I.

GENERAL PRINCIPLES

A. CONCEPT AND PURPOSE OF TAXATION

(By: Alonto and Binayao)

1. Definition
Taxation is the act of laying a tax. It is a process or means by which the sovereign,
through its law-making body, raises income to defray the necessary expenses of government 1.
Further, it is an enforced proportional contribution imposed by the State by its sovereign
capacity, to support the government2.
As a power, taxation refers to the inherent power of the state to demand enforced
contributions for public purposes. Being inherent to the State, the right to impose taxes exists
apart from the constitution. The power of taxation is a symbiotic relationship whereby, in
exchange for the protection that the citizens get from the government, taxes are paid3.
Taxes, on the other hand, are enforced proportional contributions from persons and
property, levied by the state by virtue of its sovereignty for the support of the government and
for all its public needs. 4
They are not arbitrary exactions but contributions levied by authority of law, and by some
rule of proportion which is intended to insure uniformity of contribution and a just apportionment
of the burdens of government5. They are also pecuniary in nature and payable in money.
Also, taxes are obligations created by law6. Taxes are never founded on contract or
agreement, and are not dependent for their validity upon the individual consent of the persons
taxed7. Taxes are proportional in character, since taxes are based on one's ability to pay.
In addition, taxes are only levied by the state which has jurisdiction over the person or
property. Thus, the object to be taxed, must be subject to the jurisdiction of the taxing state
before it can be enforced. The power to tax cannot reach over into another jurisdiction to seize
upon person or property for purposes of taxation.
Further, it can only be levied by the law-making body of the state, being a legislative
power, through the enactment of tax statutes. Hence, it cannot be imposed by the executive
department nor by the courts. Also, as taxation involves a charge or burden imposed to provide

1
71 Am. Jur 34
2
Tax Made less taxing: A Reviewer with Codals and Cases, Ignatius Michael D. Ingles, 2018, 2 nd Edition
3
Commissioner of Internal Revenue vs. Algue Inc. L-28896, Feb., 1988.

4
"Cooley's definition," 1 Cooley 62
5
Tax Principles and Remedies, Justice Japar B. Dimaampao, 5th Edition
6
Vera v. Fernandez, L-31364, March 30, 1979
7
I Cooley 68
income for public purposes, the revenues derived from taxes should be for the exclusive benefit
of the public and not for private persons.
Basically, there are three elements of taxation.
(1) It is an enforced proportional contribution from persons and properties;
(2) It is imposed by the State by virtue of its sovereignty;
(3) It is levied for the support of the government8.
Also, one of its nature and characteristic is that, (1) the State is free to select the
subjects of taxation and the court has repeatedly held that inequalities which result from a
singling out of a particular class for taxation or exemption infringe no constitutional exemption 9,
(2) As the State has the power to determine subjects of taxation, it is also free to select who will
be exempt from Taxation10.
Lastly, taxes are personal to the tax payer. Hence, a company’s delinquency for
instance, cannot be enforced against its stakeholders as a corporation is given a distinct and
separate personality by the law form those persons who are composing it.

2. Purpose
Taxes are considered as the lifeblood of the State through which the government and
its agencies continue to operate and with which the State effects its functions for the welfare of
the constituents. Thus, their prompt and certain availability is an imperious need 11. It should be
calculated without necessary hindrance.
The rationale of taxation is graphically described by the Supreme Court in these words:
“It is said that taxes are what we pay for a civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate. Hence, despite the
natural reluctance to surrender part of one’s hard-earned income to the taxing authorities, every
person who is able must contribute his share in the running of the government. The government
for its part is expected to respond in the form of tangible and intangible benefits to improve the
lives of the people and enhance their moral and material values.” 12
Primarily, the following are the purpose of taxation:

A. Revenue  Basically the purpose of taxation is to provide funds or property with which the
state promotes the general welfare and protection of its citizens.

B. Regulation  It had also a regulatory purpose as in the case of taxes levied on excise or
privilege taxes like those imposed on tobacco and alcoholic products or amusement places like
night clubs and cockpits.
8
PCGG vs Cojuangco, GR. NO. 147062, Dec. 14, 2001
9
Lutz vs. Araneta, GR. No. L-7859, Dec 22, 1955
10
Gomez vs. Palomar GR. No. L-23645, Oct 29, 1968.

11
Bull v. United States, 295 U.S. 247.
12
Law of Basic Taxation in the Philippines, Benjamin B. Aban, 1932-1997, Revised Edition, Fifth printing
C. Promotion of General Welfare  In one case, the Supreme Court ruled that taxation may
be used as an implement of the police power in order to promote the general welfare of the
people.

3. Tax v. other forms of exactions, distinction

It is important to differentiate taxes from other exactions especially when it comes to
problems and issues on double taxation, tax exemptions, and the jurisdiction of the Court of Tax
Appeals. If an exaction is not a tax, then the defense of a taxpayer, of double taxation will
necessarily fail. A tax-exempt individual or corporation is generally only exempt from paying tax;
if the exaction is not tax, then the individual or corporation must then still pay tax 13
Tax as against license/regulatory fees

TAX LICENSE FEE

Source Taxing Power Police power of the State
Purpose Raise revenues Regulation
Object Persons, property, and privilege Right to exercise a privilege
As to amount No limit Only necessary to carry out
regulation

o The primary purpose of tax is generating revenue.

Tax is imposed for revenue purposes, whereas a license fee is imposed for regulatory
purposes. The imposition is tax when the generating revenue is the primary purpose and
regulation is merely incidental; the imposition is not tax when the regulation is the primary
purpose and the revenue is obtained incidentally only. A tax is an exercise of the taxing power
of the state, whereas a license free is a police power of the state14. It is noteworthy that
Supreme Court ruled that the registration fees for motor vehicles are in the nature of taxes
rather than fees. The legislative intent is mainly to raise funds for the construction and
maintenance of highways and only to a lesser degree to pay for the expenses of the land.15
 Gerochi vs. Department of Energy, G.R. No. 159796, July 17, 2007

Universal Charge imposed through the Electric Power Industry Reform

(EPIRA) was held to be a regulatory fee as it was imposed to ensure the
viability of the Philippines’ electric power industry.

 Smart Communications v. Municipality of Malvar Batangas, G.R. No. 20449,

February 18, 2014

Fees for the construction of special projects such as cell sites were held as
regulatory fees because the main purpose of the ordinance imposing such

13
Tax Made less taxing: A Reviewer with Codals and Cases, Ignatius Michael D. Ingles, 2018, 2nd Edition
14
Victoria Milling Co., Inc. vs Municipality of Victorias Negros Occidental L-21183; Serafica vs. Treasurer of Ormoc City, et al L-
24813
15
Philippine Airlines vs. Edu et al, L-41383 superseding Republic vs. Philippine Rabbit Bus Liner Inc, L-26862
 fees was to regulate certain construction activities like telecommunication
towers and telephone lines.

o A license fee’s imposition must relate to the occupation or activity that so engages the
public interest in health, morals, safety and development as to require regulation for the
protection and promotion of such public interest.

 Compania general de Tabacos de Filipinas v City of Manila, G.R. No. L-

16619, June 29, 1963
The fee imposed by a city on liquor vendors for the privilege of selling liquor
is a license fee.
 Angeles University Foundation v City of Angeles, G.R. No. 189999, June
27, 2012
Building fees are not taxes or impositions upon property, but regulatory fees
imposed by a city for the activity of building or repairing a structure. Hence, a
foundation which is exempt from taxes is not exempt from the payment of
building fees, as these are not taxes in the first place.
o The imposition must also bear a reasonable relation to the probable expenses of
regulation, taking into account the costs of direct regulation and incidental
consequences. A charged of fixed sum which bears no relation at all to the cost of
inspection and regulation may well be considered a tax.16

 Chevron Philippines, Inc. v Bases Conversion Development Authority,

G.R. No. 173863, September 15, 2010
Fees imposed on a per liter basis on fuel entering the Clark Special
Economic Zone were held to be regulatory fees because there was a
reasonable relation between the high volume of fuel brought into the zone
and the greater extent of supervision and inspection needed to monitor the
fuel.
Tax as against special assessments

TAX SPECIAL ASSESSMENT

Imposed on Persons, properties, etc Only on land
Why imposed Regardless of public Public improvements benefits
improvement the land and increases its

16
Progressive Development Corporation vs. Quezon City, G.R. No. L-36081, April 24, 1989
 value
Purpose Support of government Contribution to cost of public
improvement
When imposed Regular exaction Exception as to time and
locality
Basis Necessity Benefits obtained

o Local government units may impose a special levy on lands specially benefited by the
public works projects or improvements funded by the local government unit.17

o The purpose of special levies/assessment is to finance the improvement of particular

properties, with the benefits of the improvement accruing or inuring to the owners thereof
who, after all, pay the assessment.18

Tax as against toll fees

Tax Toll Fees

Imposed by State Private Persons
Purpose Raise revenues Reimbursement of costs and
expenses incurred in the
construction of toll ways, and
to assure reasonable margin
of income
Basis State’s sovereign power Attribution of ownership

o Toll fees are not taxes. These are exactions which end up as earnings of toll way
operators, not the government. 19
Tax as distinguished from customs duties
o Tax is broader than customs duties because the latter is limited only to taxes levied
upon commodities imported into or exported out of the country.
Direct tax – is one burden of which is shouldered by the person whom the tax is directly
imposed.
Example: Income tax – paid by the person himself who derives the income

17
Book II, Title One of RA 7160, otherwise known as “Local Government Code of 1991. Sec. 40. Special Levy by Local
Government Units - A province, city or municipality may impose a special levy on the lands comprised within its territorial
jurisdiction specially benefited by public works projects or improvements funded by the local government unit concerned:
Provided, however, That the special levy shall not exceed sixty percent (60%) of the actual cost of such projects and
improvements, including the costs of acquiring land and such other real property in connection therewith: Provided, further,
That the special levy shall not apply to lands exempt from basic real property tax and the remainder of the land portions of
which have been donated to the local government unit concerned for the construction of such projects or improvements.

18
Republic of the Philippines vs. Bacolod-Murcia Milling Co., G.R. No. L-19824, July 9, 1966
19
Diaz vs . Secretary of Finance, G.R. No. 193007, July 19, 2011
Indirect tax – is one burden of which may be shouldered by a person other than him to whom
the tax is imposed.
Example: Value added tax (VAT) – the seller shifts the burden of paying the tax to the
consumer.
 B. DISTINGUISH: POWER OF TAXATION, POLICE POWER AND EMINENT
DOMAIN
(By: Cabanlit and Cabusog)

1. Power of Taxation
The Power of Taxation is the power by which the sovereign, through its law-
making body, raises revenue to defray the necessary expenses of government. It is
primarily vested in the national legislature, it may now also be exercised by the local
legislative bodies, no longer by virtue of a valid delegation as before but pursuant to a
direct authority conferred by Article X, Section 5 of the Constitution.20
Sec 5. “each local government unit shall have the power to create its own
sources of revenue 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.” 21

2. Police Power

Police Power is the power of the sovereign to promote public welfare by

restraining and regulating the use of liberty and property. 22 The justification is found in
the ancient latin maxims Salus populi est seprema lex and Sic utere tuo ut alienum non
laedas, which call for the subordination of individual benefit to the interests of the greater
number. 23

3. Eminent Domain

The Power of Eminent Domain is also called the power of expropriation. It

enables the State to forcibly acquire the needed private property, upon payment of just
compensation, for some public use. 24
Being inherent, the power of eminent domain does not need to be specifically
conferred on the government by the Constitution. However, it is expressly provided in
20
Isagani A. Cruz. Constitutional Law. 2007. P 185
21
1987 Constitution
22
Isagani A. Cruz. Constitutional Law. 2007. P 85
23
Isagani A. Cruz. Constitutional Law. 2007. P 86
24
Isagani A. Cruz. Constitutional Law. 2007. P 129
 Article III, Section 9, that “private property shall not be taken for public use without just
compensation.” This provision is not grant but a limitation of the power as its negative
and restrictive language clearly suggests.25

Differences26

Taxation Police power Eminent Domain

As to Concept Taxation refers to Police Power is Eminent Domain

the power of the power of the refers to the
imposing enforced state to make and power of the State
proportional implement laws in to take private
contribution from relation to persons property for public
persons and or property to use upon payment
property by the promote public of just
Sovereign to morals, public compensation
accumulate safety and the ascertained by
revenue in order general welfare of law. To exercise
to support its the people the power of
existence and eminent domain,
carry out its the Constitution
legitimate provides for the
objectives following
conditions. First,
the taking of
property should
be for public use;
second, there
must be a just
compensation of
the property and
third, there must
be observance of
due process in the
taking.

As to Scope Taxation is limited Police Power is Eminent domain is

to the power to broader in limited to the
raise revenue for application taking of private
the use and because it is property, for

25
Isagani A. Cruz. Constitutional Law. 2007. P 129-130
26
Hector S. De Leon, Hector M. De Leon Jr., The Fundamentals of taxation , 17 th Edition
 support of the general power to public use, upon
government. make and just
implement laws. It compensation.
is the most
pervasive, the
least limitable ,
and the most
demanding of the
three powers.

As to Authority Exercised only by Exercised only by The power of

the government or the government or eminent domain
its political its political may be granted
subdivisions. subdivisions. by the law to
public service or
public utility
companies, as
well as exercised
by the State.

As to Purpose The Property Property is taken Property taken is

taken in general in or destroyed to for public use.
Taxation is in the promote general
form of money, for welfare.
the support of the
government.

As to Neccesity Primarily vested in May be expressly

of Delegation the national delegated to the
legislature, and local government
may now also be by the law-making
May be expressly
exercised by the body.
delegated to the
local legislative
local government
bodies pursuant to
by the law-making
a direct authority
body.
conferred by
Article X, Section
5 of the
Constitution.

As to the Person Operates on the Operates on the Operates on the

Affected community as a community as a particular private
whole or on class whole or on class property of an
 of individuals. of individuals. individual.

As to Benefit An individual Through police The benefit

receives a benefit power, an received by the
in the form of individual receives individual is the
protection indirect benefits market value of
afforded by the through a healthy the specific
government. economic property taken
standard of from him.
society.

As to Amount of Generally has no The amount The benefit

Imposition limit on the imposed should received by the
amount of tax only be sufficient individual is the
which may be to cover the cost market value of
imposed. of regulation, the specific
issuance of the property taken
license and the from him.
necessary
expenses of
police
surveillance.

As to Importance Taxation is an
indispensable
function of
existence of
government.
Without it, there
shall be no
revenue to effect
and permanently
exercise eminent
domain and police
power.

As to The power to tax Police power is Eminent Domain

Relationship to is subject to the relatively free from is generally
the Constitution Consitutional constitutional SUPERIOR to or
constraints and limitations. It is may override the
inherent SUPERIOR to the Constitutional
limitations. It is Non-impairment impairment
INFERIOR to the clause in the provision as the
 “non-impairment sense that it may welfare of the
Clause” in the override the said State is superior
sense that clause for the to any private act.
taxation should purpose of As an exception,
not violate the promoting public eminent domain is
impairment clause welfare. inferior to the
of obligations and impairment
contracts. provision because
the government
cannot
expropriate a
property that has
been previously
bound itself to be
purchased from
the other
contracting
parties.

As to Property In taxation, there In police power, In eminent domain

Taken is no specific there is a there is a specific
property taken by restriction in the private property
the government use of private being taken by the
for taxes are property. Government.
generally payable
in the form of
money.

As to Limitation Taxation is under Police power is Eminent Domain

constraints of limited by the is bound by public
inherent demand for public purpose, just
limitations and interest and compensation and
constitutional requirement of due process.
restrictions. due process.
 C. THEORY AND BASIS OF TAXATION
(By: Ching and Daradar)

1. Lifeblood Theory
The lifeblood theory constitutes the theory of taxation, which provides that the existence
of government is a necessity; that government cannot continue without means to pay its
expenses; and that for these means it has a right to compel its citizens and property within its
limits to contribute.
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. It is said that taxes are what we pay for civilized society. Without taxes,
the government would be paralyzed for lack of the motive power to activate and operate it [CIR
v.Algue, G.R. No. L-28896 (1988)].

2. Necessity theory
The power of taxation proceeds upon theory that the existence of government is a
necessity; that is cannot continue without means to pay its expenses; and that for those means
it has the right to compel all citizens and property within its limits to contribute. (71 Am. Jur. 2d
346.)
The power to tax is an attribute of sovereignty. It is a power emanating from 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. [Phil.
Guaranty v. CIR, G.R. No. L-22074 (1965)]

3. Benefits received theory

This principle serves as the basis of taxation and is founded on the reciprocal duties of
protection and support between the State and its inhabitants. In return for his contribution, the
taxpayer receives the general advantages and protection which the government affords the
taxpayer and his property. One is compensation or consideration for the other: protection for
support and support for protection.
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 running of 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 moral and
material values. This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the seat of power. [CIR
v.Algue, G.R. No. L-28896 (1988)]

D. JURISDICTION OVER SUBJECTS AND OBJECTS

(By: Dela Cerna and Deloso)

Jurisdiction is a reason why citizens must provide support to the state so the latter could
continue to give protection. It is the country, state or sovereign that gives protection that has the
right to demand the payment of taxes with which to finance activities so it could continue to give
protection. The basis or rationale of taxation is also used to explain why taxation is basically
territorial in character because it is only within the territorial boundaries of the taxing authority
where tax laws may be enforced. This is so because it is only within the confines of its territory
that a country, state or sovereign may give protection

These refer to the coverage and the kind or nature of the tax. They may be persons, whether
natural or juridical; property, whether real or personal, tangible or intangible; businesses,
transactions, rights, or privileges. A state is free to select the subject of taxation and it has been
repeatedly held that the inequalities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation so long as such exemption is
reasonable and not arbitrary.27

The object to be taxed must be subject to the jurisdiction of the taxing state. This is necessary in
order that the tax can be enforced. Although a state can tax all persons subject to its jurisdiction
for all their property left by them within its jurisdiction, yet its taxing power necessarily stops at
the state boundary lines. It cannot reach over into another jurisdiction to seize upon person or
property for purposes of taxation.28

A state may not tax property lying outside its borders or lay an excise or privilege tax upon the
exercise or enjoyment of a right or privilege derived from the laws of another state and therein
exercised and enjoyed.29 The reason is that tax laws do not operate beyond a country’s
territorial limits.30 Furthermore, Property which is wholly and exclusively within the jurisdiction of

27
Lutz vs Araneta, 98 Phil 148; City of Baguio vs De Leon, 25 SCRA 938, Oct. 31,1968; Sison, Jr. vs. Ancheta, 130
SCRA 654, July 25,1984.
28
71 AM. Jur. 2d 408-409
29
51 AM. Jur. 87-88
30
84 C.J.S. 61-63
another state receives none of the protection for which a tax is supposed to be a
compensation.31

The fundamental basis of the right to tax is the capacity of the government to provide benefits
and protection to the object of the tax. A person may be taxed where there is between him and
the taxing state, a privity of relationship justifying the levy.32

The Jurisdiction referred to which among the basic/bases or rationale of taxation is basically
territorial in character. Unless the state could exercise jurisdiction over persons and property,
then it could not enforce and implement tax measures. The basis of taxation is the reason why
the Philippine government could impose taxes:

1. On the income of resident citizens derived from sources outside of the Philippines.
2. On aliens residing in the Philippines.33

The Philippine Taxation laws has jurisdiction over all tangible and intangible objects which are
capable of pecuniary estimation and shall include, among others:

1. Real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business;

2. The right or the privilege to use patent, copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or other like property or right;

3. The right or the privilege to use any industrial commercial or scientific equipment;

4. The right or the privilege to use motion picture films, films, tapes and discs;

5. Radio, television, satellite transmission and cable television time.

Such is not an exclusive list. Additionally, objects being taxed in income taxation are the following:

1. Fruit of Capital

2. Fruit of Labor

3. Fruit of Labor and Capital combined

31
Union Refrigerator Transit Co. vs Kentucky, 188 U.S. 385
32
Hector de Leon, The Fundamentals of Taxation, 55 (16th ed. 2012)
33
Volume 1, Abelardo T. Domondon, Principles of Taxation, 34-35 (10th ed., 2013)
Taxation is no longer a measure merely to raise revenue to support the existence of
government. Taxes may be levied with a regulatory purpose to provide means for the
rehabilitation, control and/or stabilization of a threatened industry which is affected with public
interest as to be within the police power of the State.34

Non-revenue or regulatory employment of taxation includes: Imposition of tariffs on imported

goods to protect local industries, adoption of progressively higher tax rates to reduce
inequalities in wealth and income and the increase or decrease of taxes to prevent inflation or
ward off depression.
 
Taxation is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for support of the government. Therefore
it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the
golden egg". And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously. 35

34
Caltex v. Commissioner, 208 SCRA 755
35
Roxas v. CTA [23 SCRA 276]; Reyes v. Almanzor [196 SCRA 322]; Cir V. Tokyo Shipping [244 SCRA
332]
 E. PRINCIPLES OF A SOUND TAX SYSTEM
By: (Edma and Gabutina)

The basic principles of an ideal or a sound tax system are the following:
1. Fiscal adequacy
The source of government revenue must be sufficient to meet governmental
expenditures and other public needs.1 This is essential in order to avoid budgetary
deficits and to minimize foreign and local borrowings. It means also that the revenues
should be elastic or capable of expanding or contracting annually in response to
variations in public expenditures.2
The alternatives are to incur the risk of a series of deficits or surpluses due to inelastic
revenues or to adjust the amount of public expenditures to fit the flow of funds probably
by curtailing certain activities so that the budget may be balanced.2

2. Theoretical justice
A good tax system must be based on the taxpayer’s ability to pay. The burden
should be distributed in the portion and that it should be fair to average taxpayer and
based upon his ability to pay. It is also called as the ability to pay principle which holds
that similarly situated taxpayers should pay equal taxes, while those who have more
should pay more.3
This suggests that, taxations should be uniform as well as equitable. 4 Further, it
must be progressive conformably with the constitutional mandate that Congress shall
evolve a progressive system of taxation.

3. Administrative feasibility

The tax system should be capable of being properly and efficiently administered
by the government and enforced with the least inconvenience to the taxpayer. It means
 that the tax must be plain and clear to the tax payer and should be capable of efficient
enforcement by government officials.
Administrative feasibility must be one that is capable of uniform enforcement by
government officials, convenient as to time and manner of payment, and not unduly
burdensome upon, or discouraging to business activity. As stated in the Report of Tax
Commission, No tax however ideally just and fair, is better than its actual operation.
Every tax must be capable of being enforced universally and uniformly under such
standards of administration as the government can command and under such
conditions, political and moral, as exist at the time and place.5
36

Will a violation of these principles invalidate a tax law?

It depends. The non-observance of these principles, which are merely intended
to make the tax system sound, will not render the tax impositions by the taxing authority
invalid, except to the extent that specific that specific constitutional or statutory
limitations are impaired. Accordingly, an exaction in kind or in services, instead of money
although perhaps violative of administrative feasibility, may not outright be legally
objectionable since no specific constitutional or statutory limitations against it exist. 37

Relevant cases:
Chaves vs. Ongpin
Chavez, the petitioner, seeks to declare unconstitutional Executive Order 73 of
President Cory Aquino. Chavez, as a taxpayer and an owner of three parcels of land. He
alleges the following: 1. that EO 73 accelerated the application of the general revision of
assessments thereby mandating an excessive increase in real property taxes; 2.that
sheer oppression is the result of increasing real property taxes at a period of time when
harsh economic conditions prevail; and 3. that the increase in the market values of real
property as reflected in the schedule of values was brought about only by inflation and
economic recession.
Chavez argues further that the unreasonable increase in real property taxes
brought about by EO No. 73 amounts to a confiscation of property repugnant to the
constitutional guarantee of due process.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP) joins
Chavez in his petition to declare unconstitutional EO 73, but additionally alleges the
following: that Presidential Decree No. 464 is unconstitutional insofar as it imposes an
36
[ CITATION Cha90 \l 13321 ]
2
The Fundamentals of Taxation (2016 Ed.) Hector S. de Leon and Hector M. de Leon., p. 13.
3
The Fundamentals of Taxation (2016 Ed.) Hector S. de Leon and Hector M. de Leon., p. 14.
4
Section 28(1), Art. VI, 1987 Constitution.
5
Report of Tax Commission of the Philippines, Vol. 1, February 1939, pp. 23-31
37
Tax Law and Jurisprudence (2014 Ed.) Justice Jose C. Vitug and Justice Ernesto D. Acosta p. 3.
additional one percent (1%) tax on all property owners to raise funds for education, as
real property tax is admittedly a local tax for local governments and does not meet the
requirements of due process.
The court ruled that the Executive order is constitutional. The revision of the
assessments in EO 73 does not impose new taxes nor increase taxes but changed the
date of implementation of the increase from January 1988 to January 1, 1987. Thus, the
court agrees with the Office of the Solicitor General that the attack on Executive Order
No. 73 has no legal basis as the general revision of assessments is a continuing process
mandated by Section 21 of Presidential Decree No. 464. Further, Court agrees with the
observation of the Office of the Solicitor General that without EO 73, the basis for
collection of real property taxes win still be the 1978 revision of property values.
Certainly, to continue collecting real property taxes based on valuations arrived at
several years ago, in disregard of the increases in the value of real properties that have
occurred since then, is not in consonance with a sound tax system. Fiscal adequacy,
which is one of the characteristics of a sound tax system, requires that sources of
revenues must be adequate to meet government expenditures and their variations.

Kapatiran ng mga Naglilingkod sa Pamahalaan vs. Tan

EO 273 was issued by the President of the Philippines which amended the
Revenue Code, adopting the value-added tax (VAT) effective 1 January 1988. Four
petitions assailed the validity of the VAT Law for being beyond the President to enact; for
being oppressive, discriminatory, regressive, and violative of the due process and equal
protection clauses, among others, of the Constitution. The Integrated Customs Brokers
Association particularly contend that it unduly discriminate against customs brokers
(Section 103 [r]) as the amended provision of the Tax Code provides that “service
performed in the exercise of profession or calling (except custom brokers) subject to
occupational tax under the Local Tax Code, and professional services. The case at bar
assails the constitutionality of the EO since the VAT law violative of the administrative
feasibility principle.
The court held that it is not violative. The VAT law is principally aimed to
rationalize the system of taxes on goods and services. Thus, simplifying tax
administration and making the system more equitable to enable the country to
attain economic recovery.

Diaz vs. Secretary of Finance

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief assailing the validity of the impending imposition of value-
added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway
operators. Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of sale of services that are subject to VAT;
that a toll fee is a user’s tax, not a sale of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the nonimpairment clause of
the constitution. The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including tollway operations, except where the law
provides otherwise; that the Court should seek the meaning and intent of the law from
the words used in the statute; and that the imposition of VAT on tollway operations has
been the subject as early as 2003 of several BIR rulings and circulars.
ISSUE: WON Toll fees collected by tollway operators may be subjected to VAT
RULING: YES. The law imposes VAT on all kinds of services rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected
services is not exclusive. By qualifying services with the words all kinds, Congress has
given the term services an all- encompassing meaning. The listing of specific services is
intended to illustrate how pervasive and broad is the VATs reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined as a form of
service rendered for a fee should be deemed included unless some provision of law
especially excludes it.
If the legislative intent was to exempt tollway operations from VAT, as petitioners
so strongly allege, then it would have been well for the law to clearly say so. Tax
exemptions must be justified by clear statutory grant and based on language in the law
too plain to be mistaken. But as the law is written, no such exemption obtains for tollway
operators. The Court is thus duty-bound to simply apply the law as it is found.
Administrative feasibility is one of the canons of a sound tax system. It
simply means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer. Non-
observance of the canon, however, will not render a tax imposition invalid "except to the
extent that specific constitutional or statutory limitations are impaired.” Thus, even if the
imposition of VAT on tollway operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution.

Abakada Guro Partylist vs Ermita

RA 9337, an act amending certain sections of the National Internal Revenue
Code of 1997, is questioned by petitioners for being unconstitutional. Procedural issues
raised by petitioners are the legality of the bicameral proceedings, exclusive origination
of revenue measures and the power of the Senate concomitant thereto. Also,
Substantive issue was raised regarding the undue delegation of legislative power to the
President to increase the rate of value-added tax to 12%.
Petitioners Pimentel et al argue that the 12% increase in the VAT rate imposes
an unfair and additional tax burden on the people. Petitioners also argue that the 12%
increase, dependent on any of the 2 conditions set forth in the contested provisions, is
ambiguous because it does not state if the VAT rate would be returned to the original
10% if the rates are no longer satisfied. They argue that such rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate from year to year.
 ISSUE: WON Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107
and 108, respectively, of the NIRC giving the President the stand-by authority to raise
the VAT rate from 10% to 12% when a certain condition is met, constitutes undue
delegation of the legislative power to tax.
RULING: NO. The case before the Court is not a delegation of legislative power.
It is simply a delegation of ascertainment of facts upon which enforcement and
administration of the increase rate under the law is contingent. The legislature has made
the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact
or condition. It leaves the entire operation or non-operation of the 12% rate upon factual
matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of
discretion is the fact that the word shall is used in the common proviso.  The use of the
word shall connote a mandatory order.  Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion. No statutory construction or
interpretation is needed. Neither can conditions or limitations be introduced where none
is provided for.
Petitioners also contend that the increase in the VAT rate, which was allegedly
an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of the
previous year, should be based on fiscal adequacy. They obviously overlooked that
increase in VAT collection is not the only condition. There is another condition, i.e., the
national government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 ½%).
That the first condition amounts to an incentive to the President to increase
the VAT collection does not render it unconstitutional so long as there is a public
purpose for which the law was passed, which in this case, is mainly to raise
revenue. In fact, fiscal adequacy dictated the need for a raise in revenue. The
principle of fiscal adequacy as a characteristic of a sound tax system was
originally stated by Adam Smith in his Canons of Taxation (1776), as: IV. Every tax
ought to be so contrived as both to take out and to keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury
of the state. It simply means that sources of revenues must be adequate to meet
government expenditures and their variations.
 F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION
(By: Hallazgo)

The power to tax is subject to limitations. These are classified into; inherent limitations and
constitutional limitations.
a. Inherent limitations- these are limitations or restrictions that spring from its very
own power. While the power of taxation is inherent in sovereignty, there are also
limitations or safeguards which spring from its own inherent power.

b. Constitutional limitations- these are restrictions in the exercise of the power of

taxation as expressly provided in the Philippine Constitution.

The following are the inherent limitations:

1. Purpose. Taxes may be levied only for public purpose. Purpose affecting the inhabitants
of the state as a community and not merely as individuals. These includes financing educational
activities, promotion of science, maintenance of roads and bridges, and aid for victims of
calamities among others.
2. Territorial Jurisdiction. The State may tax persons and properties only under its
jurisdiction. The tax laws of the state are enforceable only within its territorial limits. Tax laws do
not operate beyond the country’s territorial limits.
3. International Comity. The property of a foreign State may not be taxed by another.
Courteous and friendly agreement and interaction between nations.
4. Exemption. Government agencies performing essential governmental functions are
exempt from taxation unless expressly taxed while those performing proprietary functions are
subject to tax unless expressly exempted. The government cannot tax itself.
5. Non-delegation. The power to tax being legislative in nature may not be delegated.
(subject to exceptions)

The following are the constitutional limitations:

1. DUE PROCESS OF LAW
Sec. 1 Art. III 1987 Constitution - No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the equal protection of the laws.
Sison v. Ancheta (G.R. No. L- 59431, July 25, 1984)
FACTS: Batas Pambansa 135 was enacted. Sison, as taxpayer, alleged that its provision
(Section 1) unduly discriminated against him by the imposition of higher rates upon his income
as a professional, that it amounts to class legislation, and that it transgresses against the equal
protection and due process clauses of the Constitution as well as the rule requiring uniformity in
taxation.
Issue: Whether BP 135 violates the due process and equal protection clauses, and the rule on
uniformity in taxation.
HELD: No, there was no violation of the due process and equal protection clause, since
petitioner did not make a case, only allegations.
The Congress has the power to determine the rates of taxation; thus, the due process
clause may be invoked where a taxing statute is so arbitrary that it finds no support in the
Constitution. An obvious example is where it can be shown to amount to the confiscation of
property. That would be a clear abuse of power. It then becomes the duty of this Court to say
that such an arbitrary act amounted to the exercise of an authority not conferred. That properly
calls for the application of the Holmes dictum.
It has also been held that where the assailed tax measure is beyond the jurisdiction of
the State, or is not for a public purpose, or, in case of a retroactive statute is so harsh and
unreasonable, it is subject to attack on due process grounds.

2. EQUAL PROTECTION OF THE LAWS

All person subject to legislation shall be treated alike under similar circumstances and
conditions both in the privileges conferred and liabilities imposed. The doctrine does not require
that persons or properties different in fact be treated in law as though they were the same.
What it prohibits is “Class Legislation” which discriminates against some and favors others. As
long as there are rational or reasonable grounds for so doing. Congress may group persons or
property to be taxed and it is sufficient if all members of the same class are subject to the same
rate and the tax is administered impartially upon them.
Requisites of a Valid Classification:
1. It must be based on Substantial Distinctions.
2. It must be germane to the purpose of law
3. The classification must not be limited to existing conditions only but must also
apply to future conditions substantially identical to those of the present.
4. It must apply equally to all members of the same class.
Where the statute or ordinance in question applies alike to all persons, firms, or corporations
placed in similar situations, or differently to persons, firms, or corporations belonging to different
classes provided all those belonging to one class are treated alike, there is no infringement of
the constitutional guarantee. What the Constitution requires is equal treatment under the law
and this may involve same or different treatment depending on the circumstances.

Villegas vs. Hiu Chiong Tsai Pao Ho (G.R. No. L- 29646 November 10, 1978)
FACTS: The Municipal Board of Manila enacted Ordinance 6537 requiring aliens (except those
employed in the diplomatic and consular missions of foreign countries, in technical assistance
programs of the government and another country, and members of religious orders or
congregations) to procure the requisite mayor’s permit so as to be employed or engage in trade
in the City of Manila. The permit fee is P50, and the penalty for the violation of the ordinance is
3 to 6 months imprisonment or a fine of P100 to P200, or both.
ISSUE: Whether the ordinance imposes a regulatory fee or a tax.
HELD: The ordinance’s purpose is clearly to raise money under the guise of regulation by
exacting P50 from aliens who have been cleared for employment.
The amount is unreasonable and excessive because it fails to consider difference in
situation among aliens required to pay it, i.e. being casual, permanent, part-time, rank-and-file
or executive.
The Ordinance was declared invalid as it is arbitrary, oppressive and unreasonable,
being applied only to aliens who are thus deprived of their rights to life, liberty and property and
therefore violates the due process and equal protection clauses of the Constitution.
Further, the ordinance does not lay down any criterion or standard to guide the Mayor in
the exercise of his discretion, thus conferring upon the mayor arbitrary and unrestricted powers.

3. UNIFORMITY AND EQUITY IN TAXATION

Sec.28 (1), Art. III, 1987 Constitution- The rule of taxation shall be uniform and equitable. The
tax is uniform when it operates with the same force and effect in every place where the subject
of it is found. "Uniformity" means all property belonging to the same class shall be taxed alike. It
does not signify an intrinsic, but simply a geographic, uniformity (Churchill & Tait vs.
Conception, 34 Phil. 969). Uniformity does not require the same treatment; it simply requires
reasonable basis for classification.
Uniformity vs. equity in taxation
The concept of uniformity in taxation implies that all taxable articles or properties of the
same class shall be taxed at the same rate. It requires the uniform application and operation,
without discrimination, of the tax in every place where the subject of the tax is found. It does not,
however, require absolute identity or equality under all circumstances, but subject to reasonable
classification.
 The concept of equity in taxation requires that the apportionment of the tax burden be,
more or less, just in the light of the taxpayer’s ability to shoulder the tax burden and, if
warranted, on the basis of the benefits received from the government. Its cornerstone is the
taxpayer’s ability to pay.

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs. CITY OF BUTUAN (G.R. No. L-
22814 August 28, 1968)
FACTS: The ordinance imposes taxes for every case of soft drinks, liquors and other
carbonated beverages, regardless of the volume of sales, shipped to the agents and/or
consignees by outside dealers or any person or company having its actual business outside the
City.
ISSUE: Does the tax ordinance violate the uniformity requirement of taxation?
HELD: Yes. The tax levied is discriminatory.
Even if the burden in question were regarded as a tax on the sale of said beverages, it
would still be invalid, as discriminatory, and hence, violative of the uniformity required by the
Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers
would be subject to the tax. Sales by local dealers, not acting for or on behalf of other
merchants, regardless of the volume of their sales, and even if the same exceeded those made
by said agents or consignees of producers or merchants established outside the City of Butuan,
would be exempt from the disputed tax.
It is true that the uniformity essential to the valid exercise of the power of taxation does
not require identity or equality under all circumstances, or negate the authority to classify the
objects of taxation.
The classification made in the exercise of this authority, to be valid, must, however, be
reasonable and this requirement is not deemed satisfied unless:
(1) it is based upon substantial distinctions which make real differences;
(2) these are germane to the purpose of the legislation or ordinance;
(3) the classification applies, not only to present conditions, but, also, to future conditions
substantially identical to those of the present; and
(4) the classification applies equally to all those who belong to the same class.

4. PROHIBITION AGAINST IMPRISONMENT FOR NON-PAYMENT OF POLL TAX

Section 20, Article III, 1987 Constitution. No person shall be imprisoned for debt or
non-payment of poll tax.
 The non-imprisonment rule applies to non-payment of poll tax which is punishable only
by a surcharge, but not to other violations like falsification of community tax certificate and non-
payment of other taxes.

5. PROHIBITION AGAINST IMPAIRMENT OF OBLIGATION OF CONTRACTS

Section 10, Article III, Constitution- No law impairing the obligation of contracts shall be
passed.
The power of taxation cannot be exercised in a manner that would impair the obligation
of contracts. What is prohibited is that a taxing statute be passed that would alter the relative
rights of the parties with each other.
The mere fact that a tax makes the conduct of a business more expensive or makes an
activity more difficult does not result in the impairment of the obligation of contracts. Contract is
impaired only if the relative position of the parties to a contract (i.e. equality that is assumed
when the contract was entered into) is disturbed by the operation of a taxing statute.
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 example of impairment by law is when a later taxing statute revokes a tax exemption
based on a contract. But this only applies when the tax exemption has been granted for a valid
consideration.
A later statute may revoke exemption from taxation provided for in a franchise because
the Constitution provides that a franchise is subject to amendment, alteration or repeal.
Note: A latter statue may revoke exemption from taxation provided for in a franchise because
the Constitution provides that a franchise is subject to amendment, alteration or repeal. [Sec.
11 Art. XII]

Tolentino v. Sec. of Finance (G.R. No. 115455 October 30, 1995)

The issue that was raised was whether the imposition of the VAT on sales & leases on real
estate by virtue of contract s entered into prior to the effectivity of the law would violate the non-
impairment of contracts rule in the constitution.
HELD: It is enough to say that 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 & good order of society.
6. PROHIBITION AGAINST INFRINGEMENT OF RELIGIOUS FREEDOM
Section 5, Article III, Constitution- No 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.
American Bible Society v. City of Manila (G.R. No. L- 9637, April 30, 1957)
FACTS: In the course of its ministry, the Philippine agency of the American Bible Society has
been distributing and selling bibles and/or gospel portions thereof throughout the Philippines
and translating the same into several Philippine dialects. The acting City Treasurer of Manila
required the society to secure the corresponding Mayor’s permit and municipal license fees,
together with compromise covering the period from the 4th quarter of 1945 to the 2nd quarter of
1953. The society paid such under protest, and filed suit questioning the legality of the
ordinances under which the fees are being collected.
HELD: The payment of license fees for the distribution and sale of bibles suppresses the
constitutional right of free exercise of religion.
A tax ordinance is considered violative of the free exercise of religion when it becomes a
prior restraint to the exercise thereof. In this case, the business permit is a prior restraint to the
exercise of one's religion since the constitutional guaranty of the free exercise and enjoyment of
religious profession and worship carries with it the right to disseminate religious information.
It is one thing to impose a tax on the income or property of a preacher, and another to
exact a tax for him for the privilege of delivering a sermon.
The power to tax the exercise of a privilege is the power to control or suppress its
enjoyment.

7. PROHIBITION AGAINST APPROPRIATION OF PROCEEDS OF TAXATION

Section 29, Article VI, Constitution
1. No money shall be paid out of the Treasury except in pursuance of an
appropriation made by law.
2. No public money or property shall be appropriated, applied, paid, or employed
directly or indirectly, for the use, benefit, or support of any 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.
3. All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general
funds of the government.
8. PROHIBITION AGAINST TAXATION OF REAL PROPERTY ACTUALLY, DIRECTLY
AND EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL
PURPOSES
Section 28 (3), Article VI, Constitution- Charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.
This is an exemption from real property tax only.

Abra Valley College vs. Aquino (G.R. No. L- 39086, June 15, 1988)
Facts: Abra Valley College rents out the ground floor of its college building to Northern
Marketing Corporation while the second floor thereof is used by the Director of the College for
residential purposes. The municipal and provincial treasurers served upon the College a “notice
of seizure” and later a “notice of sale” due to the alleged failure of the College to pay real estate
taxes and penalties thereon. The school filed suit to annul said notices, claiming that it is tax-
exempt.
Issue: Whether the College is exempt from taxes.
HELD:
While the Court allows a more liberal and non-restrictive interpretation of the phrase
“exclusively used for educational purposes,” reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes.
While the second floor’s use, as residence of the director, is incidental to education; the
lease of the first floor cannot by any stretch of imagination be considered incidental to the
purposes of education.
The test of exemption from taxation is the use of the property for purposes mentioned in
the Constitution. “Use” overrides “ownership”. If a property is incidentally used for the
aforementioned purposes, it is clear from decided cases that tax exemption still subsist.

9. PROHIBITION AGAINST TAXATION OF THE REVENUES AND ASSETS OF NON-

STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS
Section 4, Article XIV, Constitution- All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law.
This exemption from corporate income tax is embodied in Section 30 of the NIRC which
includes a non-stock, non-profit educational institution.
 Note: However, the last paragraph of Section 30 which states: “Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their property, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such income, shall be subject to tax
imposed under this Code.”
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. [Section 28 (3) , Article VI, Constitution]
This is an exemption from real property tax only.
The exemption in favor of property used exclusively for charitable or educational
purposes is not limited to property actually indispensable therefore, but extends to facilities
which are incidental to and reasonably necessary for the accomplishment of said purposes.
(Abra Valley College vs. Aquino (G.R. No. L- 39086, June 15, 1988)

CIR v. Court of Appeals, et.al., 298 SCRA 83 (1998)

FACTS: The Young Men’s Christian Association of the Philippines, Inc. (YMCA) was
established as “a welfare, educational and charitable non-profit corporation.” It conducts various
programs and activities that are beneficial to the public, especially the young people, pursuant
to its religious, educational and charitable objectives.
HELD: In this case, the Supreme Court held that the income derived by YMCA from leasing
out a portion of its premises to small shop owners, like restaurant and canteen operators, and
from parking fees collected from non-members are taxable income.
First, the constitutional tax exemption granted to non-stock, non-profit educational institutions
does not find application because YMCA is not an educational institution. The term “educational
institution” or “institution of learning” has acquired a well- known technical meaning. Under the
Education Act of 1982, such term refers to schools.
Second, even if it be exempt under Section 30 of the NIRC as a non-profit, non-stock
educational corporation, the income from the rent of its premises and parking fees is not
covered by the exemption, according to the last paragraph of the same section. Section 30
provides that income of whatever kind and character from any of its properties, real or personal,
or from any of its activities for profit are not exempt from income tax.
Finally, Section 28(3), Article VI of the Constitution does not apply as it extends exemption only
from real property taxes – not from income taxes.

10. OTHER CONSTITUTIONAL LIMITATIONS

1. Grant of tax exemption
Section 28 (4), Article VI, Constitution- No law granting any tax exemption shall be passed
without the concurrence of a majority of all Members of Congress
2. Veto of appropriation, revenue, or tariff bills by the President
Section 27 (2) Article VI, Constitution- The President shall have the power to veto any
particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the
item or items to which he does not object.
3. Non-impairment of the jurisdiction of the Supreme Court
• Congress cannot take away from the Supreme Court the power given to it by the
Constitution as the final arbiter of tax cases.
Section 5 (2) (b), Article VIII, Constitution - The Supreme Court shall have the following
powers:
Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of lower courts in:
All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in
relation thereto.
4. Revenue bills shall originate exclusively from the House of Representatives
Section 24, Article VI, Constitution - All appropriation, revenue or tariff bills, bills authorizing
an 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.
5. Infringement of Press Freedom
• This limitation does not mean that the press is exempt from taxation.
• Taxation constitutes an infringement of press freedom when it operates as a prior
restraint to the exercise of this constitutional right.
• When the tax is imposed on the receipts or the income of the press it is a valid exercise
of the sovereign prerogative.

6. Grant of franchise
Tax exemptions included in the grant of a franchise may be revoked by another law as it is
specifically provided in the Constitution that the grant of any franchise is always subject to
amendment, alteration, or repeal by the Congress when the common good so requires.

G.STAGES OF TAXATION
 (By: Macalos)

1. Levy

Levy is the act of imposition by the Legislature, such as by enactment of the law. The term is
understood to include not only the mandate on when and how the tax is imposed, but also,
whenever it may be appropriate, to grant tax exemptions, tax amnesties or tax donations.

2. Assessment and Collection

The terms refer to the act of administration and implementation of the tax laws by the
executive, through its administrative agencies. The term “assessment,” which here means
notice and demand of for payment of a tax liability, should not be confused with the
“assessment” relative to real property taxation, which refers to the listing and valuation of
taxable real property.

An assessment is formalized through the issuance of the formal assessment notice (FAN),
which must be protested within 30 days from its receipt. Otherwise, the formal assessment
notice shall become final and executory. The BIR can then enforce collection by issuing a
warrant of distraint of garnishment. 38

For an assessment to be valid, the corresponding assessment notice must be properly

served and received by the taxpayer. This is in accordance with Section 228 of the National
Internal Revenue Code, which provides that the taxpayer shall be informed in writing of the law
and the facts on which the assessment is made; otherwise, the assessment shall be void. The
assessment regulations (i.e., Revenue Regulations No. 12-99) explicitly require “the written
details on the nature, factual and legal bases of the deficiency tax assessments.” 39

o In a July 24, 2017 case docketed as CTA EB Case No. 1444, the Court of Tax Appeals
(CTA) struck down a deficiency tax assessment on the basis that the taxpayer did not
receive the assessment notice. In the said case, the taxpayer did not get the
assessment notice since it was addressed and delivered to the taxpayer’s old address.
Under existing jurisprudence, in case of denial of receipt of the assessment notice by the
taxpayer, the BIR has the burden to prove that such assessment was indeed received by
the taxpayer. In this case, the court noted that the BIR failed to prove that the taxpayer
had received the assessment notice. 40

3. Payment

This is the act of compliance by the taxpayer, including such options, schemes or remedies
as may be legally open or available to him. Taxes imposed at the national level are collected by

38 II
, National Internal Revenue Code (NIRC) of 1997, as amended.
39

40
The Court of Tax Appeals EB Case 1444, July 24, 2017
the Bureau of Internal Revenue (BIR), while those imposed at the local level (i.e., provincial,
city, municipal, barangay) are collected by a local treasurer's office.

As a rule, both individual taxpayers and corporate taxpayers are required to file their
quarterly and annual income-tax returns (ITRs). The quarterly income tax returns for individual
taxpayers are filed within 45 days from the close of each taxable quarter. On the other hand, the
quarterly ITRs for corporate taxpayers are filed within 60 days from the close of the taxable
quarter. After filing, it’s time to pay the taxes. Since the Philippines adheres to the “pay as you
file” system, the general rule is that imposable taxes shall be paid by the person or corporation
subject thereto at the time the return is filed. The taxpayer, though, may ask for an extension of
time to pay, which, at times, depends upon the discretion of the tax authority and only in
meritorious cases. 41

4. Refund

Refund refers to the recovery of tax erroneously or illegally assessed or collected. The
administration of taxes does not always end upon the collection by the Bureau of Internal
Revenue (BIR), but rather upon refund or issuance of a tax-credit certificate. A taxpayer may
ask for a refund of erroneously, excessively or illegally assessed or collected taxes, whether as
a liability or penalty, applying Section 229 of the Tax Code. On the other hand, the taxpayer
may ask for a refund of the creditable input taxes attributable to its zero-rated or effectively zero-
rated transactions, applying Section 112 of the Tax Code. 42

In claiming tax refunds, the taxpayer must first file an administrative claim before the BIR
in a form of a letter, discussing the grounds for the refund and submitting all supporting
documents for such claim. For refunds of erroneously or illegally paid taxes, the taxpayer should
file the administrative claim within two years from the payment of the tax; while for input VAT
refund, the claim should be filed within two years from the close of the taxable quarter when the
sale was made. The taxpayer has 30 days from receipt of the decision of the BIR to elevate the
claim to the Court of Tax Appeals (CTA) via a petition for review. 43
, , National Internal Revenue Code (NIRC) of 1997, as amended.
41 v vi

42
43
 G. REQUISITES OF A VALID TAX
(By:Mangao)

 Tax must be for a public purpose

 The rule of the taxation should be uniform.
 The person or property taxed is within the jurisdiction of the taxing authority.
 The assessment and collection should be in harmony with the Due process clause; and
 The tax must not infringe on the inherent and constitutional limitations of the power of
taxation.

Tax as distinguished from other forms of exactions.

 Tarrif

Taxes Tarrif
All embracing term to include various kinds of A kind of tax imposed on articles which are
enforced contributions upon persons for the traded internationally.
attainment of public purposes.

 Toll

Taxes
Paid for the support of the government
Demand of sovereignty
Generally, no limit on the amount collected as
long as it is not excessive, unreasonable, or
confiscatory.
Imposed only by the government.
Toll
Paid for the use of another’s property
Demand of proprietorshio
Amount paid depends upon the cost of
construction or maintenance of the public
improvement used.
Imposed by the government or by private
individuals or entities.

A toll is a sum of money for the use of something, generally applied to the consideration which
is paid for the use of a road, bridge or the like, of a public nature. [1 Cooley 77]

The view has been expressed, however, that the taking of tolls is only another method of taxing
the public for the cost of construction and repair of the improvement for the use of which the toll
is charged. [71 Am. Jur. 2d 351]
 License Fee

Taxes License Fee and Regulatory Fee

Imposed under the taxing power of the state Levied under the police power of the state.
for purposes of revenue.
Forced contributions for the purpose of
maintaining government functions.
Generally, unlimited as to amount.
Imposed on persons, property and to exercise
a privilege.
Failure to pay does not necessarily make the
act or business illegal.
Exacted primarily to regulate certain
businesses or occupations.
Should not unreasonably exceed the
expenses of issuing the license and
supervision.
Imposed only on the right to exercise a
privilege.
Failure to pay makes the act or business
illegal.

License or permit fee is a charge imposed under the police power for puposes of regulation.
License is in the nature of a special privilege, of a permission or authority to do what is within its
terms. It makes lawful an act which would otherwise be unlawful. A license granted by the state
is always revocable. [Gonzalo Sy Trading vs Central Bank of the Phil., 70 SCRA 570, 1976]

I.KIND/S CLASSIFICATION OF TAXES

 (By: Mutia)

1. As to Subject Matter:
a) Personal, poll or capitation- tax of a fixed amount imposed on persons residing
within a specified territory , whether citizens or not , whether regard to their
property or the occupation or business in which they may be engaged.

EXAMPLE: Community Tax (formerly residence tax)

b) Property- tax imposed on property ,whether real or personal, in proportion to either
its value, or in accordance with some other reasonable methods of apportionment.

EXAMPLE: Real Estate Tax

c) Excise- any tax which does not fall within the classification of poll tax or property tax.
It is said an excise tax when it is charged upon the performance of an act, the
enjoyment of a privilege , or the engaging in an occupation. May be used
interchangeably with “privilege tax”

2. As to who bears the burden:

a. Direct- Tax which is demanded or exacted from the very person who also shoulders
the burden of the tax; or tax for which the taxpayer is directly or primary liable or
which he cannot shift to another.

EXAMPLE: Corporate and individual income taxes; estate tax; donor’s tax
b. Indirect- tax which is demanded from, or are paid by one person in the expectation
and intention the he shall indemnify himself at the expense of another by passing on
the burden to the latter, falling finally upon the the ultimate purchaser or consumer;
or tax imposed upon goods before they reach the consumer who ultimately pays for
it not as tax but as part of the purchase price of goods sold or services rendered.

EXAMPLE: Value-added tax, percentage tax, customs duties

3. As to determination of amount:

A. Specific - tax of a fixed amount imposed by the head or number, or by

some standard of weight or measurement; it requires no assessment
(valuation)other than a listing or classification of the objects to be taxed.

EXAMPLE: Taxes on distilled spirits, wines, and fermented liquiors

B. Ad valorem tax – tax of a fixed proportion of the value of property with
respect to which the tax is assessed; it requires the intervention of assessors
or appraisers to estimate the value of such property before the amount due
from each taxpayer can be determined. The phrase “ad valorem” means
literally, “according to value”.
 EXAMPLE: Real Estate Tax, excise tax on automobiles, non-essential goods
such as jewelry

4. As to purpose:
a. General or fiscal, or revenue-- tax imposed for the general purposes of
government , i.e to raise revenue for governmental needs.

EXAMPLE: Income tax, value-added tax

b. Special or regulatory- tax imposed for a special purpose, i.e to achieve some
social or economic ends irrespective of whether revenue is actually raised or not

5. As to scope (or authority imposing the tax) :

a. National – tax imposed by the national government
b. Municipal or local- tax imposed local government units

EXAMPLE: Real property tax, professional tax

6. As to graduation or rate:
a. Proportional – tax based on a fixed percentage of the amount of the property,
receipts, or other basis to be taxed. The rate of the tax remains constant for all
levels of the tax base or any given income level. It is also called flat or uniform
tax.

EXAMPLE: Real estate taxes , value-added tax and other percentage

taxes
b. Progressive or graduated- the rate of which increases as the tax base or
bracket increases.

EXAMPLE: Income Tax, estate tax, donor’s tax

c. Regressive- the rate of which decreases as the tax base or bracket increases,
i.e the tax rate and the tax base move in opposite directions. We have no
regressive taxes.

J. GENERAL CONCEPTS IN TAXATION

(By: 1-2: Nolasco.| 3-4: Omega | 5-7: Ondong and Panes | 8-10: Orio and Tanog)
1. Prospectivity of tax laws
Sec. 246. Non-retroactivity of rulings.- Any revocation, modification or
reversal of any of the rules and regulations promulgated in accordance with
the preceding Section or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers except in the
following cases:
(a) where the taxpayer deliberately misstates or omits material facts
from his return on any document required of him by the Bureau of Internal
Revenue;
(b) where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different form the facts on which the ruling is based;
or
(c) where the taxpayer acted in bad faith.

Tax laws do not have retroactive effect even if it is favourable to the tax payer
considering that retroactivity applies mostly to criminal law and the giving tax law a retroactive
effect would impair the constitutional right of the tax payer to due process. A tax payer should
be made aware of his obligations to the State so that he would be able to pay for it.

2. Imprescriptability
SEC. 222. Exceptions as to Period of Limitation of Assessment and
Collection of Taxes.-(a) In the case of a false or fraudulent return with intent
to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may be filed without
assessment, at any time within ten (10) years after the discovery of the falsity,
fraud or omission: Provided, That in a fraud assessment which has become
final and executory, the fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof.

(b) If before the expiration of the time prescribed in Section 203 for the
assessment of the tax, both the Commissioner and the taxpayer have agreed
in writing to its assessment after such time, the tax may be assessed within
the period agreed upon. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the period
previously agreed upon.

(c) Any internal revenue tax which has been assessed within the period of
limitation as prescribed in paragraph (a) hereof may be collected by distraint
or levy or by a proceeding in court within five (5) years following the
assessment of the tax.

(d) Any internal revenue tax, which has been assessed within the period
agreed upon as provided in paragraph (b) hereinabove, may be collected by
distraint or levy or by a proceeding in court within the period agreed upon in
 writing before the expiration of the five (5) -year period. The period so agreed
upon may be extended by subsequent written agreements made before the
expiration of the period previously agreed upon.

(e) Provided, however, That nothing in the immediately preceding and

paragraph (a) hereof shall be construed to authorize the examination and
investigation or inquiry into any tax return filed in accordance with the
provisions of any tax amnesty law or decree.
SEC. 281. Prescription for Violations of any Provision of this Code. - All
violations of any provision of this Code shall prescribe after five (5) years.

Prescription shall begin to run from the day of the commission of the violation
of the law, and if the same be not known at the time, from the discovery
thereof and the institution of judicial proceedings for its investigation and
punishment.

The prescription shall be interrupted when proceedings are instituted against

the guilty persons and shall begin to run again if the proceedings are
dismissed for reasons not constituting jeopardy.

The term of prescription shall not run when the offender is absent from the
Philippines.

The Theory posits that taxpayers are unjustly robbed of the benefits of the statutes of
limitations, either through the actual application of law or by judicial interpretation construing the
prescriptive period established. Specifically, it maintains that in two specific provisions of the
Tax Code, the prescriptive period provided for, although definite and determinable on its face
inasmuch as a period is explicitly laid down, appears imprescriptible. First, the extraordinary ten-
year period under Section 222(a) and second, the five-year prescriptive period under Section
281.44
General Rule: The right of the government to collect taxes is IMPRESCRIPTABLE.
Exemptions: if a statute provides for prescription period.
“Generally, internal revenue taxes shall be assessed within three (3) years after the last
day prescribed by law for the filing of the return, or where the return is filed beyond the period,
from the day the return was actually filed. 19 Section 222 of the NIRC, however, provides for
exceptions to the general rule. It states that in the case of a false or fraudulent return with intent
to evade tax or of failure to file a return, the assessment may be made within ten (10) years
from the discovery of the falsity, fraud or omission 45. “

3. Situs of Taxation
 Situs of taxation literally means place of taxation.1
44
The Theory of Imprescriptibility in Criminal Tax Actions Vincent Paul S. Ventus, Ateno Law Journal, page 549
45
G.R. No. 192173, July 29, 2015
 The general rule is that the taxing power cannot go beyond the territorial limits of the
taxing authority.2
 The basic rule is that the state where the subject to be taxed has a situs may rightfully
levy and collect the tax; and the situs is necessarily in the state which has jurisdiction
or which exercises dominion over the subject in question.3
Situs of Subjects of Taxation
a. Persons

 Poll tax may properly be levied upon persons who are inhabitants or residents
of the state, whether citizens or not.4

b. Real property

 Real estate is subject to taxation in the state in which it is located whether or

not the owner is a resident of the said jurisdiction. This is the rule of lex rei
sitae (the law of the situation of the thing) which enunciated in Article 16 of the
Civil Code.5

c. Tangible personal property

 The modern rule is that it is taxable in the state where it is physically located
notwithstanding that the owner resides in another jurisdiction. The Philippines
has also adopted this rule of lex rei sitae for personal property such that
personal property is also subject to the law of the country where it is situated”.6

d. Intangible personal property

 The general rule is that the situs for purposes of property taxation is at the
domicile of the owner. This is in accordance with the principle of mobilia
sequuntur personam – that the situs of personal property is the domicile of the
owner.7
 The principle, however, is not controlling when it is inconsistent with express
provisions of statute, or when justice does not demand that it should be, as
where the property has in fact a situs elsewhere.8

e. Income

 Income tax may properly be exacted from persons who are residents or
citizens in the taxing jurisdiction and even from those who are neither residents
nor citizens provided the income is derived from sources within the taxing
state.9

f. Business, occupation, and transaction

g.
  The general rule is that the power to levy an excise tax depends upon the place
where the business is done, or the occupation is engaged in, or the transaction
took place.10

h. Gratuitous transfer of property

 The transmission of property from a donor to a donee or from a decedent to his

heirs may be subject to taxation in the state where the transferor is/was a
citizen or resident, or where the property is located.11

4. Double Taxation

a. Strict sense
 referred to as direct duplicate taxation or direct double taxation
 means –
(a) taxing twice,
(b) by the same taxing authority,
(c) within the same jurisdiction or taxing district or locality,
(d) for the same purpose,
(e) in the same taxing period,
(f) some of the property in the territory12

b. Broad sense
 referred to as indirect duplicate taxation or indirect double taxation
 taxation other than direct duplicate13

c. Tax treaties as relief from double taxation

 The purpose of these international agreements is to reconcile the national fiscal

legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions.14
 More precisely, the tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods.15
In order to eliminate double taxation, a tax treaty resorts to several methods:
(a) First, it sets out the respective rights to tax of the state of source
or situs and of the state of residence with regard to certain
classes of income or capital. In some cases, an exclusive right to
tax is conferred on one of the contracting states; however, for
other items of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by the state
of source is limited;
 (b) The second method for the elimination of double taxation applies
whenever the state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaties
make it incumbent upon the state of residence to allow relief in
order to avoid double taxation. There are two methods of relief –

i. Exemption method -  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;

ii. Credit method - although the income or capital which is

taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against
the tax levied in the latter.16

FOOTNOTES:
1
De Leon, Hector S. and Hector M. De Leon, Jr. The Fundamentals of Taxation (REX Book Store, 2016), 57.

2
Nelson S. Gargoles Law Office. 2020. Situs Of Taxation. [online] Available at: <http://www.nsglawoffice.com/index.php/blog/14-situs-of-
taxation#:~:text=Situs%20of%20taxation%20literally%20means%20place%20of%20taxation.&text=The%20basic%20rule%20is%20that,over%20the
%20subject%20in%20question.> [Accessed 8 August 2020].
3
De Leon, supra note 1.

4
Id. at 58.
5
Nelson S. Gargoles Law Office, supra note 2.

6
Ibid.
7
De Leon, supra note 4.

8
Id. at 59.
9
Ibid.

10
Ibid.
11
Ibid.

12
Id. at 60.
13
Id. at 61.

14
P. Baker, 1994 as cited in CIR v. S.C. Johnson And Son, Inc., G.R. No. 127105, June 25, 1999.
15
Ibid.

16
Ibid.

5. Escape from taxation

 There are six (6) basic forms of escape from taxation, namely:

1. Shifting
2. Capitalization
3. Transformation
4. Evasion
5. Avoidance
6. Exemption

A. Shifting of tax burden

Definition

Shifting is the transfer or passing of the burden of a tax by the original payer or
the one on whom the tax was assessed or imposed to another or someone else.
So, the person on whom the tax is imposed might not be the person who actually
shoulders the burden of the tax. This is the case where the tax is indirect. It
should be borne in mind that in shifting, what is transferred is not the payment of
the tax or liability for the tax but merely the burden of the tax. Once shifted, the
tax ceases to be tax and simply becomes part of the price or cost that the buyer,
for example, must pay to purchase the goods, property, or service. The seller
remains directly and legally liable for the payment of the tax. Shifting is possible
only when there is an exchange of commodities. 46

A tax cannot be shifted when it is purely personal – when it has no relation to any
business dealings of the taxpayer, like estate and community (formerly
residence) tax. 47

Kinds

There are three (3) kinds of shifting, namely:

1. Forward shifting – This takes places when the burden of the tax is transferred
from a factor of production through the factors of distribution until it finally
settles on the ultimate purchaser or consumer.

Thus, a manufacturer or producer upon whom a tax has been assessed may
shift it to the wholesaler, the latter, to the retailer who may shift it to the final
purchaser or consumer. If by reason of the tax the price is raised, the tax is to
that extent shifted.

2. Backward shifting – This is effected when the burden of the tax is transferred
from the consumer or purchaser through the factors of distribution to the
factor of production.

Thus, the tax may be imposed in the first instance on the consumer or
purchaser, and may be shifted by him to the retailer by purchasing only after

46
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 63

47
Shultz and Harris, American Public Finance [1959], p. 154, cited in J.F Rivera, p. 253
 the price is reduced, and from the latter to the wholesaler, and then finally to
the manufacturer or producer. The tax is shifted to the extent that the price is
reduced by reason of the tax.

3. Onward shifting – This occurs when the tax is shifted two or more times either
forward or backward. Thus, a transfer from producer to consumer or from
seller to purchaser involves one shift; from producer to wholesaler, then to
retailer, we have two (2) shifts; and if the tax is transferred again to the
purchaser by the retailer, we have three (3) shifts in all.

B. Distinction between tax avoidance and tax evasion

Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or
lessen the payment of a tax. It is also known as “tax dodging” and punishable by law,
subjecting the taxpayer to civil and criminal liabilities. 48

Tax avoidance, often called tax planning, is the use 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. Here, the taxpayer uses tax saving device or
means sanctioned or allowed by law so the law is not violated in any way. 49

Tax evasion Tax avoidance

Escape from taxation accomplished by Escape accomplished by legal
breaking the letter of the tax law procedures or means which may be
contrary to the intent of the sponsors of
the tax law but nevertheless do not
violate the letter of the law
Tax evader breaks the law; Tax avoider sidesteps the law 50

The gain of the tax evader or tax avoider is the government’s loss

Seek the same objective, i.e., avoiding taxes or a larger tax liability

6. Exemption from taxation

Definition

Exemption from taxation is the grant of immunity Grant of immunity, express or implied,
to particular persons or corporations of a particular class, from a tax upon property or an
48
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 69

49
Ibid, 70.

50
Schultz and Harris, op. cit., p 210
 excise which persons and corporations generally within the same taxing district are
obliged to pay. 51

It is an immunity or privilege; it is freedom from a financial charge or burden to which

others are subjected. 52

Nature of the power to grant tax

Taxation is the rule and exemption is the exception.53

1. National Government

The power to exempt is an attribute of sovereignty. The power to prescribe who

or what property shall be taxed implies the power to prescribe who or what
property shall not be taxed. 54

Limitation: Unless restricted by the Constitution, Legislative power to exempt is

as broad as its power to tax.

2. Local Government

Municipal corporations are clothed with no inherent power to tax. Thus, also no
inherent power to exempt from taxation.

But when the power to impose a particular tax is granted to them, they also have
the power to grant the exemption.

Exemption: Power to grant exemption is forbidden by the Constitution or a law.

Rationale for granting tax exemption

Its avowed purpose is some public benefit or interests which the lawmaking body
considers sufficient to offset the monetary loss entailed in the grant of the exemption. 55

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

Grounds for granting tax exemption

51
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 72

52
Greenfield vs. Meer, 77 Phil. 394 [1946]

53
Fels Energy, Inc. vs. Province of Batangas, 516 SCRA 186 [2007]

54
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 73
55
Comm. Vs. Phil. Air Lines, 25 SCRA 912 [1968]
 1. May be based on contract. In such a case, the public, which is represented by
the government is supposed to receive a full equivalent therefor, i.e. charter of a
corporation. 56

2. May be based on some ground of public policy, i.e., to encourage new

industries or to foster charitable institutions. Here, the government need not
receive any consideration in return for the tax exemption. 57

3. May be based on grounds of reciprocity or to lessen the rigors of international

double or multiple taxation58

Note: Equity is not a ground for tax exemption. Exemption is allowed only if
there is a clear provision therefor.

Nature of tax exemption

 It is a mere personal privilege of the grantee.

 It is generally revocable by the government unless the exemption is founded on

a contract which is contract which is protected from impairment.

 It implies a waiver on the part of the government of its right to collect what
otherwise would be due to it, and so is prejudicial thereto.

 It is not necessarily discriminatory so long as the exemption has a reasonable

foundation or rational basis.

 It is not transferable except if the law expressly provides so.

Kinds of tax exemption

1. As to manner of creation

a. Express or affirmative exemption

When certain persons, property or transactions are, by express provision,

exempted from all certain taxes, either entirely or in part.59

b. Implied exemption or exemption by omission

56
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 74

57
Ibid.

58
Ibid.

59
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 76
 When a tax is levied on certain classes of persons, properties, or
transactions without mentioning the other classes. Every tax statute
makes exemptions since all those not mentioned are deemed exempted.
60

Note: There is no tax exemption by implication. It must be expressed in a

clear and unmistakable language. 61

2. As to scope or extent

a. Total exemption

When certain persons, property or transactions are exempted, expressly

or impliedly from all taxes. 62

b. Partial exemption

When certain persons, property or transactions are exempted, expressly

or impliedly from certain taxes, either entirely or in part.63

3. As to object

a. Personal exemption

Those granted directly in favor of such persons as are within the

contemplation of the law granting the exemption. 64

b. Impersonal exemption

Those granted directly in favor of a certain class of property.65

Note: There can be no simultaneous exemptions under two laws, when

one grants partial exemption while other grants total exemption. 66

Exemptions provided by law

60
Ibid.

61
Social Security System vs. City of Bacolod, 115 SCRA 412 [1982]

62
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 76

63
Ibid, 77.

64
Ibid.

65
Ibid.

66
Ibid.
 1. Constitution

a. 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.67

b. All revenues and assets of non-stock, non-profit educational institutions

used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall be disposed of
in the manner provided by law. 68

Note: The provisions are self-executing. 69

2. Tax Code (as amended by TRAIN)

a. From income tax

Exemptions from Tax on Corporations70

 Labor, agricultural or horticultural organization not organized

principally for profit;
 Mutual savings bank not having a capital stock represented by
shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
 A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal organization
operating under the lodge system, or mutual aid association or a
nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to
the members of such society, order, or association, or nonstock
corporation or their dependents;
 Cemetery company owned and operated exclusively for the benefit
of its members;
 Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person;

67
Sec. 28 [31], Art. VI, 1987 Constitution

68
Sec. 4 [3,4], Art. XIV, 1987 Constitution

69
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 77

70
Sec 30, National Internal Revenue Code
  Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures
to the benefit of any private stock-holder, or individual;
 Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
 A nonstock and nonprofit educational institution;
 Government educational institution;
 Farmers' or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of
meeting its expenses; and
 Farmers', fruit growers', or like association organized and operated
as a sales agent for the purpose of marketing the products of its
members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the quantity of produce
finished by them;

Exemptions from Tax on General Professional Partnership71

General professional partnerships are partnerships formed by persons for

the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.

A general professional partnership as such shall not be subject to the

income tax imposed under this Chapter. Persons engaging in business as
partners in a general professional partnership shall be liable for income
tax only in their separate and individual capacities.

b. From estate tax72

 The merger of usufruct in the owner of the naked title;

 The transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary;
 The transmission from the first heir, legatee or donee in favor of
another beneficiary, in accordance with the desire of the
predecessor; and
 All bequests, devises, legacies or transfers to social welfare,
cultural and charitable institutions, no part of the net income of
which inures to the benefit of any individual:
o Provided, however, that not more than thirty percent (30%)
of the said bequests, devises, legacies or transfers shall be
used by such institutions for administration purposes.

71
Sec 22 (B) and 26, National Internal Revenue Code

72
Sec 87, National Internal Revenue Code
 c. From donor’s tax73

In the case of gifts made by a resident

 Gifts made to or for the use of the National Government or any

entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government; and
 Gifts in favor of an educational and/or charitable, religious, cultural
or social welfare corporation, institution, accredited
nongovernment organization, trust or philanthropic organization or
research institution or organization
o Not more than thirty percent (30%) of said gifts shall be
used by such donee for administration purposes.

In the case of gifts made by a nonresident not a citizen of the Philippines

 Gifts made to or for the use of the National Government or any

entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government.

 Gifts in favor of an educational and/or charitable, religious, cultural

or social welfare corporation, institution, foundation, trust or
philanthropic organization or research institution or organization
o Not more than thirty percent (30%) of said gifts shall be
used by such donee for administration purposes.

3. Special Laws

a. From income tax74

 Benefit payments to members made by the GSIS (PD 1146) and

SSS (RA. 1161 aa)
o Also exempt from estate tax

 Benefits received from the US government through the US

Veterans Administration (RA 360)
o Also exempt from estate tax
 Income from bonds and securities for sale in the international
market (PD 81)
 Exemptions of pioneer and registered enterprises under the
Investment Incentives Act (RA 5186)
 Exemption for a limited period of new and necessary industries
(RA 901)

73
Sec 101, National Internal Revenue Code

74
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 79
  Prizes received by winners in charity horse race sweepstakes from
the PCSO (RA 1169)
 The annual taxable incomes of senior citizens or those at least 60
years old and have an income of not more than P60,000 per
annum, subject to review by NEDA every three years (RA 7432)

b. From donor’s tax75

 Donations to the Philippine government for scientific, engineering

and technological research, invention and development (RA 1606)
 Donations to social welfare, cultural and charitable institutions (PD
507, RA 1916)
 Donations to the International Rice Research Institute (RA 2707,
PD 1620)
 Donations to the Ramon Magsaysay Award Foundation (RA 3076)
 Donations to the National Museum, the National Library, and the
archives of the National Historical Institute (PD 373)
 Donations to the Southern Philippine Development Administration
(PD 690)
 Irrevocable donations of American-owned private lands acquired
under the Laurel-Langley Agreement in favor of the National
Government (PD 762)
 Ex. Philippine National Red Cross, Community Chest, Boy Scouts
of the Philippines, Philippine Heart Foundation.
 Donations to the Museum of Philippine Costumes (PD 1349 aa PD
1388)
 Donations to the Intramuros Administration created for purposes of
restoring and administering the development of Intramuros (PD
1616)
 Sec. 34 (H), NIRC

c. From estate tax (Chapter II-C, de Leon) 76

d. From real property tax77

 Under the LGC (RA 7160), certain properties are exempt from real
property taxation (Chap. IV-L, de Leon

7. Equitable Recoupment

The Doctrine of Equitable Recoupment provides that where the refund of a tax illegally or
erroneously collected or overpaid by a taxpayer is barred by prescription, a tax presently
75
Ibid, 80.

76
Hector S. De Leon and Hector S. De Leon Jr. The Fundamentals of Taxation 17 th Ed. Pg. 81

77
Ibid.
 being assessed against a taxpayer may be recouped or set-off against the tax whose
refund is now barred by prescription. This doctrine is inapplicable in the Philippines in light
of the lifeblood theory.
78

8. Prohibition on Compensation and set-off

I. General Rule on Compensation of Taxes for Debts and Taxes for Taxes

Taxes cannot be subject to legal compensation or off-set against debts owed by the
Government. Debt Obligations are owed by the Government to a taxpayer in its corporate
capacity while taxes owed by taxpayers are due to the government in its sovereign capacity.
With this, the Government and Taxpayer are not mutually creditors and debtors to each
other.79

Also, as a general rule, excess tax paid cannot be off-set against other taxes payable to
the Government. However, the Commissioner on Internal Revenue is authorized by Law, under
Sec. 204 ( c ) of the National Internal Revenue Code, as amended by Republic Act No. 10973,
otherwise known as the Tax Reform for Acceleration and Inclusion Act (TRAIN), to grant
refund or credit of taxes erroneously or illegally paid.80

Moreover,

A. Review on Concept of Compensation

Compensation is the extinguishment to the concurrent amount of the debts who, in their own
right, are debtors and creditors of each other.81

Under Art. 1279 of the Civil Code, the following are necessary for compensation to be
proper:

(1) each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

78
UST vs. Collector, 104 PHIL 1062
79
Hector S. De Leon and Hector S. De Leon Jr..The Fundamentals of Taxation 7 th Ed. Pg.25
80
Hector S. De Leon and Hector S. De Leon Jr..The Fundamentals of Taxation 7 th Ed. Pg.25
81
Hector S. De Leon. The Law on Obligations and Contracts .1992 Edition. Pg.221, citing 8 Manresa 401
 A. Supreme Court Case in which Compensation of taxes for debts owed by the
Government is not allowed.

G.R. No. 92585 May 8, 1992,

CALTEX PHILIPPINES, INC., petitioner, vs. THE HONORABLE COMMISSION ON AUDIT,

NATURE OF THE ACTION

This is a petition questioning the authority of the Commission on Audit (COA) which
prevented CALTEX from exercising the right to offset its remittances against its reimbursement
vis-a-vis the OPSF .

MATERIAL FACTS:

The Commission on Audit handed down Decision No. 921 which prohibited Caltex
Philippines Inc. from further offsetting its unremitted collections to the Oil Price Stabilization
Fund (OPSF) and claims of reimbursements from the said Fund for the current and ensuing
years. The OPSF source of fund are as follows:

a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
exchange rate adjustment, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax

exemptions of government corporations, as may be determined by the
Minister of Finance in consultation with the Board of Energy;

Pursuant to Decision No. 921, the COA sent a letter to the Office of Energy Affairs
(OEA) on August 18,1989, requiring CALTEX to remit to OPSF an amount of P1,505,668,906,
representing remittances to the OPSF which were offset against its claims for
reimbursements (net of unsubmitted claims).

Unsatisfied with COA’s decisions, CALTEX filed a petition to the Supreme Court,
alleging that COA erred in preventing it from exercising its legal right to offset its remittances
against its reimbursement vis-a-vis the OPSF. Also, CALTEX argued that the collections that it
owes to OPSF do not arise as a result of taxation because "P.D. 1956, amended, did not
create a source of taxation; it instead established a special fund . . .," 56 and that the
OPSF contributions do not go to the general fund of the state and are not used for public
purpose, i.e., not for the support of the government, the administration of law, or the
payment of public expenses. This alleged lack of a public purpose behind OPSF exactions
distinguishes such from a tax

ISSUE
 Whether or not CALTEX’s unremitted collections to OPSF can be legally compensated
or off-set against CALTEX reimbursement claims on the said Fund.

RULING

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the

challenged decision of the Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from sales to the National Power
Corporation, which is hereby allowed.

RATIO DECIDENDI

No. The Supreme Court held that the petitioner’s unremitted collections to OPSF cannot
be legally compensated or off-set against its reimbursement claims on the said Fund.

1. The Oil Price Stabilization Fund is for public purpose

P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of
OPSF is taxation. Hence, petitioner’s contention that the OPSF contributions are not for a
public purpose because they go to the Government’s special fund is not valid. Further, Taxation
is not only a measure to raise revenue to support the existence of the government but also it
may be levied with a regulatory purpose to provide means for the rehabilitation and
stabilization of a threatened industry which is affected with public interest as to be within
the police power of the state.

In addition, petitioner has primary obligation to account for and remit the taxes
collected to the Administrator of the OPSF because, in respect to the taxes for the OPSF,
the oil companies, such as the Petitioner, acts as agents for the Government in the latter’s
collection since, in reality, the tax burden is passed unto the consuming public.

2. A taxpayer may not offset taxes due from the claims that he may have against the
government.

The Supreme Court held that Petitioner’s unremitted collection to OPSF vis-à-vis its
claims for reimbursement from the said Fund, compensation is not legally feasible. First, the
Government and the petitioner cannot be said to be mutually debtors and creditors of
each other. Second, there is no proof that petitioner's claim is already due and liquidated.
Under Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary
that:

(1) each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

 (5) over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

Further, R.A. No. 6952 (An Act Establishing the Petroleum Price Standby Fund to
Support the Oil Price Stabilization Fund (OPSF), does not authorize oil companies to offset their
claims against their OPSF contributions. Instead, it prohibits the government from paying
any amount from the Petroleum Price Standby Fund to oil companies which have
outstanding obligations with the government, without said obligation being offset first
subject to the rules on compensation in the Civil Code.

II. Exception to General Rule

a. Exception

The exception to the General Rule is where the claims of the Government and the
Taxpayer against each other have already become due and demandable.82

b. Supreme Court Case in which Compensation of taxes for debts owed by the
Government is allowed.

G.R. No. L-18994 , June 29, 1963

MELECIO R. DOMINGO, petitioner vs. HON. LORENZO C. GARLITOS, respondent

NATURE OF THE ACTION

This is a petition for certiorari and mandamus against the Judge of the Court of First
Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the
court and for an order in this Court directing the respondent court below to execute the
judgment in favor of the Government against the estate of Walter Scott Price for internal
revenue taxes

Material Facts

The Fiscal presented a petition to the Hon. Garlitos, Judge of CFI of Leyte, to execute
the Supreme Court’s judgement in the case of Melecio R. Domingo vs. Hon Judge S.C Moscoso
G.R. No. L-14674, January 30,1960. In the said case, the SC declared as final and executory
the order issued by the CFI of Leyte to the Estate of the Late Walter Scott Price to pay the
estate and inheritance taxes, charges and penalties amounting to P 40,058.55

However, the Fiscal’s petition was denied by Hon. Garlitos, because the said order’s
execution is not justifiable since is indebted to the estate under administration in the amount of
P262,200.

The CFI of Leyte, through Hon. Garlitos, emphasized in its order dated August 20, 1960
that in the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late
husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands, dated December
82
Hector S. De Leon and Hector S. De Leon Jr..The Fundamentals of Taxation 7 th Ed. Pg.25
14, 1956, that was duly acknowledged before Notary Public Salvador V. Esguerra -legal
adviser in Malacañang to Executive Secretary De Leon , Pres. Carlos P. Garcia, made a note
directing Director Castrillo to pay to Mrs. Price the sum of P368,140.00, and an extract of
page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment
to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as
directed in the above note of the President.

Considering these facts, the Court orders that the payment of inheritance taxes in
the sum of P40,058.55 due the Collector of Internal Revenue be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this
estate, the balance to be paid by the Government to her without further delay.

Hence, this Petition was filed to annul the said order and compel the CFI of Leyte to
execute the Supreme Court’s decision in Melecio R. Domingo vs. Hon Judge S.C Moscoso,
directing the Estate of the Late Walter Scott Price to pay the estate and inheritance taxes due
to the Government.

ISSUE

Whether or not the CFI of Leyte’s order to deduct the payment of inheritance due to the
Collector of Internal Revenue to the amount of P 262,200 due and payable to the Administrator
of Late Scott Walter Price for services rendered by Leyte Cadastral Survey Inc is valid.

RULING

The petition to set aside the above orders of the court below and for the execution of the
claim of the Government against the estate must be denied for lack of merit

RATIO DECIDENDI

Yes, the order is valid. The Supreme Court held that:

The fiscal’s petition should be denied because the court having jurisdiction of the estate
had found that the claim of the estate against the Government has been recognized and
an amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have
already become overdue and demandable is well as fully liquidated. Compensation, therefore,
takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of
the Civil Code, and both debts are extinguished to the concurrent amount.

III. COMPARISON OF CASES : CALTEX PHIL VS COA AND DOMINGO VS

CARLITOS

Caltex Phil Vs COA Domingo vs. Carlitos

As to whether the CALTEX’s obligation to The Estate of the Late Scott
 two debts are due, remit to the Government
demandable and the “unremitted collections”
fully liquidated for the Oil Price
Stabilization Fund is due
and demandable while the
Government’s obligation to
reimburse CALTEX from
the OPSF is not due and
demandable since, under
RA 6952, the Government
is prohibited from from
paying any amount from
the Petroleum Price
Standby Fund to oil
companies which have
outstanding obligations
with the government
Walter Price’s Obligation to pay
the inheritance tax to the
Government has been due
,demandable and fully
liquidated since SC has made
the said Obligation final and
executory while the
Government’s obligation to pay
for the services rendered by the
Estate’s company has also
become due, demandable and
fully liquidated since the
Government has recognized
the estate’s claim and an
amount of P262,200 has
already been appropriated for
the purpose by a
corresponding law (Rep. Act
No. 2700).

9. Compromise

I. Concept

a) Definition

A tax compromise is an agreement whereby the taxpayer offers to pay something less
than what is due and the government accepts it as a full settlement of his tax liability. In
compromise, there is meeting of the minds of the taxpayer and the government, lacking of
which, there is no compromise to speak of.83

b) Purpose

A remedy a taxpayer may avail of when issued a deficiency tax assessment by the BIR.
Since compromises effectively condones, waives the collection of taxes, or gives away
revenues belonging to the government, any tax compromise not in accordance with the law
is a ground for graft and corruption or even plunder.84

83
Du-Baladad, B. (2017, March 15). Compromising tax liabilities: Benedicta Du-Baladad. Retrieved August 08,
2020, from https://businessmirror.com.ph/2017/03/15/compromising-tax-liabilities/
 II. Scope

Violation of the Tax Code gives rise to civil and criminal liabilities. The civil liability pertains
to the unpaid taxes plus surcharges and penalties. The surcharge is a 25-percent penalty, or 50
percent in fraud cases, added to the tax unpaid. Interest penalty is at 20 percent per annum,
and could run up to 40 percent per annum for delinquent accounts. The criminal liability, on the
other hand, is imprisonment ranging from one year to 10 years.85

Under Section 204 of the Tax Code, the Commissioner of the Internal Revenue (CIR) is
authorized to compromise taxes in the Philippines or to allow payment of taxes at minimal
amounts in certain instances. No other person may exercise this power, not even the president
of the Philippines.

In December 16, 2002, Bureau of Internal Revenue issued Revenue Regulations No. 30-
2002 providing the scope of tax compromise. Section 2 thereof provides the cases which may
be the subject of compromise settlement as well as exceptions. And Section thereof provides for
the basis for acceptance of compromise settlement.

A. Cases which may be compromised:

1. Delinquent accounts;

2. Cases under administrative protest after issuance of the Final Assessment Notice to
the taxpayer which are still pending in the Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service
and other offices in the National Office;

3. Civil tax cases being disputed before the courts;

4. Collection cases filed in courts;

5. Criminal violations, other than those already filed in court or those involving criminal
tax fraud.

B. Exceptions:

1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast
doubt on the taxpayer’s obligation to withhold;

2. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or
his duly authorized representative;

84
Id.
85
Id.
3. Criminal violations already filed in court;

4. Delinquent accounts with duly approved schedule of installment payments;

5. Cases where final reports of reinvestigation or reconsideration have been issued resulting
to reduction in the original assessment and the taxpayer is agreeable to such decision
by signing the required agreement form for the purpose. On the other hand, other
protested cases shall be handled by the Regional Evaluation Board (REB) or the
National Evaluation Board (NEB) on a case to case basis;

6. Cases which become final and executory after final judgment of a court, where
compromise is requested on the ground of doubtful validity of the assessment; and

7. Estate tax cases where compromise is requested on the ground of financial incapacity of
the taxpayer.

C. The Commissioner may compromise the payment of any internal

revenue tax on the following grounds:

1. Doubtful validity of the assessment. - The offer to compromise a delinquent account or

disputed assessment under these Regulations on the ground of reasonable doubt as to
the validity of the assessment may be accepted when it is shown that:

a) The delinquent account or disputed assessment is one resulting from a jeopardy

assessment (For this purpose, “jeopardy assessment” shall refer to a tax assessment
which was assessed without the benefit of complete or partial audit by an authorized
revenue officer, who has reason to believe that the assessment and collection of a
deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply
with the audit and investigation requirements to present his books of accounts and/or
pertinent records, or to substantiate all or any of the deductions, exemptions, or credits
claimed in his return); or

b) The assessment seems to be arbitrary in nature, appearing to be based on

presumptions and there is reason to believe that it is lacking in legal and/or factual
basis; or

c) The taxpayer failed to file an administrative protest on account of the alleged

failure to receive notice of assessment and there 3 is reason to believe that the
assessment is lacking in legal and/or factual basis; or

d) The taxpayer failed to file a request for reinvestigation/ reconsideration within 30

days from receipt of final assessment notice and there is reason to believe that the
assessment is lacking in legal and/or factual basis; or
 e) The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse
decision of the Commissioner, or his authorized representative, in some cases, within
30 days from receipt thereof and there is reason to believe that the assessment is
lacking in legal and/or factual basis; or

f) The assessments were issued on or after January 1, 1998, where the demand
notice allegedly failed to comply with the formalities prescribed under Sec. 228 of the
National Internal Revenue Code of 1997; or

g) Assessments made based on the “Best Evidence Obtainable Rule” and there is
reason to believe that the same can be disputed by sufficient and competent evidence;
or

h) The assessment was issued within the prescriptive period for assessment as
extended by the taxpayer’s execution of Waiver of the Statute of Limitations the validity
or authenticity of which is being questioned or at issue and there is strong reason to
believe and evidence to prove that it is not authentic .

2. Financial incapacity. - The offer to compromise based on financial incapacity may be

accepted upon showing that:

a) The corporation ceased operation or is already dissolved. Provided, that tax

liabilities corresponding to the Subscription Receivable or Assets
distributed/distributable to the stockholders representing return of capital at the time of
cessation of operation or dissolution of business shall not be considered for
compromise; or

b) The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with
the Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to
impairment in the original capital by at least 50%, provided that amounts payable or
due to stockholders other than business-related transactions which are properly
includible in the regular “accounts payable” are by fiction of law considered as part of
capital and not liability, and provided further that the taxpayer has no sufficient liquid
asset to satisfy the tax liability; or

c) The taxpayer is suffering from a networth deficit (total liabilities exceed total
assets) computed by deducting total liabilities (net of deferred credits and amounts
payable to stockholders/owners reflected as liabilities, except businessrelated
transactions) from total assets (net of prepaid expenses, deferred charges, pre-
operating expenses, as well as appraisal increases in fixed assets), taken from the
latest audited financial statements, provided that in the case of an individual taxpayer,
he has no other leviable properties under the law other than his family home; or
 d) The taxpayer is a compensation income earner with no other source of income
and the family’s gross monthly compensation income does not exceed the levels of
compensation income provided for under Sec. 4.1.1 of these Regulations, and it
appears that the taxpayer possesses no other leviable or distrainable assets, other
than his family home; or

e) The taxpayer has been declared by any competent

tribunal/authority/body/government agency as bankrupt or insolvent.

10. Tax Amnesty

I. Concept

a) Definition

A tax amnesty can be defined as a limited-time offer by the government to a specified
group of taxpayers to pay a defined amount, in exchange for forgiveness of a tax liability
(including interest and penalties), relating to a previous tax period (s), as well as freedom
from legal prosecution. Amnesties generally fall in two categories: financial and legal. For
the former, a tax amnesty implies a reduction (in real terms) of taxpayers’ declared or
undeclared tax liabilities as established by law. This reduction can be achieved through a
variety of measures: for example, through a reduction or cancellation of (1) interest and
penalties owed on the under reported or undeclared taxes or (2) tax liabilities (or some
combination of these). The latter includes a waiving of civil and criminal penalties.86
It is a general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of tax evasion or violation of a revenue or tax law.87

b) Purpose

Due to the pilling of taxes caused by years of nonpayment, many taxpayers can no
longer pay the total amount due plus the interest and penalties thereto. As a solution to this

86
Borgne, E. L., & Baer, K. (2008, July). CHAPTER 2. Definition and Types of Amnesties. Retrieved August 08,
2020, from https://asean.elibrary.imf.org/view/IMF058/09193-9781589067363/09193-
9781589067363/ch02.xml?redirect=true

87
Leon, H. S. (2016). G. Nature Construction, Application, and Sources of Tax Laws. In The fundamentals of
taxation (pp. 85-89). Quezon City, Philippines: Rex Printing Company.
 problem, the State periodically relinquish the accumulated tax from a certain period of time.
A taxpayer who wish to avail of this opportunity needs to comply with the condition or
requirement as provided by the pertinent amnesty 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.88 It, also, gives the government a chance to collect uncollected taxes from tax
evaders without having to go through the tedious process of a tax case.89

c) Construe

A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted,
the terms of the amnesty, like that of a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority. For the right of taxation is inherent in
government. The State cannot strip itself of the most essential power of taxation by doubtful
words. He who claims an exemption (or an amnesty) from the common burden must justify his
claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague
implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in
favor of the state.90

II. Development

Various tax amnesty laws have been passed in the Philippines over the years after the
enactment of Presidential No. 379, which requires the filling of statement of all assets, liabilities
and net worth (SALN) by all persons, whether natural or juridical, having gross assets of
P50,000 or more as of December 31, 1973.

Below are the different tax amnesty laws in the Philippines:

1. Presidential Decree No. 631

Signed on January 6, 1975 by President Marcos granting an ultimate amnesty on

untaxed income and/or wealth earned or acquired in 1973 and prior years and

88
Id.

89
Id. (pp. 89)
90
Commissioner of Internal Revenue v. Marubeni Corporation [Supreme Court] G.R. No. 137377, December
18, 2001 (Puno, J., available at http://elibrary.judiciary.gov.ph, August 8, 2020).
 immunity from investigation of the statement of assets, liabilities, and net worth
required by presidential decree no. 379, as amended.

2. Presidential Decree No. 1740

Took effect in 1980 condoning penalties for certain violations of the income tax law
upon voluntary disclosure of undeclared income for income tax purposes and requiring
periodic submission of net worth statement.
It condones penalties for delinquent taxpayers for the years 1974 to 1979, provided the
taxpayer paid the correct amount of tax after amending his fraudulent return or filling a new
return in case he failed to do so, on or before March 15, 1981.91

3. Presidential Decree No. 1840

Signed on September 19, 1981 granting a tax amnesty on untaxed income  and/or
wealth earned or acquired  during the taxable years 1974 to 1980 provided: that the tax
amnesty must be 20% of the untaxed income and/or wealth but in no case less than P1,000
per taxable year and a statement of all assets, liabilities and net worth as of December 31,
1980 must be filed.

4. Executive Order No. 41

Granted a one-time tax amnesty covering unpaid income taxes for the years 1981 to
1985 provided that: the taxpayer shall, on or before December 5, 1986, file a sworn
statement declaring his net worth as of December 31, 1986, a certified true copy of his
statement declaring his net worth as of December 31, 1980, and a return and pay a tax
equilvalent to 10% of the increase in net worth from December 31, 1980 to December 31,
1985.92
This was amended by Executive Order No. 64 which, expanded the tax amnesty to
include estate, donor’s and business taxes. The period, then, for availing this tax amnesty
was extended up to January 3, 1987 by Executive Order No. 94.

91
Leon, H. S. (2016). G. Nature Construction, Application, and Sources of Tax Laws. In The fundamentals of
taxation (pp. 86). Quezon City, Philippines: Rex Printing Company.

92
Leon, H. S. (2016). G. Nature Construction, Application, and Sources of Tax Laws. In The fundamentals of
taxation (pp. 87). Quezon City, Philippines: Rex Printing Company.
5. Republic Act No. 7498

Is an act granting tax amnesty to persons repatriating their foreign currencies

and/or securities to the Philippines. Every taxpayer may avail of this except the
following:
a) Those with income tax cases already filed in court as of the effectivity of this Act;

b) Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity of this Act;

c) Those who have withholding tax liabilities under the National Internal Revenue
Code, as amended, insofar as the said liabilities are concerned;

d) Those with pending cases involving unexplained or unlawfully acquired wealth

before the Sandiganbayan;

e) Those liable under Title VII, Chapter III (Frauds, Illegal Exactions and
Transactions) and Chapter IV (Malversation of Public Funds and Property) of the
Revised Penal Code, as amended; and

f) Those with pending cases involving unexplained or unlawfully acquired wealth

falling under the jurisdiction of the Philippine Commission on Good Government.

6. Republic Act No. 9480

Signed on May 24, 2007. It is an act enhancing revenue administration and collection
by granting an amnesty on all unpaid internal revenue taxes imposed by the national
government for taxable year 2005 and prior years.

7. Republic Act No. 11213

Also known as “Tax Amnesty Act” which took effect in 2019. It is an act enhancing
revenue administration and collection by granting an amnesty on all unpaid internal revenue
taxes imposed by the national government for taxable year 2017 and prior years with
respect to estate tax, other internal revenue taxes, and tax on delinquencies.

It includes estate tax amnesty and tax amnesty on delinquencies. The former covers
the estate of decedent who died in or before December 31, 2017, and the tax rate is 6%
based on the decedent’s total net share at the time of the death. The latter, on the other
hand, covers all national internal revenue taxes collectible by the BIR and the BOC for
taxable year 2017 and prior years, falling under the types of delinquencies below:93

93
Finance, D. (n.d.). Package 1B: Tax Amnesty. Retrieved August 08, 2020, from
https://taxreform.dof.gov.ph/tax-reform-packages/package-1b-tax-amnesty/
 Amnesty taxes
Type of delinquency
(% of basic tax
assessed)

Final and executory delinquencies and assessments; 40

Tax cases subject to final and executory judgment by the courts; and 50

Pending criminal cases with the Department of Justice or the courts for tax
evasion and other criminal offenses under Chapter II of Title X and Section 60
275 of the NIRC of 1997, as amended;

Withholding tax agents with respect to unremitted withheld taxes. 100

K. CONSTRUCTION, INTERPRETATION, AND RULES AND REGULATION

(By: Urquia and Yasser)

A. CONSTRUCTION OF TAX LAWS

1. Legislative intent.  Tax statutes are to receive reasonably construction with the view to
carry out their purpose and intent.  If there is some issue on construction and
interpretation, we determine what was the intent of the legislators.
2. When there is doubt, tax statutes are construed strictly against the government and
liberally in favour of the taxpayer. Tax laws are, therefore, given liberal construction for
the reason that taxes are burdens. 
3. Where language is plain, which does not require independent interpretation or
construction, the rule of strict construction against the government is not applicable
 where the language of the tax statute is plain and there is no doubt as to its legislative
intent.
4. Where taxpayer claims exemption, the law frowns on exemption from taxation, hence,
an exempting provision should be construed strictissimi juris. Exemption provisions are
construed strictly not against the government but against the one who asserts the claim
of exemption.

B. INTERPRETATION OF TAX LAWS

The power to interpret the provisions of the Tax Code and other tax laws is under the exclusive
and original jurisdiction of the Commissioner of Internal Revenue subject to review by the
Secretary of Finance.
Administrative issuances which may be relied upon in interpreting the provisions of the Tax
Code, which are signed by the Secretary of Finance, or the Commissioner of Internal Revenue,
or his duly authorized representative, come in the form of Revenue Regulations, Revenue
Memorandum Orders, Revenue Memorandum Rulings, Revenue Memorandum Circulars, and
BIR Rulings.

1. Revenue Regulations are issuances signed by the Secretary of Finance, upon

recommendation of the Commissioner of Internal Revenue, that specify, prescribe or
define rules and regulations for the effective enforcement of the provisions of the
National Internal Revenue Code and related statutes.
2. Revenue Memorandum Orders are issuances that provide directives or instructions;
prescribe guidelines; and outline processes, operations, activities, workflows, methods
and procedures necessary in the implementation of stated policies, goals, objectives,
plans and programs of the Bureau in all areas of operations, except auditing.
3. Revenue Memorandum Rulings are rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to the provisions of the Tax Code and
other tax laws, as applied to a specific set of facts, with or without established
precedents, and which the Commissioner may issue from time to time for the purpose of
providing taxpayers guidance on the tax consequences in specific situations. BIR
Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null
and void ab initio.
4. Revenue Memorandum Circular (RMCs) are issuances that publish pertinent and
applicable portions, as well as amplifications, of laws, rules, regulations and precedents
issued by the BIR and other agencies/offices.
5. BIR Rulings are the official position of the Bureau to queries raised by taxpayers and
other stakeholders relative to clarification and interpretation of tax laws.

What is the weight given to administrative interpretation?

It is a principle widely accepted that the contemporaneous construction placed upon the
statute by the executive officers whose duty is to enforce it is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found
to be erroneous.

C. RULES AND REGULATIONS

 Application of Tax Laws are generally prospective. The reason is that the nature and
amount of the tax could not be foreseen and understood by the taxpayer at the time the
transaction which the law seeks to tax was completed. Nevertheless, while it is not favoured, a
statute may operate retroactively if it is expressly declared or is clearly the legislative intent. But,
there shall be no retroactive application when it would be harsh and oppressive.

The provisions of tax statutes may be mandatory or directory. Mandatory tax laws are
those provisions intended for the security of citizens or which are designed to ensure equality of
taxation or certainty as to the nature and amount of each person’s tax.

The sources of tax laws, aside from the pertinent provisions of the Constitution are:

1. Legal rules on taxation – Each of the three (3) organs of the government contributes
one way or another to the making of the legal rules of taxation. Only the Constitution
and legislation are to be considered as independent sources of tax laws.

2. Tax treaties with other countries – Those tax agreements entered into by the
Philippines with other countries are considered as and have the same force and
effects as statutes.

Existing tax laws include the National Internal Revenue Code of 1997, Tariff and
Customs Code of 1978(P.D. 1464 as amended), the Local Government Code, and respective
tax ordinances of Local Government Units.

The Secretary of Finance has the authority to promulgate rules and regulations. Under
Section 244 of the Tax Code, it is provided that the Secretary of Finance, upon the
recommendation of the Commissioner of Internal Revenue, shall promulgate all needful rules
and regulations for the effective enforcement of the provisions of the Tax Code. Moreover, the
Secretary of Finance has the power to revoke the rulings of his predecessors. However, such
repeal shall not be applied retroactively.

The most formal pronouncements of the Department of Finance in this respect are
known as “Revenue Regulations”, which prescribe or define rules for the effective enforcement
fo the Tax Code and related status.

As to the nature of regulations, the power to make regulations is not the power to
legislate in the true sense. Likewise, legislation may not be enacted under the guise of
regulation. It may be legitimately exercised only for the purpose of implementing the law or
putting it into effect.

As to its necessity and functions, regulations are necessary to the proper enforcement
and execution of laws. They are intended to clarify or explain the law and carry into effect its
general provisions by providing the details of administration and procedure. To be valid and
effective, regulations must comply with the following requisites: (a) They are necessary to the
proper enforcement of the law; (b) they must not be contrary to law and the Constitution; and (c)
They must be published in the Official Gazette.

In tax cases, the Supreme Court is the tribunal of last resort or final appeal. The
decisions of the Supreme court applying or interpreting existing tax laws are binding on all
subordinate courts and have the force and effect of law. The same is also true with respect to
the decisions of the Court of Tax Appeals (CTA). However, decisions of the CTA are still
appealable to the Supreme Court.