much an
exercise of the power of taxation, nor the imposition of a
special assessment, but the exercise of the police power for
the general welfare of the entire country. It is, therefore, an
exercise of a sovereign power which no private citizen may
lawfully resist.
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The tax is levied with a regulatory purpose, to provide
means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is
primarily an exercise of the police power.
Sugar production is one of the great industries of our
nation, sugar occupying a leading position among its export
products; that it gives employment to thousands of laborers
in fields and factories; that it is a great source of the state's
wealth, is one, of the important sources to foreign exchange
needed by our government, and is thus pivotal in the plans
of a regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore
redounds greatly to the general welfare. Hence, it was
competent for the Legislature to find that the general
welfare demanded that the sugar industry should be
stabilized in turn; and in the wide field of its police power,
the law-making body could provide that the distribution of
benefits therefrom be readjusted among its components, to
enable it to resist the added strain of the increase in taxes
that it had to sustain.
REPUBLIC vs. INTERNATIONAL COMMUNICATIONS
Section 40(g) of the Public Service Act is not a tax
measure but a simple regulatory provision for the collection
of fees imposed pursuant to the exercise of the States
police power. A tax is imposed under the taxing power of
government principally for the purpose of raising revenues.
The law, however, merely authorizes and requires the
collection of fees for the reimbursement of the
Commission's expenses in the authorization, supervision
and/or regulation of public services. There can be no doubt
then that petitioner NTC is authorized to collect such fees.
However, such fees must be commensurate to the costs
and expenses involved in discharging its supervisory and
regulatory functions.
Q: Is motor registration fee considered a tax measure? YES
PAL vs. EDU
The legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is
mainly to raise funds for the construction and maintenance
of highways and to a much lesser degree, pay for the
operating expenses of the administering agency. Fees may
be properly regarded as taxes even though they also serve
as an instrument of regulation. If the purpose is primarily
revenue, or if revenue is at least one of the real and
substantial purposes, then the exaction is properly called a
tax. These exactions are sometimes called regulatory taxes.
It is quite apparent that vehicle registration fees were
originally simple exceptional intended only for rigidly
purposes in the exercise of the State's police powers. Over
the years, however, as vehicular traffic exploded in number
and motor vehicles became absolute necessities without
which modem life as we know it would stand still, Congress
found the registration of vehicles a very convenient way of
raising much needed revenues. Without changing the
earlier deputy of registration payments as "fees," their
nature has become that of "taxes." Therefore, motor vehicle
registration fees as at present exacted pursuant to the Land
Transportation and Traffic Code are actually taxes intended
for additional revenues of government even if one fifth or
less of the amount collected is set aside for the operating
expenses of the agency administering the program.
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
MANILA MEMORIAL vs. DSWD Power of taxation as implement of power of eminent domain
The taxation power can also be used as an implement for the
The validity of the 20% senior citizen discount and tax exercise of the power of eminent domain. The power of eminent
deduction scheme under RA 9257 as well as the tax domain is the inherent power of the state to take private property for
deduction scheme is a valid exercise of the police power of public use upon payment of just compensation. Tax measures are but
the State. enforced contributions exacted on pain of penal sanctions and clearly
The 20% discount is intended to improve the welfare of imposed for a public purpose. In recent years, the power to tax has
senior citizens who, at their age, are less likely to be indeed become a most effective tool to realize social justice, public
gainfully employed, more prone to illnesses and other welfare, and the equitable distribution of wealth.
disabilities, and, thus, in need of subsidy in purchasing
basic commodities. As to its nature and effects, the 20% CIR vs. CENTRAL LUZON
discount is a regulation affecting the ability of private
establishments to price their products and services relative The discount privilege to which our senior citizens are
to a special class of individuals, senior citizens, for which entitled is actually a benefit enjoyed by the general public to
the Constitution affords preferential concern. which these citizens belong. The discounts given would
In turn, this affects the amount of profits or have entered the coffers and formed part of the gross sales
income/gross sales that a private establishment can derive of the private establishments concerned, were it not for RA
from senior citizens. In other words, the subject regulation 7432. The permanent reduction in their total revenues is a
affects the pricing, and, hence, the profitability of a private forced subsidy corresponding to the taking of private
establishment. However, it does not purport to appropriate property for public use or benefit.
or burden specific properties, used in the operation or As a result of the 20% discount imposed by RA 7432,
conduct of the business of private establishments, for the CLDC becomes entitled to a just compensation. The social
use or benefit of the public, or senior citizens for that matter, justice consecrated in our Constitution is not intended to
but merely regulates the pricing of goods and services take away rights from a person and give them to another
relative to, and the amount of profits or income/gross sales who is not entitled thereto. For this reason, a just
that such private establishments may derive from, senior compensation for income that is taken away from CLDC
citizens. The subject regulation may be said to be similar to, becomes necessary. It is in the tax credit that our legislators
but with substantial distinctions from, price control or rate of find support to realize social justice, and no administrative
return on investment control laws which are traditionally body can alter that fact.
regarded as police power measures.
CARLOS SUPERDRUG vs. VELASCO
Q: Should margin fees be considered a tax or a fee? NO
The Senior Citizens Act was enacted primarily to
ESSO STANDARD vs. CIR maximize the contribution of senior citizens to nation-
building, and to grant benefits and privileges to them for
Margin fees are regulatory fees. It cannot be deducted their improvement and well-being as the State considers
as they are not taxes. Margin fees are imposed to curb them an integral part of our society. The law is a legitimate
excessive demand upon the international reserves in order exercise of police power which, similar to the power of
to stabilize the currency. It is applied to strengthen the eminent domain, has general welfare for its object.
country’s international reserves and is not imposed for Police power as an attribute to promote the common
revenue purposes. Hence, as they are not taxes, they good would be diluted considerably if on the mere plea of
cannot be considered as a deductible business expense petitioners that they will suffer loss of earnings and capital,
the questioned provision is invalidated. Moreover, in the
Q: Is the grant of building permit a form of tax? NO absence of evidence demonstrating the alleged confiscatory
effect of the provision in question, there is no basis for its
ANGELES vs. CITY OF ANGELES nullification in view of the presumption of validity which
every law has in its favor.
The building permit fees are regulatory fees. A charge
of a fixed sum which bears no relation at all to the cost of Power of Taxation Power of Eminent
inspection and regulation may be held to be a tax rather Domain
than an exercise of the police power. In this case, AUF As to concept Collecting money for The taking of private
failed to demonstrate that the building fees were arbitrarily the purpose of raising property for public
determined or unrelated to the activity being regulated. revenues to carry out purpose after
Neither has AUF adduced evidence to show that the rates the legitimate objects payment of just
of building permit fees imposed and collected by the of the government compensation
respondents were unreasonable or in excess of the cost of As to authority Only by the May be exercised by
regulation and inspection. While it is conceded that the government or its (1) government or
revenue from the building fees is generated for the benefit political subdivisions political subdivisions
of LGUs, the fact that the revenue is incidentally raised or (2) granted to
does not make the imposition a tax. public utilities
As to purpose The property is taken The property is taken
Other principles to remember to carry out the for public use and
1. A charge, which bears no relation at all to the cost of legitimate objectives must be
inspection and regulation, may be held to be a tax rather of the government compensated
than an exercise of the police power. As to person affected Operates on a Operates on an
2. The fact that revenue is incidentally raised does not make community or class individual as owner of
the imposition a tax (Angeles vs. City of Angeles). of individuals a particular property
As to effect The money There is a transfer of
contributed becomes the right to property
part of the public
6
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
funds
As to benefits It is assumed that the Receives the just
individual receives compensation or the
the equivalent of the actual market value
tax in the form of of the property
protection and expropriated
benefits he receives
from the government
PRINCIPLES OF SOUND TAX SYSTEM
Note: The Principles of sound tax system is also known as the
Canons of Taxation.
Principles of sound tax system
1. Fiscal adequacy – the source of government revenue
must be sufficient to meet governmental expenditures and
other public needs. Otherwise stated, the sources of
revenue taken as a whole should be sufficient to meet the
expenditures of the government regardless of business
conditions and problems of economic adjustment.
CHAVEZ vs. ONGPIN
EO 73 which changed the date of implementation of the
increase in real property taxes from January 1, 1988 to
January 1, 1987 does not impose new taxes nor does it
increase taxes. It merely hastens the effectivity of legal
process mandated by PD 464, wherein the LGU are tasked
to revise real property assessments from 1979 and every 5
years thereafter.
Certainly, to continue collecting real property taxes
based on valuations arrived at several years ago, in
disregard of the increases in the value of real properties
that have occurred since then, is not in consonance with a
sound tax system. Fiscal adequacy, which is one of the
characteristics of a sound tax system, requires that sources
of revenues must be adequate to meet government
expenditures and their variations.
2. Administrative feasibility – taxes should be capable of
being effectively enforced. It means that the tax measures
should be easily implemented in order to assure the smooth
flow into the treasury of the fiscally adequate amounts.
Also, it is a tax system that should be capable of being
effectively administered or enforced with the least
inconvenience to the taxpayer.
DIAZ vs. SECRETARY OF FINANCE
Administrative feasibility is one of the canons of a
sound tax system. It simply means that the tax system
should be capable of being effectively administered and
enforced with the least inconvenience to the taxpayer. Non-
observance of the canon, however, will not render a tax
imposition invalid "except to the extent that specific
constitutional or statutory limitations are impaired." Thus,
even if the imposition of VAT on toll way operations may
seem burdensome to implement, it is not necessarily invalid
unless some aspect of it is shown to violate any law or the
Constitution.
3. Theoretical Justice – a good tax system must be based
on the taxpayer’s ability to pay
Note: A mere violation of any of the principles of sound tax system will
not invalidate the tax measure. To invalidate a tax measure, there
must be a violation of the Constitution or any law or statute (Diaz vs.
Secretary of Finance).
7
THEORY AND BASIS OF TAXATION
The theory of taxation and the basis or rationale for taxation are
two different concepts.
1. The theory of taxation explains why there is a need to
impose taxes. It refers to the lifeblood theory (and the
necessity theory which is but an extension of the lifeblood
theory).
2. The basis or rationale for taxation explains the reason
why a State may impose taxes. It refers to (1) the symbiotic
relationship and (2) jurisdiction by the state over persons
and property within its territory.
Theory and basis of taxation
1. Necessity theory
Taxation is a necessary burden to preserve the States
sovereignty and a means to give the citizenry an army to resist
aggression, a navy to defend its shores from invasion, a corps of civil
servants to serve, public improvements for the enjoyment of the
citizenry, and those which come within the State’s territory and
facilities and protection which a government is supposed to provide.
2. Benefit-protection theory
According to this principle, the basis of taxation is found in the
reciprocal duties of protection and support between the State and its
inhabitants. In return for his contribution, the taxpayer receives the
general advantages and protection which the government affords the
taxpayer and his property.
Taxes are what we pay for civilized society. Hence, despite the
natural reluctance to surrender part of one’s hard-earned income,
every person who is able must contribute his share in the running of
the government and the latter, for its part, is expected to respond in
the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.
3. Lifeblood theory
The existence of government is a necessity; it cannot exist nor
endure without the means to pay its expenses; and for those means,
the government has the right to compel all its citizens and property
within its limits to contribute in the form of taxes.
Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. On the other hand, such
collection should be made in accordance with law as any arbitrariness
will negate the very reason for government itself. It is therefore
necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.
The lifeblood theory states that an assessment of a tax is
enforceable despite it being contested because of the urgency to
collect taxes, this being the government’s primary source of revenue.
The government cannot and must not be stopped in matters involving
taxes as “they are the lifeblood of the nation through which the
government agencies continue to operate and with which the State
effects its functions for the welfare of its constituents.
Further, the Government cannot be estopped from collecting
taxes by the mistake, negligence, or omission of its agents. Upon
taxation depends the Government’s ability to serve the people for
whose benefit the taxes are collected. Neglect or omission of
government officials entrusted to collect taxes should not be allowed
to bring harm or detriment to the people.
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
Manifestations of lifeblood theory
1. The prohibition against set-off of taxes
2. The prohibition against the issuance of an injunction to
restrain the collection of taxes
3. Presumption of correctness of assessments
4. The power to tax is unlimited and plenary
5. The power to tax is the power to destroy
Q: Can payment of taxes be postponed by questioning the
validity of the assessment made?
NO. If the payment of taxes could be postponed by simply
questioning heir validity, the machinery of the state would grind to a
halt and all government functions would be paralyzed. Hence, the
validity of a tax cannot be assailed until after the taxpayer has paid
the tax under protest. By questioning a tax’s legality without first
paying it, a taxpayer, in collusion with BIR officials, can unduly delay,
if not totally evade, the payment of such tax.
Principles to remember under the lifeblood theory
1. No injunction rule
GR: Injunction cannot be issued to stop the implementation of a tax
legislation. The collection of taxes must be with haste and should be
without any interference from the court.
EXCS:
1. An injunction may be issued to restrain the collection of
taxes “when in the opinion of the Court the collection may
jeopardize the interest of the Government and/or the
taxpayer, the Court at any stage of the proceeding may
suspend the said collection and require the taxpayer either
to deposit the amount claimed or to file a surety bond for not
more than double the amount with the Court (Section 11,
RA 1125 as amended by RA 9282).
2. When it comes to local taxes
2. Strict construction
GR: There is no need for statutory construction if the tax law is clear.
Where the law is clear and unambiguous, the law must be taken as it
is devoid of judicial addition or subtraction.
EXC: If there is an ambiguity in the law, statutory construction is but
proper and tax laws shall be liberally interpreted in favor of the
taxpayer and strictly against the taxing authority.
Tax statutes are strictly construed against the taxing
authority because taxation is a destructive power which
interferes with the personal and property rights of the
people and takes from them a portion of their property for
the support of the government.
Q: Is the BIR bound by the construction of the previous BIR?
NO. It must be noted, however, that the construction of a statute
by predecessors (BIR) is not binding on their successors if thereafter
the latter becomes satisfied that a different construction should be
given.
OTHER DOCTRINES
Prospectivity
GR: Tax laws shall have prospective application pursuant to
Article 2 of the Civil Code.
EXC: Tax laws may be imposed retroactively if the law expressly
provides and if it will not amount to a denial of due process.
8
Imprescriptibility
GR: Taxes are imprescriptible.
EXC: The tax law may provide otherwise. In particular, the NIRC
and LGC provides for prescriptive periods for assessment and
collection of taxes.
Rationale for imprescriptibility of tax
The law prescribing a limitation of actions for the collection of the
income tax is beneficial both to the Government and to its citizens; to
the Government because tax officers would be obliged to act promptly
in the making of assessment, and to citizens because after the lapse
of the period of prescription citizens would have a feeling of security
against unscrupulous tax agents who will always find an excuse to
inspect the books of taxpayers, not to determine the latter's real
liability, but to take advantage of every opportunity to molest peaceful,
law-abiding citizens. In other words, our tax laws provides for a
statute of limitations in the collection of taxes for the purpose of
safeguarding taxpayers from any examination, investigation or
unreasonable assessment.
It must be noted however that the law on prescription being a
remedial measure should be liberally construed in order to afford
protection. On the other hand, the exceptions to the law on
prescription should be strictly construed.
Prescriptive period for income tax under the NIRC
GR: 3 years reckoned from the date of the filing of the return or
from the date of the deadline for the filing of the return, whichever
comes later.
EXCs:
1. If it is based on fraud, 10 years reckoned from the date
of the discovery of fraud or the discovery of the non-
filing of the income tax return.
2. As to collection, it prescribes in 5 years
Double taxation
Double taxation refers to taxing the same property twice when it
should be taxed but once. It has also been defined as taxing the
same person twice by the same jurisdiction over the same thing. It is
sometimes known as “duplicate taxation.”
Q: Is double taxation prohibited under the Constitution?
It depends. The Constitution does not prohibit the imposition of
double taxation in the broad sense. However, if double taxation
amounts to a direct double taxation, then it becomes legally
objectionable for being oppressive and inequitable. It violates the
equal protection and uniformity clauses of the Constitution. Hence,
double taxation is not illegal per se.
Types of double taxation
1. Direct double taxation – this is double taxation in the strict
sense. This means that the same property is taxed twice
when it should be taxed only once and that both taxes are
imposed on the same subject matter for the same purpose,
by the same taxing authority within the same jurisdiction
during the same taxing period and covering the same kind
of tax.
2. Indirect double taxation – this is double taxation in the
broad sense. Double taxation is indirect where some
elements of direct double taxation are absent. It applies to
all cases in which there are two or more pecuniary
impositions.
Requisites of direct double taxation
There is direct double taxation if the two taxes are imposed:
1. On the same subject matter
2. For the same purpose
3. By the same taxing authority
4. Within the same jurisdiction
5. During the same taxing period
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
6. The taxes must be of the same kind or character
Note: The absence of one element implies that it can no longer be
deemed as direct double taxation.
CITY OF MANILA vs. COCA-COLA
The City of Manila argued that here can be no double
taxation when Coca-Cola is being taxed under both
Sections 14 and 21 of Tax Ordinance 7794, for under the
Section 14, it is being taxed as a manufacturer pursuant to
Section 143(a) of the LGC while under the Section 21, it is
being taxed as a person selling goods in the course of trade
or business subject to excise, VAT, or percentage tax
pursuant to Section 143(h) of the LGC.
HELD:
There is indeed double taxation if Coca-Cola is
subjected to the taxes under both Sections 14 and 21 of
Tax Ordinance 7794 of the City of Manila.
Section 143 of the LGC, the very source of the power of
municipalities and cities to impose a local business tax, and
to which any local business tax imposed by petitioner City
of Manila must conform. It is apparent from a perusal
thereof that when a municipality or city has already imposed
a business tax on manufacturers, etc. of liquors, distilled
spirits, wines, and any other article of commerce, pursuant
to Section 143(a) of the LGC, said municipality or city may
no longer subject the same manufacturers, etc. to a
business tax under Section 143(h) of the same Code.
Section 143(h) may be imposed only on businesses that are
subject to excise tax, VAT, or percentage tax under the
NIRC, and that are not otherwise specified in preceding
paragraphs. In the same way, businesses such as
respondents, already subject to a local business tax under
Section 14 of Tax Ordinance 7794 (which is based on
Section 143(a) of the LGC), can no longer be made liable
for local business tax under Section 21 of the same Tax
Ordinance (which is based on Section 143(h) of the LGC).
SWEDISH MATCH vs. CITY OF MANILA
There is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and 21 of
Tax Ordinance 7794, since these are being imposed:
1. On the same subject matter – the privilege of doing
business in the City of Manila;
2. For the same purpose – to make persons
conducting business within the City of Manila
contribute to city revenues;
3. By the same taxing authority – the City of Manila;
4. Within the same taxing jurisdiction – within the
territorial jurisdiction of the City of Manila;
5. For the same taxing periods – per calendar year;
6. Of the same kind or character – a local business tax
imposed on gross sales or receipts of the business
ERICSSON vs. CITY OF PASIG
Ericsson filed a Protest claiming that the computation of
the local business tax should be based on gross receipts
and not on gross revenue. Hence, the City of Pasig
committed a palpable error when it assessed petitioners
local business tax based on its gross revenue as reported in
its audited financial statements, as Section 143 of the LGC
and Section 22(e) of the Pasig Revenue Code clearly
provide that the tax should be computed based on gross
receipts.
9
HELD:
Local business tax should be based on Gross Receipts
and not Gross Revenue as this would result in double
taxation.
Gross receipts include money or its equivalent actually
or constructively received in consideration of services
rendered or articles sold, exchanged or leased, whether
actual or constructive. There is constructive receipt, when
the consideration for the articles sold, exchanged or leased,
or the services rendered has already been placed under the
control of the person who sold the goods or rendered the
services without any restriction by the payor.
In contrast, gross revenue covers money or its
equivalent actually or constructively received, including the
value of services rendered or articles sold, exchanged or
leased, the payment of which is yet to be received.
In petitioners case, its audited financial statements
reflect income or revenue which accrued to it during the
taxable period although not yet actually or constructively
received or paid. This is because petitioner uses the accrual
method of accounting, where income is reportable when all
the events have occurred that fix the taxpayers right to
receive the income, and the amount can be determined with
reasonable accuracy; the right to receive income, and not
the actual receipt, determines when to include the amount
in gross income.
The imposition of local business tax based on
petitioners gross revenue will inevitably result in the
constitutionally proscribed double taxation taxing of the
same person twice by the same jurisdiction for the same
thing inasmuch as petitioners revenue or income for a
taxable year will definitely include its gross receipts already
reported during the previous year and for which local
business tax has already been paid.
Q: When is there no double taxation?
CIR vs. BPI
Domestic corporate taxpayers, including banks, are
levied a 20% final withholding tax (FWT) on bank deposits
under Section 24(e)(1)[2] in relation to Section 50(a) of the
NIRC. Banks are also liable for a tax on gross receipts
(GRT) derived from sources within the Philippines under
Section 119 of the NIRC. The interest earned by BPI from
deposits and similar arrangements are subjected to a FWT
of 20%. Consequently, the interest income it receives on
amounts that it lends out is always net of the 20% withheld
tax. As a bank, BPI is furthermore liable for a 5% gross
receipts tax on all its income.
HELD:
There is no double taxation if the law imposes two
different taxes on the same income, business or property.
Subjecting interest income to a 20% FWT and including it in
the computation of the 5% Gross Receipts Tax (GRT) is
clearly not double taxation.
First, the taxes are imposed on two different subject
matters. The subject matter of the FWT is the passive
income generated in the form of interest on deposits and
yield on deposit substitutes, while the subject matter of the
GRT is the privilege of engaging in the business of banking.
A tax based on receipts is a tax on business rather than on
the property; hence, it is an excise rather than a property
tax. It is not an income tax, unlike the FWT. In fact, one can
be taxed for engaging in business and further taxed
differently for the income derived therefrom.
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
Second, although both taxes are national in scope
because they are imposed by the same taxing authority,
which is the national government under the Tax Code, and
operate within the same Philippine jurisdiction for the same
purpose of raising revenues, the taxing periods they affect
are different. The FWT is deducted and withheld as soon as
the income is earned, and is paid after every calendar
quarter in which it is earned. On the other hand, the GRT is
neither deducted nor withheld, but is paid only after every
taxable quarter in which it is earned.
Third, these two taxes are of different kinds or
characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not subject
to withholding.
Modes of eliminating double taxation
1. Tax treaty – it pertains to allowing reciprocal exemption
either by law or by treaty. These are created on grounds of
reciprocity or to lessen the rigors of international double or
multiple taxation. Its purpose is to reconcile the fiscal
legislations of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different
jurisdictions. Further, it is to encourage the free flow of
goods and services with and the movement of capital,
technology and persons between the countries.
Purposes of tax treaty
• To reconcile fiscal legislations of different countries;
• To eliminate international juridical taxation;
• To support and facilitate international trade with respect to
capital or services
Q: Does the Most Favored Nation Clause of US-RP treaty
constitute double taxation? NO
CIR vs. S.C. JOHNSON
Double taxation usually takes place 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.
The RP-US Tax Treaty is just one of a number of
bilateral treaties which the Philippines has entered into for
the avoidance of double taxation. The purpose of these
international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for
identical periods.
The apparent rationale for doing away with double
taxation is of encourage the free flow of goods and services
and the movement of capital, technology and persons
between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will
only thrive in a fairly predictable and reasonable
international investment climate and the protection against
double taxation is crucial in creating such a climate. Further,
the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation
that the tax given up for this particular investment is not
taxed by the other country
Under the RP-US Tax Treaty, the state of residence
and the state of source are both permitted to tax the
royalties, with a restraint on the tax that may be collected by
the state of source. Furthermore, the method employed to
give relief from double taxation is the allowance of a tax
10
credit to citizens or residents of the United States (in an
appropriate amount based upon the taxes paid or accrued
to the Philippines) against the US tax, but such amount
shall not exceed the limitations provided by United States
law for the taxable year.
Given the purpose underlying tax treaties and the
rationale for the most favored nation clause, the
concessional tax rate of 10% provided for in the RP-
Germany Tax Treaty should apply only if the taxes imposed
upon royalties in the RP-US Tax Treaty and in the RP-
Germany Tax Treaty are paid under similar circumstances.
This would mean that private respondent must prove that
the RP-US Tax Treaty grants similar tax reliefs to residents
of the US in respect of the taxes imposable upon royalties
earned from sources within the Philippines as those allowed
to their German counterparts under the RP-Germany Tax
Treaty.
2. Tax credit – allowance of tax credit for foreign taxes paid.
A tax credit is an amount subtracted directly from one’s
total tax liability. It is a peso deduction of a taxpayer’s
liability and therefore has a direct effect.
3. Tax deduction – allowance of deduction for foreign taxes
paid. Like tax credit, tax deduction also reduces the tax
liability on the income. However, unlike tax credit, tax
deduction only has indirect effect.
4. Tax reduction – reduction of the Philippine tax rate. This is
usually manifested through tax exemptions.
LIMITATIONS TO THE POWER OF TAXATION
1. The inherent limitations (PITIE)
• The tax measure must be for a public purpose;
• The power to tax is inherently legislative;
• The tax measure may be imposed only within the
State’s territory;
• The power to tax is limited by international comity
• The government, its entities, agencies and
instrumentalities are tax exempt
2. The Constitutional limitations
• Due process under Article III, Section 1
• Equal protection under Article III, Section 1
• Uniformity and equity in taxation under Article VI,
Section 28(1)
• Progressive taxation under Article VI, Section
28(1)
• Origin of appropriation, revenue and tariff bills
under Article VI, Section 24
• Voting requirements for tax exemption under
Article VI, Section 28(4)
• Delegation to the President to fix tariff rates under
Article VI, Section 28(2)
• President’s veto power on appropriation, revenue,
tariff under Article VI, Section 27(2)
• Taxes levied for special purposes under Article VI,
Section 29(3)
• Grant to LGUs to create its own sources of
revenue under Section 5, Article X
• Flexible tariff clause under Article VI, Section 28(2)
• Exemption from real property tax under Article VI,
Section 28(3)
• Tax exemption of revenues, assets, including
donations to educational institution under Article
XIV, Sections 4(3) and (4)
• Non-impairment of Supreme Court’s jurisdiction in
tax cases under Article VIII, Section 5
• Non-imprisonment for non-payment of poll tax
under Article III, Section 20
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
• Freedom of speech and of the press under Article
III, Section 4
• Religious freedom under Article III, Section 5
• Non-impairment of contracts under Article III,
Section 10
Note: There are two broad types of Constitutional limitations.
1. Those provisions which directly affect the power of taxation;
2. Those that indirectly affect the power of taxation of the
government.
INHERENT LIMITATIONS TO POWER OF TAXATION
1. Public purpose (P)
The right of taxation can only be used in aid of a public purpose.
The right of the legislature to appropriate public funds is correlative
with its right to tax and as such the power of taxation may only be
exercised for public purposes. In that case, the appropriation of public
funds for the construction of feeder roads on land owned by a private
person is invalid for being made for other than a public purpose.
In its traditional sense, public purpose is limited to government
functions. However, in its expanded meaning, it now covers broad
concepts such as health, moral, and social justice among others.
2. Inherently legislative (I)
GR: Only the legislature can exercise the power of taxation.
EXC: Unless the same is delegated by the constitution or through a
law which does not violate the constitution
1. Delegation to the LGUs
2. Tariff power of the President
3. Delegation to the administrative bodies
4. Delegation to the people at large through initiative and
referendum
5. Emergency powers of the President
Q: Do local governments have the power to tax?
YES. The power to tax is no longer vested exclusively on
Congress. The local governments are now given direct authority to
levy taxes, fees and other charges pursuant to Section 5, Article X of
the 1987 Constitution. Nevertheless, while the power to tax may be
exercised by local governments, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority conferred by the
Constitution, the basic doctrine on local taxation remains the same in
that the power to tax is primarily vested in Congress.
It must be noted, further, that the power is not inherent in the local
government unlike in the national government. A municipal
corporation has no inherent right to impose taxes. Its power to tax
must always yield to a legislative act which is superior having been
passed by the state itself which has the inherent power to tax.
However, the Congress cannot abolish what is expressly granted by
the fundamental law. The only authority conferred to Congress is to
provide the guidelines and limitations on the local government’s
exercise of the power to tax.
3. Territoriality (T)
The principle of territoriality means that the taxing power should
be exercised only within the territorial jurisdiction of the taxing
authority. However broad the power of taxation may be as to its
character and no matter how searching it is in its extent, such power
is necessarily limited only to persons, property or businesses within
its jurisdiction.
The EXC: to this principle is if there is privity of relationship
between the taxing authority and the tax subject/object.
11
4. International comity (I)
Comity is respect accorded by nation to each other as co-equals.
As taxation is an act of sovereignty, such power should be imposed
upon equals out of respect. This also implies that the property or
income of a foreign state or government may not be the subject of
taxation by another.
Basis or grounds for international comity
1. Sovereign equality among States;
2. There is an implied understanding that where one country’s
representative will come to another country, that visiting
envoy does not degrade its status as such;
3. The foreign government cannot be sued without its consent
TAÑADA vs. ANGARA
While sovereignty has traditionally been deemed
absolute and all encompassing on the domestic level, it is
however subject to restrictions and limitations voluntarily
agreed to by the Philippines, expressly or impliedly, as a
member of the family of nations. Unquestionably, the
Constitution did not envision a hermit-type isolation of the
country from the rest of the world.
By their voluntary act, nations may surrender some
aspects of their state power in exchange for greater benefits
granted or derived from a convention of pact. The
underlying consideration in this partial surrender of
sovereignty is the reciprocal commitment of the other
contracting states in granting the same privilege and
immunities to the Philippines, its officials and its citizens.
The point is that a portion of sovereignty may be waived
without violating the Constitution, based on the rationale
that the Philippines "adopts the generally accepted
principles of international law as part of the law of the land
and adheres to the policy of cooperation and amity with all
nations."
5. Exemption from taxes of government entities (E)
GR: The State may not be subject to taxation by reason of public
policy. However, while this may be so, sovereignty being absolute
and taxation being an act of high sovereignty, the State may tax itself
including its political subdivisions.
Nevertheless, to avail of such tax exemption, it is required to
prove that such entity is part of the government. When it comes to
proprietary functions of the government, nothing prevents the
Congress from imposing taxes on the income or property earned or
owned by the particular government agency.
Q: Can local governments tax the national government, its
agencies, and instrumentalities?
NO. In MIAA vs. CA, the Supreme Court, in resolving the issue
on whether the lands and buildings owned by the Manila International
Airport Authority (MIAA) were subject to real property tax, ruled in the
negative. The Supreme Court opined that since MIAA is not a GOCC
but instead as government instrumentality vested with corporate
powers or a government corporate entity, it is exempt from real
property tax. By express provision of the Local Government Code,
local governments cannot levy taxes, fees or charges of any kind on
the National Government, its agencies and instrumentalities.
Furthermore, the said lands and buildings are property of the
public dominion and therefore owned by the State. They are devoted
to public use. Thus, they cannot be auctioned as they are outside the
commerce of man. However, the portions of the property leased to
private entities are subject to real property tax.
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
MACTAN CEBU vs. MARCOS
The general rule laid down in the Local Government
Code is that the taxing powers of local government units
cannot extend to the levy of, inter alia, taxes, fees and
charges of any kind on the National Government, its
agencies and instrumentalities, and local government units.
However, pursuant to Section 232 thereof, provinces, cities,
and municipalities in the Metropolitan Manila Area may
impose the real property tax except on, inter alia, 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.
Q: Are GOCCs subject to local government taxes?
YES. The Local Government Code has withdrawn the exemptions
of GOCCs from local government taxes.
Section 193 of the LGC prescribes the general rule that tax
exemptions or incentives granted to or presently enjoyed by natural or
juridical persons, including GOCCs are withdrawn upon the effectivity
of the LGC, except those granted to local water districts, cooperatives
duly registered under RA 6938, non-stock and non-profit hospitals
and educational institutions, and unless otherwise provided in the
LGC.
CONSTITUTIONAL LIMITATIONS TO THE POWER OF TAXATION
1. Due process
Due process
Due process is a law which hears before it condemns; which
proceeds upon inquiry and renders judgment only after trial. It
furnishes though a standard to which governmental action should
conform in order that deprivation of life, liberty or property, in each
appropriate case, be valid.
The purpose of the guaranty is to prevent governmental
encroachment against the life, liberty and property of individuals.
While taxes serve as the lifeblood of the government, the power to tax
still has its limits. Hence, if there is a process accorded by law for the
imposition of tax, such process must first be observed before the
government can take away life, liberty or property.
Components or requirements of due process
1. There must be a valid law; and
2. There must be a valid procedure
SECTION 1, ARTICLE III of the 1987 CONSTITUTION. No person
shall be deprived of life, liberty, or property without due process
of law, nor shall any person be denied the equal protection of the
laws.
There is a valid exercise of power of taxation on the part of the
government if
1. The tax is for a public purpose;
2. The rule on uniformity of taxation is observed;
3. Either the person or property taxed is within the jurisdiction
of the government levying the tax; and
4. In the assessment and collection of the certain kinds of
taxes, notice and opportunity to be heard are provided
CIR vs. METRO STAR
Section 228 of the Tax Code clearly requires that the
taxpayer must first be informed that he is liable for
deficiency taxes through the sending of a Preliminary
Assessment Notice (PAN). He must be informed of the facts
and the law upon which the assessment is made. The law
imposes a substantive, not merely a formal, requirement.
12
To proceed heedlessly with tax collection without first
establishing a valid assessment is evidently violative of the
cardinal principle in administrative investigations - that
taxpayers should be able to present their case and adduce
supporting evidence.
It is clear that the sending of a PAN to taxpayer to
inform him of the assessment made is but part of the “due
process requirement in the issuance of a deficiency tax
assessment,” the absence of which renders nugatory any
assessment made by the tax authorities. The
persuasiveness of the right to due process reaches both
substantial and procedural rights and the failure of the CIR
to strictly comply with the requirements laid down by law
and its own rules is a denial of Metro Star’s right to due
process. Thus, for its failure to send the PAN stating the
facts and the law on which the assessment was made as
required by Section 228 of RA 8424, the assessment made
by the CIR is void.
2. Equal protection
3. Uniformity and equity in taxation
SECTION 1, ARTICLE III of the 1987 CONSTITUTION. No person
shall be deprived of life, liberty, or property without due process
of law, nor shall any person be denied the equal protection of the
laws.
SECTION 28(1), ARTICLE VI of the 1987 CONSTITUTION. The rule
of taxation shall be uniform and equitable.
When laws operate equally and uniformly
It is inherent in the power to tax that a State is free to select the
subjects of taxation. Inequities which result from a singling out of one
particular class for taxation or exemption infringe no constitutional
limitation. Hence, the laws operate equally and uniformly on all
persons or things similarly situated when they are treated in a similar
manner, both as to rights conferred and responsibilities imposed.
Furthermore, the rule on uniformity does not require taxes for the
same purpose should be imposed in different territorial subdivisions at
the same time. It is enough that the tax falls equally and impartially on
all owners or operations of tenement houses similarly classified or
situated.
Note: Equity in taxation means that that the tax imposed is based on
the taxpayer’s ability to pay. On the other hand, uniformity of
taxation means that the tax operates with the same force and effect
in every place where the subject may be found and at the same rate.
Uniformity of taxation puts emphasis on taxation based on geography.
Requisites of valid classification to guaranty equal protection
1. It must be based upon substantial distinctions;
• There must be real and substantial differences
between the classes treated differently
2. It must be germane to the purposes of the law;
3. It must not be limited to existing conditions only; and
• The classification must be enforced not only for
the present but as long as the problem sought to
be corrected continues to exist
4. It must apply equally to all members of the class
• All the members of the class must be treated
similarly, both as to rights conferred and
obligations imposed
SISON vs. ANCHETA
The rule of uniformity does not call for perfect uniformity
or perfect equality, because this is hardly attainable.
Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed
at the same rate. The taxing power has the authority to
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
make reasonable and natural classifications for purposes of
taxation. Where “the differentiation” complained of
“conforms to the practical dictates of justice and equity” it “is
not discriminatory within the meaning of this clause and is
therefore uniform.” There is quite a similarity then to the
standard of equal protection for all that is required is that
the tax “applies equally to all persons, firms and
corporations placed in similar situation.
Taxpayers who are recipients of compensation income
have practically no overhead expenses and thus, they
should not be entitled to make deductions for income tax
purposes. On the other hand, professionals and
businessmen have no uniformity in terms of costs or
expenses necessary to produce their income. Thus, it would
be unjust to disregard such disparities and giving them all
zero deductions and impose on all the same tax rates. To
repeat, it. is enough that the classification must rest upon
substantial distinctions that make real differences.
FERRER vs. BAUTISTA
For the purpose of garbage collection, there is, in fact,
no substantial distinction between an occupant of a lot, on
one hand, and an occupant of a unit in a condominium,
socialized housing project or apartment, on the other hand.
Most likely, garbage output produced by these types of
occupants is uniform and does not vary to a large degree;
thus, a similar schedule of fee is both just and equitable.
Nevertheless, the rates being charged by the ordinance
2
are unjust and inequitable. A resident of a 200m unit in a
condominium or socialized housing project has to pay twice
the amount than a resident of a lot similar in size; unlike unit
2
occupants, all occupants of a lot with an area of 200m and
less have to pay a fixed rate of P100 and the same amount
of garbage fee is imposed regardless of whether the
resident is from a condominium or from a socialized
housing project.
Note: There is a violation of the equal protection clause only if there
is a clear showing that the tax law is so arbitrary and confiscatory in
nature or if there is discrimination which finds no support in reason.
ABAKADA vs. ERMITA
The tax law is uniform as it provides a standard rate of
0% or 10% (or 12%) on all goods and services. Neither
does the law make any distinction as to the type of industry
or trade that will bear the 70% limitation on the creditable
input tax, 5-year amortization of input tax paid on purchase
of capital goods or the 5% FWT by the government.
It must be stressed that the rule of uniform taxation
does not deprive Congress of the power to classify subjects
of taxation, and only demands uniformity within the
particular class.
RA 9337 is also equitable. It is admitted that RA 9337
puts a premium on businesses with low profit margins, and
unduly favors those with high profit margins. Thus, to
equalize the weighty burden the law entails, the law, under
Section 116, imposed a 3% percentage tax on VAT-exempt
persons under Section 109(v), i.e., transactions with gross
annual sales and/or receipts not exceeding P1.5 Million.
This acts as an equalizer because in effect, bigger
businesses that qualify for VAT coverage and VAT-exempt
taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to
cushion the impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum products and
natural gas were reduced. Percentage tax on domestic
carriers was removed. Power producers are now exempt
from paying franchise tax.
13
Aside from these, Congress also increased the income
tax rates of corporations, in order to distribute the burden of
taxation. Domestic, foreign, and non-resident corporations
are now subject to a 35% income tax rate, from a previous
32%. Intercorporate dividends of non-resident foreign
corporations are still subject to 15% final withholding tax but
the tax credit allowed on the corporation’s domicile was
increased to 20%. The PAGCOR is not exempt from
income taxes anymore. Even the sale by an artist of his
works or services performed for the production of such
works was not spared.
Q: Is there a violation of the uniformity of taxation or equal
protection when the State gives preferential tax treatment to
locators inside special economic zones? NO
TIU vs. CA
There are substantial differences between the big
investors who are being lured to establish and operate their
industries in the special economic zones and those
business operators outside the zones. One of these is that
the former bring in billion-peso investments and thousands
of new jobs. The SC also stated that the equal protection
guarantee does not require territorial uniformity of laws. The
objective of RA 7227, is to establish a "self-sustaining,
industrial, commercial, financial and investment center" in
the area. There will, therefore, be a long-term difference
between such investment center and the areas outside it.
Further, it was reasonable for the President to have
delimited the application of some incentives to the confines
of the former Subic military base. It is this specific area
which the government intends to transform and develop
from its status quo ante as an abandoned naval facility into
a self-sustaining industrial and commercial zone,
particularly for big foreign and local investors to use as
operational bases for their businesses and industries.
Q: Does the Attrition Law (RA 9335), which gives incentives to
BOR/BOC employees, violate the equal protection clause? NO
ABAKADA GURO PARTY-LIST vs. PURISIMA
There was no violation of the equal protection clause.
The equal protection clause recognizes a valid
classification, that is, a classification that has a reasonable
foundation or rational basis and not arbitrary. The subject of
the Attrition Law was revenue generation and collection of
the BIR and BOC, thus, the incentives and sanctions should
logically pertain to them and not to other government
agencies.
Q: Does the classification freeze scheme under RA 9334 violate
the equal protection clause? NO
BRITISH AMERICAN TOBACCO vs. CAMACHO
The classification freeze provision was inserted in the
law for reasons of practicality and expediency. The
classification freeze does not violate the equal protection
clause as it passes the rational basis test and is meant to
improve the efficiency and effectivity of the tax
administration over sin products while trying to balance the
same with state interests. It addresses the concerns in the
simplification of tax administration of sin products,
elimination of potential areas for abuse and corruption in tax
collection, buoyant and stable revenue generation, and
ease of projection of revenues.
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
4. Progressive taxation
SECTION 28(1), ARTICLE VI of the 1987 CONSTITUTION. The
Congress shall evolve a progressive system of taxation.
A progressive system of taxation means that a State has more
direct taxes than indirect taxes. Conversely, a regressive system of
taxation means that there is more indirect tax than direct tax. On the
other hand, a progressive tax rate means that as the tax base
increases, the tax rate increases. In other words, it refers to the tax
rate.
Q: Should the system of taxation be always progressive? As a
general rule, YES
TOLENTINO vs. SECRETARY OF FINANCE
What Congress is required by the Constitution to do is
only to evolve a progressive system of taxation. This is a
directive to Congress, just like the directive to it to give
priority to the enactment of laws for the enhancement of
human dignity and the reduction of social, economic and
political inequalities or for the promotion of the right to
quality education. These provisions are put in the
Constitution as moral incentives to legislation, not as
judicially enforceable rights. Thus, even if the VAT is
regressive because it is an indirect tax, it is not prohibited
by the Constitution.
ABAKADA vs. ERMITA
Progressive taxation is built on the principle of the
taxpayer’s ability to pay. The VAT is an antithesis of
progressive taxation. By its very nature, it is regressive.
Nevertheless, the principle of progressive taxation has no
relation with the VAT system inasmuch as the VAT paid by
the consumer or business for every goods bought or
services enjoyed is the same regardless of income. The
Constitution does not really prohibit the imposition of
indirect taxes, like the VAT. What it simply provides is that
Congress shall evolve a progressive system of taxation.
Hence, The constitutional provision has been interpreted to
mean simply that direct taxes are to be preferred [and] as
much as possible, indirect taxes should be minimized.
Resort to indirect taxes should be minimized but not
avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the
taxpayers' ability to pay.
SUMMARY
5. Origin of appropriation, revenue and tariff bills
SECTION 24, ARTICLE VI of the 1987 CONSTITUTION. All
appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills shall
originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
TOLENTINO vs. SECRETARY OF FINANCE
It is not the law but the revenue bill which is required by
the Constitution to originate exclusively in the House of
Representatives. To insist that a revenue statute and not
only the bill which initiated the legislative process
culminating in the enactment of the law must substantially
be the same as the House bill would be to deny the
Senate’s power not only to concur with amendments but
also to propose amendments.
Indeed, what the Constitution simply means is that the
initiative for filing revenue, tariff or tax bills, bills authorizing
an increase of the public debt, private bills and bills of local
14
application must come from the House of Representatives
on the theory that, elected as they are from the districts, the
members of the House can be expected to be more
sensitive to the local needs and problems. Nor does the
Constitution prohibit the filing in the Senate of a substitute
bill in anticipation of its receipt of the bill from the House, so
long as action by the Senate as a body is withheld pending
receipt of the House bill.
The power of the Senate to propose amendments must
be understood to be full, plenary and complete as on other
Bills. Thus, because revenue bills are required to originate
exclusively in the House of Representatives, the Senate
cannot enact revenue measures of its own without such
bills. After a revenue bill is passed and sent over to it by the
House, however, the Senate certainly can pass its own
version on the same subject matter. This follows from the
coequality of the two chambers of Congress.
ABAKADA vs. ERMITA
To begin with, it is not the law but the revenue bill which
is required by the Constitution to "originate exclusively" in
the House of Representatives. It is important to emphasize
this, because a bill originating in the House may undergo
such extensive changes in the Senate that the result may
be a rewriting of the whole. At this point, what is important
to note is that, as a result of the Senate action, a distinct bill
may be produced. To insist that a revenue statute and not
only the bill which initiated the legislative process
culminating in the enactment of the law must substantially
be the same as the House bill would be to deny the
Senate’s power not only to "concur with amendments" but
also to "propose amendments." It would be to violate the
coequality of legislative power of the two houses of
Congress and in fact make the House superior to the
Senate.
Given, then, the power of the Senate to propose
amendments, the Senate can propose its own version even
with respect to bills which are required by the Constitution
to originate in the House. Initiative for such bills must come
from the House of Representatives on the theory that,
elected as they are from the districts, the members of the
House can be expected to be more sensitive to the local
needs and problems. On the other hand, the senators, who
are elected at large, are expected to approach the same
problems from the national perspective. Both views are
thereby made to bear on the enactment of such laws.
1. Revenue and tariff bills must originate from the House of
Representatives.
• Hence, the Senate cannot make any revenue or
tariff bill unless and until the HR has already
proposed a bill.
2. Once the HR has already proposed a bill, the Senate is
already given the power to concur and propose
amendments to the said bill.
• The proposition is extensive because the Senate
can actually propose an entirely new set of bills
which may or may not include the matters in the
bill which came from the HR.
• To insist that the bill must be the same as the
House Bill would be to deny the Senate’s power
not only to concur with the amendment but also to
propose new amendments thereby violating the
co-equality of the two houses.
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
6. Voting requirements for tax exemption
SECTION 28(4), ARTICLE VI of the 1987 CONSTITUTION. No law
granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
JOHN HAY vs. LIM
It is clear that under Section 12 of RA 7227 it is only the
Subic SEZ which was granted by Congress with tax
exemption, investment incentives and the like. There is no
express extension of the aforesaid benefits to other SEZs
still to be created at the time via presidential proclamation.
It is the legislature, unless limited by a provision of the
state constitution, that has full power to exempt any person
or corporation or class of property from taxation, its power
to exempt being as broad as its power to tax. Other than
Congress, the Constitution may itself provide for specific tax
exemptions, or local governments may pass ordinances on
exemption only from local taxes.
The claimed statutory exemption of the John Hay SEZ
from taxation should be manifest and unmistakable from the
language of the law on which it is based; it must be
expressly granted in a statute stated in a language too clear
to be mistaken. Tax exemption cannot be implied as it must
be categorically and unmistakably expressed. If it were the
intent of the legislature to grant to the John Hay SEZ the
same tax exemption and incentives given to the Subic SEZ,
it would have so expressly provided in the RA 7227.
Otherwise, the challenged grant of tax exemption would
circumvent the Constitution's imposition that a law granting
any tax exemption must have the concurrence of a majority
of all the members of Congress.
7. Delegation to the President to fix tariff rates
SECTION 28(2), ARTICLE VI of the 1987 CONSTITUTION. The
Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions
as it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within the
framework of the national development program of the
Government.
8. President’s veto power on appropriation, revenue, tariff
SECTION 27(2), ARTICLE VI of the 1987 CONSTITUTION. The
President shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but the veto shall
not affect the item or items to which he does not object.
CIR vs. CTA AND MANILA GOLF
The presidential veto referred merely to the inclusion of
hotels, motels and rest houses in the 20% caterer's tax
bracket but not to the whole section.
What additions are objectionable can be gleaned from
the reasons given: a general reason that this sort of tax is
passed on to the consuming public, and a particular reason
that hotel developments, so essential to the tourist industry,
may be restrained. These reasons have been taken
together in the interpretations of the veto message and the
deletions of such enterprises as are connected with the
tourist industry has therefore been recommended.
To interpret the veto message otherwise would result in
the exemption of entities already subject of tax. This would
be absurd. Where the Congress wanted to exempt, it was
so provided in the bill. While the President may veto any
item or items in a revenue bill the constitution does not give
him the power to repeal an existing tax.
15
9. Taxes levied for special purposes
SECTION 29(3), ARTICLE VI of the 1987 CONSTITUTION. All
money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If
the purpose for which a special fund was created has been
fulfilled or abandoned, the balance, if any, shall be transferred to
the general funds of the Government.
OSMEÑA vs. ORBOS
The OPSF is actually a special fund. It is segregated
from the general fund; and while it is placed in what the law
refers to as a “trust liability account,” the fund nonetheless
remains subject to the scrutiny and review of the COA.
These measures comply with the constitutional description
of a “special fund.”
10. Grant to LGUs to create its own source of revenue
SECTION 5, ARTICLE X of the 1987 CONSTITUTION. Each local
government unit shall have the power to create its own sources
of revenues and to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes,
fees, and charges shall accrue exclusively to the local
governments.
11. Flexible tariff clause
SECTION 28(2), ARTICLE VI of the 1987 CONSTITUTION. The
Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions
as it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within the
framework of the national development program of the
Government.
The power of the President to prescribe or to increase tariff rates
is derived from the Congress. Hence, the Constitutional provision is
not self-executing for there must be a law affording the President the
power to fix tariff rates. It must be noted also that the delegated power
is limited only to:
1. Tariff rates,
2. Import and export quotas,
3. Tonnage and wharfage dues, and
4. Other duties or imposts within the framework of the national
development program of the Government
AKBAYAN vs. AQUINO
In our system of government, the President, being the
head of state, is regarded as the sole organ and authority in
external relations and is the country's sole representative
with foreign nations. As the chief architect of foreign policy,
the President acts as the country's mouthpiece with respect
to international affairs. Hence, the President is vested with
the authority to deal with foreign states and governments,
extend or withhold recognition, maintain diplomatic
relations, enter into treaties, and otherwise transact the
business of foreign relations. In the realm of treaty-making,
the President has the sole authority to negotiate with other
states.
Nonetheless, while the President has the sole authority
to negotiate and enter into treaties, the Constitution
provides a limitation to his power by requiring the
concurrence of 2/3 of all the members of the Senate for the
validity of the treaty entered into by him. Hence, while the
power then to fix tariff rates and other taxes clearly belongs
to Congress, and is exercised by the President only by
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
delegation of that body, it has long been recognized that the
power to enter into treaties is vested directly and exclusively
in the President, subject only to the concurrence of at least
two-thirds of all the Members of the Senate for the validity
of the treaty.
SOUTHERN CROSS CEMENT vs. CEMENT
MANUFACTURERS
The Court recognizes that the authority delegated to the
President under Section 28(2), Article VI may be exercised
by the alter egos of the President such as department
secretaries. Indeed, for purposes of the Presidents exercise
of power to impose tariffs, it is generally the Secretary of
Finance who acts as alter ego of the President.
Certainly, however, the DTI Secretary has no inherent
power, even as alter ego of the President, to levy tariffs and
imports. Indeed, even the President may be considered as
an agent of Congress for the purpose of imposing
safeguard measures. It is Congress, not the President,
which possesses inherent powers to impose tariffs and
imposts. Without legislative authorization through statute,
the President has no power, authority or right to impose
such safeguard measures because taxation is inherently
legislative, not executive.
When Congress tasks the President or his/her alter
egos to impose safeguard measures under the delineated
conditions, the President or the alter egos may be properly
deemed as agents of Congress to perform an act that
inherently belongs as a matter of right to the legislature.
Under the SMA, Congress assigned the DTI Secretary and
the Tariff Commission their respective functions in the
legislatures scheme of things. Section 5 of the SMA
provides that the positive final determination by the Tariff
Commission is plainly required by the law and so it must be
strictly complied with.
Hence, the DTI Secretary was barred from imposing a
general safeguard measure absent a positive final
determination rendered by the Tariff Commission. The
fundamental premise is based on the acknowledgment that
the required positive final determination of the Tariff
Commission exists as a properly enacted constitutional
limitation imposed on the delegation of the legislative power
to impose tariffs and imposts to the President under Section
28(2), Article VI of the Constitution.
12. Exemption from real property taxes
SECTION 28(3), ARTICLE VI of the 1987 CONSTITUTION.
Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.
Exemption from real property taxes does not require an enabling
law because it is a self-executing provision specifically provided in the
Constitution.
Entities granted tax exemptions under the Constitution
1. Charitable institutions,
2. Churches
3. Parsonages or convents appurtenant thereto,
4. Mosques,
5. Non-profit cemeteries, and
6. All lands, buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.
16
Note: The test of exemption from real property tax is the use of the
property for purposes mentioned in the Constitution. The real property
must be actually, directly, and exclusively used for religious,
charitable, or educational purposes. Hence, ownership does not
matter as long as the real property is used actually, directly, and
exclusively used for religious, charitable, or educational purposes.
Q: What is meant by actually, directly, and exclusively used?
In its traditional sense, actually, directly, and exclusively used for
religious, charitable, or educational purposes mean the direct and
immediate and actual application of the property itself to the purpose
for which the institution is organized. Hence, the use thereof must be
exclusive. It is not the use of the income from the real property that is
determinative of whether the property is used for tax-exempt
purposes.
A more liberal and non-restrictive interpretation of the phrase
actually, directly, and exclusively used for religious, charitable, or
educational purposes mean that exemption extends to facilities which
are incidental to and reasonably necessary for the accomplishment of
the main purposes.
Q: Is the second floor of the school buidling used for residential
purposes as well as the first floor used for commercial purposes
exempt from real property tax?
ABRA VALLEY vs. AQUINO
Exemption to the real property tax extends to facilities
which are incidental to and reasonably necessary for the
accomplishment of the main purposes. The use of the
school buidling or lot for commercial purposes is not
contemplated by law nor by jurisprudence. While the use of
the second floor of the main building for residential
purposes of the Director and his family, may find
justification under the concept of incidental use, which is
complimentary to the main or primary purpose
(educational), the lease of the first floor thereof to the
Northern Marketing Corporation cannot by any stretch of
the imagination be considered incidental to the purpose of
education.
Q: Is a vegetable garden and an unused cemetery adjacent to a
convent exempt from payment of real property taxes?
ROMAN CATHOLIC vs. ILOCOS NORTE
The exemption from the payment of the land tax in favor
of the convent includes not only the land actually occupied
by the building, but also the adjacent ground or vegetable
garden destined to the incidental use of the parish priest in
his ordinary life. The unused cemetery is also exempt as it
is not used for commercial purposes and instead is used as
a place for those who participate in the religious festivities.
Q: The Philippine Lung Center leased portions of its real
property out for commercial purposes. Are these exempt from
real property taxes?
LUNG CENTER vs. QUEZON CITY
Exclusive is defined as possessed and enjoyed to the
exclusion of others. If real property is used for one or more
commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation.
While portions of the hospital are used for the treatment
of patients and the dispensation of medical services to
them, whether paying or non-paying, other portions thereof
are being leased to private individuals for their clinics and a
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
canteen. Further, a portion of the land is being leased to a
private individual for her business enterprise.
Accordingly, the portions of the land leased to private
entities as well as those parts of the hospital leased to
private individuals are not exempt from real property
taxes. On the other hand, the portions of the land occupied
by the hospital and portions of the hospital used for its
patients, whether paying or non-paying, are exempt from
real property taxes.
13. Tax exemption of revenues, assets, including
donations to educational institution
SECTION 4(3), ARTICLE XIV of the 1987 CONSTITUTION. 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.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment.
SECTION 4(4), ARTICLE XIV of the 1987 CONSTITUTION. Subject
to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and
exclusively for educational purposes shall be exempt from tax.
Covered institutions under Article XIV Section 4(3)(4)
1. Non-stock, non-profit educational institution
• Revenues and assets thereof are exempt from
income tax
• Revenues pertains to the income earned while
assets pertains to resources like school bus,
equipment, facilities, buildings etc.
• The condition for tax exemption s that the revenue
and assets must be actually, directly, and
exclusively used for educational purposes
2. Proprietary educational institution
• Before tax exemption may be granted, there must
be an enacting law granting the same.
• They are entitled only to a preferential tax rate of
10% based on the net taxable income.
Illustration:
Ateneo leases out some of its vacant buildings for commercial
purposes. Is the renting out of the said building exempt from real
property tax? How about the income derived therefrom?
The building is no longer exempt from real property tax because it
is no longer actually, directly, and exclusively used for educational
purpose. As for the income derived from the leasing of the property,
the exemption thereof depends whether the income is actually,
directly, and exclusively used for educational purpose. If it is, then it is
exempted from income tax. Otherwise, if it inures to private benefits
and not for educational purpose, it becomes a subject of income tax.
SUMMARY
1. The exemption from real property tax covers both Non-
stock, non-profit educational institution and Proprietary
educational institution.
2. The exemption from revenues and assets covers only Non-
stock, non-profit educational institution.
17
As to donations
Section 101. Exemption of Certain Gifts. - The following gifts or
donations shall be exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident.
(3) Gifts in favor of an educational and/or charitable, religious, cultural
or social welfare corporation, institution, accredited
nongovernment organization, trust or philanthropic organization or
research institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such
donee for administration purposes. For the purpose of the
exemption, a 'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or
organization' is a school, college or university and/or charitable
corporation, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or
organization, incorporated as a non-stock entity, paying no
dividends, governed by trustees who receive no compensation,
and devoting all its income, whether students' fees or gifts,
donation, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in its
Articles of Incorporation.
Condition imposed: Not more than 30% of said gifts shall be used by
such donee for administration purposes.
Q: Does a charitable institution loses its character as such and
its exemption from taxes simply because it derives income from
paying patients? NO
LUNG CENTER vs. QUEZON CITY
The test whether an enterprise is charitable or not is
whether it exists to carry out a purpose reorganized in law
as charitable or whether it is maintained for gain, profit, or
private advantage.
As a general principle, a charitable institution does not
lose its character as such and its exemption from taxes
simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or receives
subsidies from the government, so long as the money
received is devoted or used altogether to the charitable
object which it is intended to achieve; and no money inures
to the private benefit of the persons managing or operating
the institution.
The money received by the petitioner becomes a part of
the trust fund and must be devoted to public trust purposes
and cannot be diverted to private profit or benefit. Further,
under PD 1823, the petitioner is entitled to receive
donations. The petitioner does not lose its character as a
charitable institution simply because the gift or donation is
in the form of subsidies granted by the government.
CIR vs. ST. LUKE’S MEDICAL CENTER
Charity is essentially a gift to an indefinite number of
persons which lessens the burden of government. In other
words, charitable institutions provide for free goods and
services to the public which would otherwise fall on the
shoulders of government. However, despite its being a tax
exempt institution, any income such institution earns from
activities conducted for profit is taxable.
The Constitution exempts charitable institutions only
from real property taxes. But in the NIRC, Congress
decided to extend the exemption to income taxes.
To be exempt from real property taxes, Section 28(3),
Article VI of the Constitution requires that a charitable
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
institution use the property actually, directly and exclusively Effect of non- Taxpayer may be No imprisonment for
for charitable purposes. Likewise, to be exempt from payment imprisoned for his failure to pay a debt
income taxes, Section 30(G) of the NIRC requires that the failure to pay the tax
institution be “operated exclusively” for social welfare. Mode of payment Generally payable in May be payable in
However, the last paragraph of Section 30 of the NIRC money money, property and
provides that if a tax exempt charitable institution conducts services
“any” activity for profit, such activity is not tax exempt even Assignability Not assignable Can be assigned
as its not-for-profit activities remain tax exempt. Thus, even Interest Does not draw Draws interest if
if the charitable institution must be “organized and operated interest unless stipulated or guilty of
exclusively” for charitable purposes, it is nevertheless delinquent delay
allowed to engage in “activities conducted for profit” without Authority Imposed by the State Can be imposed by
losing its tax exempt status for its not-for-profit activities. private individuals
The only consequence is that the “income of whatever kind Prescription Determined by the Governed by the Civil
and character” of a charitable institution “from any of its NIRC Code
activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax.” 16. Freedom of speech and of the press
Hence, St. Luke’s is a corporation that is not “operated
exclusively” for charitable or social welfare purposes insofar SECTION 4, ARTICLE III of the 1987 CONSTITUTION. No law shall
as its revenues from paying patients are concerned.
be passed abridging the freedom of speech, of expression, or of
the press, or the right of the people peaceably to assemble and
SUMMARY petition the government for redress of grievances.
With regard to taxation of real property, the doctrine laid down in
TOLENTINO vs. SECRETARY OF FINANCE
Lung Center vs. Quezon City still holds. The lands, buildings, and
improvements actually, directly and exclusively used for religious,
As a general proposition, the press is not exempt from
charitable and educational purposes shall remain exempt from real
the taxing power of the State and that what the
property taxes even if there is, in the case of a hospital, admission of
constitutional guarantee of free press prohibits are laws
paying patients. If the hospital were to lease to private persons
which single out the press or target a group belonging to the
portions of its property for profit, the real property will not be exempt
press for special treatment or which in any way discriminate
from real property taxes. That’s for real property taxes. Income
against the press on the basis of the content of the
taxation is another thing.
publication, and RA 7716 is none of these. The law granted
With regard to income taxation, the statement of the Court must
the press a privilege, the law could take back the privilege
be noted: “Non-profit does not necessarily mean charitable.” This is
anytime without offense to the Constitution. The reason is
affirmed in the constitutional provision with regard to non-stock, non-
simple: by granting exemptions, the State does not forever
profit educational institutions. For their income to be exempt, their
waive the exercise of its sovereign prerogative.
revenues and assets must be used actually, directly, and exclusively
for educational purposes. The rule now can be laid down as follows:
17. Religious freedom
1. For the income of a non-stock, non-profit corporation to be
totally exempt, it must be organized and operated
SECTION 5, ARTICLE III of the 1987 CONSTITUTION. No law shall
exclusively for educational or charitable purposes. In such
be made respecting an establishment of religion, or prohibiting
case, it will fall within the coverage of Section 30(E) and (G)
the free exercise thereof. The free exercise and enjoyment of
of the Tax Code.
religious profession and worship, without discrimination or
2. However, if it conducts for-profit activities, like the
preference, shall forever be allowed. No religious test shall be
admission of paying patients, it will not be exempt with
required for the exercise of civil or political rights.
regard to that particular income. Section 27(B) will apply
and the income will be taxed at the preferential rate of 10%.
TOLENTINO vs. SECRETARY OF FINANCE
14. Non-impairment of Supreme Court’s jurisdiction in tax
cases The Philippine Bible Society, Inc. claims that although it
sells bibles, the proceeds derived from the sales are used
to subsidize the cost of printing copies which are given free
SECTION 5(b), ARTICLE VIII of the 1987 CONSTITUTION. The
to those who cannot afford to pay so that to tax the sales
Supreme Court shall have the following powers: (b) All cases
would be to increase the price, while reducing the volume of
involving the legality of any tax, impost, assessment, or toll, or
sale. Granting that to be the case, the resulting burden on
any penalty imposed in relation thereto.
the exercise of religious freedom is so incidental as to make
it difficult to differentiate it from any other economic
While it is true that the power to tax is inherently legislative, the
imposition that might make the right to disseminate religious
Supreme Court is still the final arbiter that will determine the legality of
doctrines costly. Otherwise, to follow the petitioner's
any tax assessment and whether the taxpayer is liable for the
argument, to increase the tax on the sale of vestments
imposition.
would be to lay an impermissible burden on the right of the
preacher to make a sermon.
15. Non-imprisonment for non-payment of poll tax
AMERICAN BIBLE vs. CITY OF MANILA
SECTION 20, ARTICLE III of the 1987 CONSTITUTION. No person
shall be imprisoned for debt or non-payment of a poll tax.
The constitutional guaranty of the free exercise and
enjoyment of religious profession and worship carries with it
Distinguish tax from debt the right to disseminate religious information. Any restraints
of such right can only be justified like other restraints of
Tax Debt freedom of expression on the grounds that there is a clear
Basis Based on law Based on contract or and present danger of any substantive evil which the State
judgment has the right to prevent". This does not mean to say that
18
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
religious groups and the press are free from all financial
burdens of government. It is one thing to impose a tax on
the income or property of a preacher. It is quite another to
exact a tax from him for the privilege of delivering a sermon.
Hence, the municipal ordinances imposing a tax on the sale
of bibles were declared unconstitutional as it would impair
the free exercise and enjoyment of its religious profession
and worship, as well as its rights of dissemination of
religious beliefs.
18. Non-impairment of contracts
SECTION 10, ARTICLE III of the 1987 CONSTITUTION. No law
impairing the obligation of contracts shall be passed.
To impair the obligation of a contract is to alter or change the
terms and effects of the contract and thus, in the contemplation of the
law, to weaken the position or rights of one or all of the parties.
GR: The Constitutional provision on non-impairment of contract is
superior to the power of taxation.
EXC: When it involves legislative franchise.
Q: When can the non-impairment clause be rightly invoked
against the withdrawal of a tax exemption?
MANILA ELECTRIC vs. PROVINCE OF LAGUNA
The non-impairment clause may be rightly invoked
against contractual tax exemptions. Contractual tax
exemptions are those agreed 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,
sheds its cloak of authority and waives its government
immunity. Tax exemptions of this kind may not be revoked
without impairing the obligations of contracts. These
contractual tax exemptions, however, are not to be
confused with tax exemptions granted under franchises.
Franchises are not ordinary contracts. In granting it, the
government does not shed its cloth. A franchise partakes
the nature of a grant which is beyond the purview of the
non-impairment clause of the Constitution. Indeed, Article
XII, Section 11, of the 1987 Constitution is explicit that no
franchise for the operation of a public utility shall be granted
except under the condition that such privilege shall be
subject to amendment, alteration or repeal by Congress as
and when the common good so requires.
JUDICIAL REVIEW – TAXPAYER’S SUIT
Power of judicial review
The power of judicial review is the power of the Supreme Court to
examine an executive or legislative act and to invalidate the said act if
it is contrary to the Constitution or there was grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch
or instrumentality of the government.
Further, it is the power to declare a treaty, international or
executive agreement, law, presidential decree, proclamation, order,
instruction, ordinance or regulation unconstitutional. This power also
includes the duty to rule on the constitutionality of the application, or
operation of presidential decree, proclamation, order, instruction,
ordinance or regulation.
Elements of judicial review
1. There must be an actual case or controversy calling for the
exercise of judicial power;
2. The person challenging the act must have personal and
substantial interest or locus standi in the case that he has
sustained or will sustain direct injury as a result of its
enforcement;
19
3. The question of constitutionality must be raised at the
earliest opportunity; and
4. The issue of constitutionality must be the very lis mota of
the case
Taxpayer’s suit
A taxpayer has the right to file an action questioning the validity
or constitutionality of a law based on the theory that expenditure of
public funds by the officer of the government or the one administering
or implementing a valid law constitute misapplication of funds.
Jurisprudence dictates that that a taxpayer may be allowed to sue
where there is a claim that the public funds are illegally disbursed or
that public money is being deflected to any improper purposes, or that
public funds are wasted through the enforcement of an invalid or
unconstitutional law or ordinance. Hence, the taxpayer has locus
standi to file a suit when:
1. Public funds are disbursed by a political subdivision and in
doing so, a law is violated;
2. He will sustain direct injury.
Principles to remember
1. A taxpayer’s suit necessarily involves a Constitutional
question, which is the misapplication of public funds.
Hence, a suit to nullify a compromise agreement against
the government is not deemed a taxpayer’s suit because it
does not involve any disbursement of public funds (Anti-
Graft League vs. San Juan).
2. The taxpayer must have a sufficient interest in preventing
the illegal expenditure of money raised by taxation.
PLARIDEL ABAYA vs. EBDANE
In a taxpayer’s suit, it is not necessary that it should be
filed by a party who benefitted from it. It could be filed by
any citizen or taxpayer or both who actually sues for public
interest. The prevailing doctrine in taxpayer’s suit is to allow
taxpayers to question contracts entered into by the national
government or GOCCs in contravention of law. A taxpayer
is allowed to sue when it appears that public funds are
illegally disbursed or that it is being used for any improper
purpose. Hence, there must be misapplication of funds.
ESCAPE FROM TAXATION
Escape from taxation is the means employed by the taxpayer,
regardless of the legality thereof, so as not to pay or absorb the
burden of the tax that is imposed by the State.
Escape from taxation distinguished from tax exemption
Escape from taxation and tax exemption has the same effect,
which is the non-payment of taxes. However, their difference lies as
to who initiates the non-payment. In escape from taxation, it is
initiated by the taxpayer himself while tax exemption is initiated by
the taxing authority by express provision of law issued by Congress or
the Local Government exempting the subject or object from taxation.
Ways of escaping from taxation
• Tax shifting
• Tax avoidance
• Tax evasion
1. Tax shifting
Shifting of tax burden is the process by which the burden of a tax
is transferred from the statutory taxpayer or the one whom the tax
was assessed or imposed to another without violating the law.
1. Through absorbing when the tax is included as part of the
purchase price; or
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
2. To bill the tax separately such as in service oriented
businesses.
Note: The burden of tax may be shifted only when it comes to indirect
taxes (e.g. VAT). What is passed is only the economic burden and not
the liability of paying the tax.
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.
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. As an
example, the purchaser may shift the tax to the producer by
purchasing only when the price is reduced.
3. Onward shifting – when the tax is shifted two or more
times either or backward. As an example, the producer or
manufacturer may pass the tax burden to the retailer or
seller of the goods who in turn will pass the tax burden to
the purchaser.
Impact of taxation distinguished from incidence of taxation
Impact of taxation (liability) is the point on which a tax is
originally imposed while incidence of taxation (burden) is that point
on which the tax burden finally rests or settles down.
In other words, impact of taxation answers the question to whom
the tax is originally imposed who is the statutory taxpayer while
incidence of taxation answers the question to whom the economic
burden is passed on.
Q: What taxes can be shifted?
Only indirect taxes may be shifted. Direct taxes are taxes
wherein the impact or liability for the payment of the tax as well as the
incidence or burden of the tax falls on the same person. On the other
hand, indirect tax are taxes wherein the impact or the tax liability for
the payment of the tax falls on one person but the incidence or
burden thereof can be shifted or passed to another.
Direct taxes are those that are extracted from the very person
who, it is intended or desired, should pay them while indirect taxes
are those that are demanded, in the first instance, from, or are paid
by, one person in the expectation and intention that he can shift the
burden to someone else.
Q: In the refund of indirect taxes, who is the proper party to
claim the said refund? THE STATUTORY TAXPAYER
DIAGEO vs. COMMISSIONER
Section 130 of the NIRC provides that the right to claim
a refund or be credited with the excise taxes belongs to its
supplier. The phrase "any excise tax paid thereon shall be
credited or refunded" requires that the claimant be the
same person who paid the excise tax.
Though excise taxes are paid by the manufacturer or
producer before removal of domestic products from the
place of production or by the owner or importer before the
release of imported articles from the customs house, the
same partake of the nature of indirect taxes when it is
passed on to the subsequent purchaser. Accordingly, when
the excise taxes paid by the supplier were passed on to
Diageo, what was shifted is not the tax per se but an
additional cost of the goods sold. Thus, the supplier
remains the statutory taxpayer even if Diageo, the
purchaser, actually shoulders the burden of tax.
In the present case, it is not disputed that the supplier of
Diageo imported the subject raw alcohol, hence, it was the
one directly liable and obligated to file a return and pay the
20
excise taxes under the Tax Code before the goods or
products are removed from the customs house. It is,
therefore, the statutory taxpayer as contemplated by law
and remains to be so, even if it shifts the burden of tax to
Diageo. Consequently, the right to claim a refund, if legally
allowed, belongs to it and cannot be transferred to another,
in this case Diageo, without any clear provision of law
allowing the same.
SILKAIR vs. CIR
The proper party to question, or seek a refund of, an
indirect tax is the statutory taxpayer, the person on whom
the tax is imposed by law and who paid the same even if he
shifts the burden thereof to another. Hence, even if Petron
Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is not a tax but
part of the price which Silkair had to pay as a purchaser.
2. Tax avoidance
Tax avoidance is the tax saving device within the means
sanctioned by law. Hence, it is always legal. However, this method
should be used by the taxpayer in good faith and at arms length.
Examples of tax avoidance are when a taxpayer avails of deductions
allowed by law, estate planning, and when a taxpayer proves that he
is a non-resident citizen. The ultimate effect of tax avoidance is either:
1. To partially avoid taxes; or
2. To totally avoid taxes
Note: Tax avoidance is otherwise known as tax minimization.
Q: Is estate planning a form of tax evasion?
NO. There is nothing wrong or objectionable about the "estate
planning" scheme resorted to by taxpayers. The legal right of a
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.
3. Tax evasion
Tax evasion is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities. Hence, it is always illegal because
it employs fraud and deceit in order to reduce or totally evade
payment of taxes.
Note: Tax evasion is otherwise known as tax dodging.
Factors to be considered in determining if a scheme is designed
to evade taxes
1. The end to be achieved – payment of less taxes than that
known by the taxpayer to be legally due or non-payment of
a tax when it is shown that a tax is due
2. An evil or deliberate state of mind (intent); and
3. A course of action which is unlawful
BIR vs. CA AND SPOUSES MANLY
Tax evasion is deemed complete when the violator has
knowingly and willfully filed a fraudulent return with intent to
evade and defeat a part or all of the tax. Corollarily, an
assessment of the tax deficiency is not required in a
criminal prosecution for tax evasion. However, although a
deficiency assessment is not necessary, the fact that a tax
is due must first be proved before one can be prosecuted
for tax evasion. In the present case, the scheme sought to
make it appear that there were two sales of the object
properties. It is obvious that the objective of the sale to Z
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
was to reduce the amount of tax to be paid especially that
the transfer from Z to XYZ would then be subject to only 6%
capital gains tax, and not the 30% corporate income tax.
The intermediary transaction which was prompted more on
the mitigation of tax liabilities than for legitimate business
purpose constitutes one of tax evasion
CIR vs. ESTATE OF TODA
It is obvious that the objective of the sale to Altonaga
was to reduce the amount of tax to be paid especially that
the transfer from him to RMI would then subject the income
to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonaga’s sole purpose of acquiring
and transferring title of the subject properties on the same
day was to create a tax shelter. Altonaga never controlled
the property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a tax
ploy, a sham, and without business purpose and economic
substance. Doubtless, the execution of the two sales was
calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability.
Q: Can the seller claim an exemption on indirect taxes if it sold
products to buyers who, under the law, are tax-exempt entities?
NO. The seller cannot claim an exemption or a refund on the
indirect taxes it paid for those goods sold or services rendered to an
entity exempt from indirect taxes. As a tax-exempt entity, the buyer is
exempted from absorbing the burden of indirect taxation and it is the
seller then that shall shoulder this burden. The tax exemption of the
buyer cannot be the basis of a claim for tax exemption of the
manufacturer (Philippine Acetylene vs. CIR).
The oil companies may not shift a tax burden to a tax-exempt
entity. As NPC is exempt from direct and indirect taxation, it must be
held exempted from absorbing the economic burden of taxation.
Thus, the oil companies must absorb all or part of the economic
burden of the taxes. Had not NPC been exempt from indirect taxes,
the oil companies could have shift the burden to NPC (Maceda vs.
Macaraig).
TAX EXEMPTION
Tax exemption, defined
A tax exemption is a grant of immunity, express or implied, to
particular persons or corporations from the obligation to pay taxes.
Hence, it is an act of the State by divesting itself of its power to
impose taxes to a particular subject or object.
Both the power to tax and to exempt certain persons is vested in
the legislature pursuant to Section 28, Article VI of the Constitution,
which provides that, “No law granting any tax exemption shall be
passed without the concurrence of a majority of all the Members of
the Congress.”
Instances where tax exemptions may be granted other than by
act of Congress
1. Where the President exercises his power under the flexible
tariff clause to remove existing protective tariff rates under
Section 28(2), Article VI of the1987 Constitution;
2. The local government may grant exemptions from the
payment of local taxes without congressional approval
consequent to its power to levy taxes, fees and other
charges under Section 5, Article X of the 1987 Constitution;
3. Where the President enters into and ratify a tax treaty
granting certain exemptions subject only to Senate
occurrence
21
Nature of tax exemption
1. Mere personal privileges to the grantees;
2. Generally revocable by the government unless founded on
contract which is protected by the non-impairment clause;
3. Implies a waiver on the part of the Government of its right
to collect what otherwise would be due; and
4. Not necessarily discriminatory so long as the exemption
has a rational basis
Principles to remember
1. Tax exemptions are not presumed because it affects the
very life of the State (lifeblood theory).
2. Tax exemptions are strictly construed against the taxpayer
and in favor of the Government.
a. The taxpayer who claims the exemption must be
able to prove that the law intended to exclude
him from payment of tax.
b. Tax exemption can be conferred only when it is
clear and unambiguous. It cannot exist by
implication.
Kinds of tax exemption
1. As to source
a. Constitutional – exemption originates from the
Constitution
b. Statutory – emanating from legislation
c. Contractual – based on contractual stipulation
d. Treaty – based on treaty provisions
e. Ordinance – based on an ordinance exempting
payment of local government taxes
2. As to manner of creation
a. Express – expressly conferred by law or statute
b. Implied – whenever particular persons,
properties, or excises are deemed exempt as
they fall outside the scope of the taxing provision
3. As to scope or extent
a. Total – certain property, persons or transactions
are exempted from all taxes
b. Partial – when certain property, persons or
transactions are exempted from certain taxes
4. As to object
a. Personal – those granted directly in favor of such
persons as are within the contemplation of the
law granting the exemption
b. Impersonal – those granted directly in favor of a
certain class of property
Rationale for tax exemption
1. Public interest will be served by the exemption allowed; and
2. Such public benefit or interest is sufficient to offset the
monetary loss entailed in the grant of the exemption
Grounds for tax exemption
1. Contract;
2. Some ground of public policy; and
3. Treaty created on grounds of reciprocity or to lessen the
rigors of international double or multiple taxation
Note: The rationale for exemption and the grounds for exemption are
two different things. The rationale asks the question why tax
exemptions are given while the grounds tell why the State can
provide tax exemptions.
Revocation of tax exemption
Since taxation is the rule and exemption therefrom is the
exception, the exemption may be withdrawn at the pleasure of the
taxing authority. Hence, Section 234 of the Local Government Code
unequivocally withdrawing exemptions from payments of real property
taxes granted to natural or juridical persons, including government-
owned and control corporations is valid (MCIAA vs. Marcos). As a
consequence thereof, since MCIAA is a GOCC, it follows that its
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
exemption granted under a charter prior to the LGC has been
withdrawn.
Further, there is no vested right in a tax exemption and more so
when the latest expression of legislative intent renders it continuance
doubtful. Nevertheless, it must be noted that the exemption cannot be
withdrawn if the exception was granted to private parties based on
material consideration of a mutual nature, which then becomes
contractual and thus covered by the non-impairment clause of the
Constitution (MCIAA vs. Marcos).
COMPENSATION
Compensation is a mode of extinguishing an obligation under the
Civil which can either be:
1. Legal compensation – Article 1278 of NCC; or
2. Conventional compensation – even if the requirements
under Article 1278 are lacking, the parties may agree to a
compensation
GR: Taxes cannot be a subject of compensation.
Q: Can taxes be the subject of compensation between the
government and the taxpayer?
NO. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of
each other. A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.
There can be no offsetting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse
to pay taxes on the ground that the government owes him an amount
equal or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.
Further, taxes cannot be the subject of set-off because they are
not in the nature of contracts between parties but grow out of a duty
to, and, are positive acts, of the Government, to the making and
enforcing of which, the personal consent of the taxpayer is not
required. Not only this, the erroneous payment of final withholding tax
cannot be used to offset or be treated as advance tax payment, and
cannot be used against the succeeding final withholding tax.
SOUTH AFRICAN AIRWAYS vs. CIR
Taxes cannot be subject to compensation for the simple
reason that the government and the taxpayer are not
creditors and debtors of each other. There is a material
distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to
the Government in its sovereign capacity.
Q: Is of solutio indebiti applicable to taxation? YES
COMMISSIONER vs. ESSO STANDARD
Having been paid and received by mistake, as
petitioner Commissioner subsequently acknowledged, that
sum unquestionably belonged to ESSO, the Government
had the obligation to return the same to ESSO. That
acknowledgment of the erroneous payment came some 4
years afterwards in nowise negates or detracts from its
actuality. The obligation to return money mistakenly paid
arises from the moment that payment is made, and not from
the time that the payee admits the obligation to reimburse.
The obligation of the payee to reimburse an amount paid to
him results from the mistake, not from the payee's
confession of the mistake or recognition of the obligation to
reimburse.
In other words, since the amount belonging to ESSO
was already in the hands of the Government as although
the latter had no right whatever to the amount and indeed
22
was bound to return it to ESSO, it was neither legally nor
logically possible for ESSO thereafter to be considered a
debtor of the Government in that amount; and whatever
other obligation ESSO might subsequently incur in favor of
the Government would have to be reduced by that sum.
In the field of taxation where the State exacts strict
compliance upon its citizens, the State must likewise deal
with taxpayers with fairness and honesty. Hence, under the
principle of solutio indebiti, the Government has to restore
to ESSO the sums representing erroneous payments of
taxes.
Note:
In Domingo vs. Garlitos, the SC allowed the set-off between
taxes and debts. It opined that if the obligation to pay taxes and the
taxpayer’s claim against the government are both overdue,
demandable, as well as fully liquidated, compensation takes place by
operation of law and both obligations are extinguished to their
concurrent amounts. In the said case, the taxpayer who has been
assessed municipal taxes was allowed to assign in favor of the
municipality a final judgment obtained by him against the said
municipality to cover the assessment.
To reconcile the rules
In Domingo vs. Garlitos, both claims were overdue,
demandable, and fully liquidated while in South African vs. CIR, the
claim against the government was not overdue and demandable as it
was already settled. The latter case is controlling unless the facts
would involve the (1) the application of the principle of solutio indebiti
or (2) it involves local government taxes.
Doctrine of equitable recoupment
The doctrine provides that where the refund of a tax illegally or
erroneously collected or overpaid by a taxpayer is barred by
prescription, a tax presently being assessed against a taxpayer may
be recouped or set-off against the tax whose refund is now barred by
prescription.
Note: This doctrine is inapplicable in the Philippines in light of the
lifeblood theory.
TAX AMNESTY
Tax amnesty, defined
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. It partakes of an
absolute waiver by the government of its right to collect what is due it
and to give tax evaders who wish to relent a chance to start with a
clean slate (Asia International vs. CIR).
A tax amnesty, much like a tax exemption, is never favored or
presumed in law. The grant of tax amnesty, similar to a tax
exemption, must be strictly construed against the taxpayer and
liberally in favor of the taxing authority (Asia International vs. CIR).
Note: A tax amnesty partakes the nature of an absolute forgiveness.
BAÑAS vs. CA
The mere filing of tax amnesty return under PD 1740
and 1840 does not ipso facto shield him from immunity
against prosecution. Tax amnesty is a general pardon to
taxpayers who want to start a clean tax slate. It also gives
the government a chance to collect uncollected tax from tax
evaders without having to go through the tedious process of
a tax case. To avail of a tax amnesty granted by the
government, and to be immune from suit on its
delinquencies, the tax payer must have voluntarily disclosed
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
his previously untaxed income and must have paid the
corresponding tax on such previously untaxed income.
Tax amnesty distinguished from tax exemption
Tax Amnesty Tax Exemption
Grants immunity from all criminal, Grants immunity from civil liability
civil and administrative liabilities only
arising from nonpayment of taxes
Applies only to past tax periods Has prospective application
Indirect tax distinguished from withholding tax
ASIA INTERNATIONAL vs. CIR
To distinguish, in indirect taxes, the incidence of
taxation falls on one person but the burden thereof can be
shifted or passed on to another person, such as when the
tax is imposed upon goods before reaching the consumer
who ultimately pays for it. On the other hand, in
withholding taxes, the incidence and burden of taxation
fall on the same entity, the statutory taxpayer. The burden
of taxation is not shifted to the withholding agent who
merely collects, by withholding, the tax due from income
payments to entities arising from certain transactions and
remits the same to the government.
Due to this difference, the deficiency VAT and excise
tax cannot be "deemed" as withholding taxes merely
because they constitute indirect taxes. Moreover, records
support the conclusion that AIA was assessed not as a
withholding agent but as the one directly liable for the said
deficiency taxes.
Q: What is a tax condonation or remission?
The condonation of a tax liability is equivalent and is in the nature
of a tax exemption. Hence, it is a grant of immunity, express or
implied, to particular persons or corporations from the obligation to
pay taxes.
Construction of tax condonation
Being in the nature of tax exemptions, it should be sustained only
when expressed in explicit terms, and it cannot be extended beyond
the plain meaning of those terms. Hence, it must be construed strictly
against the grantee and liberally in favor of the taxing authority.
COMPROMISE
Q: Can taxes be the subject of a compromise?
YES. Compromises are allowed and enforceable when the
subject matter thereof is not prohibited from being compromised and
the person entering into it is duly authorized to do so. In fact, under
Section 204 of the Tax Code, payment of internal revenue taxes may
be compromised on the grounds of:
1. Doubtful validity of the assessment, or
2. Financial incapacity.
CONSTRUCTION AND INTERPRETATION OF TAX LAWS
1. Tax laws
GR: There is no need for statutory construction if the tax law is
clear. Where the law is clear and unambiguous, the law must be
taken as it is devoid of judicial addition or subtraction.
EXC: If there is an ambiguity in the law, statutory construction is
but proper and tax laws shall be liberally interpreted in favor of the
taxpayer and strictly against the taxing authority.
23
1. When the statute granting exemption provides for liberal
construction thereof
2. In case of special taxes relating to special cases and affecting
only special classes of persons
3. If exemption refer to the public property
4. In cases of exemptions granted to charitable and educational
institutions or their property
5. In cases of exemptions in favor of a government political
subdivision or instrumentality
CIR vs. FORTUNE TOBACCO
The rule in the interpretation of tax laws is that a statute
will not be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously. A tax cannot be
imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the
letter in construing statutes applies with peculiar strictness
to tax laws and the provisions of a taxing act are not to be
extended by implication.
In answering the question of who is subject to tax
statutes, it is basic that in case of doubt, such statutes are
to be construed most strongly against the government and
in favor of the subjects or citizens because burdens are not
to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import. As burdens, taxes
should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws.
Rationale behind the liberal construction of tax laws
Tax statutes are strictly construed against the taxing authority
because taxation is a destructive power which interferes with the
personal and property rights of the people and takes from them a
portion of their property for the support of the government.
Sources of tax laws
1. Constitution
2. NIRC as amended – RA 9648
3. Tariff and Custom Code as amended – RA 8181
4. Local Government Code of 1991
5. Local Tax Ordinance, City or Municipal Tax Code
6. Tax Treaties or International Agreements
7. Presidential Decree or Executive Order
8. Decisions of SC, CTA, CA; and
9. Revenue Rules and Regulations, Rulings implemented by
the BIR
Nature of tax laws
1. Not political in character
2. Civil in nature, not subject to ex post facto law prohibition
3. Not penal in character
4. Not retroactive in its application
Note: Tax laws are civil in nature because it involves an obligation to
pay taxes to the government, which is not contractual in nature but
one that is created by law. This is notwithstanding the fact that non-
payment of taxes due may give rise to criminal liability.
2. Tax exemption and exclusions
Tax exemption differed from tax exclusion
There is no essential difference between a tax exemption and a
tax exclusion. An exemption is an immunity or a privilege; it is the
freedom from a charge or burden to which others are subjected. An
exclusion, on the other hand, is the removal of otherwise taxable
items from the reach of taxation, e.g., exclusions from gross income
and allowable deductions.
An exclusion is, thus, also an immunity or privilege which frees a
taxpayer from a charge to which others are subjected. Consequently,
the rule that a tax exemption should be applied in strictissimi
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
juris against the taxpayer and liberally in favor of the government
applies equally to tax exclusions (SMART Communications vs. City
of Davao).
Construction of tax exemption
GR: Tax exemptions are strictly construed against the taxpayer.
Statutes granting tax exemptions are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing authority. He
who claims an exemption from his share of common burden must
justify his claim that the legislature intended to exempt him by
unmistakable terms. For exemptions from taxation are not favored in
law, nor are they presumed. They can only be given force when the
grant is clear and categorical.
The surrender of the power to tax, when claimed, must be clearly
shown by a language that will admit of no reasonable construction
consistent with the reservation of the power. If the intention of the
legislature is open to doubt, then the intention of the legislature must
be resolved in favor of the State.
A tax exemption must also be strictly construed against the one
claiming the exemption because it is contrary to the lifeblood theory
which is the underlying basis for taxes. Hence, taxation is the rule and
exemption is the exception. The burden of proof rests upon the party
claiming the exemption to prove that it is in fact covered by the
exemption so claimed.
Consequences of tax exemption
1. The tax exemption must be clear and unequivocal. There
must be an express provision of the law granting the same.
2. The burden of proof rests to the taxpayer who claims the
tax exemption.
SMART vs. CITY OF DAVAO
RA 7294 does not expressly provide what kind of taxes
SMART is exempted from. It is not clear whether the in lieu
of all taxes provision in the franchise of SMART would
include exemption from local or national taxation. What is
clear is that SMART shall pay franchise tax equivalent to
3% of all gross receipts of the business transacted under its
franchise. Hence, due to the uncertainty in the “in lieu of all
taxes” clause in RA 7294 on whether Smart is exempted
from both local and national franchise tax must be
construed strictly against SMART, which claims the
exemption. SMART has the burden of proving that, aside
from the imposed 3% franchise tax, Congress intended it to
be exempt from all kinds of franchise taxes whether local or
national.
Doctrine of legislative grace
The legislative grace concept provides that any tax relief provided
is the result of specific acts of Congress that must be applied and
interpreted strictly.
Q: Should the doctrine of strict interpretation of tax exemptions
be applied first as a precondition to the application of the
principle of tax exemption?
YES. Before applying the principles of tax exemption, the doctrine
of strict interpretation must first be applied. There must first be a
determination who are covered by the tax statute before a
determination of who are exempted. Hence, it is an error to apply the
principle of tax exemption without first applying the well-settled
doctrine of strict interpretation in the imposition of taxes (CIR vs.
PAL).
3. Tax refund
GR: Tax refund is strictly construed against the claimant and liberally
in favor of the government.
24
PANASONIC vs. CIR
Statutes that grant tax exemptions are construed
strictissimi juris against the taxpayer and liberally in favor of
the taxing authority. Tax refunds in relation to the VAT are
in the nature of such exemptions. The general rule is that
claimants of tax refunds bear the burden of proving the
factual basis of their claims.
Q: What are the types of tax refund?
1. Tax refund based on law – there is a provision in law
granting a taxpayer a refund because it is exempt from tax.
Hence, it is strictly construed against the taxpayer.
2. Tax refund wrongfully or illegally collected – the tax
collected is more than the assessment or the government
has no power collect such tax. Hence, it is strictly construed
against the government.
CIR vs. FORTUNE TOBACCO
A claim for tax refund may be based on statutes
granting tax exemption or tax refund. In such case, the rule
of strict interpretation against the taxpayer is applicable as
the claim for refund partakes of the nature of an exemption,
a legislative grace, which cannot be allowed unless granted
in the most explicit and categorical language. The taxpayer
must show that the legislature intended to exempt him from
the tax by words too plain to be mistaken.
Tax refunds (or tax credits), on the other hand, are not
founded principally on legislative grace but on the legal
principle which underlies all quasi-contracts abhorring a
persons unjust enrichment at the expense of another.
Under the Tax Code itself, apparently in recognition of
the pervasive quasi-contract principle, a claim for tax refund
may be based on the following:
1. Erroneously or illegally assessed or collected
internal revenue taxes;
2. Penalties imposed without authority; and
3. Any sum alleged to have been excessive or in
any manner wrongfully collected.
What is controlling in this case is the well-settled
doctrine of strict interpretation in the imposition of taxes, not
the similar doctrine as applied to tax exemptions. The rule
in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly,
expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the
letter in construing statutes applies with peculiar strictness
to tax laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who
is subject to tax statutes, it is basic that in case of doubt,
such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly import. As
burdens, taxes should not be unduly exacted nor assumed
beyond the plain meaning of the tax laws. However, BIR
exceed its authority in collecting the tax hence, tax refund is
in order.
4. Tax rules and regulations
Tax rules and regulations are construed strictly against the
government and liberally in favor of the taxpayer as they have the
force and effect of law. Further administrative rules and regulations
must be in harmony with the provisions of the law.
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
Requirements of a valid revenue regulation
1. It must be germane to the object and purpose of the law;
2. It must not contradict but must conform to the standard of
the law;
3. It must be issued for the sole purpose of carrying into effect
the provisions of the law
Q: Do rules and regulations issued by administrative or
executive officers (implementing tax laws) have the force and
effect of law?
YES. Rules and regulations issued by administrative or executive
officers pursuant to the procedure or authority granted by law upon
the administrative agency have the force and effect, or partake of the
nature of a statute and are just as binding as if they have been written
in the statute itself. As such, they have the force and effect of law and
enjoy the presumption of constitutionality and legality until they are
set aside with finality in an appropriate case by a competent court.
Note: Revenue Memorandum Circulars must not supplant, modify or
amend the law but must always conform to the law.
Tax rulings
Tax rulings are usually issued by the BIR, which are at best, a
guess as of the moment as to the sound interpretation of the a
particular law. Hence, as a GR: tax rulings are merely advisory and
are only applicable to the taxpayer who inquires as to the doubtful
interpretation of the tax regulation with respect to a specific
transaction.
Note: A tax ruling that is favorable to the taxpayer does not create a
perpetual tax exemption in favor of the taxpayer. If a tax ruling is
reversed, the principle of non-retroactivity in tax laws applies.
5. Penal provisions of tax laws
Penal provisions of tax laws are strictly construed against the
State and liberally in favor of the taxpayer. Tax laws not being penal
in character, the rule in the Constitution against the passage of the ex
post facto laws cannot be invoked, except for the penalty imposed.
Note: Prescriptive period of offenses is strictly construed against the
taxpayer and liberally in favor of the government.
6. Non-retroactivity of tax laws
GR: Tax laws are applied prospectively. Pursuant to Section 246 of
the NIRC, rulings and circulars, rules and regulations promulgated by
the CIR would have no retroactive application if to so apply them
would be prejudicial to the taxpayers.
EXC: BIR issuances may be applied retroactively if its application will
not be prejudicial to the taxpayer under Section 246 of the NIRC.
BIR issuances given retroactive application even prejudicial to
taxpayers
1. Where the taxpayer deliberately misstates or omits material
facts from his return or any document required of him by
the BIR;
2. Where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is
based; or
3. Where the taxpayer acted in bad faith (Section 246 of the
NIRC).
4. Non-retroactivity of rulings by the CIR is inapplicable where
the nullity of the issuance was declared by the Courts and
not by the CIR (PBCOM vs. CIR)
25
Q: May a statute favorable to a taxpayer-heir be given retroactive
effect?
NO. Inheritance taxation is governed by the statute in force at
the time of the death of the decedent, unless the language of the
statute clearly demands or expresses that it shall have a retroactive
effect which is not the case. And such Revenue laws are not to be
classed penal laws, so even if favorable, should not be given
retroactive effect.
MANDATORY AND DIRECTORY PROVISIONS
Mandatory provisions are those provisions intended:
1. For the security of citizens;
2. To insure the equality of taxation;
3. To the certainty as to the nature and amount of tax of each
person;
4. For the requirements for purposes of validity of certain tax
form.
Note: Remedies are mandatory provisions.
Directory provisions are those designed merely for the
information or direction of the officers to secure a method and
systematic modes of proceeding.
CIR vs. LIQUIGAZ
The importance of providing the taxpayer of adequate
written notice of his tax liability is undeniable. The use of the
word “shall” in Section 228 of the NIRC and in RR No. 12-
99 indicates that the requirement of informing the taxpayer
of the legal and factual bases of the assessment and the
decision made against him is mandatory.
The requirement of providing the taxpayer with written
notice of the factual and legal bases applies to both the
FLD/FAN and the FDDA. The written notice requirement for
both the FLD and the FAN is in observance of due process
– to afford the taxpayer adequate opportunity to file a
protest on the assessment and thereafter file an appeal in
case of an adverse decision. The requirement should be in
place so that the taxpayer could be adequately informed of
the basis of the assessment enabling him to prepare an
intelligent protest or appeal of the assessment or decision.
Q: What does expressio unius est exclusio alterius mean?
SAN PABLO vs. CIR
The rule is that the exemption must not be so enlarged
by construction since the reasonable presumption is that
the State has granted in express terms all it intended to
grant and that, unless the privilege is limited to the very
terms of the statute, the favor would be intended beyond
what was meant.
Where the law enumerates the subject or condition
upon which it applies, it is to be construed as excluding
from its effects all those not expressly mentioned. Expressio
unius est exclusio alterius. Anything that is not included in
the enumeration is excluded therefrom and a meaning that
does not appear nor is intended or reflected in the very
language of the statute cannot be placed therein.
The rule proceeds from the premise that the legislature
would not have made specific enumerations in a statute if it
had the intention not to restrict its meaning and confine its
terms to those expressly mentioned. The rule of expressio
unius est exclusion alterius is a canon of restrictive
interpretation. Its application in this case is consistent with
the construction of tax exemptions in strictissimi juris
against the taxpayer. To allow SPMC’s claim for tax
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
exemption will violate these established principles and
unduly derogate sovereign authority.
Q: What does the principle of ejusdem generis mean?
PELIZLOY REALTY vs. PRVOVINCE OF BENGUET
Under the principle of ejusdem generis, where a
general word or phrase follows an enumeration of particular
and specific words of the same class or where the latter
follow the former, the general word or phrase is to be
construed to include, or to be restricted to persons, things
or cases akin to, resembling, or of the same kind or class as
those specifically mentioned.
Section 140 expressly allows for the imposition by
provinces of amusement taxes on "the proprietors, lessees,
or operators of theaters, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement." However,
resorts, swimming pools, bathhouses, hot springs, and
tourist spots are not among those places expressly
mentioned as being subject to amusement taxes.
Section 131(c) of the LGC already provides a clear
definition: "Amusement Places" include theaters, cinemas,
concert halls, circuses and other places of amusement
where one seeks admission to entertain oneself by seeing
or viewing the show or performances. As defined in The
New Oxford American Dictionary, ‘show’ means "a
spectacle or display of something, typically an impressive
one"; while ‘performance’ means "an act of staging or
presenting a play, a concert, or other form of
entertainment." As such, the ordinary definitions of the
words ‘show’ and ‘performance’ denote not only visual
engagement (i.e., the seeing or viewing of things) but also
active doing (e.g., displaying, staging or presenting) such
that actions are manifested to, and (correspondingly)
perceived by an audience.
Considering these, it is clear that resorts, swimming
pools, bath houses, hot springs and tourist spots cannot be
considered venues primarily "where one seeks admission to
entertain oneself by seeing or viewing the show or
performances". While it is true that they may be venues
where people are visually engaged, they are not primarily
venues for their proprietors or operators to actively display,
stage or present shows and/or performances.
TAXES
Stages of taxation
1. Levy – this refers to the enactment of a law by Congress
imposing a tax. In other words, levy is a tax legislation.
2. Assessment and collection – this is the act of
administration and implementation of the tax law by the
executive department through the administrative agencies
a. Assessment – is usually done by the taxpayer
by filing his tax return
b. Collection – pertains to the government. It is the
actual effort of collecting taxes. The remedies
available to the government in collecting taxes
includes:
1. Administrative remedies of forfeiture by
levying properties and sell it in a public
auction;
2. Civil action thru ordinary collection case;
3. Criminal action of a tax evasion case
3. Payment – this is the act of compliance by the taxpayer
including whatever remedies are available to him under the
law
26
Note: Refund is one of the remedies of the taxpayer. It is not a
separate stage of taxation. It is deemed included in the stage of
payment.
Taxes, defined
Taxes are enforced proportional contributions from persons and
property, levied by the state by virtue of its sovereignty for the support
of the government and for all its public needs.
Elements or characteristics of a tax
1. Enforced contributions
2. Generally payable in money
3. Proportional in character, since taxes are based on one’s
ability to pay
4. Levied on persons, property, or exercise of a right or
privilege
5. Levied by the State having jurisdiction
6. Levied by the legislature
7. Levied for a public purpose
8. Paid at regular periods or intervals
Requisites of a valid tax
1. The tax should be within the jurisdiction of the taxing
authority
2. It must be for a public purpose
3. The rule of taxation must be uniform
4. It guarantees against injustice to individuals, especially by
way of notice and opportunity to be heard be provided
5. It must not impinge on the inherent and Constitutional
limitations on the power of taxation
Kinds of tax
1. As to subject or object
a. Personal, capitation or poll tax – taxes of a
fixed amount upon all persons of a certain class
within the jurisdiction of the taxing power without
regard to the amount of their property or the
occupations of businesses in which they may be
engaged (e.g. community tax)
b. Property tax - taxes assessed on all property or
all property of a certain class within the
jurisdiction of the taxing power (e.g. real estate
tax)
c. Excise tax or privilege tax – taxes laid upon the
manufacture, sale or consumption of
commodities within the country; upon licenses to
pursue certain occupations and upon corporate
privileges (e.g. value-added tax)
2. As to burden or incidence
a. Direct tax – taxes wherein both the tax liability as
well as the impact or burden of the tax falls on
the same person (e.g. corporate and income tax)
b. Indirect tax – taxes wherein the tax liability falls
on one person but the burden thereof may be
shifted or passed to another. (e.g. value-added
tax, percentage taxes)
3. As to tax rates
a. Specific tax rate – tax which imposes a specific
sum by the head or number or by some standard
of weight or measurement and which requires no
assessment beyond a listing and classification of
the subjects to be taxed (e.g. taxes on distilled
spirits)
b. Ad valorem tax – tax upon the value of the
article or thing subject of taxation (e.g. real estate
tax)
c. Mixed – a choice between ad valorem or specific
depending on the condition attached
 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
4. As to purposes amount of tax that can be collected
a. General or fiscal – taxes levied for the general is limited to the cost
or ordinary purposes of Government (e.g. income of the license and the
tax, value-added tax) expenses of police
b. Special, regulatory, sumptuary – taxes levied surveillance and
for a special purpose (e.g. protective tariffs, regulation
custom duties) Time of payment Normally paid after Normally paid before
the start of business the commencement
5. As to scope or imposing authority of the business
a. National – taxes levied by the National Effect of non- Failure to pay not Failure to pay the
Government (e.g. national internal revenue payment make the business license fee makes
taxes) illegal the business illegal
b. Local – taxes levied by the local governments
subject to such guidelines and limitations as the Types of license fees
Congress may provide (e.g. real estate tax) 1. License for regulation of useful occupation or enterprises
2. License for the regulation or restriction of non- useful
6. As to graduation occupation or enterprises
a. Progressive – taxes imposed where the tax rate 3. License for revenue only
increases as the tax base increases (e.g. income
tax) Tax distinguish from special assessment
b. Regressive – taxes imposed where the tax rate
decreases as the tax base increases Tax Special
c. Mixed – tax rates are partly progressive and Assessment
partly regressive Definition Enforced proportional An enforced
d. Proportionate – tax rates are fixed (in amounts contribution from proportional
or in percentage) on a flat tax base) (e.g. real persons and property contribution from
estate tax) owners of lands
especially or
TAX AND OTHER EXACTIONS peculiarly benefited
by public
Tax distinguish from tariff improvements
Basis Based on necessity Based wholly on
Tax Tariff benefits
An all embracing term to include Should be understood to mean a Subject Levied on persons, Levied only on land
various kinds of enforced kind of tax imposed on articles property, or acts
contributions imposed upon which are traded internationally Scope Has general It is exceptional both
persons for the attainment of application as to time and place
public purposes Personal liability It is a personal Not a personal
liability of the liability of the person
Tax distinguish from toll taxpayer assessed; his liability
is limited only to the
Tax Toll land involved
Definition Enforced proportional Sum of money for the
contributions from use of something, a Tax distinguish from penalty
persons and property consideration which
is paid for the use of Tax Penalty
a property which is of Definition Enforced proportional Sanction imposed as
a public nature contributions from punishment for
Basis A demand of A demand of persons and property violation of a law or
sovereignty proprietorship acts deemed
Amount No limit as to the Amount of toll injurious; violation of
amount of tax depends upon the tax laws may give
cost of construction rise to imposition of
or maintenance of penalty
the public Purpose Intended to raise Designed to regulate
improvement used revenue conduct
Authority May be imposed only May be imposed only Authority Imposed by the May be imposed by
by the government by the government or Government the Government or
private individuals or private individuals or
entities entities

Tax distinguish from license fee Q: Is subsidy a form of tax?

Tax License fee NO. A subsidy is a legislative grant of money in aid of a private
Purpose Imposed for revenue Imposed for enterprise deemed to promote a public welfare. It is not a tax although
purposes regulatory purposes it may be necessary to raise the money to pay the subsidy by means
Basis Imposed under the Imposed under the of a tax.
power of taxation police power
Amount No limit as to the Amount of license fee

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 FIRST EXAM REVIEWER IN
TAXATION LAW I
Atty. Percy Donalvo, CPA
Maria Katherina Lobaton Gumboc
Q: What is custom duties and fees?

Customs Duties and fees are those charged upon commodities

on their being imported in or exported from the country. Customs
duties are taxes but a tax is a broader term to include not only
customs duties but other taxes as well.

Tax pyramiding
Tax pyramiding is the practice of imposing a tax upon another tax
which has no basis in law. Hence, it is illegal.

- end -

“Trust in the Lord with all your heart

and lean not on your own understanding;
in all your ways submit to him,
and he will make your paths straight.”

~ Proverbs 3:5-6

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