Section C Taxation Laws 1: General Principles of Taxation

Section C TAXATION LAWS 1
GENERAL PRINCIPLES OF TAXATION

I. Definition of Taxation
It is the power by which the sovereign raises revenue to defray the expenses of
the government. It is a way of apportioning the cost of government among those
who in some measure are privileged to enjoy its benefits and must bear its
burden.
Taxes are the enforced proportional contributions from persons and property
levied by the law-making body of the State by virtue of its sovereignty for the
support of government and for public needs.
Power to Tax is the Power to Destroy

Reconcile these seemingly conflicting views.
Chief Justice Marshall opines that the power to tax is the power to destroy. Justice Malcolm
opines that the power to tax does not include the power to destroy. This is worth 5 points.
“The conflict is more apparent than real. Chief Justice Marshall is correct in the sense that
the power to tax is the power to destroy if it is used validly as an implement of the police
power of the State. Justice Malcolm is likewise correct in this perspective: where the power
to tax is used solely for the purpose of raising revenues, it cannot be allowed to confiscate
or destroy.” (J. Isagani Cruz)
II. Characteristics of Taxation
1. Comprehensive - It is comprehensive as it covers persons, businesses,
activities, professions, rights and privileges.
2. Unlimited - It is unlimited because the tax does not cease to be valid merely
because it regulates, discourages or even definitely deters the activities
taxed, and 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.
3. Plenary - It is plenary in the sense that it is complete.
4. Supreme - It is supreme insofar as the selection of the subject of taxation is
concerned.
III. Theories in Taxation

1. Lifeblood Theory - The lifeblood doctrine is one that is enunciated by the
Supreme Court in Commissioner of Internal Revenue v. Pineda,[2] as follows:
taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need.” This means that, without taxes, the State
can neither exist nor endure. Taxes should be collected without unnecessary
hindrance.
Q:When must the payment under protest be lodged?

A: It must be lodged within 30 days from payment of the tax.
Q: Explain the rule of payment under protest?
A: Payment under protest means payment of real property tax before filing a protest.
Q: What does the lifeblood doctrine dictate or require regarding the application of
Sec. 252?
A: Before you can protest, you must first pay the real property tax.
Q: What does lifeblood doctrine require regarding the rule of payment under protest?
A: The lifeblood doctrine requires strict compliance of this rule.
Dimaampao: Payment under protest is thus consistent with the lifeblood doctrine,
and as such their collection cannot be curtailed by injunction or any like action;
otherwise, the state or, in this case, the local government unit, shall be crippled in
dispensing the needed services to the people, and its machinery gravely disabled.
2. Necessity Theory - The necessity theory, as pronounced by the Supreme
Court in Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue,
[3] states that taxation is a power predicated upon necessity. It is a
necessary burden to preserve the State’s 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.
3. Benefits-Protection Theory - The basis of taxation is the reciprocal duty of
protection between the state and its inhabitants. In return for the
contributions, the taxpayer receives the general advantages and protection
which the government affords the taxpayer and his property.
4. Symbiotic Relationship Theory - The doctrine of symbiotic relationship is
a term culled from the ruling of the Supreme Court in Commissioner of
Internal Revenue v Algue, Inc., 4which stressed that: “Taxes are what we pay
for a civilized society. Without taxes, the government would be paralyzed for
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lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one’s hard-earned income to the
taxing authorities, every person who is able to must contribute his share in
the burden of running the government. The government, 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 material and moral
values.”
IV. Nature of Taxation

1. Attribute of Sovereignty - The power of taxation is inherent in
sovereignty as an incident or attribute thereof, being essential to the
existence of every government. It can be exercised by the government
even if the Constitution is entirely silent on the subject.
a. Constitutional provisions relating to the power of taxation do not
operate as grants of the power to the government. They merely constitute
limitations upon a power which would otherwise be practically without
limit.
b. While the power to tax is not expressly provided for in our constitutions,
its existence is recognized by the provisions relating to taxation.
In the case of Mactan Cebu International Airport Authority vs Marcos, Sept.
11, 1996, as an incident of sovereignty, the power to tax has been
described as “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 legislative which imposes the tax on the constituency
who are to pay it.”
2. Legislative - The power to tax is exclusively legislative and cannot be

exercised by the executive or judicial branch of the government.
3. Non-delegable – it is generally not delegated to the judicial or executive

branch
Exceptions:
a. Taxing power of local governments (Section 5, Art. X, 1987
Constitution) Sec. 5, Art. X, Constitution: “Section 5. 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.”
i. Pepsi Cola v. Municipality of Tanauan: “Legislative powers
may be delegated to local governments in respect of
matters of local concern. This is sanctioned by immemorial
practice. By necessary implication, the legislative power to
create political corporations for purposes of local self-
government carries with it the power to confer on such local
governmental agencies the power to tax.”
ii. Quezon City v. ABS-CBN: “Municipal Corporation has a
general power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for the statutory grant
for these powers. The taxing power of the local government
is limited in the sense that Congress can enact legislation
granting exemptions.
Q: What are the exceptions to the principle of non-delegation of powers?

A: Delegation of the powers of the Congress is allowed in:
1. Article VI, Section 28(2) of the Constitution, which states that “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.”
2. Article X, Section 5 of the Constitution, which states that “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.”
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b. When allowed by the Constitution [Section 28(2), Article VI, 1987

Constitution]
i. Under the Constitution, Congress may expressly 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. (Sec
28[2], Art. VI, Constitution)
c. Administrative Implementation - When delegation merely relates to

the administrative implementation or implied from the policy and
purpose of the Act.
4. It is not the contract between the State and its citizens.

5. It is not political in nature. Tax laws are civil in nature. Not political. Hence,
even during the period of enemy occupation (such as, for instance, during
the Japanese occupation of the Philippines in World War II), tax laws are
continually enforced as they are deemed to be the laws of the occupied
territory and not of the occupying power.
6. Subject to Constitution and Inherent limitations. - Although in one decided
case the Supreme Court called it an awesome power, the power of taxation
is subject to certain limitations. Most of these limitations are specifically
provided in the Constitution or implied therefrom while the rest are inherent
and they are those which spring from the nature of the taxing power itself
although, they may or may not be provided in the Constitution.
a. Inherent Limitations
i. Public purpose - One test of determining the public purpose in a
tax is whether the thing to be furthered by the appropriation of
public revenue is something which is the duty of the State, as a
government, to provide. Another test is whether the proceeds of
the tax will directly promote the welfare of the community in
equal measure.
ii. Non- delegability - The power of taxation is exclusively
legislative. Consequently, the taxing power as a general rule may
not be delegated.
Exemption of the Government: As a matter of public policy,
property of the State and of its municipal subdivisions devoted to
government uses and purposes is generally deemed to be
exempt from taxation although no express provision in the law is
made therefor. Such exemption is upheld as long as the said
property is devoted to government uses and purposes. Further, it
may be said that it is absurd to tax entities which is actually
funded by the revenues raised through taxation.
GOCCs are exempted unless they are performing

proprietary functions in which case such income derived
therefrom Exempt Entities: PHIC, SSS, GSIS, PCSO
1. Delegation to the President. Under the Constitution,

Congress may expressly 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. (Sec. 28[2], Art. VI, 1987 Constitution)
a. Flexible Tariff Clause
b. Emergency Powers
2. Delegation to Local Governments. 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. (Sec. 5, Art. X,
1987 Constitution)
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3. Delegation to Administrative Agencies. Administrative

agencies like the BIR and Bureau of Customs may be delegated
with respect to administrative purposes – that is, only for tax
collection.
iii. International Comity - The property of a foreign state or

government may not be taxed by another under the
principle of sovereign equality among states by virtue of
which one state cannot exercise its sovereign powers over
another.
Sec 2, Article II of the Philippine Constitution - Section 2. The

Philippines renounces war as an instrument of national policy, adopts the
generally accepted principles of international law as part of the law of
the land and adheres to the policy of peace, equality, justice, freedom,
cooperation, and amity with all nations.
1. See Resolution in the First National Tax Association cited in

International Comity in Taxation by Clyde J. Crobaugh,
University of Chicago Press, p. 269.
Territorial Jurisdiction or Situs - 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.
b. Constitutional Limitations
i. Due Process Clause (Section 1, Article III, 1987 Constitution)
Sec. 1, Art. III of the Constitution provides in part that “(n)o
person shall be deprived of life, liberty or property without due
process of law.”
Substantive Requirement. The tax law should be valid; should

not be harsh, oppressive or confiscatory; must be for a public
purpose and imposed within territorial jurisdiction.
Procedural Requirement. This involves the compliance with

the fair and reasonable methods of procedure prescribed by law.
There must be no arbitrariness in assessment and collection and
that the taxpayer is entitled to right to notice and hearing.
ii. Equal Protection Clause (Section 1, Article III, 1987

Constitution)
All persons subject to legislation shall be treated alike under like

circumstances and conditions both in the privileges conferred and
obligations imposed.
The Constitution prohibits class legislation which discriminates

against some and favors others. As long as there are rational or
reasonable grounds for so doing, Congress may, therefore, group
the persons or properties to be taxed and it is sufficient “if all of
the same class are subject to the same rate and the tax is
administered impartially upon them.
Classification to be valid must:

- Rest on substantial distinctions
- Germane to the purposes of the law
- Not be limited to existing conditions only
- Equally apply to all members of the same class
iii. The rule of taxation shall be uniform and equitable. The

Congress
shall evolve a progressive system of taxation (Section
28[1], Article III, 1987 Constitution)
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Uniformity in taxation means that all taxable articles or properties

of the same class shall be taxed at the same rate. This means
that there must be equality in burden and not necessarily
equality in amount. It does not signify an intrinsic, but simply a
geographic, uniformity.
A tax is uniform when it operates with the same force and effect
in every place where the subject of it is found. It does not signify
an intrinsic but simply geographic uniformity. A levy of tax is not
unconstitutional because it is not intrinsically equal and uniform
in its operation. The uniformity rule does not prohibit
classification for purposes of taxation. (British American Tobacco
v. Camacho)
Equity in taxation involves the application of the ability to pay

principle. The concept of equity in taxation requires that such
apportionment be more or less just in the light of the taxpayer’s
ability to shoulder the tax burden (usually measured in terms of
the size of wealth or property and income, gross or net) and, if
warranted, on the basis of the benefits he receives from the
government.
Taxation may be uniform but inequitable when the amount of tax

imposed is excessive or unreasonable.
To insure and enhance the equity objective, the Constitution

enjoins Congress to “evolve a progressive system of taxation.”
This means that tax laws shall place emphasis on direct rather
than indirect taxation, with ability to pay as the principal criterion.
On the basis of the foregoing discussions, it can safely be said
that while equal protection refers more to like treatment of
persons in like circumstances, uniformity and equity refers to the
proper relative treatment for tax purposes of persons in unlike
circumstances.
Absolute or perfect equality or uniformity and equity is, of course,

hardly attainable, if not impossible. No system has ever been
devised which has produced perfect equality and uniformity of
taxation as between persons or corporations or different classes
of property and such a result cannot reasonably be expected.
(First Nat. Bank v. Holmes, 92 N.E. 893.) Approximation to it is all
that can be had.
iv. No law impairing the obligation of contracts shall be

passed (Section 10, Article III, 1987 Constitution) - The
above proceeds from the constitutional provision that “No
law impairing the obligation of contracts shall be passed.”
(Sec. 10, Art. III)
The obligation of a contract is impaired when its terms or

conditions are changed by law or by a party without the consent of
the other, thereby weakening the position or rights of the latter.
An exemption of impairment by law is when a tax exemption

based on a contract is revoked by a later taxing statute. Note that
when the government is a party to the contract granting
exemption, it cannot be withdrawn without violating the non-
impairment clause.
However, non-impairment may not be invoked in the case of a

public utility franchise grantee; the legislature can impair a
grantee’s franchise since a franchise is granted under the
Constitutional condition that it shall be subject to amendment,
alteration or repeal by Congress when the public interest so
requires. (See Sec. 11, Art. XII)
Thus in the case of PPI v. Chato, the SC said that since the law
granted the press a privilege, the law could take back the privilege
anytime without offense to the Constitution. The reason is simple:
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by granting exemptions, the State does not forever waive the

exercise of its sovereign prerogative. Indeed, in withdrawing the
exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject.
In Tolentino v. Sec. of Finance, CREBA, one of the petitioners,

alleged that the imposition of the VAT on sales and leases of real
estate by virtue of contracts entered into prior to the effectivity of
the law would violate the non-impairment of contracts rule. The
Court ruled that it is not enough to say that the parties to a
contract cannot, through the exercise of prophetic discernment,
fetter the exercise of the taxing power of the State. For not only
are existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a basic postulate of
the legal order. The policy of protecting contracts against
impairment presupposes the maintenance of a government which
retains adequate authority to secure the peace and good order of
society.
v. No person shall be imprisoned for debt or non-payment of

a poll tax (Section 20, Article III, 1987 Constitution)
This principle is based on the provision of the Constitution that “No person shall be
imprisoned for debt or non-payment of a poll tax.” (Sec. 20, Art. III)
A poll tax refers to a personal or capitation tax; it is a tax of a fixed amount on individuals
residing within a specified territory, whether citizen or not, without regard to their property
or occupation. Applying the said provision, no one may be sent to prison for failure to pay
the community tax. One should not be punished on account of his poverty.
Under the LGC, the only penalty for delinquency is the payment of a surcharge in the form of
interest at the rate of 24% per annum which shall be added to the unpaid amount, from the
due date until it is paid.
vi. The free exercise and enjoyment of religious profession and

worship, without discrimination or preference, shall forever be
allowed (Section 5, Article III, 1987 Constitution)
Sec. 5, Art. III of the Constitution provides that “(n)o law shall be made respecting an
establishment of religion or prohibiting the free exercise thereof. The free exercise and
enjoyment of religious profession and worship without discrimination or preference shall
forever be allowed. No religious test shall be required for the exercise of civil or political
rights.”
The general rule is that activities simply, purely and for propagation of faith are exempt, as
well as sales of bibles and religious articles not for purposes of profit by a non-stock, non-
profit organization. However, as an exception, the Constitution does not prohibit the
imposition of a generally applicable tax on the sale of religious materials when done by
proprietary institution.
A municipal license tax on the sale of bibles and religious articles by a non-stock, non-profit
missionary organization at a little profit constitutes curtailment of religious freedom and
worship which is guaranteed by the Constitution. The license tax is actually in the nature of
a condition or permit for the exercise of the right. (American Bible Society v. City of Manila)
Prohibition against appropriation for religious purposes

Sec. 29(2) of Art. VI of the Constitution provides that “(n)o public money or property shall be
appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or
support of any sect, church, denomination, sectarian institution, or system of religion, or of
any priest, preacher, minister or other religious teacher or dignitary as such, except when
such priest, preacher, minister or dignitary is assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium.
The above limitation is based on the requirement that taxes can only be levied for a public
purpose. Note that what the Constitution prohibits is the use of public money or property for
the benefit of any priest, etc. as such. When so employed in the armed forces, any penal
institution, or government orphanage or leprosarium, they may receive their corresponding
compensations for services rendered in their non-religious capacity without violating the
constitutional prohibition.
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vii. Freedom of the Press (Section 4, Article III, 1987

Constitution)
viii. Tax Exemption of Properties for Religious, Charitable, and

Education Purposes [Section 28(3), Article III, 1987
Constitution)
Sec. 28(3), Art. VI of the Constitution provides: “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.”
Note that the exemption covers only property taxes and not other taxes. (LLadoc v. CIR) The
test of exemption is the use of the property and not ownership. Thus, a property leased by
the owner to another who uses it exclusively for religious purposes is exempt from property
tax but the owner is subject to income tax on rents received. Likewise, that if a property,
although actually owned by a religious, charitable or educational institution, is actually used
for a non-exempt purpose, the exemption from tax vanishes.
The use of the word exclusively is synonymous to solely. What is exempted is not the
institution itself, those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable and
educational purposes. Portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the other
hand, the portions of the land occupied by the hospital and portions
ix. All appropriation, revenue of tariff bills shall originate

from the House of Representatives, but the Senate may
propose or concur with amendments (Section 24, Article
VI, 1987 Constitution)
Sec. 24, Art. VI of the Constitution provides that “(a)ll appropriation, revenue or tariff bills,
bills authorizing the 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.”
In the “Tolentino E-VAT” case, the SC said that “(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 be
substantially be the same as the House bill would be to deny the Senate’s power not only to
‘only concur with amendments’ but also ‘to propose amendments.’ It would be to violate the
co-equality of legislative power of the two houses of Congress and in fact make the House
superior to the Senate.
x. No law granting any tax exemption shall be passed
without the concurrence of a majority of all the members
of the Congress [Section 28(4), Article VI, 1987
Constitution]
Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
(2) 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.
(3) 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.
(4) No law granting any tax exemption shall be passed without the concurrence of a majority
of all the Members of the Congress.
xi. Every bill passed by Congress shall be embrace only one

subject, which shall be expressed in the title thereof
[Section 26(1), Article VI, 1987 Constitution]
xii. Congress shall evolve a progressive system of taxation

[Section 28(1), Article VI, 1987 Constitution]
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Theoretical Justice or Equality - A good tax system must be based on the taxpayer’s ability
to pay. This suggests that taxation must be progressive conformably with the constitutional
mandate that Congress shall evolve a progressive system of taxation. (Sec. 28[1], Art. VI,
1987 Constitution) It holds that similarly situated taxpayers should pay equal taxes, while
those who have more should pay more.
xiii. 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 [Section 27(2), Article VI, 1987
Constitution]
xiv. 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 [Section 28(2),
Article VI, 1987 Constitution]
xv. 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 [Section 4(3), Article XIV, 1987
Constitution]
xvi. Supremacy of the National Government over Local

Government.
V. Purposes and Objectives of Taxation

1. To Raise Revenue - to provide funds or property with which the State
promotes the general welfare and protection of its citizens.
2. Regulatory - As in the case of taxes levied on excises and privileges like
those imposed in tobacco or alcoholic products or amusement places like
night clubs, cabarets, cockpits, etc.
In the case of Caltex Phils. Inc. vs COA (G.R. No. 92585, May 8, 1992), it
was held that taxes may also be imposed for a regulatory purpose as, for
instance, in the rehabilitation and stabilization of a threatened industry
which is affected with public industry like the oil industry.
3. Promotion of General Welfare - Taxation may be used as an implement of
police power in order to promote the general welfare of the people. [see
Lutz vs Araneta (98 Phil 148) and Osmeňa vs Orbos (G.R. No. 99886, Mar.
31, 1993)
4. Reduction of Social Inequality - this is made possible through the
progressive system of taxation where the objective is to prevent the
under-concentration of wealth in the hands of few individuals.
5. Encourage Economic Growth by granting Incentives and Exemptions - in
the realm of tax exemptions and tax reliefs, for instance, the purpose is to
grant incentives or exemptions in order to encourage investments and
thereby promote the country’s economic growth.
6. Protectionism - in some important sectors of the economy, as in the case
of foreign importations, taxes sometimes provide protection to local
industries like protective tariffs and customs.
Secondary Purpose of Taxation
Q: What are the non-revenue /regulatory /secondary purposes of taxation? There are four.
Explain each.
A:The secondary purposes of taxation are as follows; (R-I-P-E)
1. Reduction of social inequality; - Taxation is used to reduce the inequality in the
distribution of wealth by preventing its undue concentration in the hands of a few
individuals.
2. Implement of the police power of the State - It may be used as an implement of the
police power of the State through the imposition of taxes with the end in view of regulating a
particular activity.
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3. Protection of the local industry against unfair competition - It protects the local
industry by imposing certain taxes upon imported goods or articles.
4. Encouragement of the growth of local industries- It is likewise used in the form of
exemptions and reliefs to serve as incentives to encourage investment in the local industry
and thereby promote economic growth.
VI. Stages or Aspects of Taxation

1. Levy - determination of the persons, property or excises to be taxed, the
sum or sums to be raised, the due date thereof and the time and manner
of levying and collecting taxes (strictly speaking, such refers to taxation)
2. Assessment and Collection - consists of the manner of enforcement of the
obligation on the part of those who are taxed. This involves the process
where the tax is obligated to pay is being computed. which provides for
the implementation, enforcement or administration of tax laws;
3. Payment - which is defined as the compliance by the taxpayer.
VII. Basic Principles of Sound Tax System

Q: What are the three fundamental principles of a sound taxation system? Briefly
explain each.
Answer: A: The three fundamental principles of a sound taxation are fiscal

adequacy, theoretical justice, and administrative feasibility.
1. Fiscal Adequacy dictates that sources of revenue must be sufficient to

meet government expenditures.
2. Administrative feasibility requires that tax laws must be capable of
effective and efficient enforcement.
3. Theoretical Justice mandates that taxes must be imposed based on the
taxpayer’s ability to pay.
VIII. Definition of Taxes

IX. Attributes or Characteristics of Taxes
1. It is a forced charge, imposition or contribution.
2. It is assessed in accordance with some reasonable rule of apportionment
which means that conformably with the constitutional mandate for
Congress to evolve a progressive tax system, taxes must be based on
taxpayer’s ability to pay [Section 28(A), Article VI, 1987 Constitution]
3. It is pecuniary burden payable in money.
4. It is imposed by the State on person, property, or excises within its
jurisdiction, in accordance with the principle of territoriality.
5. It is levied by the legislative body of the State.
6. It is levied for a public purpose.
7. It is personal to the taxpayer.
X. Taxes Distinguished from Other Impositions
1. Taxation v. Eminent Domain v. Police Power

As to Nature of the Power Exercised. Taxation is exercised in order to raise
public revenue; eminent domain or expropriation is the taking of private
property for public use.
As to Compensation Received. In taxation, payment of taxes results in the
general benefit of all citizens and inhabitants of a State; in eminent domain,
a direct benefit results in the form of just compensation to the property
owner.
As to Non-Impairment of Contracts. In taxation, a contract may not be
impaired; this is not so in eminent domain.
As to Persons Affected. Taxation applies to all persons, property and
excises that may be subject thereto; in eminent domain, only a particular
property is comprehended.
2. Tax v. Debt
- A debt is generally based on contract, express or implied, while a
tax is based on law;
-  A debt is assignable, while a tax cannot generally be assigned;
-  A debt may be paid in kind, while a tax is generally payable in
money;
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-  A debt may be the subject of set-off or compensation, while a

tax is generally not;
-  A person cannot be imprisoned for non-payment of debt (except
when it arises from a crime), while imprisonment is a sanction for
non-payment of tax (except poll tax);
- A debt is governed by the ordinary periods of prescription, while a
tax is governed by the special prescriptive periods provided for in
the Tax Code; and
-  A debt draws interest when it is so stipulated or when there is
default, while a tax does not draw interest except only when
delinquent.
-  A tax, however, like a debt, is a liability or obligation.
3. Tax v. Toll
A toll is a demand of proprietorship, while a tax is a demand of sovereignty;
 A toll is paid for the use of another’s property, while a tax is paid for the
support of the government;
 The amount of toll depends upon the cost of construction or maintenance
of the public improvement used, while there is generally no limit on the
amount of tax that may be imposed; and
 A toll may be imposed by the government or private individuals or
entities, while a tax may be imposed only by the government.
4. Tax v. License Fee
License or permit fee is a charge imposed under the police power for
purposes of regulation.
 It is imposed for regulation, while a tax is levied for revenue;
 Its amount should be limited to the necessary expenses of inspection and
regulation, while there is generally no limit on the amount of tax that may
be imposed;
 It is imposed on the right to exercise a privilege, while a tax is imposed
also on persons and property; and
 Failure to pay a license fee makes the act or business illegal while failure
to pay a tax does not necessarily make the act or business illegal but may
be a ground for prosecution.
5. Tax v. Penalty
Penalty is any sanction imposed as a punishment for violation of law or acts
deemed injurious. Thus, the violation of tax laws may give rise to imposition
of penalty.
 A penalty is designed to regulate conduct, while a tax is generally
intended to raise revenue; and
 A penalty may be imposed by the government or private individuals or
entities, while a tax may be imposed only by government.
6. Tax v. Special Assessment

Special assessment is an enforced proportional contribution from owners of
lands especially or peculiarly benefited by public improvements.
 A special assessment is levied only on land;
 It is not a personal liability of the person assessed, i.e., his liability is
limited only to the land involved;
 It is based wholly on benefits (not necessity); and
 It is exceptional both as to the time and place. A tax, on the other hand,
has general application.
XI. Classification of Taxes

1. As to subject matter:
a. Personal, Capitation, or Poll - taxes of 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 occupations or
businesses in which they may be engaged in.
example: community tax
b. Property - taxes on things or property of a certain class within the
jurisdiction of the taxing power.
example: real estate tax
c. Excise or Privilege - charges imposed upon the performance of an
act, the enjoyment of a privilege, or the engaging in an occupation.
examples: income tax, value-added tax, estate tax or donor’s tax
d. Custom Duties - tax imposed on imports and exports of goods
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2. As to purpose:
a. General, Fiscal or Revenue - tax imposed for the general purposes
of the government, i.e., to raise revenues for governmental needs.
Examples: income taxes, VAT, and almost all taxes
b. Special or Regulatory - tax imposed for special purposes, i.e., to
achieve some social or economic needs.
Examples: educational fund tax under Real Property Taxation
3. As to who bears the burden:
a. Direct Tax - taxes wherein both the “incidence” as well as the
“impact” or burden of the tax faces on one person.
examples: income tax, community tax, donor’s tax, estate tax
b. Indirect Tax - taxes wherein the incidence of or the liability for the
payment of the tax falls on one person, but the burden thereof can
be shifted or passed to another person.
examples: VAT, percentage taxes, customs duties excise taxes on
certain specific goods
Important Points to Consider regarding Indirect Taxes:
1. When the consumer or end-user of a manufacturer product is tax-exempt, such

exemption covers only those taxes for which such consumer or end-user is directly liable.
Indirect taxes are not included. Hence, the manufacturer cannot claim exemption from the
payment of sales tax, neither can the consumer or buyer of the product demand the refund
of the tax that the manufacturer might have passed on to him. (Phil. Acetylene Co. inc. vs
Commissioner of Internal Revenue et. al., L-19707, Aug.17, 1987)
2. When the transaction itself is the one that is tax-exempt but through error the seller pays
the tax and shifts the same to the buyer, the seller gets the refund, but must hold it in trust
for buyer. (American Rubber Co. case, L-10963, April 30, 1963)
3. Where the exemption from indirect tax is given to the contractee, but the evident
intention is to exempt the contractor so that such contractor may no longer shift or pass on
any tax to the contractee, the contractor may claim tax exemption on the transaction
Commissioner of Internal Revenue vs John Gotamco and Sons, Inc., et.al., L-31092, Feb. 27,
1987)
4. When the law granting tax exemption specifically includes indirect taxes or when it is
clearly manifest therein that legislative intention to exempt embraces indirect taxes, then
the buyer of the product or service sold has a right to be reimbursed the amount of the
taxes that the sellers passed on to him. (Maceda vs Macaraig,supra)
4. As to graduation or rate:
a. Proportional
b. Progressive or graduated
c. Regressive
5. As to Taxing Authority
a. National Tax
b. Local/ Municipal Tax
6. As to scope:
a. General
b. Special
7. As to basis of amount
a. Specific
b. Ad Valorem
J. Double Taxation
Prohibited sense v. Broad sense
(1) In its strict sense (referred to as direct duplicate taxation or direct double
taxation), double taxation means – Direct duplicate taxation (obnoxious double
taxation) - double taxation in the objectionable or prohibited sense. This
constitutes a violation of substantive due process.
 taxing twice,
 by the same taxing authority,
 within the same jurisdiction or taxing district,
 for the same purpose
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 in the same year (or taxing period),

 for some of the property in the territory.
Both taxes must be imposed on the same property or subject matter.
(2) In its broad sense (referred to as indirect duplicate taxation or indirect

double taxation), double taxation is taxation other than duplicate. It extends to all
cases in which there is a burden of two or more pecuniary impositions. In other
words, any of the elements. ndirect duplicate taxation - not legally objectionable.
The absence of one or more of the above-mentioned elements makes the double
taxation indirect.
Indirect Duplicate Taxation (Broad sense),

The permissible kind of double taxation, this arises in the
absence of one or more of the above-mentioned elements
of direct double taxation.
Note: Elements: (p3-j-a-c)

a. The same property of subject matter is taxed twice
when it should be taxed only once;
b. Both taxes are levied for the same purpose;
c. Imposed by the same taxing authority;
d. Within the same jurisdiction;
e. During the same taxing period;
f. Covering the same kind or character of tax
(Villanueva v. City of Iloilo, G.R. No. L-26551,
December 28, 1968)
Local Double Taxation

The imposition of taxes of similar nature both by the national government and the local
government unit where the object of tax is located (Recalde, 2009).
However, it is settled that the imposition of both a license fee and a tax on the same
business or occupation, or for selling the same article is not in violation of the rule against
double taxation (Compania General de Tabacos de Filipinas v. City of Manila, G.R. No. L-
16619, June 29, 1963).
Constitutionality of Double Taxation

There is no constitutional prohibition against double taxation in the Philippines. However, it
is something not favored. It is permissible, provided some other constitutional requirement
is not thereby violated, such as the requirement that taxes must be uniform (Villanueva v.
City of Iloilo, supra).
1. Schemes to Avoid Double Taxation
a.Tax Credit - Instances under the NIRC:
For VAT purposes, the tax on inputs or items that go into the
manufacture of finished products (which are eventually sold) may be
credited against or deducted from the output tax or tax on the
finished product.
Foreign income taxes may be credited against the Phil. Income tax,
subject to certain limitations, by citizens, including members of
general professional partnerships or beneficiaries of estates or
trusts (pro rata), as well as domestic corporations.
b. Tax Deductions
c. Tax Reduction
d. Tax Exemption - the income or capital which is taxable in the state of
source or situs is exempted in the state of residence, although in some
instances it may be taken into account in determining the rate of tax
applicable to the taxpayer’s remaining income or capital (ex. Tax Sparing
Credit Scheme)
e. Tax Treaties - Allowing reciprocal exemption either by law or by treaty;
2. International Juridical Double Taxation (IJDT) – 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.
3. Approaches to Avoid IJDT:
a. Territorial based system – foreign source income is normally exempted
from domestic tax
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b. Imposition of tax on the worldwide income of their individual citizens and

residents and domestic corporations
K. Exemption from Taxation - Exemption from taxation is the grant of immunity

to
particular persons or corporations or to persons or corporations of a particular
class from a tax which persons and corporations generally within the same state
or taxing district are obliged to pay.
When do you apply this rule; that “tax exemption is the general rule and taxation
is the exemption”?
A: The general rule is that taxation is the rule and exemption is the exemption. It
shall apply when the grantee is a municipal corporation, and the property is not
held in private ownership but a public property.
1. Classifications:
a. As to source:
1. Constitutional - Section 28(3) of Article VI of the Philippine Constitution
grants religious and charitable institutions exemption from real
property tax on all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational
purposes
2. Statutory/Ordinance - Tax exemptions are limited to those granted by law.

However, no law granting any tax exemption shall be passed without the
concurrence of a majority of all the members of the Congress. (Article VI,
Section 28, par. 4).
3. Treaty/Executive Order The Philippines has entered into several tax

treaties for the avoidance of double taxation and prevention of fiscal
evasion with respect to income taxes. At present, there are 31 Philippine
Tax Treaties in force. Copies are available at the BIR Library and the
International Tax Affairs Division of the BIR, which is under the Deputy
Commissioner for Legal and Inspection Group.
4. Contractual – Tax exemption may be based on contract in which case

the public represented by the government is supposed to receive a full
equivalent therefor. Ordinarily, the provisions of a contract of
exemption from taxation are contained in the charter of the corporation
(law under which is organized) to which the exemption is granted.
b. As to manner:
1. Express - Taxation is the rule and exemption is the exception.
Therefore, he who claims must be able to justify his claim or right
thereto, by a grant expressed in terms “too plain to be mistaken and
too categorical to be misinterpreted.”
2. Implied - In the following cases, however, the exemption statutes are

liberally construed:
(1) When the law itself expressly provides for a liberal
construction;
(2) When the exemption is in favor of the government itself or
its agencies;
(3) When the exemption is in favor of religious, charitable and
educational institutions because the general rule is that they
are exempt from tax.
c. As to scope:
1. Total/Full
2. Partial
2. Characteristics:
a. It is not presumed.
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b. It must be justified by words too plain to be mistaken.

c. It is a personal privilege.
d. It is not created by implication.
e. There must be convincing proof.
f. Equity does not apply.
g. Tax exemption is not inherent.
h. It cannot be granted by regulation.
i. There is no vested right in a tax exemption, more so when the latest
expression of legislative intent renders its continuance doubtful.
May the taxes be the subject of setoff or compensation?

No. Taxes may not be the subject of setoff or compensation because:
(1) Taxes are not ordinary obligations which may be governed by the Civil Code;
(2) Taxes are not based on a contract, debt or judgment, but on legal impositions; and
(3) The government and the taxpayer are not creditors and debtors of each other.
L. Tax Laws and Implementing Rules and Regulations

1. Requisites for validity of regulations:
a. It is issued under authority of law.
b. It must be within the scope and purview of the law.
c. It is reasonable.
d. It must be published in the Official Gazette or in a newspaper of general
circulation.
e. Where the regulations impose penal sanctions, the law itself must declare
as punishable the violation of the administrative, and the law should fix or
define the penalty for the violation of the rule or regulation.
2. Section 246 - The rulings of the BIR are not retroactive. Any revocation,
modification, or reversal of any of the rules and regulations promulgated or
any rulings or circulars promulgated by the CIR shall not be given retroactive
application if it will be prejudicial to the taxpayers, exceptin the following
cases:
i. Where the taxpayer deliberately misstates or omits
material facts from his return or any document
required of him by the BIR;
ii. Where the facts subsequently gathered by the BIR
are materially different from the facts on which the
ruling is based; or
iii. Where the taxpayer acted in bad faith
M. Escape from Taxation
1. Forms:
a. Tax Shifting - It is the transfer of the burden of a tax by the original payer
or the one on whom the tax was assessed or imposed to someone else.
What is transferred is not the payment of the tax but the burden of the tax.
Note: Only indirect taxes may be shifted; direct taxes cannot be shifted.
Ways of Shifting the Tax Burden

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

When the burden of the tax is transferred from the consumer or purchaser
through the factors of distribution to the factor of production.
iii. Onward shifting

When the tax is shifted
Taxes that can be shifted - Only indirect taxes
i. Value-Added Tax
ii. Percentage Tax
iii. Excise Tax
IMPACT OF TAXATION
The point on which a tax is originally imposed. In so far as the law is concerned, the
taxpayer is the person who must pay the tax to the government. He is also termed as the
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statutory taxpayer- the one on whom the tax is formally assessed. He is the subject of the
tax.
INCIDENCE OF TAXATION
It is that point on which the tax burden finally rests or settles down. It takes place when
shifting has been effected from the statutory taxpayer to another.
RELATIONSHIP BETWEEN IMPACT, SHIFTING, AND INCIDENCE OF A TAX
The impact is the initial phenomenon, the shifting is the intermediate process, and the
incidence is the result. Impact is the imposition of the tax; shifting is the transfer of the tax;
while incidence is the setting or coming to rest of the tax.
b. Tax Capitalization or Amortization This refers to the reduction in the

price of the taxed object to the capitalize value of future taxes which the
purchaser expects to be called upon to pay.
 Capitalization – payment of taxes in lump-sum.
 Amortization – payment of taxes by regular payments.
c. Tax Transformation - Occurs when the manufacturer or the producer upon

whom the tax has been imposed pays the tax and endeavor to “recoup”
himself/herself by improving his/her process of production (De Leon, 1991).
d. Transfer Pricing – Transfer pricing is an accounting and taxation practice

that allows for pricing transactions internally within businesses and
between subsidiaries that operate under common control or ownership. The
transfer pricing practice extends to cross-border transactions as well as
domestic ones.
e. Resorting to Tax Haven - A tax haven is generally an offshore country that

offers foreign individuals and businesses little or no tax liability in a
politically and economically static environment. Tax havens also share
limited or no financial information with foreign tax authorities. Tax havens
do not typically require residency or business presence for individuals and
businesses to benefit from their tax policies
f. Tax Deferral - Tax deferral refers to instances where a taxpayer can delay
paying taxes to some future period. In theory, the net taxes paid should be
the same. Taxes can sometimes be deferred indefinitely, or may be taxed
at a lower rate in the future, particularly for deferral of income taxes.
g. Tax Shelter - tax shelter is a vehicle used by taxpayers to minimize or

decrease their taxable incomes and, therefore, tax liabilities. Tax shelters
can range from investments or investment accounts that provide favorable
tax treatment, to activities or transactions that lower taxable income.
(Example is when persons enter into a corporation rather than individually

make a sole proprietorship to avail of the grants of tax exemptions or
reductions not granted to sole proprietorship.)
h. Doctrine of Equitable Recoupment - It is a principle, which allows a

taxpayer, whose claim for refund has been barred due to prescription, to
recover said tax by setting off the prescribed refund against a tax that may
be due and collectible from him. Under this doctrine, the taxpayer is
allowed to credit such refund to his existing tax liability.
NOTE: Equitable recoupment is allowed only in common countries, not in

the Philippines.
i. Tax Avoidance - It is the exploitation by the taxpayer of legally permissible

alternative tax rates or methods of assessing taxable property or income in
order to avoid or reduce tax liability. It is not punishable by law (tax
minimization). It is the use of legal means to reduce tax liability by means
which the law permits (Heng Tong Textiles Co., Inc. v. CIR, G.R. No. L-
19737, August 26, 1968).
j. Tax Dodging or Tax Evasion - It is the use by the taxpayer of illegal or

fraudulent means to defeat or lessen the payment of a tax. It is also known
as “tax dodging.” It is punishable by law.
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ELEMENTS OF TAX EVASION

i. The end to be achieved (ex. Paying no tax when such is due).
ii. An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or
“deliberate and not accidental.”
iii. A course of action (or failure of action) which is unlawful (CIR v. Estate of Benigno P.
Toda, Jr., G.R.No. 147188, September 14, 2004).
EVIDENCE TO PROVE EVASION

Since fraud is a state of mind, it need not be proved by direct evidence but may be proved
from the circumstances of the case. The Supreme Court held that:
i. The failure of the taxpayer to declare for taxation purposes his true and actual income
derived from his business for two consecutive years has been held as an indication of his
fraudulent intent to cheat the government of its due taxes (Republic v. Gonzales, G.R. No. L-
17962, April 30, 1965).
ii. The substantial underdeclaration of income in the income tax returns of the taxpayer for
four (4)
consecutive years coupled with his intentional overstatement of deductions justifies the
finding of
fraud (Perez v. CTA, G.R. No. L-10507, May 30, 1958).
MAMALATEO Questions and Answers
CHAPTER I: GENERAL PRINCIPLES AND LIMITATIONS ON THE POWER OF

TAXATION
Q: Describe the power of taxation. May a legislative body enact laws to raise revenues in
the absence of a constitutional provision granting said body the power to tax? Explain.
A: The power of taxation is inherent in the State, being an attribute of sovereignty. As an

incident of sovereignty, the power to tax has been described as 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
are to pay it (Mactan Cebu Int’l Airport Authority v. Marcos)
Q: It is an attribute of sovereignty
A: The power of taxation is an essential and inherent attribute of sovereignity, belonging as
a matter of right to every independent government, without being expressly conferred by
the people (Pepsi-Cola Bottling Co v Mun of Tanauan, Leyte)
Q: Why is the power to tax considered inherent in a sovereign State?

A: It 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. The power to
tax is an essential and inherent attribute of sovereignty, belonging as a matter of right to
every independent State. 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 property
within its limits to contribute; hence, the emergence of power to tax.
Q: May Congress under the 1987 Constitution, abolish the power to tax of local
governments?
A: No, Congress cannot abolish what is expressly granted by the fundamental law. The only
authority conferred to Congress is to provide guidelines and limitations on the local
government’s exercise of the power to tax (Sec. 5, Art. X, 1987 Constitution)
Q: In our jurisdiction, which of the following statements may be erroneous? Justify your
answer.
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 Taxes are pecuniary in nature

 Taxes are enforced charges and contributions
 Taxes are imposed on persons and property within the territorial jurisdiction of a State
 Taxes are levied by the executive branch of government
 Taxes are assessed according to a reasonable rule of apportionment
A: Taxes are levied by the executive branch of government. This statement is

erroneous because “levy” refers to the act of imposition by the legislature which
is done through the enactment of a tax law. Levy is an exercise of the power to
tax, which is exclusively legislative in nature and character. Clearly, taxes are not
levied by the executive branch of government. (NPC v Albay)
Q: Enumerate the 3 stages or aspect of taxation. Explain each.

A: The 3 stages or aspects of taxation are:
 Levy – this refers to the enactment of a law by Congress imposing a tax.
 Assessment and collection – this is the act of administration and implementation of the
tax law by the executive department through the administrative agencies
 Payment – this is the act of compliance by the taxpayer including such options, schemes
or remedies as may be legally available to him.
Q: Discuss the meaning and the implications of the following statement: “Taxes are the
lifeblood of government and their prompt and certain availability is an imperious need”
A: The phrase “taxes are the lifeblood of government, etc.” expresses the underlying basis
of taxation which is governmental necessity, for indeed, without taxation, a government can
neither exist nor endure. Taxation is the indispensable and inevitable price for civilized
society; without taxes, the government would be paralyzed. This phrase has been used to
justify the validity of the laws providing for summary remedies in the collection of taxes. In
Valley Trading Co. v CFI, when the Supreme Court ruled that the damages that may be
caused to the taxpayer by being made to pay the taxes cannot be said to be a irreparable
as it would be against the government’s inability to collect taxes.
Q: Justice Holmes once said: “The power to tax is not the power to destroy while this Court
(the Supreme Court) sits.” Describe the power to tax and its limitations
A: The power to tax is an inherent power of the sovereign, which is 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 government. The
underlying basis for its exercise is governmental necessity for without it no government can
exist nor endure. Accordingly, it has the broadest scope of all the powers of government
because in the absence of limitations, it is considered as unlimited, plenary, comprehensive
and supreme. The two limitations on the power of taxation are the inherent and
constitutional limitations which are intended to prevent abuse on the exercise of the
otherwise plenary and unlimited power. It is the Court’s role to see to it that the exercise of
the power does not transgress these limitations.
Q: For failure to comply with certain corporate requirements, the stockholders of ABC Corp.
were notified by the SEC that the corporation would be subject to involuntary dissolution.
The stockholders did not do anything to comply with the requirements, and the corporation
was dissolved. Can the stockholders be held personally liable for the unpaid taxes of the
dissolved corporation? Explain briefly.
A: No. As a general rule, stockholders cannot be held personally liable for the unpaid taxes
of a dissolved corporation. The rule prevailing under our jurisdiction is that a corporation is
vested by law with a personality that is separate and distinct from those persons composing
it (Sunio v NLRC). However, stockholders may be liable for the unpaid taxes of a dissolved
corporation, if it appears that the corporate assets have passed into their hands (Tan TIong
Bio v CIR). Likewise , when the stockholders have unpaid subscriptions to the capital of the
corporation, they can be made liable for unpaid taxes of the corporation.
Q: Among the taxes imposed by the BIR are income tax, estate tax and donor’s tax, value
added tax, excise tax, other percentage taxes and documentary stamp tax. Classify these
taxes into direct and indirect taxes, and differentiate direct from indirect taxes.
A: Income tax, estate tax and donor’s tax are considered as direct taxes. On the other
hand, VAT, excise tax, OPT and DST are indirect taxes. A direct tax is demanded from the
very person who, as intended should pay the tax which he cannot shift to another, while an
indirect tax is demanded in the first instance from one person with the expectation that he
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can shift the burden to someone else, not as a tax but as part of the purchase price
(Maceda v. Macaraig).
Q: The police power, the power to tax and the power of eminent domain are inherent
powers of government. May a tax be validly imposed in the exercise of the police power and
not of the power to tax? If your answer is in the affirmative, give an example.
A: The police power may be exercised for the purpose of requiring licenses for which
licenses fees may have to be paid. The amount of the license fees for the regulation of
useful occupations should only be sufficient to pay for the cost of the license and the
necessary expense of police surveillance and regulations. For non-useful occupations, the
license fee may be sufficiently high to discourage the particular activity sought to be
regulated. It is clear from the foregoing that police power may not be exercised by itself
alone for the purpose of raising taxes. However, police power may be exercised jointly with
the power of taxation for the purpose of raising revenues (Lutz v. Araneta).
Q: “X” is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has
an area of 300 square meters. On June 1, 1994, 100 sq meters of said lot owned by “X” was
expropriated by the government to be used in the widening of Quirino Avenue for
P300,000.00, representing the estimated assessed value of said portion. From 1991 to
1995, “X”, who is a businessman, has not been paying his income tax. X is now being
assessed for the unpaid income taxes in the total amount of P150,000.00. X claims his
income tax liability has already been compensated by the amount of P300,000.00 which the
government owes him for the expropriation of his property. Decide.
A: The income tax liability cannot be compensated with the amount owed by the
government as compensation for his expropriated property. Taxes are distinct kind, essence
and nature than ordinary obligations. Taxes and debts cannot be subject of compensation
because the government and X are not mutually creditors and debtors of each other and a
claim for taxes is not a debt, demand contract or judgment as it is allowable to be set off
(Francis v. IAC).
Q: A municipality, BB, has an ordinance which requires that all stores, restaurants and other
establishments selling liquor should pay a fixed annual fee of P20,000.00. Subsequently, the
municipal board proposed an ordinance imposing a sales tax equivalent to 5% of the
amount paid for the purchase or consumption of liquor in stores, restaurants and other
establishments. The municipal mayor, CC, refused to sign the ordinance on the ground that
it would constitute double taxations. Is the refusal of the mayor justified? Reason briefly.
A: No. The refusal of the mayor is not justified. The impositions are of different nature and
character. The fixed annual fee is in the nature of a license fee imposed through the
exercise of police power, while the 5% tax on purchase or consumption is a local tax
imposed through the exercise of taxing powers. Both a license fee and a tax may be
imposed on the same business or occupation, or for selling the same article and this is not
in violation of the rule against double taxation (Compania General de Tobacos de Filipinas v.
City of Manila).
Q: (a) Is double taxation a valid defense against the legality of tax measure? (b) When an
item of income is taxed in the Philippines and the same income is taxed in another country,
is there a case of double taxation? (c) What are the unusual methods of avoiding the
occurrence of double taxation?
A: (a) No, double taxation standing alone and not being forbidden by our fundamental law is
not a valid defense against legality of a tax measure (Pepsi-Cola Bottling Company of the
Phil v. Mun of Tanauan, Leyte). However, if double taxation amounts to a direct duplicate
taxation, in that the same subject is taxed twice when it should be taxed but once, in a
fashion that both taxes are imposed for the same purpose by the same taxing authority,
within the same jurisdiction or taxing district, for the same taxable period and for the same
kind or character of a tax, then it becomes legally objectionable for being oppressive and
inequitable.
(b) Yes, but it is only a case of indirect duplicate taxation which is not legally prohibited
because the taxes are imposed by different taxing authorities.
(c) The usual methods of avoiding the occurrence of double taxation are:
Page 18 of 59
1. Allowing reciprocal exemption either by law or by treaty;

2. Allowance of tax credit for foreign taxes paid;
3. Allowance of deduction for foreign taxes paid; and
4. Reduction of the Philippine tax rate
Q: X, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax
based on rental receipts and income tax on the rentals. He claims that this is double
taxation. Decide
A: There is no double taxation. “Double taxation” means taxing for the same tax period the
same thing or activity twice, when it should be taxed but once, by the same taxing authority
for the same purpose and with the same kind or character of tax. The real estate tax is a
tax on property; the real estate dealer’s tax is a tax on the privilege to engage in business;
while the income tax is a tax on the privilege to earn an income. These taxes are impose by
different taxing authorities and are essentially of different kind and character.
Q: Why are tax exemptions strictly construed against the taxpayer?

A: Tax exemptions are strictly construed against the taxpayer because such provisions are
highly disfavored and may almost be said to be odious to the law (Manila Electric Company
v. Vera). The exception contained in the tax statutes must be strictly construed against the
one claiming the exemption because the law does not look with favor on tax exemptions,
they being contrary to the lifeblood theory which is underlying basis for taxes. The natural
rule is that everyone in the state must contribute to the support of government. Exemptions
are in derogation of sovereignty; hence, they must be strictly construed against the person
claiming it (Commissioner v. Guerrero).
Q: As an incentive for investors, a law was passed giving newly established companies in
certain economic zone exemption from all taxes, duties, fees, imposts and other charges for
a period of three years. ABC Corp. was organized and was granted such incentive. In the
course of business, ABC Corp purchased mechanical equipment from XYZ, Inc. (a) Normally,
the sale is subject to a sales tax.
XYZ, Inc. claims, however, that since it sold the equipment to ABC Corp., which is tax
exempt, XYZ should not be liable to pay sales tax. Is this claim tenable?
(b) Assume arguendo that XYZ had to and did pay the sales tax. ABC Corp. later found,
however, that XYZ merely shifted or passed on to ABC the amount of the sales tax by
increasing the purchase price. ABC Corp. now claims for a refund from the BIR in an amount
corresponding to the tax passed on to it, since it is tax exempt. Is the claim of ABC Corp
meritorious?
A: (a) No. Exemption from taxes is personal in nature and covers only taxes for which the
taxpayer grantee is directly liable. The sales tax is a tax on the seller who is not exempt
from taxes. Since XYX, Inc. is directly liable for the sales tax and no tax exemption privilege
is ever given to it, therefore its claim that the sale is exempt is not tenable. A tax
exemption is construed in strictissimi juris and it cannot be permitted to exist upon vague
implications (Asiatic Petroleum Co Ltd v Llanes).
(b) No. The claim of ABC Corp is not meritorious. Although the tax was shifted to ABC Corp.
by the seller, what is paid by it is not a tax but part of the cost it has assumed. The
taxpayer who can file a claim for refund is the person statutorily liable for the payment of
the tax. Since ABC Corp. is not said taxpayer, it has no capacity to file a claim for refund.
Q: Due to an uncertainty w/n a new tax law is applicable to printing companies, DEF
Printers submitted a legal query to the BIR on that issue. The BIR issued a ruling that
printing companies are not covered by the new law. Relying on this ruling, DEF Printers did
not pay said tax.
Subsequently, however, the BIR reversed the ruling and issued a new one stating that the
tax covers printing companies. Could the BIR now assess DEF for back taxes corresponding
to the years before the new ruling? Reason briefly.
A: No. The reversal of a ruling shall not be given a retroactive application, if said reversal
will be prejudicial to the taxpayer. Therefore, BIR cannot assess DEF Printers for back taxes
because it would be violative of the principle of non-retroactivity of ruling and doing so
would result in grave injustice to the taxpayer who relied on the first ruling in good faith.
Page 19 of 59
Q: In view of the unfavorable balance of payment, condition and the increasing budget
deficit, the President of the Philippines, upon recommendation of the NEDA, issues during a
recess of Congress, an EO imposing an additional duty on all imports at the rate of 10% ad
valorem. The EO also provides that the same shall take effect immediately. Ricardo San
Miguel, an importer, questions the legality of the EO on the grounds that only Congress has
the authority to fix the rates of import taxes and in any event, such an EO can take effect
only 30 days after promulgation and the President has no authority to shorten said period.
Are objections of Mr. San Miguel tenable?
A: No, the objections are not tenable as the EO cannot take effect immediately. Being an
external law and having the effect of law, the EO cannot become effective without
publication, a requirement of due process (Tañada v Tuvera).
Q: Mr. Pascual’s income tax from leasing his property reaches the maximum rate of tax
under the law. He donated ½ of his said property to non-stock, non-profit educational
institution whose income and assets are actually, directly and exclusively used for
educational purposes, and therefore qualified for tax exemption under Article XIV, Section
4(3) of the Constitution and Section 3(h) of the Tax Code. Having thus transferred a portion
of his said asset, Mr. Pascual succeeded in paying a lesser tax on the rental income derived
from his property. Is there tax avoidance or tax evasion? Explain.
A: There is tax avoidance. Mr. Pascual exploited a legally permissive alternative method to
reduce his income tax for transferring part of his rental income to a tax exempt entity
through a donation of one half of the income producing property. The donation is likewise
exempt from the donor’s tax. The donation is the legal means employed to transfer the
incidence of income tax on the rental income.
Q: Distinguish tax evasion from tax avoidance.

A: Tax evasion is a scheme used outside of those lawful means to escape tax liability and,
when availed of, it usually subjects the taxpayer to further or additional civil or criminal
liabilities. Tax avoidance, on the other hand, is a tax saving device within the means
sanctioned by law; hence, legal.
Q: When may a taxpayer suit be allowed?

A: A taxpayer’s suit may only be allowed when an act complained of, which may include a
legislative enactment, directly involves the illegal disbursement of public funds derived from
taxation (Pascual v. Secretary of Public Works). No money shall be paid out of the Treasury,
except in pursuance of an appropriation made by law. (Sec 29, Art VI, 1987 Constitution).
Q: May taxes be the subject of set-off or compensation? Explain.

A: No. Taxes cannot be the subject of set-off or compensation for the following reasons: (1)
taxes are of distinct kind, essence and nature, and these impositions cannot be classed in
merely the same category as ordinary obligations; (2) the applicable laws and principles
governing each are peculiar, not necessarily common, to each; and (3) public policy is
better subserved if the integrity and independence of taxes are maintained (Republic v.
Mambulao Lumber Company).
Q: Can an assessment for a local tax be the subject of set-off or compensations against a
final judgment for a sum of money obtained by the taxpayer against the local government
that made the assessment? Explain.
A: No. Taxes and debts are of different nature and character; hence, no set-off or
compensation between these two different classes of obligations is allowed. The taxes
assessed are the obligation of the taxpayer arising from law, while the money judgment
against the government is an oblgation arising from contract, whether express or implied.
Inasmuch as taxes are not debts, it follows that the two obligations are not susceptible to
set-off or legal compensation. It is only when the local tax assessment and final judgment
Page 20 of 59
are both overdue, demandable, as well as fully liquidated may set-off or compensation be
allowed.
Page 21 of 59
CHAPTER II: INHERENT AND CONSTITUTIONAL LIMITATIONS

Q: To provide means for rehabilitation and stabilization of the sugar industry so as to
prepare it for the eventuality of the loss of the quota allocated to the Philippines resulting
from the lifting of US sanctions against an African country, Congress passes a law increasing
the existing tax on the manufacture of sugar on a graduated basis. All collections made
under the law are to accrue to a special fund to be spent only for the purpose enumerated
therein, among which are to place the sugar industry in a position to maintain itself and
ultimately to insure its continued existence despite the loss of that quota, and to afford
laborers employed in the industry a living wage and to improve their working conditions. X,
a sugar planter, files a suit questioning the constitutionality of the law alleging that the tax
is not for public purpose as the same is being levied exclusively for the aid and support of
the sugar industry. Decide the case.
A: The suit filed by the sugar planter questioning the constitutionality of the sugar industry
stabilization measure is untenable. Taxation is no longer merely for raising revenue to
support the existence of the government; the power may also be exercised to carry out
legitimate objects of the government. It is a legitimate object of government to protect is
local industry on which the national economy largely depends. Where the aim of the tax
measure is to achieve such a governmental objective, the tax imposition can be said to be
for a public purpose (Gaston v Republic Bank)
Q: The Municipality of Malolos passed an ordinance imposing a tax on any sale or transfer of
real property located within the municipality at arate of ¼ of 1% of the total consideration
of such transaction. X sold a parcel of land in Malolos which he inherited from his deceased
parents and refused to pay the aforesaid tax. He instead filed appropriate case asking that
the ordinance be declared null and void since such a tax can only be collected by the
national government, as in fact he has paid BIR the required CGT. The Municipality
countered that under the Constitution, each local government is vested with the power to
create its own sources of revenue and to levy taxes, and it imposed the subject tax in the
exercise of said constitutional authority. Resolve the controversy.
A: The ordinance passed by the Municipality of Malolos imposing a tax on the sale-or-
transfer of real property is void. The Local Tax Code only allows provinces and cities to
impose a tax on the transfer of ownership of real property (Secs 7 and 23, Local Tax Code).
Municipalities are prohibited from imposing said tax that provinces are specifically
authorized to levy (Sec 22, Local Tax Code). While it is true that the Constitution has given
broad powers of taxation to LGU’s, this delegation, however, is subject to such limitations as
may be provided by law (Sec 5, Art X, 1987 Constitution).
Q: Ace Tobacco Corp bought a parcel of land situated in Pateros and donated it to the
Municipal Gov’t of Pateros for the sole purpose of devoting the said land as a relocation site
for the less fortunate constituents of said municipality. In accordance therewith, the
Municipal Government of Pateros issued to the occupants/beneficiaries Certificates of Award
giving them the respective areas where their houses are erected. Through Ordinance No. 2,
Series of 1998, the said municipal government ordained that the lots awarded to the
awardees/donees be finally transferred and donated to them. Determine the tax
consequence of the foregoing dispositions with respect to the Municipal Government of
Pateros.
A: The Municipality of Pateros is not subjected to any donor’s tax on the value of land it
subsequently donated, it being exempt from taxes as a political subdivisions of National
Government.
Page 22 of 59
Q: Mr. Cortez is a non-resident alien based in HK. During the calendar year 1999, he came
to the Philippines several times and stayed in the country for an aggregate period of more
than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the
Philippines?
A: Mr. Cortez, being a non-resident alien individual who has stayed for an aggregate period
of more than 180 days during the calendar year 1999, hsall for that taxable year be deemed
to be a non-resident alien doing business in the Philippines.
Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as
an individual citizen and a resident alien individual, on taxable income received from all
sources within the Philippines (Sec. 25[A][1], NIRC). Thus, he is allowed to avail of the
itemized deductions including the personal and additional exemptions but subject to the rule
on reciprocity on the personal exemptions (Sec. 34[A] to [J] and [M] in relation to Sec.
25[A][1] and Sec. 35[D], NIRC).
Q: X, a multinational corporation doing business in the Philippines, donated 100 shares of

stock of said corporation to Mr. Y, its resident manager in the Philippines. What is the tax
liability, if any, of X corporation?
A: Foreign corporations effecting a donation are subject to donor’s tax only if the property
donated is located in the Philippines. Accordingly, donation of a foreign corporation of its
own shares of stocks in favor of resident employees is not subject to donor’s tax. However,
if 85% of the business of the foreign corporation is located in the Philippines or the shares
donated have acquired business situs in the Philippines, the donation may be taxed in the
Philippines subject to the rule of reciprocity.
Q: The President of the Philippines and the Prime Minister of Japan entered into an
executive agreement in respect of a loan facility to the Philippines from Japan, whereby it
was stipulated that interest on loans granted by private Japanese financial institutions to
private financial institutions in the Philippines shall not be subject to Philippine income
taxes. Is this tax exemption valid? Explain.
A: Yes. The tax exemption is valid because an executive agreement has the force and effect
of a treaty under the provision of Revenue Code. Taxation is subject to international comity.
Q: An EO was issued pursuant to law, granting tax and duty incentives only to businesses
and residents within the “secured area” of the Subic Economic Special Zone, and denying
said incentives to those who live within the Zone but oustside such “secure area”. Is the
constitutional right to equal protection of the law violated by the EO? Explain.
A: No. Equal protection of the law clause is subject to reasonable classification.
Classification, to be valid, must: (a) rest on substantial distinctions; (b) be germane to the
purpose of the law; (c) not be limited to existing conditions only; and (d) apply equally to
all member of the same class.
There are substantial differences between big investors being in the “secured area” and the
business operations outside the “secured area”.
Q: Explain the requirement of uniformity as a limitation in the imposition and/or collection

of taxes.
A: The tax is uniform when it operates with the same force and effect in every place where
the subject of it is found. It does not signify an intrinsic, but simply a geographical
uniformity. Uniformity does not require the same treatment; it simply requires reasonable
basis for classification.
Q: The City of Makati, in order to solve the traffic problem in its business districts, decided
to impose a tax, to be paid by the driver, on all private cars entering the city during peak
hours from 8am to 9am from Mondays to Fridays, but it exempts those cars carrying more
than two occupants, excluding the driver. Is the ordinance valid? Explain.
A: The ordinance is in violation of the rule of uniformity and equality, which requires that all
subjects or objects of taxation, similarly situated must be treated alike and must not be
classified in an arbitrary manner. In the case at bar, the ordinance exempts cars carrying
more than two occupants from the said ordinance. Furthermore, the ordinance imposes the
tax only on private cars and exempts public vehicles from the imposition of the tax,
although both contribute to the traffic problem. There exists no substantial standard used in
the classification used by the City of Makati.
Another issue is the fact that the tax is imposed on the driver of the vehicle and not on the
registered owner thereof. The ordinance does not only violate the requirement of
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uniformity; the same is also unjust because it places the burden on someone who had no
control over the route of the vehicle. Hence, the ordinance is invalid for violating the rules of
uniformity and equality as well as for being unjust.
Q: X Corporation was the recipient in the 1990 of two tax exemptions both from Congress,
one law exempting the company’s bond issues from taxes and the other exempting the
company from taxes in the operation of its public utilities. The two laws extending the tax
exemptions were revoked by Congress before their expiry dates. Were the revocations
constitutional?
A: Yes. The exempting statutes are both granted unilaterally by Congress in the exercise of
taxing powers. Since taxations is the rule and tax exemption is the exception, any tax
exemption unilaterally granted can be withdrawn at the pleasure of the taxing authority
without violating the Constitution (Mactan Cebu Int’l Airport Authority v Marcos).
Q: A law was passed granting tax exemption to certain industries and investments for a
period of fiver years. But the three years later, the law was repealed. With the repeal, the
exemptions were considered revoked by the BIR, which assessed the investing companies
for unpaid taxes effective on the date of th repeal of the law.
NPC and KTR companies questioned the assessments on the ground that, having made their
investments in full reliance with the period of exemption granted by the law, its repeal
violated their constitutional right against the impairment of the obligations and contracts. Is
the contention of the companies tenable or not? Reason.
A: The contention is not tenable. The exemption granted is in the nature of a unilateral tax
exemption. Since the exemptions is spontaneous on the part of the legislature and no
service or duty or other remunerative conditions have been imposed on the taxpayers
receiving the exemption, it may be revoked at will by the legislature. What constitutes an
impairment of the obligation of contracts is the revocation of an exemption which is founded
on a valuable consideration because it takes the form and essence of a contract.
Q: ART VI Section 28(3) of the 1987 Constitution provides that 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. (a) To what
kind of tax does this exemption apply? (b) Is proof of actual use necessary for tax
exemption purposes under the Constitution?
A: (a) This tax exemption applies only to property taxes. What is exempted is not the
institution itself but the lands, buildings and improvements actually, directly and exclusively
used for religious, charitable and educational purposes. (b) Yes, because tax exemptions are
strictly construed against the taxpayer. There must be evidence to show that the taxpayer
has complied with the requirements for exemption. Furthermore, RPT is based on use and
not on ownership; hence, the same rule must also be applied for RPT exemptions.
Q: The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The
southern side and middle part are occupied by the Church and a convent, the eastern side,
by a school run by the Church itself, the southern side, by some commercial establishments,
while the rest of the property, in particular, the northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land? Decide with reasons.
A: No, The portions of land occupied and used by the Church, convent and school run by the
church are exempt from real property taxes, while the portion of the land occupied by
commercial establishments and the portion, which is idle, are subject to real property taxes.
The usage of the property and not the ownership is the determining factor whether or not
the property is taxable.
Q: The Constitution exempts from taxation charitable institutions, churches, parsonages or

convents appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and
improvements actually, directly and exclusively used for religious, charitable and
educational purposes.
Mercy Hospital is a 100-bed hospital organized for charity patients. May said hospital claim
exemption from taxation under the above-quoted constitutional provision? Explain.
A: Yes. Mercy Hospital can claim exemption from taxation under the provision of the
Constitution, but only with respect to real property taxes provided that such real properties
are used actually, directly and exclusively for charitable purposes.
Page 24 of 59
Q: In 1991, Imelda gave her parents a Christmas gift of P100,000.00 and a donation of
P80,000.00 to her parish church. She also donated a parcel of land for the construction of a
building to the PUP Alumni Association, a non-stock, non-profit organization. Portions of the
building shall be leased to generate income for the association. Is the donation to the parish
church subject to tax?
A: The donation of P80,000.00 to the parish church, even assuming that it is exclusively for
religious purposes, is no tax-exempt because exemption granted under ART VI, Section
28(3) of the Constitution applies only to real estate taxes.
Q: X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to
be devoted strictly for religious purposes by the Church. When the Church tried to register
the title of the land, the Registry of Deeds refused claiming that the CGT was not paid. Is
the transaction exempt from the CGT? Reason.
A: No. Under section 21(e) in relation to Section 49(a)(4) of the NIRC, the seller is the one
liable for the payment of the CGT from the sale of real property by an individual taxpayer.
Meanwhile, the Church in this instant case is the buyer. Hence, Section 28(4) of the 1987
Constitution, which exempts church lands, buildings and improvements, does not apply
because the obligation to pay the CGT herein is imposed on X, the seller, and not on the
Church. Since payment of the CGT is a condition precedent for the registration of the
transfer certificate of the title to real property, the non-payment herein by the seller is a
valid reason for the Registry of Deeds to deny the transfer of title to the subject land.
Q: Under Article XIV, Section 4(3) of the 1987 Constitution, all revenues and assets of non-
stock, non-profit educational Institutions, used actually, directly and exclusively for
educational purposes, are exempt from taxes and duties. Are income derived from
dormitories, canteens and bookstores as well as interest income on bank deposits and yields
from deposit substitutes automatically exempt from taxation? Explain.
A: no. The interest income on bank deposits and yields from deposit substitutes are not
automatically exempt from taxation. There must be a showing that the income are included
in the school's annual information return and duly audited financial statements, together
with: (a) certifications from depository banks as to the amount of interest income earned
from passive investments not subject to the 20% FWT; and (b) certification of actual, direct
and exclusive utilization of said income for educational purposes; (c)!Board resolution on
proposed project to be funded out of the money deposited in banks or placed in money
market placements, which must be used actually, directly and exclusively for educational
purposes. The income derived from dormitories, canteens and bookstores are not also
automatically exempt from taxation. There is still the requirement for evidence to show
actual, direct and exclusive use for educational purposes. It is to be noted that the 1987
Constitution does not distinguish with respect to the sources or origin of the income. Th
distinction is with respect to the use which should be actual, direct and exclusive for
educational purposes. Consequently, the provisions of Section 30 of the NIRC, that a non-
stock and non-profit educational institution is exempt from taxation only in respect to
income received By them as such could not affect the constitutional tax exemption. Where
the Constitution does not distinguish with respect to sources or origin, the Tax Code should
not make distinctions.
Q: The HR introduced HB No. 7000, which was envisioned to levy a tax on various
transactions. After the bill was approved by the House, the bill was sent to Senate as so
required by the Constitution. In the upper house, instead of a deliberation on the House Bill,
the Senate introduced Senate Bill no. 8000 which was its own version of the same tax. The
Senate deliberated on this Senate Bill and approved the same. The House bill and Senate
billNewer then consolidated in the Bicameral Committee. Eventually, the consolidated bill
was approved and sent to the President who signed the same. The private sectors affected
by the new law questioned the validity of the enactment on the ground that the
constitutional provision requiring that all revenue bills should originate from the HR had
been violated. Resolve the issue.
A: There is no violation of the constitutional requirement that all revenue bills should
originate from the HR. What is prohibited is for the Senate to enact revenue measures on its
own without a bill originating from the House. But once the revenue bill was passed by the
House and sent to the Senate, the latter's power to propose or concur with amendments.
This follows from the co-equality of the two chambers of Congress.
Q: XYZ Colleges is a non-stock, non-profit educational institution, run by the Archdiocese of

BP City. It collected and received the following: Tuition fees; Dormitory fees; Rentals from
canteen concessionaires; Interest from money market placements of the tuition fees;
Page 25 of 59
Donation of a lot and building by school alumni. 1. Which of these above-cited income and
donation would not be exempt from taxation? Explain briefly. 2. Suppose that XYZ Colleges
is a proprietary educational institution owned by the Archbishop's family, rather than the
Archdiocese, which of those above-cited income and donation would be exempt from
taxation? A: (1) All of the income derived by the non-stock, non-profit educational
institution will be exempt from taxation, provided they are used actually, directly and
exclusively for educational purposes are exempt from taxation. The donation is likewise
exempt from donor’s tax, if actually, directly and exclusively used for educational purposes,
provided that not more than 30% of the donation is used by the done for administration
purposes. The donee, being a non-stock, non-profit educational institution, is a qualified
entity to receive an exempt donation, subject to conditions prescribed by law. Accordingly,
none of the cited income and donation collected and received by the non-stock, non-profit
educational institution would not be exempt from taxation.
(2) If XYZ Colleges is a proprietary educational institution, all of its income from school-
related and non-school-related activities will be subject to the income tax, based on its
aggregate net income derived from both activities. Accordingly, all of the income
enumerated in the problem will be taxable. The donation of lot and building will likewise be
subject to the donor’s tax because a donation to an educational institution is exempt only if
the school is incorporated as a non-stock entity paying no dividends. Since the donee is
proprietary educational institution, the donation is taxable.
Q: Anne Lapada, a student activist, wants to impugn the validity of a tax on text messages.
On what grounds may she do so?
A: She may claim that the law adversely affects her since she sends messages by text and
that the tax money is being extracted and spent in violation of the constitutionally
guaranteed right to freedom of communication.
BAR QUESTIONS AND ANSWERS 2010-2015 General Principles
Congress passed a sin tax law that increased the tax rates on cigarettes
by 1,000%. The law was
thought to be sufficient to drive many cigarette companies out of
business, and was questioned in
court by a cigarette company that would go out of business because it
would not be able to pay the
increased tax.
The cigarette company is __________ (1%)(2013 Bar Question)
(A) wrong because taxes are the lifeblood of the government
(B) wrong because the law recognizes that the power to tax is the power to destroy
(C) correct because no government can deprive a person of his livelihood
(D) correct because Congress, in this case, exceeded its power to tax
SUGGESTED ANSWER:
(B) wrong because the law recognizes that the power to tax is the power to destroy
In McCulloch v. Maryland,1Chief Justice Marshall declared that the power to tax involves the power
to
destroy. This maxim only means that the power to tax includes the power to regulate even to the extent
of prohibition or destruction of businesses. The reason is that the legislature has the inherent power to
determine who to tax, what to tax and how much tax is to be imposed. Pursuant to the regulatory
purpose of taxation, the legislature may impose tax in order to discourage or prohibit things or
enterprises inimical to the public welfare. 2
In the given problem, the legislature’s imposition of prohibitive sin tax on cigarettes is congruent with
its purpose of discouraging the public form smoking cigarettes which are hazardous to health.
XYZ Corporation manufactures glass panels and is almost at the point of

insolvency. It has no
more cash and all it has are unsold glass panels. It received an
assessment from the BIR for
deficiency income taxes. It wants to pay but due to lack of cash, it seeks
permission to pay in kind
with glass panels.
Should the BIR grant the requested permission? (1%)(2013 Bar Question)
Page 26 of 59
(A) It should grant permission to make payment convenient to taxpayers.

(B) It should not grant permission because a tax is generally a pecuniary burden.
(C) It should grant permission; otherwise, XYZ Corporation would not be able to pay.
(D) It should not grant permission because the government does not have the storage facilities for
glass panels.
SUGGESTED ANSWER:
(B) It should not grant permission because a tax is generally a pecuniary burden.
This principle is one of the attributes or characteristics of tax. 3
Money collected from taxation shall not be paid to any religious dignitary
EXCEPT when: (2011
Bar Question)
(A) the religious dignitary is assigned to the Philippine Army
(B) it is paid by a local government unit
(C) the payment is passed in audit by the COA
1US 4 Wheat 316, 31 r I/Ed. 579.
2Dimaampao, Tax Principles and Remedies, 2008 ed., pp. 19-20.
3 Benjamin B. Aban, Law of Basic Taxation in the Philippines (Revised Ed.), p. 2, citing 1 Cooley 63.
(D) it is part of a lawmaker’s pork barrel
SUGGESTED ANSWER:
(A) the religious dignitary is assigned to the Philippine Army
Anne Lapada, a student activist, wants to impugn the validity of a tax on

text messages. Aside from
claiming that the law adversely affects her since she sends messages by
text, what may she allege
that would strengthen her claim to the right to file a taxpayer’s suit? (2011
Bar Question)
(A) That she is entitled to the return of the taxes collected from her in case the court nullifies the
tax measure.
(B) That tax money is being extracted and spent in violation of the constitutionally guaranteed
right to freedom of communication.
(C) That she is filing the case in behalf of a substantial number of taxpayers.
(D) That text messages are an important part of the lives of the people she represents.
SUGGESTED ANSWER:
(B) That tax money is being extracted and spent in violation of the constitutionally guaranteed
right to freedom of communication.
Real property taxes should not disregard increases in the value of real
property occurring over a
long period of time. To do otherwise would violate the canon of a sound
tax system referred to as:
(2011 Bar Question)
(A) theoretical justice.
(B) fiscal adequacy.
(C) administrative feasibility.
(D) symbiotic relationship.
SUGGESTED ANSWER:
(B) fiscal adequacy
Explain the principles of a sound tax system. (2015 Bar Question)

SUGGESTED ANSWER:
The principles of a sound tax system are the following:
a. Fiscal adequacy which means that the sources of revenue should be sufficient to meet the
demands of public expenditures;
b. Equality or theoretical justice which means that the tax burden should be proportionate to
the taxpayer’s ability to pay (this is the so-called ability to pay principle); and
c. Administrative feasibility which means that the tax law should be capable of
convenience, just and effective administration.
Which statement below expresses the lifeblood theory? (2012 Bar Question)
a) The assessed taxes must be enforced by the government.
b) The underlying basis of taxation is government necessity, for without taxation, a government
can neither exist nor endure;
Page 27 of 59
c) Taxation is an arbitrary method of exaction by those who are in the seat of power;
d) The power of taxation is an inherent power of the sovereign to impose burdens upon subjects
and objects within its jurisdiction for the purpose of raising revenues.
SUGGESTED ANSWER:
b) The underlying basis of taxation is government necessity, for without taxation, a government
can neither exist nor endure
Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from
the very existence of the state whose social contract with its citizens obliges it to promote public
interest and common good. The theory behind the exercise of 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. (National Power Corporation vs. City of Cabanatuan)
Which theory in taxation states that without taxes, a government would

be paralyzed for lack of
power to activate and operate it, resulting in its destruction? (2011 Bar
Question)
(A) Power to destroy theory
(B) Lifeblood theory
(C) Sumptuary theory
(D) Symbiotic doctrine
SUGGESTED ANSWER:
(B) Lifeblood theory
The power to tax is the power to destroy. Is this always so? (2011 Bar Question)
(A) No. The Executive Branch may decide not to enforce a tax law which it believes to be
confiscatory.
(B) Yes. The tax collectors should enforce a tax law even if it results to the destruction of the
property rights of a taxpayer.
(C) Yes. Tax laws should always be enforced because without taxes the very existence of the
State is endangered.
(D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected.
SUGGESTED ANSWER:
(D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected.
Choose the correct answer. Double Taxation - (1%)

(A) is one of direct duplicate taxations wherein two (2) taxes must be
imposed on the same
subject matter, by the same taxing authority, within the same jurisdiction,
during the same
period, with the same kind or character of tax, even if the purposes of
imposing the same
are different.
(B) is forbidden by law; and therefore, it is a valid defense against the
validity of a tax
measure.
(C) means taxing the same property twice when it should be taxed only
once; it is
tantamount to taxing the same person twice by the same jurisdiction for
the same thing.
(D) exists when a corporation is assessed with local business tax as a
manufacturer, and at
the same time, value-added tax as a person selling goods in the course of
trade or business.
(2014 Bar Question)
SUGGESTED ANSWER :
A. Double taxation is one of direct duplicate taxations wherein two (2) taxes must be imposed
on the same subject matter, by the same taxing authority, within the same jurisdiction, during
the same period, with the same kind of character of tax, even if the purposes of imposing the
same are different.
Page 28 of 59
Differentiate between double taxation in the strict sense and in a broad

sense and give an example
of each. (2015 Bar Question)
SUGGESTED ANSWER:
Double taxation in the strict sense pertains to the direct double taxation. This means that the
taxpayer is taxed twice by the same taxing authority, within the same taxing jurisdiction, for the same
property and same purpose.
On the other hand, double taxation in broad sense pertains to indirect double taxation. This
extends to all cases in which there is a burden of two or more impositions. It is the double taxation other
than those covered by direct double taxation.
In 2009, Caruso, a resident Filipino citizen, received dividend income from

a U.S.-based
corporation which owns a chain of Filipino restaurants in the West Coast,
U.S.A. The dividend
remitted to Caruso is subject to U.S. withholding tax with respect to a non-
resident alien like
Caruso.
a. What will be your advice to Caruso in order to lessen the impact of
possible double taxation
on the same income?
b. Would your answer in A. be the same if Caruso became a U.S. immigrant
in 2008 and had
become a non-resident Filipino citizen? Explain the difference in treatment
for Philippine
income tax purposes.(2010 Bar Question)
SUGGESTED ANSWER:
a. Caruso has the option either to claim the amount of the income tax withheld in US as a
deduction from his gross income in the Philippines or to claim it as a tax credit.
b. No. The income from abroad of a non-resident citizen is exempt from the Philippine income
tax. There is no international double taxation on the said income.
Bank A deposit money with Bank B which earns interest that is subjected
to the 20% final
withholding tax. At the same time, Bank A is subjected to the 5% gross
receipts tax on its interest
income on loan transactions to customers. Which statement below
INCORRECTLY describes the
transaction? (2012 Bar Question)
a) There is double taxation because two taxes – income tax and gross receipts tax are imposed on
the interest incomes described above and double taxation is prohibited under the 1987
Constitution
b) There is no double taxation because the first tax is income tax, while the second tax is business
tax;
c) There is no double taxation because the income tax is on the interest income of Bank A on its
deposits with Bank B (passive income), while the gross receipts tax is on the interest income
received by Bank A from loans to its debtor-customers (active income);
d) Income tax on interest income of deposits of Bank A is a direct tax, while GRT on interest
income on loan transaction is and tax.
SUGGESTED ANSWER:
a) There is double taxation because two taxes – income tax and gross receipts tax are imposed on
the interest incomes described above and double taxation is prohibited under the 1987
Constitution
There is no double taxation if the law imposes two different taxes on the same income, business
or property. First, the taxes herein are imposed on two different subject matters. The subject
matter of the FWT [Final Withholding Tax] is the passive income generated in the form of
interest on deposits and yield on deposit substitutes, while the subject matter of the GRT [Gross
Receipts Tax] is the privilege of engaging in the business of banking. Second, although both taxes
are national in scope because they are imposed by the same taxing authority - 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
Page 29 of 59
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. (Commissioner of Internal Revenue vs. BPI,
G.R.
No. 147375)
Double taxation in its general sense means taxing the same subject twice
during the same taxing
period. In this sense, double taxation: (2011 Bar Question)
(A) violates substantive due process.
(B) does not violate substantive due process.
(C) violates the right to equal protection.
(D) does not violate the right to equal protection.
SUGGESTED ANSWER:
(C) violates the right to equal protection.
Mr. Alas sells shoes in Makati through a retail store. He pays the VAT on
his gross sales to the BIR
and the municipal license tax based on the same gross sales to the City of
Makati. He comes to you
for advice because he thinks he is being subjected to double taxation.
What advice will you give him? (1%)(2013 Bar Question)
(A) Yes, there is double taxation and it is oppressive.
(B) The City of Makati does not have this power.
(C) Yes, there is double taxation and this is illegal m the Philippines.
(D) Double taxation is allowed where one tax is imposed by the national government and the
other by the local government.
SUGGESTED ANSWER:
(D) Double taxation is allowed where one tax is imposed by the national government and the
other by the local government.
There is double taxation when one tax is imposed by the national government and the other is
imposed by a local government unit.4 However, the 1987 Constitution does not forbid double
taxation. In Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of
Tanauan
(G.R. No. L-31156, February 27, 1976), the Supreme Court declared that double taxation does
not violate the uniformity rule nor does it infringe the equal protection guarantee just because one
tax is imposed by the national government and the other tax is levied by a local government unit.
Choose the correct answer. Tax Avoidance -

(A) 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.
(B) is a tax saving device within the means sanctioned by law.
(C) is employed by a corporation, the organization of which is prompted
more on the
mitigation of tax liabilities than for legitimate business purpose.
(D) is any form of tax deduction scheme, regardless if the same is legal or
not. (2014 Bar
Question)
SUGGESTED ANSWER :
B. Tax avoidance is a tax-saving device within the means sanctioned by law.
You are the retained tax counsel of ABC Corp. Your client informed you
that they have been
directly approached with a proposal by a BIR insider (i.e., a middle rank
BIR official) on the tax
matter they have referred to you for handling. The BIR insider's proposal
is to settle the matter by
Page 30 of 59
significantly reducing the assessment, but he will get 50% of the savings
arising from the reduced
assessment.
What tax, criminal and ethical considerations will you take into account in
giving your advice?
Explain the relevance of each of these considerations. (2013 Bar Question)
SUGGESTED ANSWER:
As a lawyer, I have the responsibility to give only a lawful advice. Canon I of the Code of
Professional Responsibility mandates me to “uphold the Constitution, obey the laws of the land and
promote respect for law and legal processes. Rule 1.01 states that “a lawyer shall not engage in unlawful,
dishonest, immoral or deceitful conduct.” Rule 1.02 provides that “a lawyer shall not counsel or abet
activities aimed at defiance of the law or at lessening confidence in the legal system.”
4Dimaampao, Tax Principles and Remedies, 2008 ed., p. 127
Therefore, I will advise my client not to agree with the proposal of the BIR officer. Agreeing with
the proposal will result in criminal prosecution under the following laws:
Under the NIRC, the officers of the board who authorized the tax evasion will be liable under
Section 253(C), while the corporation shall be liable under Section 256.
The BIR official is liable under Section 269 which provides for the violations committed by
government enforcement officers. Paragraph (d) of Section 269 provides that one of these violations is
“offering or undertaking to accomplish, file or submit a report or assessment on a taxpayer without the
appropriate examination of the books of accounts or tax liability, or offering or undertaking to submit a
report or assessment less than the amount due the Government for any consideration or compensation, or
conspiring or colluding with another or others to defraud the revenues or otherwise violate the provisions
of this Code.”
Under the Revised Penal Code, the officers of the corporation shall be liable under Article 212 for
corruption of public officials while the BIR official is liable for direct bribery.
Both my client and the BIR official will also be liable under Republic Act No. 3019 or the Anti-
Graft and Corrupt Practices Act.
On August 31, 2014, Haelton Corporation (HC), thru its authorized

representative Ms. Pares, sold
a 16-storey commercial building known as Haeltown Building to Mr. Belly
for P100 million. Mr.
Belly, in turn, sold the same property on the same day to Bell Gates, Inc.
(BGI) for P200 million.
These two (2) transactions were evidenced by two (2) separate Deeds of
Absolute Sale notarized on
the same day by the same notary public.
Investigations by the Bureau of Internal Revenue (BIR) showed that:
(1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized
ahead of the sale between
HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million
from BGI, and not from
Mr. Belly; (3) the said payment of P40 million was recorded by BGI in its
books as of June 30, 2014
as investment in Haeltown Building; and (4) the substantial portion of P40
million was withdrawn
by Ms. Pares through the declaration of cash dividends to all its
stockholders.
Based on the foregoing, the BIR sent Haeltown Corporation a Notice of
Assessment for deficiency
income tax arising from an alleged simulated sale of the aforesaid
commercial building to escape
the higher corporate income tax rate of thirty percent (30%). What is the
liability of Haeltown
Corporation, if any? (2014 Bar Question)
SUGGESTED ANSWER :
The tax planning scheme adopted by Haeltown Corporation constitutes tax evasion. According to
CIR v. Estate of Benigno Toda (G.R. No. 147188, September 14, 2004), a transaction where a taxpayer
made it appear that there were two sales of the property was considered “tainted with fraud.” The sole
purpose of acquiring and transferring title of the property on the same day was to create a tax shelter. The
Page 31 of 59
sale to Mr. Belly (which is subject to individual capital gains tax) was to mislead the BIR and avoid the
higher corporate income tax.
Which of the following are NOT usually imposed when there is a tax
amnesty? (2011 Bar Question)
(A) Civil, criminal, and administrative penalties
(B) Civil and criminal penalties
(C) Civil and administrative penalties
(D) Criminal and administrative penalties
SUGGESTED ANSWER:
(A) Civil, criminal, and administrative penalties
Q. What is a tax amnesty?
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 law. It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders who wish to
relent a chance to start with a clean slate. A tax amnesty, much like a tax
exemption, is never favored nor presumed in law. The grant of a tax amnesty,
similar to a tax exemption, must be construed strictly against the taxpayer and
liberally in favor of the taxing authority. (Commissioner of Internal Revenue v.
Philippine Aluminum Wheels, G.R. No. 216161, August 9, 2017)
Q. When will a taxpayer be entitled to the immunities and privileges of

a tax amnesty program?
Amnesty taxpayers may immediately enjoy the privileges and immunities under
a Tax Amnesty Law, provided they fulfill the suspensive conditions imposed
therein. (Commissioner of Internal Revenue v. Covanta Energy
Philippine Holdings, G.R. No. 203160, January 24, 2018)
Which of the following statement is NOT correct? (2012 Bar Question)

a) In case of doubt, statutes levying taxes are constructed strictly the government;
b) The construction of a statute made by his predecessors is not binding upon the successor, if
thereafter he becomes satisfied that a different construction should be given;
c) The reversal of a ruling shall not generally be given retroactive application, if said reversal will
be prejudicial to the taxpayer;
d) A memorandum circular promulgated by the CIR that imposes penalty for violations of certain
rules need not be published in a newspaper of general circulation or official gazette because it has
the force and effect of law.
SUGGESTED ANSWER:
d) A memorandum circular promulgated by the CIR that imposes penalty for violations of certain
rules need not be published in a newspaper of general circulation or official gazette because it has
the force and effect of law.
A revenue memorandum circular shall not begin to be operative until after due notice thereof
maybe fairly presumed. (Commissioner of Internal Revenue vs. Philippine Airlines, G.R.
No.
180066, July 8, 2009)
The BIR, through the Commissioner, instituted a system requiring

taxpayers to submit to the BIR a
summary list of their sales and purchases during the year, indicating the
name of the seller or the
buyer and the amount. Based on these lists, the BIR discovered that in
2004 ABC Corp. purchased
from XYZ Corp. goods worthP5,000,000. XYZ Corp. did not declare these
for income tax purposes
as its reported gross sales for 2004was only Pl,000,000.
Which of the following defenses may XYZ Corp. interpose in an
assessment against it by the BIR?
Page 32 of 59
(1%)(2013 Bar Question)

(A) The BIR has no authority to obtain third party information to assess taxpayers.
(B) The third party information is inadmissible as hearsay evidence.
(C) The system of requiring taxpayers to submit third party information is illegal for violating the
right to privacy.
(D) None of the above.
SUGGESTED ANSWER:
(D) None of the above.
Section 6(B) of the NIRC authorizes the Commissioner to assess the property tax due from a
taxpayer when he believes that the report the taxpayer submitted is false, incomplete, or
erroneous. The same provision authorizes the Commissioner to amend the return from his own
knowledge and from such information he can obtain through testimony or otherwise, which is
deemed prima facie correct and sufficient for all legal purposes.
Which statement is WRONG? (2012 Bar Question)
a) The power of taxation may be exercised by the government, its political subdivisions, and
public utilities;
b) Generally, there is no limit on the amount of tax that may be imposed;
c) The money contributed as tax becomes part of the public funds;
d) The power of tax is subject to certain constitutional limitations.
SUGGESTED ANSWER:
a) The power of taxation may be exercised by the government, its political subdivisions, and
public utilities
Which among the following concepts of taxation is the basis for the situs
of income taxation? (2011
Bar Question)
(A) Lifeblood doctrine of taxation
(B) Symbiotic relation in taxation
(C) Compensatory purpose of taxation
(D) Sumptuary purpose of taxation
SUGGESTED ANSWER:
(B) Symbiotic relation in taxation
Guidant Resources Corporation, a corporation registered in Norway, has a

50 MW electric power
plant in San Jose, Batangas. Aside from Guidant's income from its power
plant, which among the
following is considered as part of its income from sources within the
Philippines? (2011 Bar
Question)
(A) Gains from the sale to an Ilocos Norte power plant of generators bought from the United
States.
(B) Interests earned on its dollar deposits in a Philippine bank under the Expanded Foreign
Currency Deposit System.
(C) Dividends from a two-year old Norwegian subsidiary with operations in Zambia but derives
60% of its gross income from the Philippines.
(D) Royalties from the use in Brazil of generator sets designed in the Philippines by its engineers.
SUGGESTED ANSWER:
(A) Gains from the sale to an Ilocos Norte power plant of generators bought from the United
States.
Triple Star, a domestic corporation, entered into a Management Service

Contract with Single Star,
a non-resident foreign corporation with no property in the Philippines.
Under the contract, Single
Star shall provide managerial services for Triple Star’s Hongkong branch.
All said services shall be
performed in Hongkong.
Page 33 of 59
Is the compensation for the services of Single Star taxable as income from
sources within the
Philippines? Explain. (2014 Bar Question)
SUGGESTED ANSWER :
No. Pursuant to the case of Commissioner of Internal Revenue v. Baier-Nickel (G.R. No.
153793,
August 29, 2006), the factor which determines the source of income for personal services is the place
where the services were actually rendered. Since Single Star, a non-resident foreign corporation, will
perform all the managerial services for Triple Star’s branch in Hong Kong, all compensation income
arising from the performance of such services will be considered income from sources outside the
Philippines, and therefore not subject to Philippine income tax.
The municipality of San Isidro passed an ordinance imposing a tax on

installation managers. At
that time, there was only one installation manager in the municipality;
thus, only he would be liable
for the tax.
Is the law constitutional? (2013 Bar Question)
(A) It is unconstitutional because it clearly discriminates against this person.
(B) It is unconstitutional for lack of legal basis.
(C) It is constitutional as it applies to all persons in that class.
(D) It is constitutional because the power to tax is the power to destroy.
SUGGESTED ANSWER:
(C) It is constitutional as it applies to all persons in that class.
The ordinance imposing tax on installation managers does not violate the equal protection clause
under Section 1, Article III of the Constitution and the uniformity rule under Section 28, Article
VI of the Constitution. The equal protection clause simply means that all persons subject to
legislation shall be treated alike under like circumstances and conditions both in privileges
conferred and liabilities imposed. On the other hand, the uniformity rule states that a tax is
uniform when it operates with the same force and effect in every place where the subject of it is
found. It does not signify an intrinsic but simply a geographical uniformity. (See: British
American Tobacco v. Camacho, G.R. No. 163583, April 15, 2009)
In the given problem, the ordinance applies to all installation manager. In other words, the
ordinance does not specifically identify who among the installation managers shall be liable for
tax. The fact that there is only one installation manager in the municipality does not mean that the
taxing authority singled him out as the only taxable person.
Choose the correct answer. Tax laws -

(A) may be enacted for the promotion of private enterprise or business for
as long as it gives
incidental advantage to the public or the State
(B) are inherently legislative; therefore, may not be delegated
(C) are territorial in nature; hence, they do not recognize the generally-
accepted tenets of
international law
(D) adhere to uniformity and equality when all taxable articles or kinds of
property of the
same class are taxable at the same rate (2014 Bar Question)
SUGGESTED ANSWER :
D. Tax laws adhere to uniformity and equality when all taxable articles or kinds of property of the
same class are taxable at the same rate.
What is the rule on the taxability of income that a government educational

institution derives from
its school operations? Such income is: (2011 Bar Question)
(A) subject to 10% tax on its net taxable income as if it is a proprietary educational institution.
(B) Exempt from income taxation if it is actually, directly, and exclusively used for educational
purposes.
(C) subject to the ordinary income tax rates with respect to incomes derived from educational
activities.
Page 34 of 59
(D) Exempt from income taxation in the same manner as government-owned and controlled
corporations.
SUGGESTED ANSWER:
(B) Exempt from income taxation if it is actually, directly, and exclusively used for educational
purposes.
A group of philanthropists organized a non-stock, non-profit hospital for

charitable purposes to
provide medical services to the poor. The hospital also accepted paying
patients although none of its
income accrued to any private individual; all income were plowed back for
the hospital's use and
not more than 30% of its funds were used for administrative purposes.
Is the hospital subject to tax on its income? If it is, at what rate? (2013 Bar
Question)
SUGGESTED ANSWER:
The non-stock, non-profit hospital’s income from paying patients is subject to a preferential
income tax of 10%.
In Commissioner of Internal Revenue v. St. Luke’s Medical Center, the Supreme Court laid down
the rules on the treatment of icome tax of non-profit hospitals. Pursuant to Sec. 30(E) and (G) of the
NIRC, these hospitals are exempt from income tax with respect to their activities conducted exclusively
for charitable or social welfare purposes. However, they are subject to a preferential income tax rate of
10% under charitable or social welfare purposes.
Mr. Amado leased a piece of land owned by the Municipality of

Pinagsabitan and built a warehouse
on the property for his business operations. The Municipal Assessor
assessed Mr. Amado for real
property taxes on the land and the warehouse. Mr. Amado objected to the
assessment, contending
that he should not be asked to pay realty taxes on the land since it is
municipal property.
Was the assessment proper? (2013 Bar Question)
SUGGESTED ANSWER:
The assessment was proper.
Under Section 217 of the LGC, real property shall be classified, valued and assessed on the basis
of its actual use regardless of where located, whoever owns it, and whoever uses it. A related and
complementary provision is Section 234(a) of the LGC which provides that a real property owned by the
Republic of the Philippines or any of its political subdivisions is exempt from realty taxes, except when
the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.
In the given problem, Mr. Arnado, as lessee of the land owned by the Municipality, is the actual
user of the land and is liable for the realty taxes. Therefore, the assessment was proper.
LLL is a government instrumentality created by Executive Order to be

primarily responsible for
integrating and directing all reclamation projects for the National
Government. It was not
organized as a stock or a non-stock corporation, nor was it intended to
operate commercially and
compete in the private market.
By virtue of its mandate, LLL reclaimed several portions of the foreshore
and offshore areas of the
Manila Bay, some of which were within the territorial jurisdiction of Q City.
Certificates of title to
the reclaimed properties in Q City were issued in the name of LLL in 2008.
In 2014, Q City issued
Page 35 of 59
Warrants of Levy on said reclaimed properties of LLL based on the

assessment for delinquent
property taxes for the years 2010 to 2013.
a. Are the reclaimed properties registered in the name of LLL subject to
real property
tax?
b. Will your answer be the same in (a) if from 2010 to the present time,
LLL is leasing
portions of the reclaimed properties for the establishment and use of
popular
fastfood restaurants J Burgers, G Pizza, and K Chicken? (2015 Bar Question)
SUGGESTED ANSWER:
a. The reclaimed properties are not subject to real property tax because LLL is a government
instrumentality. Instrumentality refers to any agency of the National Government, not integrated within
the department framework vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually through a
charter. Under the law, real property owned by the Republic of the Philippines (Republic) is exempt from
real property tax unless the beneficial use thereof has been granted to a taxable person. When the title of
the real property is transferred to LLL, the Republic remains the owner of the real property. Thus, such
arrangement does not result in the loss of the tax exemption.
b. No. As a rule, properties owned by the Republic of the Philippines are exempt from real
property tax except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person. LLL leased out portions of the reclaimed properties to a taxable entity, such as the popular
fastfood restaurant, hence the reclaimed properties are subject to real property tax.
What is the "rational basis" test? Explain briefly. (2010 Bar Question)
SUGGESTED ANSWER:
This test is applied to gauge the constitutionality of an assailed law in the face of an equal
protection challenge. It has been held that “in areas of social and economic policy, a statutory
classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld
against equal protection challenge if there is any reasonably conceivable state of facts that could provide a
rational basis for the classification”. Under the rational basis test, it is sufficient that the legislative
classification is rationally related to achieving some legitimate State interest.
True or False.
The Tax Code allows an individual taxpayer to pay in two equal
installments, the first installment
to be paid at the time the return is filed, and the second on or before July
15 of the same year, if his
tax due exceeds P2,000. (2010 Bar Question)
SUGGESTED ANSWER:
True. [Sec. 56(A)(A), NIRC]
The actual effort exerted by the government to effect the exaction of what
is due from the taxpayer
is known as: (2011 Bar Question)
(A) assessment.
(B) levy.
(C) payment.
(D) collection.
SUGGESTED ANSWER:
(D) collection
Although the power of taxation is basically legislative in character, it is

NOT the function of
Congress to: (2011 Bar Question)
(A) fix with certainty the amount of taxes.
(B) collect the tax levied under the law.
(C) identify who should collect the tax.
(D) determine who should be subject to the tax.
SUGGESTED ANSWER:
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(B) collect the tax levied under the law
2016 TAXATION BAR QUESTION with suggested answer
State at least five (5) cases under the exclusive appellate jurisdiction of the Court of Tax
Appeals (CTA). (5%)
The following cases are under the exclusive appellate jurisdiction of the Court of Tax
Appeals.
Exclusive appellate jurisdiction to review by appeal:
 Decisions of the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the NIRC or other laws administered
by the BIR;
 Inaction of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the NIRC or other laws administered
by the BIR, where the NIRC provides a specific period of action, in which case the
inaction shall be deemed a denial;
 Decisions, orders or resolutions of the RTC in local tax cases originally decided or
resolved by them in the exercise of their original or appellate jurisdiction;
 Decisions of the Commissioner of Customs in cases involving liability of customs
duties, fees or other money charges, seizure, detention or release of property
affected, fines, forfeitures or other penalties in relation thereto, or other matters
arising under the Customs Law or other laws administered by the Bureau of Customs;
and
 Decisions of the Central Board of Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and taxation of real property
originally decided by the provincial or city board of assessment appeals.
 Decisions of the Secretary of Finance on customs cases elevated to him
automatically for review from decisions of the Commissioner of Customs adverse to
the Government under Sec. 2315 of the Tariff and Customs Code; and
 Decisions of the Secretary of Trade and Industry, in the case of nonagricultural
product, commodity or article, and the Secretary of Agriculture, in the case of
agricultural product, commodity or article, involving dumping and countervailing
duties under Sec. 301 and 302. respectively, of the Tariff and Customs Code, and
safeguard measures under R.A. No. 8800, where either party may appeal the
decision to impose or not impose said duties.
Exclusive appellate jurisdiction in criminal offenses:
 Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in
tax cases originally decided by them, in their respective territorial jurisdiction; and
 Over petitions for review of the judgments, resolutions or orders of the Regional Trial
Courts in the exercise of their appellate jurisdiction over tax cases originally decided
by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial
Courts in their respective jurisdiction.
NOTE: It is recommended that any five (5) of the above-enumerated cases
be given credit].
QUESTION ON LOCAL TAX
1. The City of Maharlika passed an ordinance imposing a tax on any sale or transfer of
real property located within the city at a rate of fifty percent (50%) of one percent
(1%) of the total consideration of the transaction. Jose sold a parcel of land in the
city, which he inherited from his deceased parents, and refused to pay the aforesaid
tax. He instead filed a case asking that the ordinance be declared null and void since
the tax it imposed can only be collected by the national government, as in fact he
was paid the Bureau of Internal Revenue (BIR) the required Capital Gain Tax. If you
were the city legal officer of Maharlika what defenses would you raise to sustain the
validity of the ordinance?
Page 37 of 59
ANSWER:
The Ordinance passed by the City Council of Maharlika imposing a Transfer Tax on the
sale, or any other mode of transferring ownership at the rate of 50% of 1% of the total
consideration involved in the acquisition of the property cannot be declared null and void
as Petitioned by Jose with his contention that he already paid the Capital Gain Tax. Said
City Ordinance is a Taxing Power granted to the Provincial, Municipality or Cities,
pursuant to Section 135 of the Local Government Code of 1991 (LGC).
Transfer Tax paid in the Bureau of Internal Revenue (BIR) can be either donor’s or estate
taxes which is far different with the Transfer tax imposed by the Local Government,
hence, there is no reason to be confuse. Also, the transfer tax paid to the provincial or
city assessor’s office, its evidence of payment or the official receipt is required by the
Register of Deeds of the province concerned before registering any deed. This is also
required by the provincial assessor before cancelling an old tax declaration and issuing a
new one in its place. The payment of the transfer tax is the responsibility of the seller,
donor, transferor, executor or and administrator. As to the rate of tax imposed it is also
compliant to Section 151 of the LGC.
Therefore, Jose has no reason not to pay nor to question the transfer tax imposed on him
and seek declaration of which to be null and void.
Question 2 on local tax
Philippine National Railways (PNR) operates the rail transport of passengers and goods
by providing train stations and freight customer facilities from Tutuban, Manila to the
Bicol Province. As the operator of the railroad transit, PNR administers the land,
improvements and equipment within its main station in Tutuban, Manila.
Invoking Section 193 of the Local Government Code (LGC) expressly withdrawing the tax
exemption privileges of government-owned and controlled corporations upon the
effectivity of the Code in 1992, the City Government of Manila issued Final Notices of
Real Estate Tax Deficiency in the amount of P624,000,000.00 for the taxable years 2006
to 2010. On the other hand, PNR, seeking refuge under the principle that the
government cannot tax itself, insisted that the PNR lands and buildings are owned by the
Republic.
Is the PNR exempt from real property tax? Explain your answer. (5%)
Answer:
Yes, PNR is exempt from real property tax. PNR is a corporation created to serve as the
instrumentality of the Government of the Philippines in providing a nationwide railroad
and transport system, and under Section 133 (o) of the Local Government Code, PNR as
a government instrumentality as such it is not taxable because it is not subject to taxes,
fees or charges of any kind by local governments pursuant to the Local Government
Code the only exception is when PNR leases its real property to a taxable person as
provided in Section 234(a) of the Local Government Code, in which case the specific real
property leased becomes subject to real estate tax. Thus, only portions of the PNR Lands
and Buildings leased to taxable persons like private parties are subject to real estate tax
by the City of Manila.
Section 193 does not apply with PNR since its charter is not listed as Government owned
and controlled corporation.
Question no. 3 on Local tax
The Philippine-British Association, Inc. (Association) is a non-stock, non-profit

organization which owns the St. Michael's Hospital (Hospital). Sec. 216 in relation to Sec.
215 of the LGC classifies all lands, buildings and other improvements thereon actually,
directly, and exclusively used for hospitals as "special." A special classification prescribes
a lower assessment than a commercial classification.
Within the premises of the Hospital, the Association constructed the St. Michael's Medical
Arts Center (Center) which will house medical practitioners who will lease the spaces
therein for their clinics at prescribed rental rates. The doctors who treat the patients
confined in the Hospital are accredited by the Association.
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The City Assessor classified the Center as "commercial" instead of "special" on the
ground that the Hospital owner gets income from the lease of its spaces to doctors who
also entertain out-patients. Is the City Assessor correct in classifying the Center as
"commercial?" Explain. (5%)
Answer:
Real Property shall be classified for purposes of assessment as provided by Sec.215 of

the Local Government Code. In the same code, Sec. 216 All lands, buildings, and other
improvements thereon actually, directly and exclusively used for hospitals, cultural, or
scientific purposes, and those owned and used by local water districts, and government-
owned or controlled corporations rendering essential public services in the supply and
distribution of water and/or generation and transmission of electric power shall be
classified as special. However, in Section 217 it is provided that Real property shall be
classified, valued and assessed on the basis of actual use regardless if where located,
whoever owns it, and who ever uses it.
St. Michael's Medical Arts Center (Center) which will house medical practitioners who will
lease the spaces therein for their clinics at prescribed rental rates and the doctors who
treat the patients confined in the Hospital are accredited by the Association, was
classified by the City Assessor as “Commercial” instead of “Special” because the
Hospital owner gets income from the lease of its spaces to doctors who also entertain
out-patients.
The City Assessor on the foregoing arguments, classified it as commercial, however, in

the case of City Assessor of Cebu vs. Association of Benevola de Cebu, the court ruled
that Center the importance of CHHMAC in the operation of CHH cannot be over-
emphasized nor disputed. Clearly, it plays a key role and provides critical support to
hospital operations. Charging rentals for the offices used by its accredited physicians
cannot be equated to a commercial venture. Finally, respondents charge of rentals for
the offices and clinics its accredited physicians occupy cannot be equated to a
commercial venture, which is mainly for profit.
Respondents explanation on this point is well taken. First, CHHMAC is only for its
consultants or accredited doctors and medical specialists. Second, the charging of
rentals is a practical necessity: (1) to recoup the investment cost of the building, (2) to
cover the rentals for the lot CHHMAC is built on, and (3) to maintain the CHHMAC
building and its facilities. Third, as correctly pointed out by respondent, it pays the
proper taxes for its rental income. And, fourth, if there is indeed any net income from the
lease income of CHHMAC, such does not inure to any private or individual person as it
will be used for respondent’s other charitable projects.
The Supreme Court affirmed the decision of CA that CHHMAC building should be
classified as special and not commercial and should be accorded the 10% special
assessment for it is not operated primarily for profit but as an integral part of CHH and
CHHMAC operations being devoted for the benefit of the CHHs patients.
In the instant case being similarly situated the City Assessor is incorrect for classifying
the Center as commercial instead of special on the proper application of Sec. 216 in
relation to Section 215 of the Local Government Code.(Section C: READ SLMC and
PHILIPPINE LUNG CENTER)
Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the
Republic of Nigeria. Its commercial airplanes do not operate within Philippine territory, or
service passengers embarking from Philippine airports. The firm is represented in the
Philippines by its general agent, Narotel. SAA sells airplane tickets through Narotel, and
these tickets are serviced by SAA airplanes outside the Philippines. The total sales of
airplane tickets transacted by Narotel for SAA in 2012 amounted to PIO,000,000.00 The
Commissioner of Internal Revenue (CIR) assessed SAA deficiency income taxes at the
rate of 30% on its taxable income, finding that SAA’s airline ticket sales constituted
income derived from sources within the Philippines. SAA filed a protest on the ground
that the alleged deficiency income taxes should be considered as income derived
exclusively from sources outside the Philippines since SAA only serviced passengers
outside Philippine territory. It, thus, asserted that the imposition of such income taxes
Page 39 of 59
violated the principle of territoriality in taxation. Is the theory of SAA tenable? Explain.
(5%)
No. The activity which gives rise to the income is the sale of ticket in the Philippines,
hence, the income from sale of tickets is an income derived from Philippine sources
which is subject to the Philippine income tax. Accordingly, there is no violation of the
principle of territoriality in taxation (Air Canada v. CIR, G.R. No. 169507, January 11,
2016, 778 SCRA 131).
(A) Explain the procedure for claiming refunds or tax credits of input Value Added Tax
(VAT) for zero-rated or effectively zero-rated sale. under Sec. 112 of the National Internal
Revenue Code (NIRC) from the filing of an application with the CIR up to the CTA. (2.5%)
(B) Explain the procedure for claiming refunds of tax erroneously or illegally collected
under Sec. 229 of the NIRC from the filing of the claim for refunds with the CIR up to the
CTA. (2.5%)
SUGGESTED ANSWER
(A) In order to be entitled to a refund/tax credit of excess input VAT attributable to zero-
rated or effectively zero-rated sales, the following requisites must be complied with:
The claim for refund must be filed with the Commissioner within 2 years counted from
the last day of the quarter when the zero. rated sale was made (Sec. 112, NIRC);
The claim for refund must be accompanied by a statement under oath that all
documents to support the claim has been submitted at the time of filing of the claim for
refund (RMC 54-14);
The Commissioner must decide on the claim within 120 days from date of filing and the
adverse decision is appealable to the CTA within 30 days from receipt (Sec. 112, NIRC;
CIR v. Aichi Forging of Asia, Inc., G.R. No. 184823, October 6, 2010, 632 SCRA 422);
If no decision is made within the 120-day period, there is a deemed denial or adverse
decision which is appealable to the CTA within 30 days from the lapse of the 120-day
period (Sec. 112, NIRC; Sec. 7(a)(1) of RA 1125, as amended by RA 9282).
Congress issued a law allowing a 20% discount on the purchases of senior citizens from,
among others, recreation centers. This 20% discount can then be used by the sellers as
a “tax credit.” At the initiative of BIR, however, Republic Act No. (RA) 9257 was enacted
amending the treatment of 20% discount as a “tax deduction.” Equity Cinema filed a
petition the RTC claiming that RA 9257 is unconstitutional as it forcibly deprives sellers a
part of the price without just compensation.
(A) What is the effect of converting the 20% discount from a “tax credere to a “tax
deduction”? (2.5%)
(B) If you are the judge, how will you decide the case? Briefly explain your answer.
(2.5%)
(A) The effect of converting the 20% discount from a “tax credit” to a “tax deduction” is
that the tax benefit enjoyed by sellers of goods and services to senior citizens is
effectively reduced. A tax credit reduces the tax liability while a tax deduction merely
reduces the tax base. Under the tax credit scheme, the establishments are paid back
100% of the discount they give to senior citizens while under the tax deduction scheme,
they are only paid back about 32% of the 20% discount granted to senior citizens.
Page 40 of 59
(B) I will decide in favor of the Constitutionality of the law. The 20% discount as well as
the tax deduction scheme is a valid exercise of the police power of the State (Manila
Memorial Park Inc. v. Department on Social Welfare and Development, G.R. No. 175356,
December 3, 2013, 711 SCRA 302)
The Philippine-British Association, Inc. (Association) is a non-stock non-profit organization

which owns the St. Michael’s Hospital (Hospital) Sec. 216 in relation to Sec. 215 of the
LGC classifies all lands, buildings and other improvements thereon actually, directly, and
exclusively used for hospitals as “special.” A special classification prescribes a lower
assessment than a commercial classification.
Within the premises of the Hospital, the Association constructed the St. Michael’s Medical
Arts Center (Center) which will house medical practitioners who will lease the spaces
therein for their clinics at prescribed rental rates. The doctors who treat the patients
confined in the Hospital are accredited by the Association. The City Assessor classified
the Center as “commercial” instead of “special” on the ground that the Hospital owner
gets income from the lease of its spaces to doctors who also entertain out-patients. Is
the City Assessor correct in classifying the Center as “commercial?” Explain. (5%)
SUGGESTED ANSWER
No. The Medical Arts Center is an integral part of the Hospital and should be classified for
assessment purposes as “special”. The fact alone that the doctors holding clinics in the
Center are those duly accredited by the Association who owns the Hospital, and these
doctors are the ones who can treat the Hospital’s patients confined in it, takes away the
said Medical Arts Center from being categorized as “commercial” since a tertiary hospital
is required by law to have a pool of physicians who comprise the required medical
departments in various medical fields (City Assessora Cebu City v. Association of
Benevola de Cebu, Inc., G.R. No. 152904, June 2007, 524 SCRA 128).
XIII
Pursuant to Sec. 11 of the “Host Agreement between the United Nations and the
Philippine government, it was provided that the World Health Organization (WHO), “its
assets, income and other properties shall be: a) exempt from all direct and indirect
taxes.” Precision Construction Corporation (PCC) was hired to construct the WHO Medical
Center in Manila. Upon completion of the building, the BIR assessed a 12% VAT on the
gross receipts of PCC derived from the construction of the WHO building. The BIR
contends that the 12% VAT is not a direct nor an indirect tax on the WHO but a tax that
is primarily due from the contractor and is therefore not covered by the Host Agreement.
The WHO argues that the VAT is deemed an indirect tax as PCC can shift the tax burden
to it. Is the BIR correct? Explain. (5%)
SUGGESTED ANSWER
No. Since World Health Organization (WHO), the contractee, is exempt from direct and
indirect taxes pursuant to an international agreement where the Philippines is a
Page 41 of 59
signatory, the exemption from indirect taxes should mean that the entity or person
exempt is the contactor itself because the manifest intention of the agreement is to
exempt the contractor so that no tax may be shifted to the contractee (CIR v. John
Gotamco & Sons, Inc., G.R. No. L-31092, February 24, 1987, 148 SCRA 36). The immunity
of WHO from indirect taxes extends to the contractor by treating the sale of service as
effectively zero-rated when the law provided that, “services rendered to persons or
entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such service to zero percent
(0%) rate” (Section 108(B) 3, NIRC). Accordingly, the BIR is wrong in assessing the 12%
VAT from the contractor, Precision Construction Corporation.
Jennifer is the only daughter of Janina who was a resident in Los Angeles California,
U.S.A. Janina died in the U.S. leaving to Jennifer one million shares of Sun Life
(Philippines), Inc., a corporation organized and existing under the laws of the Republic of
the Philippines. Said shares were held in trust for Janina by the Corporate Secretary of
Sun Life and the latter can vote the shares and receive dividends for Janina. The Internal
Revenue Service (IRS) of the U.S. taxed the shares on the ground that Janina was
domiciled in the U.S. at the time of her death.
(A) Can the CIR of the Philippines also tax the same shares? Explain. (2.5%)
(B) Explain the concept of double taxation. (2.5%)
SUGGESTED ANSWER
(A) Yes. The property being a property located in the Philippines, it is subject to the
Philippine estate tax irrespective of the citizenship or residence of the decedent (Sec. 85,
NIRC). However, if Janina is a non-resident alien at the time of her death, the
transmission of the shares of stock can only be taxed applying the principle of reciprocity
(Sec. 104, NIRC).
(B) Double taxation occurs when the same subject or object of taxation is taxed twice
when it should be taxed but once. Double taxation is prohibited. when it is an imposition
of taxes on the same subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same taxing period, with the same
kind or character of a tax (84 C.J.S. 131-132). It is permissible if taxes are of different
nature or character, or the two taxes are imposed by different taxing authorities
(Villanueva v. City of Iloilo, G.R. No. L-26521, December 28, 1968, 26 SCRA 578).
2017 BAR Qs
I.
SMZ, Inc. is a VAT-registered enterprise engaged in the general construction business. HP

International contracts the services of SMZ Inc, to construct HP International’s factory building
located in the Laguna TechnoPark, a special economic zone HP International is registered with
the Philippine Economic Zone Authority (PEZA) as an ecozone export enterprise, and, as such,
enjoys income tax holiday pursuant to the Special Economic Zone Act of 1995.
SMZ, Inc., files an application with the Bureau of Internal Revenue (BIR) for the VAT zero-
rating of its sale of services to HP International. However, the BIR denies SMZ, Inc.’s
application on the ground that HP International already enjoys income tax holiday: Is the BIR
correct in denying SMZ, Inc.’s application? Explain your answer: (6%)
Page 42 of 59
SUGGESTED ANSWER
No. All sales of goods, properties, and services made by a VAT-registered supplier from the
Customs Territory to an ecozone enterprise shall be subject to VAT, at zero percent (0%) rate,
regardless of the latter’s type or class of PEZA registration (Coral Bay Nickel Corporation v.
CIR, G.R. No. 190506, June 13, 2016, citing Commissioner of Internal Revenue v. Toshiba
Information Equipment (Phils.), Inc., G.R. No. 150154, August 9, 2005).
Moreover, under Section 108 (B)(3), of the 1997 NIRC as amended, services rendered to persons
or entities whose exemption under special laws effectively subjects the supply of such services to
zero percent (0%) rate are considered zero-rated. Considering the law doés not provide for any
additional qualification or disqualification, the BIR cannot deny the application on the ground
that HP International already enjoys income tax holiday.
An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to
the requirements provided by law. To do so constitutes lawmaking, which is generally reserved
for Congress (Soriano v. Secretary of Finance, et al, G.R. Nos. 184450, 184508, 184538,
185234, January 24, 2017).
ALTERNATIVE ANSWER
The BIR is wrong. Under Sec 108(B)(3) of the NIRC, the sale is effectively zero-rated and there
is no need to file an application for zero-rating with the BIR The BIR in pointing out that HP
International enjoys income tax holiday is of no moment, because a sale of services to an
ecozone enterprise by a supplier from the customs territory is considered as an effectively zero-
rated sale of service in view of the exemption enjoyed by the Peza enterprise from indirect taxes.
II.
Wreck Corporation is a domestic corporation engaged in the business of importing, refining and
selling petroleum products. During the period from September 1, 2014 to December 31, 2014,
Wreck Corporation imported 225 million liters of Jet A-1 aviation fuel and paid the excise taxes
thereon. Seventy-five percent (75%) of the total volume of aviation fuel imported were actually
sold to international carriers of Philippine and foreign registries for their use or consumption
outside of the Philippines in the period from November 1, 2014, to December 31, 2014. Wreck
Corporation did not pass on to the international carriers the excise taxes it paid on the
importation of petroleum products.
On June 25, 2015, Wreck Corporation filed an administrative claim for refund or issuance of tax
credit certificate amounting to the excise taxes it had paid on the importation of 225 million liters
of Jet A-l aviation fuel.
If you were the Commissioner of Internal Revenue, will you grant Wreck Corporation’s
administrative claim for refund or issuance of tax credit certificate? Explain your answer. (6%)
SUGGESTED ANSWER:
Yes, but only the excise tax which corresponds to the 75% of the total volume of aviation fuel
imported that were actually sold to the inter national carriers. Wreck Corporation, as the statutory
taxpayer who is directly liable to pay the excise tax on its petroleum products, is entitled to a
refund or credit of the excise taxes it paid for petroleum products sold to international carriers,
the latter having been granted exemption from the payment of said excise tax under Sec. 135 (a)
Page 43 of 59
of the NIRC(CIR v. Pilipinas. Shell Petroleum Corporation, G.R. No. 188497, February 19,
2014).
III
Vanderful, Inc.’s income tax return for taxable year 2015 showed an overpayment due to excess
creditable withholding taxes in the amount of P750,000. The company. opted to carry over the
excess income tax credits: as tax credit against its quarterly income tax liabilities for the next
succeeding years. For taxable year 2016, the company’s income tax return showed an
overpayment due to excess creditable withholding taxes in the amount of PI,100,000, which
included the carry-over from year 2015 in the amount of P750,000 because its operations
resulted in a net loss hence, there was no application for any tax liability. This time, the company
opted and marked the box “To be refunded” in respect of the total amount of P1,100,000.
Vanderful, Inc. now files in the BIR a claim for refund of unutilized overpayments of
P1,100,000, Is the claim meritorious? (4%).
SUGGESTED ANSWER:
No, but only to the extent of the amount of P750,000.00 which was carried over from year 2015.
Section 76 of the NIRC of 1997 clearly states: Once the option to carry-over and apply the
excess quarterly income tax” against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered irrevocable for that taxable period
and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.
Section 76 expressly states that the option shall be considered irrevocable for that taxable period
referring to the period comprising the succeeding taxable years. Section 76 further states that no
application for cash refund or issuance of a tax credit certificate shall be allowed therefore
referring to that taxable period..” comprising the succeeding taxable years (Asiaworld Properties
Philippine Corporation v. CIR, G.R. No. 171766, July 29, 2010).
IV.
On the basis of a warrant of seizure and detention issued by the Collector of Customs for the
purpose of enforcing the Tariff and Customs Code, assorted brands of liquor and cigarettes said
to have been illegally imported into the Philippines were seized from a store operating in a
Freeport zone. The store owner moved for the quasáhal of the warrant on the ground that the col-
… lector of Customs had no jurisdiction to enforce it within the Freeport zone..
Should the motion to quash be granted (3%)
SUGGESTED ANSWERS
No. The treatment of the Freeport zone as a separate customs territory cannot completely divest
the Government of its right to intervene in the operations and management of such Freeport,
especially when patent violations of the customs and tax laws are discovered. After all, Section
602 of the Tariff and Customs Code vests exclusive original jurisdiction in the Bureau of
Customs over seizure and forfeiture cases in the enforcement of the tariff and customs
laws (Agrier Co., Ltd. v. Hon. Fitus B. Villanueva, et al., G.R. No. 158150, September 10,
2014).
V.
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On March 30, 2016, XL Co. filed an administrative claim for refund of unutilized Input VAT for
taxable year 2014, together with supporting documents, XL Co. claimed that its sale of generated
power and delivery of electric capacity was VAT zero-rated. Due to the inaction of the
Commissioner of Internal Revenue (CIR), XL Co. filed with the Court of Tax Appeals (CTA)
the following judicial claims for refund.
Period Covered Date Filed
1st Quarter of 2014 March 31, 2016
2nd Quarter of 2014 June 30, 2016
3rd and 4th quarter of 2014 August 12, 2016
Is XL Co.’s claim for VAT refund timely filed? Explain your answer. (5%)
SUGGESTED ANSWER:
As regards the claims for VAT refund which are administrative in nature, all have been timely
filed. The law requires that the administrative claim should be filed within two years from the
end of the quarter when the sale was made (Sec. 112(A), NIRC); hence, the filing of the
administrative claim for refund on March 30, 2016 covering the four quarters of 2014, complies
with the period prescribed by law.
The same is not true, however, as to the judicial claims. Only the judicial claim filed on August
12, 2016 is timely filed. As provided by Section 112(C), 1997 NIRC, as amended, one of the
conditions for a judicial claim of refund or credit under the VAT System is compliance with the
120+30 day mandatory and jurisdictional periods. Strict compliance with the 120+30 day periods
is, thus, necessary for such claim to prosper (CIR V. San Roque Power Corporation, G.R. Nos.
187485, 196113 and 197156, October 8, 2013).
The Commissioner has been granted by law 120 days within which to decide the taxpayer’s
claim. Then, if the Commissioner does not act on the taxpayer’s claim within the 120-day period,
the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day. period.
Applying this to the present case, the 120+ day from the filing of the administrative claim fell on
July 28, 2016. XL Co. may ile the judicial claim from July 29, 2016 to August 27, 2016; thus,
only the judicial claim filed on August 12. 2016 has been timely filed.
VI.
Heeding the pronouncement of the President that the worsening traffic condition in the
metropolis was a sign of economic progress, the Congress enacted Republic Act No. 10701, also
known as An Act Imposing, a Transport Tax on the Purchase of Private Vehicles. Under RA
10701, buyers of private vehicles are required to pay a transport tax equivalent to 5% of the total
purchase price per vehicle purchased. RA 10701 provides that the Land Transportation Office
(LTO) shall not accept for registration any new vehicles without proof of payment of the 5%
transport tax. RA 10701 further provide that existing owners of private vehicles shall be required
to pay a tax equivalent to 5% of the current fair market : value of every vehicle registered with
the LTO. However, RA 10701 exempts owners of public utility vehicles and the Government
from the coverage of the 5% transport tax.
Page 45 of 59
A group of private vehicle owners sue on the ground that the law is unconstitutional for
contravening the Equal Protection Clause of the Constitution.
Rule on the constitutionality and validity of RA 10701. (5%).
SUGGESTED ANSWER
RA 10701 is valid and constitutional. A levy of tax is not unconstitutional because it is not
intrinsically equal and uniform in its operation. The uniformity, rule does not prohibit
classification for purposes of taxation (British American Tobacco v. Jose Isidro N.
Camacho, G.R. No. 163583, August 20, 2008, 562 SCRA 511).
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all
subjects or objects of taxation, similarly situated are to be treated alike both in privileges and
liabilities. Unifor-. mity does not forfend classification as long as: (1) the standards that are used
therefore are substantial and not arbitrary, (2) the categorization is germane to achieve the
legislative purpose, (3) the law applies, all things being equal, to both present and future
conditions, and (4) the classification applies equally well to all those belonging to the same
class (Rufino R. Tan v. Ramon R. Del Rosario, Jr., G.R. Nos. 109289 and 109446, October 13,
1994, 237 SCRA 324, 331). All of the foregoing requirements of a valid classification having
been net and those which are singled out are a.class. in themselves, there is no violation of the
“Equal Protection Clause” of the Constitution.
VII.
Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) of Sta. Portia Realty
Corporation (SPRC). He invited the Regional Director of the Housing and Land Use Regulatory
Board (HLURB) to lunch at the Sulo Hotel in Quezon City to discuss the approval of SPRC’s
application for a development permit in connection with its subdivision development project in
Pasig City, At breakfast the following day, Calvin met a prospective client interested to enter
into a joint venture with SPRC. for the construction of a residential condominium unit in Cainta,
Rizal.
Calvin incurred expenses for the lunch and breakfast meetings he had with the Regional Director
of HLURB and the prospective client, respectively. The expenses were duly supported by
official receipts issued in his name. At month’s end, he requested the reimbursement of his
expenses, and SPRC granted his request.
(a) Can SPRC claim an allowable deduction for the expenses incurred by Calvin? Explain your
answer. (2.5%)
SUGGESTED ANSWER
(a) SPRC cannot claim as a deduction, the amount spent for lunch in the meeting with the
Regional Director of HLURB: While the expense is business connected, the same is not allowed
as deduction because it was incurred as an indirect payment to a government official which, not
only amounts to a violation of the Anti Graft and Corrupt Practices Act but also constitutes
bribes, kickbacks and similar payments (See Şec: 34 (a) (C) NIRC).
With respect, however, to the amount spent for breakfast with a prospective client, the same is
deductible from gross income of SPRC. The expense complies with the requirements for
deductibility, namely: (a) the expense must be ordinary and necessary (b) it must have been paid
or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade
Page 46 of 59
or business of the taxpayer, and (d) it must be supported by receipts, records or other pertinent
papers (CIR v. General Foods (Phils.), Inc, GR No: 143672, April 4, 2003, 401 SCRA 545,
553).
Section 34 (A )(b) of the 1997 NIRC, as amended, does not require that the substantiation be in
the form of official receipts or invoices issued in the name of the taxpayer claiming the expense.
It must only be proven that there is a direct connection or relation of the expense being deducted
to the development, management, operation and/or conduct of the trade business or profession of
the taxpayer”.
(b) is the reimbursement received by Calvin from SPRC subject to tax? Explain your answer.
(2.5%)
SUGGESTED ANSWER:
(b) No. Any amount paid as reimbursements for representation incurred by the employee in the
performance of his duties is not compensation subject to withholding, if the following conditions
are satisfied: (1) It is for ordinary and necessary representation expense paid or incurred by the
employee in the pursuit of the trade, business or profession, and (ii) The employee is required to
account/liquidate (for such expense in accordance with the specific requirements of
substantiation pursuant to Seç, 34 of the 1997 NIRC, as amended. The amounts are actually
spent by the employee for the benefit of his employer, so no income is considered to have flowed
to the employee.
VIII
On April 30, 2015 Daryl resigned as the production manager of 52nd Avenue, a television studio
owned by SSS Entertainment Corporation. 52nd Avenue issued to her a Certificate of
Withholding Tax ori Compensation (BIR Form No. 2316), which showed that the tax withheld
from her compensation was equal to her income tax due for the period from January 2015 to
April 30, 2015.
A month after her resignation, Daryl put up her own studio and started producing short films.
She was able to earn a meager income from her short films but did not keep a record of her
production expenses.
Is Daryl qualified for substituted filing for taxable year 2015? Explain your answer. (3%)
SUGGESTED ANSWER :
No. Following the relevant revenue issuance, only an individual receiving purely compensation
income, regardless of amount; from only one employer in the Philippines for the calendar year,
the income tax of which has been withheld correctly by the said employer, shall qualify for
substituted filing of income tax return (Revenue Regulations No:3-2002). Daryl, within the same
calendar year, derived income from producing short films; thus, she did not receive purely
compensation income for calendar year 2015. Accordingly, the amount withheld from her
compensation income is not equal to the income tax due on his aggregate taxable income during
the taxable year.
IX.
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Upon his retirement, Alfredo transferred his savings derived from his salary as a marketing
assistant to a time deposit with AAB Bank. The bank regularly deducted 20% final withholding
tax on the interest income from the time deposit.
Alfredo contends that the 20% final tax on the interest income.con stituted double taxation
because his salary had been already subjected to withholding tax.
Is Alfredo’s contention correct? Explain your answer. (3%)
SUGGESTED ANSWER:
No Double taxation means taxing for the same tax period the same thing or activity twice; when
it should be taxed but once, for the same purpose and with the same kind of character of tax (CIR
v. Citytrust Investment Phils., G.R. Nos. 139786, 140857, September 27, 2006). The 20% final
tax is imposed on the interest income, while the tax earlier withheld is on the salary or
compensation income. Thus, though both pertain to income tax, they do not pertain to the same
thing or activity and consequently, no double taxation exists.
X.
On January 27, 2017, Ramon, the comptroller of Vantage Point, Inc., executed a document
entitled “Waiver of the Statute of Limitations” in connection with the BIR’s investigation of the
tax liabilities of the company for the year 2012. However, the Board of Directors of Vantage
Point, Inc., did not adopt a board resolution authorizing Ramon to execute the waiver.
On October 14, 2017, Vantage Point, Inc. received a preliminary assessment notice from the BIR
indicating its deficiency withholding taxes. for the year 2012. Vantage Point, Inc., filed its
protest. On October 30, 2017, the BIR issued a formal letter of demand and final assessment
notice. Vantage Point, Inc., again filed a protest. The Commissioner of Internal Revenue denied
the protests and directed the collection of the assessed deficiency taxes,
Accordingly, Vantage Point, Inc., filed a petition for review in the CTA to seek the cancellation
and withdrawal of the assessment on the ground of prescription.
1. What.constitutes a valid waiver of the statute of limitations for the assessment and
collection of taxes? Explain your answer.(3%)
SUGGESTED ANSWER
(a) Generally, a valid waiver of the statute of limitations for the assessment and collection of
taxes must be executed by the taxpayer and accepted by the BIR prior to the expiration of the
period which it seeks to extend. The same must also be executed by the taxpayer.or.. his duly
authorized representative, or in the case of a corporation, it must be signed by any of its
responsible officers (CIR V. Kudos Metal Corporation, G.R. No. 178087, May 5, 2010, 620
SCRA 232, 243, 244). Such requirements must be met considering that a waiver of the statute of
limitations under the NIRC, to a certain extent, is a derogation of the taxpayer’s right to security
against prolonged and unscrupulous investigations and must therefore be carefully and strictly
construed (Philippine journalists, Inc. x. CIR, G.R. No. 162852, December 16, 2004).
(b) Has the right of the Government to assess and collect deficiency taxes from Vantage Point,
Inc. for the year 2012 prescribed? Explain your answer. (4%)
Page 48 of 59
SUGGESTED ANSWER.
(b) Yes, the final assessment was issued beyond the three year prescriptive period to make an
assessment (Section 203, 1997 NIRC, as amended). The Waiver did not extend the three-year
prescriptive period, since it was executed after the expiration of such period.
XI.
The Board of Directors of Sumo Corporation, a company primarily engaged in the business of
marketing and distributing pest control products, approved the partial cessation of its commercial
operations, resulting in the separation of 32 regular employees. Only half of the affected
employees were notified of the board resolution.
Rule on the taxability of the separation pay and indemnity that will be received by the affected
employees as the result of their separation from service. Explain your answer. (3%)
SUGGESTED ANSWER
It shall be tax-exempt. Section 30(B)(6)(b) of the 1997 NIRC, as amended, provides that any
amount received by an official or employee or by his heirs from the employer as a consequence
of separation of such official or employee from the service of the employer because of death,
sickness or other physical disability or for any cause beyond the control of the said official or
employee shall be exempt from taxation.
XII.
On September 17, 2015, Data Realty, Inc., a real-estate corporation duly organized and existing
under Philippine law, sold to Jenny Vera a condominium unit at Freedom Residences in Malabon
City with an area of 32.31 square meters for a contract price of P4,213,000. The condominium
unit had a zonal value amounting to P2,877,000 and fair market value amounting to P550,000.
(a) is the transaction subject to value-added tax and documentary stamp tax? Explain your
answer. (3%)
SUGGESTED ANSWER
(a) Yes. As to the VAT liability, sale of real properties held primarily for sale to customer or held
for lease in the ordinary course of trade or business is subject to VAT (Section 106 (A) 1)(a),
1997 NIRC, as amended); further, the contract price, which is the highest compared to the zonal
value and the fair market value, is beyond the transactional . threshold amount for residential
dwellings thereby making the sale transaction VATable. As to the DST. liability, all deeds of
sale and conveyances of real property are likewise subject to DST (Section 196, 1997 NIRC, as
amended).
(b) Would your answer be the same if the property was sold by a bank in a foreclosure sale?
Explain your answer. (3%)
SUGGESTED ANSWER
(b) No, the sale made by the bank is exempt from VAT. Banks are exempt from VAT because
they are subject to percentage tax under Title V of the NIRC (Section 109 in relation to Section
Page 49 of 59
121 of 1997 NIRC, as amended). The sale, however, will still be subject to DST because
conveyances of real property are generally subject to DST (Section 196, NIRC).
XIII
BATAS Law is a general professional partnership operating in the City of Valenzuela. It

regularly pays value-added tax on its services. All its lawyers have individually paid the required
professional tax for the year 2017. However, as a condition for the renewal of its business permit
for the year 2017, the City Treasurer of Valenzuela assessed BATAS Law for the payment of
percentage business tax on its gross receipts for the year 2016 in accordance with the Revenue
Tax Code of Valenzuela.
Is BATAS Law liable to pay the assessed percentage business tax? Explain your answer. (3%)
SUGGESTED ANSWER
No Section 133 (i) of the Local Government Code provides that the exercise of the taxing powers
of local government units such as the City of Valenzuela shall not extend to the levy of
percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided in the LGC; therefore, BATAS Law may not be
assessed with and required to pay percentage business tax.
XIV.
Globesmart Services, Inc, received a final assessment notice with formal letter of demand from
the BIR for deficiency income tax, value-added tax and withholding tax for the taxable year 2016
amounting to P48 million. Globesmart Services, Inc., filed a protest against the assessment, but
the Commissioner of Internal Revenue denied the protest. Hence, Globesmart Services, Inc. filed
a petition for review in the CTA with an urgent motion to suspend the collection of tax.
After hearing, the CTA Division issued a resolution granting the mo tion to suspend but required
Globesmart Services, Inc., to post a surety bond equivalent to the deficiency assessment within
15 days from notice of the resolution. Globesmart Services, Inc, moved for the partial
reconsideration of the resolution and for the reduction of the bond to an amount it could obtain.
The CTA division issued another resolution reducing the amount of the surety bond to P24
million. The latter amount was still more than the net worth of Globesmart Services, Inc., as
reported in its audited financial statements.
May the collection of taxes be suspended? Explain your answer. (3%)
SUGGESTED ANSWER
(a) Yes. As provided by RA No. 1125, as amended by RA No. 9282, that when in the opinion of
the Court the collection by the aforementioned government agencies may jeopardize the interest
of the Government and/or the taxpayer, the Court at any stage of the proceeding may suspend the
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.
(b) Is the CTA Division justified in requiring Globesmart Services, Inc., to post a surety bond as
a condition for the suspension of the deficiency tax collection? Explain your answer. (3%)
Page 50 of 59
SUGGESTED ANSWER
(b). No. The Supreme Court in the Tridharma Case cited the case of Pacquiao v. Court of Tax
Appeals (G.R. No. 213394, April 6, 2016) where it ruled that the CTA should first conduct a
preliminary hearing for the proper determination of the necessity of a surety bond or the
reduction thereof. In the conduct of its preliminary hearing, the CTA must balance the scale
between the inherent power of the State to tax and its right to prosecute perceived transgressors
of the law, on one side, and the constitutional rights of petitioners to due process of law and the
equal protection of the laws, on the other. In this case, the CTA failed to consider that the
amount of the surety bond that it is asking Globesmart Services, Inc. to pay is more than its net
worth. It is, thus, necessary for the CTA to first conduct a preliminary hearing to give the
taxpayer an opportunity to prove its inability to come up with such amount.
XV.
Casimira died on June 19, 2017, after three weeks of confinement
due to an unsuccessful liver transplant. For her confinement, she had incurred substantial
medical expenses that she financed through personal loans secured by mortgages on her real
properties. Her heirs are still in the process of making an inventory of her assets that can be used
to pay the estate taxes, if any, which are due on December 19, 2017.
1. Are the medical expenses, personal loans and mortgages incurred by Casimira deductible
from her gross estate? Explain your answer.
SUGGESTED ANSWER
(a) Yes, subject to certain conditions set by the NIRC. As for the medical expenses, they must be
incurred within one year from death, whether paid or unpaid, and the amount must not exceed
P500,000. As for the personal loans, it is required that the loan document must be notarized and
if incurred within three years from the date of death, the executor or administrator shall submit a
statement showing the disposition of the proceeds of the loan. As to the mortgages, it is required
that the fair. market value of Casimira’s interest in said property, undiminished by such mortgage
or indebtedness, is included in the value of the gross estate. The claims for personal loans and
mortgages must have been contracted bona fide and for an adequate consideration in money or
money’s worth (Section 86, 1997 NIRC, as amended).
(b). May the heirs of Casimira file the estate tax return and pay the corresponding estate tax
beyond December 19, 2017, without incurring interest and surcharge? Explain your answer.
(3%)
SUGGESTED ANSWER
(b). The heirs may file the estate tax return beyond December 19, 2017, as long as they filed a
request for a reasonable extension, not exceeding 30 days. Once the request for extension has
been granted and the return filed within the extended period following the “pay-as-you file”
procedure, only the interest on extended payment may be imposed but not the surcharge. Interest
and surcharge, however, may be imposed upon failure of the heirs to file and pay the estate tax
within the extended period granted by the CIR (Sections 248(A) and 249 (D), 1997 NIRC, as
amended).
Section 91, on the other hand, allows for the extension of time to pay the estate tax due, for a
period not exceeding five (5) years in case the estate is settled through the courts, or two (2)
Page 51 of 59
years in case the estate is settled extrajudicially, If an extension is granted, the interest on
extended payment may be imposed. The Commissioner may require the executor,. or
administrator, or beneficiary, as the case may be, to furnish a bond in an amount not exceeding
double the amount of the tax and with such sureties as the Commissioner deems necessary,
conditioned upon the pay. ment of the said tax in accordance with the terms of the extension.
XVI.
The BIR assessed the Babuyan Water District (BWD) with deficiency income taxes amounting
to P8.5 million, inclusive of interest and surcharge. The BWD disputed the assessment, and
argued that it was a wholly-owned government entity performing essential government
functions. However, the BR denied the protest.
The BWD filed a petition for arbitration in the Office of the Secretary of Justice pursuant to
Sections 66 to 71, Chapter 14, Book IV of the Administrative Code of 1987 to assail the denial
of its protest, and to seek the proper interpretation of Section 32(B)(7)(b) of the Tax Code that
excluded from gross income the income derived by the Government or its political subdivisions.
The Secretary of Justice rendered a decision declaring the BWD exempt from the payment of
income tax.
The Commissioner of Internal Revenue appealed to the CTA on the sole ground that the
Secretary of Justice had no jurisdiction to review the assessment of the BIR.
is the appeal meritorious? Explain your answer. (4%)
SUGGESTED ANSWER
No. Section 7(a) of RA No. 1125, as amended by RA 9282 enu merates the CTA‘s exclusive
appellate jurisdiction to review by appeal certain decisions or inaction but not that of a Secretary
of Justice.
Moreover, despite the issue involves the CIR’s assessment, however, Section 7(a)(1) of the same
law, specifically the phrase “other matters arising under the National Internal Revenue or other
laws administered by the Bureau of Internal Revenue” must be read together with words
preceding it, i.e., “decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, following the statutory construction principle of ejusdem generis (CIR V.
CTA (Second Division) and Petron Corporation, GR No. 207843, July 15, 2015).
ALTERNATIVE ANSWER
Yes. GOCCs are taxable entities and they are not exempt from BIR assessment and collection,
unless their charter or the law creating them provides otherwise. Hence, in case of tax dispute
between a GOCC and the BIR, the controversy is cognizable and appealable to the CTA. The
issue cannot be resolved by the DOJ.
PD 242 is a general law that deals with administrative settlement or adjudication of disputes,
claims, and controversies between or among government offices, agencies and instrumentalities,
including GOCCs; whereas, RA 1125 (the law creating CTA) is a special law. A special law.
prevails over a general law. The fact that PD 242 is the more recent law is of no significance,
CTA has jurisdiction when a GOCC is assessed taxes. Disputes, claims, and controversies falling
under RA 1125, even though solely among government offices, agencies, and instrumentalities,
including GOCCs, remain solely in the exclusive jurisdiction of the CTA.
Page 52 of 59
[Note: (On recent jurisprudence not covered by the 2017 Bar Syllabus) The Supreme Court held
in Commissioner of Internal Revenue v. Secretary of Ju tice and PAGCOR (G.R. No. 177387,
November 9, 2016) that the Secretary of Justice does not have any jurisdiction to review any
disputed assessments arising under the Tax Code. The Secretary of Justice should have desisted
from dealing with the petition and referred the matter to the Court of Tax Appeals that has
jurisdiction over appeals on the decisions of the BIR in tax assessment cases).
XVII
San Juan University is a non-stock, non-profit, educational institution, It owns a piece of land in
Caloocan City on which its three.2-storey school. buildings stood. Two of the buildings are
devoted to classrooms, laboratories, à canteen, a bookstore, and administrative offices. The third
building is reserved as dormitory for student athletes who are granted scholarships for a given
academic year.
In 2017, San Juan University earned income from tuition fees and from leasing a portion of its
premises to various concessionaires of food, books, and school supplies.
(a) Can the City Treasurer of Caloocan City collect real property taxes on the land and building
of San Juan University? Explain your answer. (5%)
SUGGESTED ANSWER
(a) Yes, but only on the leased portion. Article XIV, Section 4(3) of the 1987 Constitution
provides that the assets of a non-stock, non-profit educational institution shall be exempt from
taxes and duties only if the same are used actually, directly, and exclusively for educational
purposes. The test of exemption from taxation is the use of the property for purposes mentioned
in the Constitution. The leased portion of the building may be subject to real property tax since
such lease is for commercial purposes, thereby, it removes the asset from the property tax
exemption granted under the Constitution (CİR v. De La Salle University, Inc., G.R. Nos.
196596, 198841; 198941, November 9, 2016).
(b) is the income earned by San Juan University for the year 2017 subject to income tax? Explain
your answer. (5%)
SUGGESTED ANSWER
(b) No, provided that the revenues are used actually, directly, and exclusively for educational
purposes as provided under Article XIV, Section 4(3) of the 1987 Constitution. The requisites for
availing the tax exemption under Article XIV, Section 4 (3) are as follows: (1) the taxpayer falls
under the classification non-stock, non-profit educational institution, and (2) the income it seeks
to be exempted from taxation is used actually, directly and exclusively for educational purposes;
thus, so long as the requisites are met, the revenues may be exempt from tax (CIR v. De La Salle
University, Inc., G.R. Nos. 196596, 198841, 198941, November 9, 2016).
XVIII.
Distinguish outright smuggling from technical smuggling. (3%)
SUGGESTED ANSWER
Page 53 of 59
(a) In outright smuggling (or unlawful importation), goods and articles of commerce are brought
into the country without the required importation documents, or are disposed of in the local
market Without having been cleared by the BOC or other authorized government agencies, to
evade the payment of correct taxes, duties and other charges. (Bureau of Customs v. The
Honorable Agnes VST Devanadera, er al, G.R.. No. 193253, September 8, 2015)
Sec, 102. (FI) CMTA: Outright Smuggling refers to an act of importing goods into the country
without complete customs prescribed importation documents, or without being cleared by
customs or other regulatory government agencies, for the purpose of evading payment of
prescribed taxes, duties and other government charges.
On the other hand, in technical smuggling, the goods and articles are brought into the country
through fraudulent, falsified or erroneous declarations, to substantially reduce, if not totally
avoid, the payment of correct taxes, duties and other charges. Such goods and articles pass
through the BOC, but the processing and clearing procedures are attended by fraudulent acts in
order to evade the payment of correct taxes, du ties, and other charges (Bureau of Customs v.
The Honorable Agnes VST Devanadera, et al, G.R. No. 193253, September 8, 2015).
Sec. 102. (pp) CMTA: Technical Smuggling refers to the act of importing goods into the
country by means of fraudulent, falsified or erroneous declaration of the goods to its nature, kind,
quality, quantity or weight, for the purpose of reducing or avoiding payment of prescribed taxes,
duties, and other charges.m
(b) Distinguish compromise from abatement of taxes (3%)
SUGGESTED ANSWER:
(b) A compromise of tax is a remedy which is available when there is a reasonable doubt as to
the validity of the claim against the taxpayer exists, or when the financial position of the
taxpayer demonstrates a clear inability to pay the assessed tax.
Abatement of tax, on the other hand, is available as a remedy when the tax or any portion thereof
appears to be unjustly or excessively assessed, or when the administration and collection costs
involved do not justify the collection of the amount due (Section 204, NIRC).
XIX.
CMI School, Inc., a non-stock, non-profit corporation, donated its three parcels of idle land
situated in the Municipality of Cuyapo, Nueva Ecija to SLC University, another non-stock, non-
profit corporation, in recognition of the latter’s contribution to and participation in the spiritual
and educational development of the former.
(a) Is CMI School, Inc., liable for the payment of donor’s tax? Explain your answer. (2.5%)
SUGGESTED ANSWER
(a) No. Gifts made by a resident in favor of an educational corporation or institution shall be
exempt from donor’s tax (Section 101(A)(3), 1997 NIRC, as amended). Considering that SLC
University is a non-stock, non-profit corporation, and the property donated was made by a
resident, then, such exemption under the law applies to the present cases.
Page 54 of 59
(b) If SLC. University later sells the three parcels of idle land to Puregold Supermarket, Inc., a
stock corporation, will SLC University be liable for capital gains tax? Explain your answer.
(3%)
SUGGESTED ANSWER
(b) Yes. The gain presumed to have been realized on the sale, exchange or disposition of lands
and/or buildings which are not actually used in the business of a corporation and are treated as
capital assets shall be subject to capital gains tax (Section 27(D)(5), 1997 NIRC, as amended).
Likewise, Section 30 of the NIRC subjects to income tax (capital gains tax) all income from
properties, real or personal, or from any activity conducted for profit, irrespective of the
disposition of the income, by all tax exempt corporations.
(c) If SLC University donates the three parcels of idle land in favor of the Municipality of
Cuyapo, Nueva Ecija, will SLC University be ii able for donor’s tax? Explain your answer.
(25%)
SUGGESTED ANSWER
(C) No. Gifts made by a resident to any political subdivision of the National Government shall
be exempt from donor’s tax (Section 101(A)2), 1997 NIRC, as amended).
2018 Bar Qs
Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization which owns
a vast tract of land in Kalinga.
KKI has devoted 1 /2 of the land for various uses: a church with a cemetery
exclusive for deceased priests and nuns, a school providing K to 12 education, and a
hospital which admits both paying and charity patients. The remaining 1/2 portion
has remained idle.
The KKI Board of Trustees decided to lease the remaining 1 /2 portion to a real
estate developer which constructed a community mall over the property.
Since the rental income from the lease of the property was substantial, the KKI
decided to use the amount to finance (1) the medical expenses of the charity
patients in the KKI Hospital and (2) the purchase of books and other educational
materials for the students of KKI School.
(a) Is KKI liable for real property taxes on the land? (2.5%)
(b) Is KKl's income from the rental fees subject to income tax? (2.5%)
1. Test is the use of the property. (Lung Center Case)
(1) Yes. The Court held that the petitioner is a charitable institution within the
context of the 1973 and 1987 Constitutions.
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. Hence, the Lung Center was organized for the welfare and
benefit of the Filipino people.
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, so long as the money received is devoted to charitable objects and no
money inures to the private benefit of the persons managing or operating the
institution. As well as the reason of donation in the form of subsidies granted by the
government.
(2) No. Those portions of its real property that are leased to private entities are not
exempt from real property taxes as these are not actually, directly and exclusively
used for charitable purposes.
The petitioner failed to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital
are used for the treatment of patients and the dispensation of medical services to
Page 55 of 59
them, whether paying or non-paying, other portions thereof are being leased to
private individuals for their clinics and a canteen.
Hence, 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 such taxes. On the
other hand, the portions of the land 12
Page 56 of 59
occupied by the hospital and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.
2. ADE = exempt from income tax (De lasalle)
The requisites for availing the tax exemption under Article XIV, Section 4 (3),
namely: (1) the taxpayer falls under the classification non-stock, non-profit
educational institution ; and (2) the income it seeks to be exempted from taxation is
used actually, directly and exclusively for educational purposes. The records of the
case showed that the foundation’s operation is not for profit, but in pursuit of its
primary purpose which is “to establish a school xxx the primary intention being to
form the whole man through the integration of a liberal Christian education with
professional competence for participation in Philippine development.”
XVIII
Kathang Isip, Inc. (Kii) is a domestic corporation engaged in the business of
manufacturing, importing, exporting, and distributing toys both locally and abroad.
Its principal office is located in Kalookan City, Philippines. It has 50 branches in
different cities and municipalities in the country. When Kii applied for renewal of its
mayor's permit and licenses in its principal office in January this year, Kalookan City
demanded payment of the local business tax on the basis of the gross sales
reported by the corporation in its audited financial statements for the preceding
year. Kil protested, contending that Kalookan City may tax only the sales
consummated by its principal office but not the sales consummated by its branch
offices located outside Kalookan City.
When Kalookan City denied the protest, Kil engaged the services of Atty. Kristeta
Kabuyao to file the necessary judicial proceedings to appeal the decision of
Kalookan City. Atty. Kabuyao is a legal expert, but resides in Kalibo, Aklan where
her husband operates a resort. She, however, practices in Metro Manila, including
Kalookan City. The counsel representing the city, in the case filed in Kalookan City
by KII, questioned the use of Atty. Kabuyao's Professional Tax Receipt (PTR) issued
in Aklan for a case filed in Kalookan City.
(a) Is Kll's contention that Kalookan City can only collect local business taxes based
on sales consummated in the principal office meritorious? (2.5%)'
(b) Is the Kalookan City counsel correct in saying that Atty. Kabuyao's PTR issued in
Aklan cannot be used in Kalookan? (2.5%)
1. Sec 150 of the LGC – For purposes of collection of the taxes under Section 143
(tax on business), businesses maintaining or operating branch or sales outlet
elsewhere shall record the sale in the branch or sales outlet making the sale or
transaction, and the tax thereon shall accrue and shall be paid to the municipality
where such branch or sales outlet is located.
2. Sec 139(B) of the LGC – Professional Tax
(b) Every person legally authorized to practice his profession shall pay the
professional tax to the province where he practices his profession or where he
maintains his principal office in case he practices his profession in several places:
Provided, however, That such person who has paid the corresponding professional
tax shall be entitled to practice his profession in any part of the Philippines without
being subjected to any other national or local tax, license, or fee for the practice of
such profession.
XX
Krisp Kleen, Inc. (KKI) is a corporation engaged in the manufacturing and processing
of steel and its by-products. It is both registered with the Board of Investments with
a pioneer status, and with the BIR as a VAT entity. On October 10, 2010, it filed a
claim for refund/credit of input VAT for the period January 1 to March 31, 2009
before the Commissioner of Internal Revenue (CIR). On February 1, 2011, as the CIR
had not yet made any ruling on its claim for refund/credit, KKI, fearful that its period
to appeal to the courts might prescribe, filed an appeal with the Court of Tax
Appeals (CTA).
(a) Can the CTA act on KKl's appeal? (2.5%)
Page 57 of 59
(b) Will your answer be the same if KKI filed its appeal on March 20, 2011 and CIR
had not yet acted on its claim? (2.5%)
Aichi case
120+30 days is mandatory and jurisdictional
the prescriptive period of 2 year . Sec. 204 (c) and 229 are applied only in instances
of erroneous payment and illegal collection. Sec. 112 (A) of NIRC applies here. Sec.
31 Chapter VIII Book I of the Administrative Code of 1987 being the more recent law
governing legal period applies making 1 year = 12 months. The principle of Lex
Posterioni Derogati Priori applies. Thus, since it is filed on exactly Sept. 30, 2004
filing is timely.
filing an administrative claim is a condition precedent to a judicial claim for refund .
Sec. 112 (D) of the NIRC clearly provides that the CIR has 120 days from date of the
submission of the complete documents in support of the application within which to
grant or deny the claim. In case of full or partial denial by the CIR, the recourse is to
appeal before the CTA within 30 days from receipt of the decision of the CIR.
However, if after 14
the 120-day period the CIR fails to act on the application for tax refund, the remedy
is to appeal the inaction of the CIR to the CTA within 30 days.
I
IKM Corporation, doing business in the City of Kalookan, has been a distributor and
retailer of clothing and household materials. It has been paying the City of Kalookan
local taxes based on Sections 15 (Tax on Wholesalers, Distributors or Dealers) and
17 (Tax on Retailers) of the Revenue Code of Kalookan City (Code). Subsequently,
the Sangguniang Panlungsod enacted an ordinance amending the Code by inserting
Section 21 which imposes a tax on "Businesses Subject to Excise, Value-Added and
Percentage Taxes under the National Internal Revenue Code (NIRC)," at the rate of
50% of 1 % per annum on the gross sales and receipts on persons "who sell goods
and services in the course of trade or business." KM Corporation paid the taxes due
under Section 21 under protest, claiming that (a) local government units could not
impose a tax on businesses already taxed under the NIRC and (b) this would
amount to double taxation, since its business was already taxed under Sections 15
and 17 of the Code.
(a) May local government units impose a tax on businesses already subjected to tax
under the NIRC? (2.5%)
(b) Does this amount to double taxation? (2.5%)
1. Yes. “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.” (Article 10, Section 5 of the 1987 Constitution).
Sec 133 of the LGC – Common limitations on the taxing power of LGC
Relate with Sec 143 (h) of the LGC – “Tax on Businesses: (h) On any business, not
otherwise specified in the preceding paragraphs, which the sanggunian concerned
may deem proper to tax: Provided, That on any business subject to the excise,
value-added or percentage tax under the National Internal Revenue Code, as
amended, the rate of tax shall not exceed two percent (2%) of gross sales or
receipts of the preceding calendar year. The sanggunian concerned may prescribe a
schedule of graduated tax rates but in no case to exceed the rates prescribed
herein.”
2. Yes, it will amount to indirect double taxation. Under the law, direct double
taxation exists if the following requisites exist:
 Both taxes are imposed on the same property or subject matter;
 For the same purpose;
 Imposed by the same taxing authority;
 Within the same jurisdiction;
 During the same taxing period;
 Covering the same kind or character of tax.
Page 58 of 59
If there is an element lacking, only indirect double taxation exists. The Constitution
only prohibits direct double taxation.
Page 59 of 59

Section C Taxation Laws 1: General Principles of Taxation

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Section C Taxation Laws 1: General Principles of Taxation

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Section C TAXATION LAWS 1

GENERAL PRINCIPLES OF TAXATION

Power to Tax is the Power to Destroy

III. Theories in Taxation

Q:When must the payment under protest be lodged?

IV. Nature of Taxation

2. Legislative - The power to tax is exclusively legislative and cannot be

3. Non-delegable – it is generally not delegated to the judicial or executive

Q: What are the exceptions to the principle of non-delegation of powers?

b. When allowed by the Constitution [Section 28(2), Article VI, 1987

c. Administrative Implementation - When delegation merely relates to

4. It is not the contract between the State and its citizens.

GOCCs are exempted unless they are performing

1. Delegation to the President. Under the Constitution,

2. Delegation to Local Governments. Each local government

3. Delegation to Administrative Agencies. Administrative

iii. International Comity - The property of a foreign state or

Sec 2, Article II of the Philippine Constitution - Section 2. The

1. See Resolution in the First National Tax Association cited in

Territorial Jurisdiction or Situs - However broad the

Substantive Requirement. The tax law should be valid; should

Procedural Requirement. This involves the compliance with

ii. Equal Protection Clause (Section 1, Article III, 1987

All persons subject to legislation shall be treated alike under like

The Constitution prohibits class legislation which discriminates

Classification to be valid must:

iii. The rule of taxation shall be uniform and equitable. The

Uniformity in taxation means that all taxable articles or properties

Equity in taxation involves the application of the ability to pay

Taxation may be uniform but inequitable when the amount of tax

To insure and enhance the equity objective, the Constitution

Absolute or perfect equality or uniformity and equity is, of course,

iv. No law impairing the obligation of contracts shall be

The obligation of a contract is impaired when its terms or

An exemption of impairment by law is when a tax exemption

However, non-impairment may not be invoked in the case of a

by granting exemptions, the State does not forever waive the

In Tolentino v. Sec. of Finance, CREBA, one of the petitioners,

v. No person shall be imprisoned for debt or non-payment of

vi. The free exercise and enjoyment of religious profession and

Prohibition against appropriation for religious purposes

vii. Freedom of the Press (Section 4, Article III, 1987

viii. Tax Exemption of Properties for Religious, Charitable, and

ix. All appropriation, revenue of tariff bills shall originate

xi. Every bill passed by Congress shall be embrace only one

xii. Congress shall evolve a progressive system of taxation

xiv. The Congress may, by law, authorize the President to fix

xv. All revenues and assets of non-stock, non-profit

xvi. Supremacy of the National Government over Local

V. Purposes and Objectives of Taxation

VI. Stages or Aspects of Taxation

VII. Basic Principles of Sound Tax System

Answer: A: The three fundamental principles of a sound taxation are fiscal

1. Fiscal Adequacy dictates that sources of revenue must be sufficient to

VIII. Definition of Taxes

X. Taxes Distinguished from Other Impositions

1. Taxation v. Eminent Domain v. Police Power

-  A debt may be the subject of set-off or compensation, while a

6. Tax v. Special Assessment

XI. Classification of Taxes

Important Points to Consider regarding Indirect Taxes:

1. When the consumer or end-user of a manufacturer product is tax-exempt, such

 in the same year (or taxing period),