TAX EXEMPTIONS

Define Exemption from Taxation.

Exemption from Taxation is the grant from immunity to particular persons or corporations or
to persons or corporations of particular class from a tax which others generally within the same
taxing district are obliged to pay. (51 Am. Jur. 503).

What is the theory behind the grant of tax exemption?

The theory is that such exemption will benefit the body of the people, and not upon any idea of
lessening the burden of the individual owners of the property (Ibid., 509-510)

The avowed purpose of a tax exemption is always “some public benefit or interest, which the
law-making body considers sufficient to offset the monetary loss entailed in the grant of the
exemption. (CIR v. Pilipinas Shell Petroleum Corp., G.R. No. 188497)

What is the basis for the grant of Tax Exemption?

The inherent power of the state to impose taxes naturally carries with it the power to grant tax
exemptions. The power to exempt from taxation, as well as the power to tax, is an essential
attribute of sovereignty, and may be exercised in the constitution, or in a statute, unless the
Constitution expressly or by implication prohibits action by the legislator on the subject.

How may exemptions be created?

They may be created, expressly or impliedly, by a provision of the (1) constitution; (2) statutes;
(3) treaty; (4) ordinance; (5) franchise; or (6) contract.

Examples of tax exemptions granted under the Constitution is found in Article VI, Section 28(3)
granting tax exemptions to properties actually, directly, and exclusively used for religious,
charitable and educational purposes.

Examples of statutory tax exemptions are found in Sec. 27 of the NIRC, Sec. 105 of the TCCP,
Sec. 234 of the LGC, and those founds in Omnibus Investment Code of the Philippines, etc.

May tax exemptions be created by implication?

No, because exemptions are highly disfavored in law and m, therefore, be based on clear provision
of law. Thus, exemption from fixed taxes does not include exemption from income tax, fixed
taxes being different from income tax. Taxation is the rule and exemption is the exception. ( De
Leon)

Page 1 of 31
Example:

State the legal basis of grant of tax exemption.

Article VI, Section 28(4) of the Constitution provides:

“No law granting any tax exemption shall be passed without the concurrence of a majority of all
the members of Congress.”

May a tax exemption be revoked (by the legislature)?

Yes. It is an act of liberality which could be taken back by the government unless there are
restrictions. Since taxation is the rule and exemption is the exception, the exemption may be
withdrawn by the taxing authority ( Mactan Cebu International Authority v. Marcos, 261 SCRA
667)

Tax exemption is generally revocable. A law granting tax exemption, like laws in general, is
subject to modification in the legislative discretion.

In order to be irrevocable, the tax exemption m be founded on a contract or granted by the

Constitution. However, an exemption provided for in a franchise, although in the nature of a
contract, may be repealed or amended pursuant to the Constitution (See Section 11, Art. XII)

Consti provision cannot be revoked.

What are the restrictions on revocation of Tax Exemption?

a. Non-Impairment clause. Where the exemption was granted to private parties based
on material consideration of a mutual nature, which then becomes contractual and is
covered by the non-impairment clause of the Constitution.

b. Adherence to Form. If the tax exemption is granted by the Constitution, its revocation
may be effected only through a constitutional amendment.

c. Where the tax exemption grant is in the form of a special law and not by a general law,
the same cannot be repealed by a latter statute which is general in its terms, provisions
and application even if the terms of the general act is broad enough to include the cases
inn the special law unless there is a manifest intent to repeal or alter the special law.
(Misamis Oriental v. Cagayan Electric Power and Light Co., Inc., G.R. No. L-45355, January
12, 1990)

What is the voting requirement in the grant and revocation of tax exemption?

Page 2 of 31
In granting tax exemptions, an absolute majority of the Members of Congress is required.
Same rule applies in case of tax condonation, amnesty, and refund considering that these
partakes of the nature of tax exemption.

In cases of withdrawal of tax exemptions, relative majority vote is required.

Absolute Majority – at least 50% of all members of the Congress.

Relative Majority – plurality of vote.

When are statutory tax exemptions valid?

They are valid when they do not infringe upon any constitutional provision or principle, such as
uniformity rule and the guarantee of equal protection of the laws. In other words, there m be
reasonable basis. (De Leon).

Where the constitution confers upon the legislature authority to grant exemption within certain
limits, statutes granting such exemption shall be valid if they do not exceed the constitutional
limits, and void, if they do. (Dimaampao)

On what grounds exemption from taxation be based?

(1) It may be based on contract in which case the public represented by the government is
supposed to receive a full equivalent therefore.

(2) It may be based on some ground of public policy such as, for example, to encourage
new and necessary indries (Marcelo v. CIR, L-12401), or to foster charitable and
benevolent institutions. In this case, the government need not receive any consideration
in return of the exemption.

(3) It may be created in a treaty on grounds of reciprocity or to lessen the rigors of

international double or multiple taxation.

State the nature characteristics of a tax exemption.

(1) An exemption from taxation is personal to the grantee, hence, unless otherwise
provided by law, it is not transferable;

(2) It is a mere privilege of the grantee; hence it is revocable by law unless founded on
a contract (in which case it becomes a right) protected under the non-impairment clause
of the Constitution;

(3) It implies a waiver on the part of the government of its right to collect what otherwise
would be due to it; hence, it exists only by virtue of an express grant and m be strictly
construed; and

Page 3 of 31
 (4) It is required that it be based upon substantial differences between those exempted
from the tax and those subject thereto; hence, it is not necessarily discriminatory. (De
Leon)

May a tax exemption be assigned or transferred?

No, without the consent of the legislature which may be given either in the original act
granting the exemption or in a subsequent law. The reason is that tax exemption is personal
in nature.

Classifications of the Tax Exemption:

1. As to source (see above):

a. Constitutional
b. Statutory
c. Contractual
d. Treaty
e. Licensing Ordinance

2. As to form:
a. Express or Affirmative – expressly granted by organic or statute law
b. Implied or Exemption by Omission – when particular person, property, or excise
are deemed exempt as they fall outside the scope of the taxing provision itself.

3. As to extent:
a. Total – absolute immunity
b. Partial – one where a collection of a part of the tax is dispensed with.

4. As to object:
a. Personal – granted directly in favor of certain persons
b. Impersonal – grated directly in favor of certain class of property or excise

Principles governing Tax Exemption

1. Exemptions from taxation are highly disfavor in law and are not presumed
2. He who claims exemption m be able to jify his claim by the clearest grant of the organic
or statute law by words too plain to be mistaken. If ambiguous, there is no exemption.
3. He who claims exemption should prove by convincing proof that he is exempted.
4. Taxation is the rule; tax exemption is the exception.
5. Tax exemption m be strictly construed against the taxpayer and liberally construed in
favor of the taxing authority. (stictsimi juris something)
6. Tax exemptions are never presumed.

Page 4 of 31
 7. Constitutional grants of tax exemption are self-executing. As such, the legislature can
neither add nor detract from it; it may however prescribe procedure to determine whether
a claimant is entitled to the constitutional exemption;
8. Tax exemptions are personal.

Note: Items 1-6 are consistent with life blood doctrine.

How is tax exemption construed?

As a rule, exemptions are construed strictly against the taxpayer (the principle of strictissimi juris
or the strict construction rule) The burden is on the taxpayer to establish clearly his right to
exemption.

Basis: Lifeblood doctrine.

When is the strict construction rule applied?

When it is said that exemptions m be strictly construed in favor of the taxing power, this does
not mean that if there is a possibility of a doubt it is to be at once resolved against exemption.
It simply means that if, after the application of all rules of interpretation for the purpose of
ascertaining the intention of the legislature, a well-founded doubt exists, then the ambiguity
occurs which may be settled by the rule on strict construction. (Cooley)

What are the exceptions to the strict construction rule, i.e. when exemptions are
liberally construed in favor of the grantee/taxpayer?

1. When the law so provides for such liberal construction.

2. Exemptions from certain taxes, granted under special circumstances to special class of
persons.
3. Exemptions in favor of the government, its political subdivisions or instrumentalities.
4. Exemptions to traditional exemptees, such as those in favor of religious and charitable
institutions.
5. If exemptions refer to public property
6. If the taxpayer falls within the purview of exemption by clear legislative intent ( CIR v.
Arnolds Carpentry Shop, 159 SCRA 199)

The following partakes of a Tax Exemption:

1. Deductions for tax purposes (e.g. Deductions from Income Taxes under Section 34, et.
seq. NIRC)

The principle recognized is that when a taxpayer claims a deduction, he m point to some
specific provision of the statute in which that deduction is authorized and m be able to
prove that he is entitled to the deduction which the law allows.

Page 5 of 31
 Thus, in the case of Pilmico-Mauri Food Corp. v. CIR, it was held that to support deductions
for business expenses, official receipts and sales invoices m the requirements provided for
in Section 238 of the 1977 Tax Code.

2. Claims for refund

A refund of taxes partakes of a nature of an exemption. It cannot be allowed unless

granted in explicit and categorical language. (Resins v. Auditor General, L-17888, October
29, 1968)

3. Condonation of unpaid Tax Liabilities

The condonation of a tax liability is in the nature of tax exemption. Being so, it should be
sained only when expressed in explicit terms and cannot be extended beyond the plain
meaning of those terms. Where the law condones the taxes due from the taxpayers who
failed to pay their taxes, the benefits of the law cannot be extended to authorize the
refund of paid taxes where it does not explicitly provide for a refund. ( Surigao
Consolidated Co., Inc. v. Coll., L-14878, Dec. 26, 1963)

4. Tax Amnesty

Tax amnesty is an immunity from all criminal and civil obligation arising from non-payment
of taxes. It is a general pardon given to all taxpayers. It partakes of an absolute waiver
by the government of its right to collect what is due it and to give tax evaders who wish
to relent a chance to start with a clean slate. It applies only to past tax periods, hence of
retroactive application.

The fact that agents of the BIR already accepted the [taxpayer’s] application for tax
amnesty and his payment of the required 15% special tax cannot be a ground for estoppel
on the part of the State. The State is not bound by the mistakes of its agents. Still
further, a tax amnesty, much like to a tax exemption, is never favored nor presumed in
law and if granted by statute, the terms of the amnesty like that of a tax exemption m be
construed strictly against the taxpayer and liberally in favor of the taxing authority. (People
v. Castaneda, G.R. No. L-46881, Sept. 15, 1988)

What is the nature of Tax Amnesty?

1. It is the general or intentional overlooking by the state of its authority to impose penalties
on persons otherwise guilty of evasion or violation of a revenue or tax law;

2. Partakes of an absolute forgiveness or waiver of the government of its right to collect

taxes;

3. To give tax evaders, who wish to relent and are willing to reform a chance to do so.

What are the rules governing Tax Amnesty?

Page 6 of 31
 1. Tax amnesty, like exemption, is never favored nor presumed. It is construed strictly
against the taxpayer, who m show complete compliance with the requirements of the law.

Basis: Lifeblood doctrine.

2. Government is not estopped from questioning the tax liability even if amnesty tax
payments has been received.

Reason: Erroneous application and enforcement of the law by public officers do not block
subsequent correct application of the statute. The government is never estopped by the
mistake or errors of its agents.

Basis: Lifeblood doctrine.

3. Defense of tax amnesty is a personal defense.

Reason: It relates to the circumstances of a particular taxpayer/accused and not the

character of the acts charged in the information.

Distinguish Tax Amnesty from Tax Exemption

1. Tax Amnesty refers to the immunity from all criminal, civil and administrative liabilities
arising from non-payment of taxes; tax exemption is immunity from civil liability only;

2. Tax Amnesty applies to past tax periods; hence, retroactive application; while tax
exemption is prospectively applied.

What is a classification statute? How it is construed?

A classification statute is one which specifies the person or property subject and not subject to a
tax.

Example. Under Section 22 (B) of the NIRC, a partnership is included in the definition of a
Corporation. Accordingly, a partnership is taxable as a corporation. In the same section,
however, a general professional partnership is expressly excluded from the definition of a
corporation; hence, a GPP is not subject to corporate income tax.

A classification statute is not an exemption statute; hence, the general rule that a tax statute will
be construed in favor of the taxpayer applies. Any doubt as to the person or property intended
to be included in tax statute will be resolved in favor of the taxpayer. ( Comm. V. Ledesma, 31
SCRA 95, January 30, 1970).

Cases:

Page 7 of 31
1. John Hay Peoples Alternative Coalition, et. al. v. Lim, et. al., G.R. No. 119775. Held:
While the grant of economic incentives may be essential to the creation and success of
SEZs (Special Economic Zones), free trade zones and the like, the grant thereof to the
John Hay SEZ cannot be sained. The incentives under R.A. 7227 are exclusive only to the
Subic SEZ. The claimed statutory exemption of the John Hay SEZ from taxation should
be manifest and unmistakable from the language of the law on which it is based; it m be
expressly granted in a statute in a language too clear to be mistaken. Tax exemption
cannot be implied as it m be categorically and unmistakably expressed. If it were the
intent of the legislature to grant to the John Hay the same tax exemption and incentives
given to the Subic SEZ, it would have so expressly provided in the R.A. 7227.

2. CIR V. Philippine Associated Smelting and Refining Corp., G.R. No. 186223, October 1,
2014. Held: If the law confers an exemption from both direct and indirect taxes, a
claimant is entitled to a refund even if it only bears the economic burden of the applicable
tax. On the other hand, if the exemption conferred only applies to direct taxes, then the
statutory taxpayer is regarded as the proper party to file the refund claim. In PASAR’s
case, Section 17 of PD No. 66, as affirmed by the Commissioner of Coms, specifically
declared that supplies, including petroleum products, whether used directly or indirectly,
shall not be subject to internal revenue laws and regulation. Such exemption includes the
payment of excise taxes, which was passed on to PASAR by Petron. PASAR, therefore, is
the proper party to file a claim for the refund.

3. Batangas Power Corp. v. Batangas City and NAPOCOR, G.R. No. 152675, April 28, 2004.
Held: This Court recognized the removal of the blanket exclusion of government
instrumentalities from local taxation as one of the most significant provisions of the 1991
LGC. Specifically, we stressed that Section 193 of the LGC, an express and general repeal
of all statutes granting exemptions from local tax, withdrew the sweeping tax privileges
previously enjoyed by the NPC under its Charter. Consequently, when NPC assumed the
tax liabilities of the BPC under their 1992 BOT Agreement, the LGC which removed NPC’s
tax exemption privileges had been in effect for six months. Thus, while BPC remains to
be the entity doing business in said City, it is the NPC that is ultimately liable to pay said
taxes under the provisions of both 1992 BOT Agreement and the 1991 LGC.

4. Tolentino v. Secretary of Finance, G.R. No. 115455, Aug 25, 1994. Held: It would suffice
to say that since the law granted the press a privilege, the law could take back the privilege
anytime without offense to the Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax
burden to which other business have long ago been subject.

5. CIR V. MERALCO, G.R. No. 181459, June 9, 2014. Held: Tax refunds are based on the
general premise that taxes have either been erroneously or excessively paid. Though the
Tax Code recognizes the right of taxpayers to request the return of such excess/erroneous
payments from the government, they m do so within a prescribed period. Further, a
taxpayer m prove not only his entitlement to a refund, but also his compliance with the
procedural due process as non-observance of the prescriptive periods within which to file
the administrative and the judicial claim would result in the denial of his claim. In the
case at bar, MERALCO had ample opportunity to verify on the tax-exempt status of

Page 8 of 31
 NORD/LB for purposes of claiming tax refund. Nevertheless, it only filed its claim for tax
refund ten months from the issuance of the said ruling.

6. Mactan Cebu International Airport v. Marcos, G.R. No. 120082, September 11, 1996.
Held: Tax exemption is the rule and exemption is the exception. Thus, the exemption
may be withdrawn at the pleasure of the taxing authority. The only exception to this rule
is where the exemption was granted to private parties based on material consideration of
a mutual nature, which then becomes contractual and is thus covered by the non-
impairment clause of the Constitution.

7. FELS Energy v. The Province of Batangas, G.R. No. 168557, February 16, 2007. Held:
The owner of the taxable properties is petitioner FELS, which in fine, is the entity being
taxed by the local government. It follows then that FELS cannot escape liability from the
payment of realty taxes by invoking its exemption under Section 234 (c) of RA 7610.
Indeed, the law states that machinery m be actually, directly, and exclusively used by the
government owned and controlled corporation. The mere undertaking of NPC under
Section 10.1 of the Agreement, that it shall be responsible for the payment of all real
estate taxes and assessments, does not jify the exemption. The privilege granted to the
NPC cannot be extended to FELS. The covenant is between FELS and NPC and does not
bind a third person not privy thereto, i.e. the Province of Batangas.

8. The Province of Misamis Oriental v. Cagayan Electric Power, G.R. No. L-45355, January
12, 1990. Held: The franchise of CEPALCO expressly exempts it from payment of “all
taxes of whatever authority” except the three per centum (3%) tax on its gross earnings.
This Court pointed out that such exemption is part of the inducement for the acceptance
of the franchise and the rendition of public service by the grantee. As a charter in the
nature of a private contract, the imposition of another franchise tax on the corporation by
the local authority would constitute an impairment of the contract between the
government and the corporation.

9. Philippine Basketball Association v. CA, 337 SCRA 358

10. CIR v. Phil American Accidents Insurance Co., 453 SCRA 668
11. NPC v. City of Cabanatuan, 401 SCRA 259

LOCAL TAXATION

State the legal basis of local taxation.

Article X, Section 5 of the Constitution provides that: “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. Such taxes, fees, and charges shall accrue exclusively to the local governments.”

Page 9 of 31
Do local government units (LGUs) have inherent power of taxation?

The power to tax “is an attribute of sovereignty,” and as such, inheres in the State. Such,
however, is not true for provinces, cities, municipalities and barangays as they are not sovereign;
rather, they are mere “territorial and political subdivisions of the Republic of the Philippines.” (A)
municipal corporation unlike a sovereign state is clothed with no inherent power of taxation. The
charter or statute m plainly show an intent to confer that power or the municipality cannot assume
it. (Pelizloy Realty Corp.v. Prov. Of Benguet, 695 SCRA 491)

LGUs power to tax emanates from where/what?

LGUs power to tax is a mere delegated authority from the Congress.

The general principle against the delegation of legislative powers as a consequence of the
principle of separation of power is subject to one well-established exception: legislative powers
may be delegated to local governments. (Pepsi-Cola Bottling Co. v. City of Butuan, 24 SCRA
789). Included in this grant of legislative power is the grant of local taxing power.

Delegation of legislative taxing power to local government is jified by the necessary implication
that the power to create political corporations for purposes of local self-government carries with
it the power to confer on such local government agencies the authority to tax. (Pepsi-Cola Bottling
Co. v. Municipality of Tanuan Leyte, 69 SCRA 460).

Note that Article X, Section 5 of the Constitution is not a self-executing provision and expressly
requires Congress to provide such guidelines and limitations on the power of the LGUs granted
therein.

Are the inherent limitations of taxation applicable to local taxation?

Yes. Despite the grant of taxing power to local governments, judicial admonition is given to the
effect that the tax so levied m be for public purpose, uniform and m not transgress any
constitutional provision nor repugnant to a controlling statute. ( Villanueva v. City of Iloilo, 26
SCRA 578).

Who exercises the power of local taxation?

The Local Government Code is specific in providing that the power to impose tax, fee, or charge,
or to generate revenue shall be exercised by the sanggunian of the local government unit
concerned through an appropriate ordinance.

How should delegated powers construed?

The power when granted is to be construed in strictissimi juris. Any doubt or ambiguity arising
out of the term used granting that power m be resolved against the municipality. Inferences,

Page 10 of 31
implications, deductions – all these – have no place in the interpretation of the taxing power of a
municipal corporation. (Pelizloy Realty Corporation v. Province of Benguet, supra.)

Considering that the taxing power is merely a delegated power, may the Congress
abolish the same?

The Congress cannot abolish the local government’s power to tax as it cannot abrogate what is
expressly granted by the fundamental law. The only authority conferred to Congress is to provide
the guidelines and limitations on the local government’s exercise of the power to tax.

State the fundamental principles governing the exercise of the taxing and other
revenue raising powers of LGUs.

Section 130 of the Local Government Code enumerates the fundamental principles that shall
govern the exercise of the taxing and other revenue-raising powers of local government units, to
wit:

(a) Taxation shall be uniform in each local government unit;

(b) Taxes, fees, charges and other impositions shall:

1. be equitable and based as far as practicable on the taxpayer’s ability to pay;

2. be levied and collected only for public purposes;

3. not be unj, excessive, oppressive, or confiscatory;

4. not be contrary to law, public policy, national economic policy, or in restraint of

trade.

(c) The collection of local taxes, fees, charges and other impositions shall in no case be
let to any private person;

(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the
benefit of, and be subject to the disposition by, the local government unit levying the
tax, fee, charge or other imposition unless otherwise specifically provided herein; and

(e) Each local government unit shall, as far as practicable, evolve a progressive system of
taxation.

Enumerate the Common Limitations on the Taxing Powers of LGUs.

Section 113 of the Local Government Code provides:

Page 11 of 31
“Section 113. Common Limitations on the Taxing Power of Local Government Units. –
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estate, inheritance, gifts, legacies and other acquisitions mortis causa, except
as otherwise provided herein;

(d) Coms duties, registration fees of vessel and wharfage on wharves, tonnage fees, and all
other kinds of coms fees, charges and dues, except wharfage on wharves constructed and
maintained by the local government unit concerned;

(e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or
passing through, the territorial jurisdiction of local government units in the guise of
charges of wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any
form whatsoever upon such goods on merchandise;

(f) Taxes, fees or charges on agricultural and aquatic when sold by marginal farmers or
fishermen;

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-
pioneer for a period of six (6) years and four (4) years respectively from the date of
registration;

(h) Excise taxes on articles enumerated under the NIRC, as amended, an taxes, fees or
charges on petroleum products;

(i) Percentage or value added tax (VAT) on sales, barter or exchanges or similar transactions
on goods or services except as provided herein;

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water,
except as provided in this Code;

(k) Taxes on premiums paid by way of reinsurance or retrocession;

(l) Taxes, taxes or charges for the registration of motor vehicles and for the issuance of all
kinds of licenses and permits for the driving thereof, except tricycles;

(m) Taxes, fees, or other charges on Philippine products actually exported, except as
otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and
cooperatives duly registered under R.A. 6810 and R.A. No. 6938, otherwise known as the
Cooperatives Code of the Philippines, respectively; and

Page 12 of 31
 (o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units.

Enumerate the fundamental principles governing the appraisal, assessment, levy

and collection of real property tax:

Section 198 of the Local Government Code enumerates the following fundamental principles
relative to the appraisal, assessment, levy and collection of real property tax:

(a) Real property shall be appraised at its current and fair market value;

(b) Real property shall be classified for assessment purposes on the basis of its actual use;

(c) Real property shall be assessed on the basis of a uniform classification within each local
government unit;

(d) The appraisal, assessment, levy and collection of real property tax shall not be let to any
private person;

(e) The appraisal and assessment of real property shall be equitable.

Discuss the Doctrine of Preemption in Local Taxation

Preemption in the matter of taxation simply refers to an instance where the national government
elects to tax a particular area, impliedly withholding from the local government the delegated
power to tax the same field. This doctrine primarily rests on the intention of Congress.
Conversely, should Congress allow municipal corporations to cover fields of taxation it already
occupies, the doctrine of preemption will not apply. ( Victoria Milling v. Municipality of Victoria,
25 SCRA 192)

Other readings:

1. NAPOCOR v. CBAA, 577 SCRA 418

2. Villanueva v. City of Iloilo, 26 SCRA 578

DOUBLE TAXATION

Define Double Taxation

Double taxation may be understood:

Page 13 of 31
 (1) In its strict sense (a.k.a direct duplicate taxation or direct double taxation) means: a)
taxing twice; b) by the same public authority; c) within the same jurisdiction or taxing
district; d) for the same purpose; e) in the same year or taxing period; f) some of the
property or subject matter in the territory.

In the case of Vilanueva v. City of Iloilo, the Supreme Court enumerated the elements of
indirect double taxation as follows:

a) The same property or subject matter is taxed twice when it should be taxed only once;
b) Both taxes are levied for the same purpose;
c) Imposed by the same taxing authority;
d) Within the same jurisdiction;
e) During the same taxing period;
f) Covering the same kind or character of tax.

(2) In its broad sense (a.k.a. indirect duplicate taxation or indirect double taxation) means
other than direct duplication taxation. It extends to all cases in which there is a burden
of two or more pecuniary impositions.

Is Double Taxation prohibited in the Philippines?

Double taxation in its narrow sense is undoubtedly unconstitutional. But while double taxation in
its broad sense is not forbidden, it has been held that such taxation should, whenever possible,
be avoided and prevented, obviously to avoid injice or unfairness. ( De Villata v. Stanley, 32 Phil
541; Pepsi Cola Butuan, L-22814, Aug 28, 1969, and related cases).

Double taxation, in general, is not forbidden by our Constitution since we have not adopted as
part thereof the injunction against double taxation found in the Constitution of the United States
of America. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity or by the same jurisdiction for the same purpose, but
not in a case where one tax is imposed by the State and the other by the city or municipality.
(Pepsi Cola Bottling Co. v. Municipality of Tanauan, Leyte, 69 SCRA 460).

When double taxation occurs, what is the remedy of the taxpayer affected?

The taxpayer may seek relief under the uniformity rule, or equal protection clause, or even due
process clause.

Aside from Direct and Indirect Double Taxation, are there any other kind of Double
Taxation?

The other kinds of Double Taxation are:

a) Domestic – this arises when the taxes are imposed by the local or national government
within the same state.

Page 14 of 31
 b) International (a.k.a. International juridical double taxatin) – refers to 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. It usually takes place when a person is resident
of a contracting state and derives income from, or owns capital in, the other contracting
state and both states impose tax on that same income or capital. ( CIR v. S.C. Johnson
and Son, Inc., 309 SCRA 102).

What are the Modes of Eliminating the Impact of Double Taxation?

1. Tax Sparing Rule – same dividend earned by a Non-Resident Foreign Corporation

(NFRC) within the Phils. is reduced by imposing a lower tax rate of 15% (in lieu of the
usual 35%), on the condition that the country to which the NFRC is domiciled is allowed
a credit against the tax due from the NFRC taxes deemed to have been paid in the Phils.
(Sec. 28 B 5b, NIRC) (See also: CIR v. S.C. Johnson and Sons, Inc., supra.)

2. Tax Deductions – example is the so-called Vanishing Deductions under Section

86(A)(2) of the NIRC, as amended.

3. Tax Credits – examples under the NIRC:

a. For VAT purposes, the tax on input or items that go into the manufacture of
finished products (which are eventually sold) may be credited against or deducted
from the output tax or the tax on the finished product. (Sec. 110, NIRC);

b. Foreign income taxes may be credited against the Phil. Income Tax, subject to
certain limitations, by citizens, including members of general professional
partnerships or beneficiaries of estate or trs as well as domestic corporations (Sec.
34(C)(3), NIRC);

c. Tax credit is granted for estate taxes paid to a foreign country on the estate of
citizen and resident aliens subject to certain limitations. (Sec. 86(D), NIRC);

d. The donor’s tax imposed upon a certain citizen or a resident alien shall be credited
with the amount of any donor’s tax imposed by the authority of a foreign country,
subject to certain limitations (Sec. 98(C), NIRC)

4. Tax Exemptions (e.g income derived by an OFW abroad is exempt from taxes).

5. Principle of Reciprocity / International Comity (e.g. income of foreign ambassadors

and properties of foreign embassies are not taxable in the Philippines under the principle
of international comity.)

6. Treaties with other States /Tax Treaties (see discussions below as lifted from the
Supreme Court decision in CIR v. SC Johnson and Sons, Inc., G.R. No. 127105, June 25,
1999).

Page 15 of 31
What is the purpose of the bilateral treaties which PH entered into for the avoidance
of double taxation?

The purpose of these international agreements is to reconcile the national fiscal legislations of
the contracting parties in order to help the taxpayer avoid simultaneous taxation of two different
jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the imposition of comparable taxes
in two or more states on the same taxpayer in respect of the same subject matter and for identical
periods.

What is the reason for doing away with international juridical double taxation?

The apparent rationale for doing away with double taxation is to encourage the free flow of goods
and services and the movement of capital, technology and persons between countries, conditions
deemed vital in creating rob and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate.

[T]he ultimate reason for avoiding double taxation is to encourage foreign investors to invest in
the Philippines – a crucial economic goal for developing countries. The goal of double taxation
conventions would be thwarted if such treaties do not provide for specific measures to minimize,
if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus,
if the rates of tax are lowered by the state of source, in this case, the Philippines, there should
be a concomitant commitment on the part of the state of residence to grant some form of tax
relief, whether in the form of tax credit or exemption. Otherwise, the tax which could have been
collected by the Philippine government will simply be collected by another state, defeating the
object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved.
If the state of residence does not grant some form of relief to the investor, no benefit would
redound to the Philippines, i.e. increased investment resulting from a favorable tax regime, should
it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose
the regular rate than lose much-needed revenues to another country.

In negotiating tax treaties, what is the underlying rationale for reducing the tax rate
(of the state of source, i.e. PH)?

The underlying rationale for reducing tax rate is that the Philippines will give up part of the tax in
the expectation that the tax given up for this particular investment is not taxed by the other
country.

What is the so-called “Most Favored Nation Clause” in tax treaties? What is its
purpose?

The purpose of the most favored nation is to grant the contracting party treatment not less
favorable than that which has been or may be granted o the “most favored” among other

Page 16 of 31
countries. The most favored nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the contracting nations may
enjoy the privileges accorded by either party to those of the most favored nation. The essence
of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country of residence of such taxpayer is also a party provided in
the subject matter of taxation is the same as that in the tax treaty under which the taxpayer is
liable. The similarity in the circumstances of payment of taxes is a condition for the enjoyment
of most favored nation treatment precisely to underscore the need for equality of treatment.

What are the methods resorted to by a Tax Treaty in order to eliminate Double
Taxation?

First Method: It sets out the respective rights to tax of the state of source or situs and of the
state of residence with regards 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 items are given the right to tax, although the amount of tax that may be imposed
by the state of source is limited.

Second Method: 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
– the exemption method and the credit method.

➢ 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.

➢ Credit Method – although the income or capital 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.

The basic difference between the two methods is that in the exemption method, the focus
is on the income or capital itself, whereas the credit method focuses upon the tax.

Cases:

1. The Manufacturers Life Insurance Co. v. Meer, G.R. No. L-2910, June 29, 1951 – MLIC
issued several insurance policies containing stipulations referred to non-forfeiture clause
and automatic premium loan clauses. Because of the WWII, for failure of the insured
under the above policies to pay the corresponding premiums, MLIC’s head office in
Toronto (its Manila office then closed due to the war), applied the provision of the
automatic premium loans clauses. Resultantly, CIR assessed taxes on the amount
advanced. MLIC contends that when it made premium loans or advances, it did not collect
premium within the meaning of the law. Held: In any event, there is no constitutional
prohibition against double taxation. The appellant takes the position that as advances of

Page 17 of 31
 premiums were made in Toronto, such premiums are deemed to have been paid there –
not in the PH – and therefore those payments are not subject to local taxation. The thesis
overlooks the fact that the loans are made to policyholders in the PH, who in turn pay
therewith the premium to the insurer thru the Manila Branch. Approval of appellant’s
position will enable foreign insurers to evade the tax by contriving to require that premium
payments shall be made at their head offices. What is important, the law does not
contemplate premiums collected in the Philippines. It is enough that the insurer is doing
insurance business in the Philippines, irrespective of the place of its organization or
establishment.

2. Ericcson Telecoms v. City of Pasig, G.R. No. 176667, November 22, 2007. BIR assessed
ET deficiency local business taxes on based on the latter’s gross revenue as reported in
its audited financial statements, arguing that gross receipts is synonymous to gross
earnings/revenue. ET contends that only a portion of the revenue which were actually
and constructively received should be considered in determining its tax base pursuant to
Sec. 143 in relation to Sec. 151 of the LGC. Held: Revenue from services rendered is
recognized when services have been performed and are billable. It is recorded at the
amount received or expected to be received. In petitioner’s case, its audited financial
statements reflect income or revenue which accrued to it during the taxable period
although not yet actually or constructively received or paid. This is because petitioner
uses the accrual method of accounting, where income is reportable when all the events
have occurred that fix the taxpayer’s right to receive the income, and the amount can be
determined with reasonable accuracy; the right receive income, and not the actual receipt,
determines when to include the amount in gross income. The imposition of local business
taxes based on petitioner’s gross revenue will inevitably result in the constitutionally
proscribed double taxation – taxing the same person twice by the same jurisdiction for
the same thing – in as much as petitioner’s revenue or income for a taxable year will
definitely include its gross receipts already reported during the previous year and for which
local business taxes has already been paid.

3. Nursery Care Corp., et. al. v. Acevedo, G.R. No. 180651, July 30, 2014 – City of Manila
assessed and collected from the individual petitioners pursuant to Section 15 and 17 of
the Revenue Code of Manila. In addition, it also assessed additional taxes under Sec. 21
of the same code as a condition for the renewal of their respective business licenses. The
subject of tax under Sec. 21 are businesses subject to excise, VAT or percentage tax under
the NIRC. Held: The additional taxes under Sec. 21 constitute double taxation.

4. La Suerte Cigar v. CA, G.R. No. 125346, November 11, 2014. Held: The contention that
the cigarette manufacturers are doubly taxed because they are paying the specific tax on
the raw materials and on the finished products in which the raw material was part of is
devoid of merit. Excise taxes are essentially taxes on property because they are levied
on certain specified goods or articles manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition, and on goods imported. In
this case, there is no double taxation in the prohibited sense because specific tax is
imposed by explicit provisions of the Tax Code on two different articles or products: (1)
on the stemmed leaf tobacco; and (2) on cigar or cigarette.

Page 18 of 31
5. Villanueva v. City of Iloilo, G.R. No. L-26521, December 28, 1968. By virtue of Ordinance
No. 11, Series of 1960, the City of Iloilo assessed and collected from Spouses Villanueva
tenement taxes because they are engaged real estate dealers. Note that the in 1946, a
similar ordinance was passed which was later on declared as unconstitutional, i.e. it was
beyond the power of the City to enact such ordinance as tenement tax was not among
those clearly and expressly granted to the City of Iloilo by its charter. They paid under
protest the assessed tenement taxes and thereafter again sought to declare ordinance as
invalid for being beyond the City’s power to enact, and as unconstitutional for being
violative of uniformity of taxation, equal protection clause. Trial court declared Ordinance
No. 11 as invalid as it is constitutive of double taxation, having been established the
Villanueva was likewise paying real property tax on the building. Held: The contention
that the plaintiffs-appellees are doubly taxed because they are paying real estate taxes
and the tenement taxes imposed by the ordinance in question, is devoid of merit. It is a
well-settled rule that a license tax may be levied upon a business or occupation although
the land or property used in connection therewith is subject to property tax. The state
may collect an ad valorem tax on property used in a calling, and at the same time impose
a license tax on that calling, the imposition of the latter kind being in no sense a double
taxation. It has been shown that a real property tax and the tenement tax imposed by
the ordinance, although imposed by the same taxing authority, are not of the same kind
or character. (note: the ordinance was upheld valid because of the passage of the Local
Autonomy Act empowering the City of Iloilo to enact the same.)

6. Compana General De Tabacos v. City of Manila, G.R. No. L-16619, June 29, 1963. Held:
That Tabacalera is being subject to double taxation is more apparent than real. As already
stated, what is collected under Ordinance No. 3358 is a license fee for the privilege of
engaging in the sale of liquor, a calling which – it is obvious – that anyone or anybody
may freely engage, considering that the sale of liquor indiscriminately may endanger
public health and morals. On the other hand, what the other three ordinances mentioned
heretofore is a tax for revenue purposes based on the sale made of the same article or
merchandise. It is already settled in this connection that both a license fee and a tax may
be imposed on the same business or occupation, or for selling the same article, this not
being in violation of the rule against double taxation. This is precisely the case with the
ordinances involved in the case at bar.

7. CIR v. Solid Bank, G.R. No. 148191, November 25, 2003. Solid Bank declared gross
receipts included the amount from passive income which was already subject to 20%
FWT. SB filed a request for refund. CTA affirmed that the 20% FWT should not form part
of its taxable gross receipts for purposes of computing the gross receipts tax. Accordingly,
it order BIR to refund. CA affirmed CTA’s ruling. Held: No double taxation. The two
taxes are different from each other. The basis of their imposition may be the same but
their natures are different. First, the taxes are imposed on two different subject matters.
The subject matter of the FWT is the passive income generated in the form of interests
on deposits and yield on deposit substitutes, while the subject matter of the GRT is the
privilege of engaging in the business of banking. Second, although both taxes are national
in scope because they are imposed by the same taxing authority, i.e. the national
government under the Tax Code, an operate within the same Philippine jurisdiction for
the same purpose of raising revenue, the taxing periods they affect are different. The
FWT is deducted and withheld as soon as the income is earned, and is paid after every

Page 19 of 31
 calendar quarter in which it is earned. On the other hand, the GRT is neither deducted
nor withheld, but is paid only after every taxable quarter in which it is earned.

ESCAPE FROM TAXATION

1. Shifting – the process by which the tax burden is transferred from the statutory taxpayer
(impact of taxation) to another (incident of taxation).

Impact of Taxation – point on which tax is originally imposed.

Incidence of Taxation – point on which the tax burden finally rests or settles down.

Kinds of Shifting:
a) Forward Shifting – when burden of tax is transferred from a factor of production
through the factors of distribution until it finally settles on the ultimate purchaser
or consumer.

b) Backward Shifting – when burden is transferred from consumer through factors

of distribution to the factors of production.

c) Onward Shifting – when the tax is shifted 2 or more times either forward or
backward.

Tax Cascading (or Cascade Tax) is a system that imposes a sales tax on products at
each successive stage in the supply chain from raw materials to consumer purchase. Each
buyer in the supply chain pays a price based on its cost, including the previous tax or
taxes that have been charged.

2. Capitalization – a mere increase in the value of the property is not income but merely
an increase in capital. No income until after the actual sale or disposition of the property
in excess of its original cost. Except: if by reason of appraisal, the cost basis of the
property increased and the resultant basis is used as the new tax base is used for purposes
of computing the allowable depreciation expense, the net difference between the original
cost and the new basis is taxable under the economic benefit rule (BIR Ruling NO. 029,
March 19, 1998).

3. Transformation – the manufacturer or producer upon whom the tax has been imposed,
fearing the loss of his market if he should add the tax to the price, pays the tax and
endeavors to recoup himself by improving his process of production thereby turning out
his units at a lower cost.

4. TAX AVOIDANCE (or Tax Minimization) – the exploitation by the taxpayer of legally
permissible alternative tax rates or methods of assessing taxable property or income, in
order to avoid or reduce tax liability.

Examples under the NIRC:

Page 20 of 31
a) Section 39(B) – Holding Period Rule. In case a taxpayer, other than a corporation,
sells a capital asset after holding the same for more than 12 months, only 50% of
the net capital gains shall be taken into account in computing net capital gain or
loss, and net income.

b) Interest of Long-Term Deposits held for more than 5 years is exempt from Final
Withholding Tax (Sec. 24B).

c) Sec. 26(D) – use of proceeds of the sale of a principal residence (capital asset) to
acquire or construct new principal residence within 18 months from sale is exempt
from capital gains tax.

What is estate planning?

Estate planning refers to the preparation for the distribution and management of a
person’s estate at death through the use of wills, trs, insurance policies, and other
arrangements, especially to reduce administration cost s and transfer-tax liabilities.

Is estate planning a recognized tax avoidance scheme?

In the case of Delpher Trades Corp. v. IAC (157 SCRA 349, G.R. No. L-69259, January
26, 1988), the Suprme Court had given judicial imprimatur to estate planning as tax
avoidance stratagem.

In this case, Pacheco siblings owned a certain parcel of land, which they leased to
Construction Components International, Inc. (CCII). The lease provides that in case
the Pachecos decide to sell the property, CCII shall have the right of first refusal to
purchase the same. Later on, CCII assigned its rights in the lease in favor of Hydro
Pipes Philippines, Inc. Both lease contract and the assignment of lease were
annotated at the back of the title of the land. Later, a deed of exchange was executed
by the Pachecos in favor of Delpher Trades Corporation whereby the former conveyed
to the latter the leased property and another property in exchange of 2,500 shares of
stocks of Delpher.

Issue: Whether or not the deed of exchange whereby Pachecos conveyed the leased
land to Delpher Corporation in exchange of 2,500 shares was actually a sale which
violated the right of first refusal under the lease contract.

Held: In exchange of their properties, the Pachecos acquired 2,500 original unissued
no par value shares of stocks of Delpher Trades Corporation. Consequently, the
Pachecos became stockholders of the corporation by subscription.

The records do not point to anything wrong or objectionable about this “estate
planning” scheme resorted to by the Pachecos. The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes or altogether avoid them,
by means the law permits, cannot be doubted.

Page 21 of 31
5. TAX EVASION (or Tax Dodging) – use by a taxpayer of illegal or fraudulent means to
defeat or lessen the payment of a tax. It connotes fraud through the use of pretenses
and forbidden devices to lessen or defeat taxes. It is punishable by law.

Tax evasion refers to the willful attempt to defeat or circumvent the tax law in order to
illegally reduce one’s tax liability.

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e.
payment of less than that known by taxpayer to be legally due, or the non-payment of
tax when it is shown that a tax is due; (2) an accompanying state of mind which is
described as being “evil”, in “bad faith”, “willful”, or “deliberate and not accidental”; and
(3) a course of action or failure of action which is unlawful.

Indicia of Fraud in Tax Evasion:

a. Failure to declare for taxation purposes true and actual income derived from business
for 2 consecutive years (Republic v Gonzales, L-17962)

b. Substantial under-declaration of income tax returns of the taxpayer for 4 consecutive

years coupled with intentional overstatement of deductions. (CIR v. Reyes, 104 Phil.
1061)

What is the quantum of proof needed to prove fraud?

The intention to minimize taxes, when used in the context of fraud, m be proven by clear
and convincing evidence amounting to more than mere preponderance. Mere
understatement of tax in itself does not prove fraud. ( Yutivo Sons Hardware v. CTA, 1
SCRA 160).

6. TAX EXEMPTION - Supra

Case/s:

1. Philippine Acetylene v. CIR, G.R. No. L-19707, Aug 17, 1967. Phil. Acetylene,
manufacturer and seller of oxygen and acetylene gases. It sold various products to NPC,
agency of the Philippines, and VOA, agency of the US. CIR assessed deficiency sales tax.
PA denied liability contending that both NPC and VOA are entities exempt from taxation.
Held: It may indeed be that the economic burden of the tax finally falls on the purchaser;
when it does, the tax becomes part of the price which the purchaser m pay. It does not
matter that an additional amount is billed as tax to the purchaser. The method of listing
the price and the tax separately and defining taxable gross receipts as the amount
received less the amount of the tax added, merely avoids payment by the seller of a tax
of the amount of the tax. The effect is still the same, namely, the purchaser does not pay
the tax. He pays or may pay the seller more for the goods because of the seller’s
obligation, but that is all and the amount added because of the tax is paid to get the
goods and for nothing else. But the tax burden may not even be shifted to the purchaser

Page 22 of 31
 at all. A decision to absorb the burden of the tax is largely a matter of economics. Then
it can no longer be contended that a sales tax is a tax on the purchaser. We therefore
hold that the tax imposed by Section 186 of the NIRC is a tax on the manufacturer or
producer and not a tax on the purchaser except probably in a very remote and
inconsequential sense. Accordingly, its levy on the sales made to a tax-exempt entities
like the NPC is permissible.

2. CIR v. Pilipinas Shell Petroleum Corp., G.R. No. 188497, Feb. 19, 2014. In this
case, Pilipinas Shell claimed for the refund of excise taxes it paid for the petroleum
products it sold to international carriers, who are exempt from the said tax. Earlier in the
2012, SC already denied the claim as Shell failed to prove that it was tax exempt. In this
motion for reconsideration, Shell argued that: 1) Sec. 135 intended that the tax exemption
apply to petroleum products at the point of production; 2) the cases of Philippine
Acetylene Co. v. CIR and Maceda v. Macaraig are inapplicable in the light of previous
rulings of the BIR and the CTA that excise tax on petroleum products sold to international
carriers for use or consumption outside the Philippines attaches to the article when sold
to said international carriers, as it is the article which is exempt from tax and not the
international carrier; and 3) the Decision of the Court will not only have adverse impact
on the domestic oil indry but also in violation of international agreements on aviation.
Held: The excise tax as presently understood is a tax on property has no bearing at all
on the issue of respondent’s entitlement to refund. Nor does the nature of excise tax as
an indirect tax supports respondent’s postulation that the tax exemption provided in Sec.
135 attaches to the petroleum products themselves and consequently the domestic
petroleum manufacturer is not liable for the payment of excise tax at the point of
production. [T]he accrual and payment of the excise tax on the goods enumerated under
Title VI of the NIRC prior to their removal at the place of production from payment of
excise tax are absolute and admit of no exception. This also underscores the fact that
the exemption and payment of excise tax is conferred on international carriers who
purchased the petroleum products of respondent. On the basis of the Phil. Acetylene, we
held that a tax exemption being enjoyed by the buyer cannot be the basis of a claim for
tax exemption by the manufacturer or seller of the goods for any tax due it as the
manufacturer or seller. The excise tax imposed on petroleum products under Section 148
is a direct liability of the manufacturer who cannot thus invoke the excise tax exemption
granted to its buyers who are international carriers. And following our pronouncement in
Maceda v Macaraig, Jr., we further ruled that Section 135(a) should be construed as
prohibiting the shifting of the burden of the excise tax to the international carrier who buy
petroleum products from local manufacturers. Said international carriers who buy
petroleum products without the excise tax component which otherwise would have been
added to the cost or price fixed by the local manufacturers or distributors/sellers. X X X
Section 135(a) of the NIRC and earlier amendments to the Tax Code represents our
Government’s compliance with the Chicago Convention, its subsequent
resolutions/annexes, and the air transport agreements entered into by the Philippine
Government with various countries. Indeed, the avowed purpose of a tax exemption is
always “some public benefit or interest, which the law-making body considers sufficient
to offset the monetary loss entailed in the grant of the exemption. The exemption from
excise tax on aviation fuel purchased by international carriers for consumption outside of
the Philippines fulfills a treaty obligation pursuant to which our Government supports the
promotion and expansion of international travel through avoidance of multiple taxation

Page 23 of 31
 and ensuring the viability and safety of international air travel. Under the baisc
international principle of pacta sunct servanda, we have the duty to fulfill our treaty
obligations in good faith. This entails harmonization of national legislation with treaty
provisions. In this case, Section 135(a) of the NIRC embodies our compliance with our
undertakings under the Chicago Convention and various bilateral air service agreements
not to impose excise tax on aviation fuel purchased by international air carriers from
domestic manufacturers or suppliers. In our Decision in this case, we interpreted Section
135(a) as prohibiting domestic manufacturer or producer to pass on to international
carriers the excise tax it had paid on petroleum products upon their removal from the
place of production, pursuant to Article 148 and pertinent BIR regulations. Ruling on
respondent’s claim for tax refund of such paid excise taxes on petroleum products sold to
tax-exempt international carriers, we found no basis in the Tax Code and jurisprudence
to grant the refund of an “erroneously or illegally paid” tax. Section 135(a), in fulfillment
of international agreement and practice to exempt aviation fuel from excise tax and other
impositions, prohibit the passing of the excise tax to international carriers who buy
petroleum products from local manufacturers/sellers such as respondent. However, we
agree that there is a need to reexamine the effect denying the domestic
manufacturer/seller’s claim for refund of the excise taxes they already paid on petroleum
products sold to international carriers, and its serious implication on our Government’s
commitment to the goals and objectives of the Chicago Convention. The Chicago
Convention, which established the legal framework for international civil aviation, did not
deal comprehensively with tax matters. Article 24(a) of the Convention simply provides
that fuel and lubricating oils on board an aircraft of a Contracting State, on arrival in the
territory of another Contracting State and retained on board on leaving the territory of
that State, shall be exempt from coms duty, inspection fees or similar national and local
duties and charges. Subsequently, the exemption of airlines from national taxes and coms
duties on spare parts and fuel became a standard element of bilateral air service
agreements (ASAs) between individual countries. In view of the foregoing, we find merit
in respondent’s motion for reconsideration. We therefore hold that respondent, as the
statutory taxpayer who is directly liable to pay the excise tax on its petroleum products,
is entitled to a refund or credit of the excise taxes it paid for petroleum products sold to
international carriers, the latter having been granted exemption from the payment of said
excise taxes under Section 135(a) of the NIRC.

Note: In this case, the SC discussed extensively the nature of excise taxes.

3. Gala, et. al. v. Ellice Agro-Indrial Corporation, G.R. No. 156819, December 11, 2013. In
essence, petitioners want the Court to disregard the separate juridical personalities of
Ellice and Margo for the purpose of treating all property purportedly owned by said
corporations as property solely owned by the Gala Spouses (the petitioners.) Held: With
regard to the claim that Ellice and Margo were meant to be used as mere tools for the
avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the
amount of what otherwise could be his taxes or altogether avoid them, by means which
the law permits, cannot be doubted. Thus, even if Ellice and Margo were organized for
the purpose of exempting the properties of Gala the spouses from the coverage of land
reform registration and avoiding estate taxes, we cannot disregard their separate juridical
personalities.

Page 24 of 31
 4. Heng Tong Textiles v. CIR, G.R. No. L-19737, Aug 26, 1968. Held: An attempt to minimize
taxes does not necessarily constitute fraud. It is a settled principle that a taxpayer may
diminish his liability by any means which the law permits. The intention is to minimize
taxes, when used in the context of fraud, m be proved to exist by a clear and convincing
evidence amounting to more than mere preponderance, and cannot be jified by mere
speculation. This is because fraud is never lightly to be presumed. No such evidence is
shown by the record in the case of herein petitioner. Its actuation is not incompatible
with good faith on its part, that is, with a genuine belief that by indorsing the goods to
Pan-Asiatic Commercial so that the latter could, as it did, take delivery thereof, Pan-Asiatic
Commercial would in law be considered the importer.

5. Delpher Trades Corp. v. IAC, G.R. L-69259, January 26, 1988 (see above)

6. CIR v. Estate of Benigno Toda, Jr., G.R. No. 147188, September 14, 2004, 438 SCRA 290.

DOCTRINE IMPRESCRIPTIBILITY

Do taxes prescribe?

No, as a rule. Taxes are imprescriptible as they are the lifeblood of the government. However,
status may provide for statute of limitations.

When do we apply the rule that taxes are imprescriptible?

When the law is silent about statue of limitation.

What are the statutes of limitations provided under the existing tax laws?

a) Under the NIRC (Section 222)

i. The statute of limitation for assessment of tax if a return filed is within three
years from the last day prescribed by law for the filing of the return or if filed after
the last day, within three (3) years from the date of actual filing. If no return is
filed or the return filed is false or fraudulent, the period to assess is within 10
years from the discovery of the omission, fraud or falsity.

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

b) Under Section 430 the Tariff and Coms Code (RA 10863) provides that “when articles have
been entered and passed free of duty of final adjments of duties made, with subsequent
delivery, such entry and passage free of duty or settlements of duties will, after the

Page 25 of 31
 expiration of three (3) years from the date of the final payment of duties, in the absence
of fraud or protest or compliance audit pursuant to the provisions of this Code, unless
liquidation of import entry was merely tentative.”

c) Under the Local Government Code:

i. Under Section 194, LGC provides:

(a) Local taxes, fees, or charges shall be assessed within five (5) years from the
date that they become due. No action for collection of such taxes, fees, or charges,
whether administrative or judicial shall be instituted after the expiration of such
period.

(b) In case of fraud or intent to evade the payment of taxes, fees, or charges, the
same may be assessed within ten (10) years from the discovery of the fraud or
intent to evade payment.

(c) Local taxes, fees, or charges shall be collected within five (5) years from the date
of assessment by administrative or judicial action. No such action shall be
instituted after the expiration of said period.

ii. Section 270, LGC provides that “The basic real property tax and any other tax
levied under this Title [Real Property Taxation] shall be collected within five (5)
years from the date they become due. No action for the collection of tax, whether
administrative or judicial, shall be instituted after the expiration of such period. In
case of fraud or intent to evade payment of the tax, such action may be instituted
for the collection of the same within ten (10) years from the discovery of such
fraud or intent to evade payment.”

What is the significance of adopting a statute of limitation on tax assessment and

collection?

In the case of CIR v. The Stanley Work Sales (Phils.), Inc., G.R. No. 187589, December 3, 2014,
The Supreme Court declared:

“Although we recognize that the power of taxation is deemed inherent in order to

support the government, tax provisions are not all about raising revenue. Our
legislature has provided safeguards and remedies beneficial to both taxpayer, to
protect against abuse; and the government, to promptly act for the availability and
recovery of revenues. A statute of limitation on the assessment and collection of
internal revenue taxes was adopted to serve a purpose that would benefit both
the taxpayer and the government.

This Court has expounded on the significance of adopting a statute of limitation

on tax assessment and collection in this case:

Page 26 of 31
 The provision of law on prescription was adopted in our statute
books upon recommendation of the tax commissioner of the
Philippines which declares:

Under the former law, the right of the Government

to collect the tax does not prescribe. However, in
fairness to the taxpayer, the Government should be
estopped from collecting the tax where it failed to
make the necessary investigation and assessment
within 5 years after the filing of the return and where
it failed to collect the tax within 5 years from the
date of assessment thereof. J as the government is
interested in the stability of its collection, so also are
the taxpayers entitled to an assurance that they will
not be subjected to further investigation for tax
purposes after the expiration of a reasonable period
of time. (Vol. II, Report of the Tax Commission of
the Philippines, pp. 321-322)

The law prescribing a limitation of actions for the collection of the income tax is
beneficial both to the Government and to its citizens; to the Government because
tax officers would be obliged to act promptly in the making of assessment, and to
citizens because after the lapse of the period of prescription citizens would have a
feeling of security against unscrupulous tax agents who will always find an excuse
to inspect the books of taxpayers, not to determine the latter's real liability, but to
take advantage of every opportunity to molest peaceful, law-abiding citizens.
Without such legal defense taxpayers would furthermore be under obligation to
always keep their books and keep them open for inspection subject to harassment
by unscrupulous tax agents. The law on prescription being a remedial measure
should be interpreted in a way conducive to bringing about the beneficient purpose
of affording protection to the taxpayer within the contemplation of the Commission
which recommends the approval of the law.”

Is there tax that is not covered by any Statute of Limitation?

[T]he prescriptive period for assessment does not apply to improperly accumulated earnings
tax. A tax imposed upon unreasonable accumulation of surplus is in the nature of a penalty. It
would not be proper for the law to compel a corporation to report improper accumulation of
surplus. (CIR v. Ayala Securities Corp., 101 SCRA 231).

Case:

1. CIR v. Ayala Securities Corp., 101 SCRA 231

Page 27 of 31
 PROSPECTIVITY OF TAX LAWS / NON-RETROACTIVITY OF TAX RULINGS

How should tax laws applied?

As a rule, tax laws apply prospectively, except when it provides for its retroactive application.

Tax laws are prospective in operation, unless the language of the statue clearly provides
otherwise. (CIR v. Acosta, G.R. No. 154068, Aug 3, 2007).

What is the exception to the exception?

As held in Republic v. Oasan Vda. De Fernandez, when tax law’s retroactive application will impose
harsh and oppressive tax or would amount to denial of due process.

Should revenue statues be equated with remedial law, such that retroactive
application should be allowed?

Revenue statues are substantive laws and in no sense m their application be equated with that
of remedial laws. Revenue laws are not intended to be liberally construed. Considering that
taxes are the lifeblood of the government, tax laws m be faithfully and strictly implemented. (CIR
v. Acosta, G.R. No. 154068, Aug 3, 2007).

May Tax Rulings be applied retroactively?

Section 246 of the NIRC provides that Rulings are not retroactive if they are prejudicial to the
taxpayer.

Well-entrenched rule is that rulings and circulars, rules and regulations promulgated by the
Commissioner would have no retroactive application if to so apply them would be prejudicial to
the taxpayer. Private respondent would be prejudiced by the retroactive application of the
revocation (of the tax ruling) as it would be assessed deficiency excise tax. ( CIR v. CA and
Alhambra Indries, Inc., G.R. No. 117982, February 6, 1997).

Are there any exemption to the above rule?

As also provided in Section 246 of NIRC, the following are the exceptions:

1. Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the BIR;
2. Where the facts subsequently gathered by the BIR is materially different from the facts
on which the ruling is based;
3. Where the taxpayer acted in bad faith.

Page 28 of 31
Cases:
a) Supreme Transliner, In. v. Alvarez, G.R. No. 165617, February 25, 2011. This case
involves the exercise by the mortgagor of his right to redeem his foreclosed property. The
Supreme Court held that although the foreclosure sale and redemption took effect before
the effectivity of RR No. 4-99, its provision may be given retroactive effect in this case.
In this case, retroactive application of RR No. 4-99 is more consistent with the policy of
aiding the exercise of the right of redemption. RR No. 4-99 has curbed the inequity of
imposing capital gains tax even before the expiration of the redemption period since there
is yet no transfer of title and no profit or gain is realized by the mortgagor at the time of
foreclosure sale but only upon expiration of the redemption period. XXX while revenue
regulations, as a rule, have no retroactive effect, if the invocation is due to the fact that
the regulation is erroneous or contrary to law, such revocation shall have retroactive
operation as to affect past transaction, because a wrong construction cannot give rise to
a vested right that can be invoked by a taxpayer.

b) CIR v. Borroughs Limited, G.R. No. L-66653, June 19, 1986.

c) CIR V. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011. Non-
retroactive application of BIR Ruling was not applied because FDC was not the taxpayer
who sought the ruling from the CIR.

d) Team Energy v. CIR, G.R. No. 197663, March 14, 2018 – In this case, Team Energy (TE)
administratively claimed for refund on December 17, 2004. Accordingly, pursuant to the
Aichi doctrine and later on the ruling in the CIR vs. San Roque, BIR had 120 days to act
on the claim or until April 16, 2005. TE, in turn, had until May 16, 2005 to file a petition
with the CTA. (Exempted from this rule are VAT refund cases that are prematurely filed
or filed before the lapse of the 120 days between December 10, 2003 (when BIR issued
Ruling No. DA-489-03) and October 6, 2010, when the Aichi case was promulgated.)
However, it only filed its appeal on July 22, 2005 or 67 days late. CTA denied the petition
due to prescription. On appeal to SC, TE argued that the application of Aichi doctrine
would violate the rule on non-retroactivity of judicial decisions. Held: Although RR No.
7-95 did not require specific number of days within which BIR m decide on the claim in
2004, the NIRC was already in effect which clearly provided for the 120+30-day period.
It m be noted that the NIRC itself provides that rules and regulations or part so of them
which are contrary to or inconsistent with it are amended or modified accordingly. In any
case, it m be noted that Aichi doctrine deals with pre-maturity while the present case
deals with late filing. Moreover, in another case where the corporate taxpayer filed its
administrative and judicial claims prior to the promulgation of the Aichi case, the Court
already ruled for the denial of the refund claim for failure to file judicial claim within the
30-day period.

e) Philippine Bank of Communications v. CIR, G.R. No. 112024. – In this case, PBCom filed
its claim for refund beyond the prescriptive period of two years. Accordingly, CTA denied
the petition for review. On appeal to the SC, PBCom argued that CTA erred in denying
the claim for refund despite its reliance on RMC No. 7-85 changing the prescriptive period
of two years to 10 years. Held: When the Acting Commissioner of CIR issued RMC 7-95
changing the prescriptive period of 2 years to 10 years on claims of excess quarterly
income tax, such circular created a clear inconsistency with the with the provision of Sec.

Page 29 of 31
 230 of the 1977 NIRC. In doing so, the BIR did not simply interpret the law; rather it
legislated guidelines to the statute passed by Congress. It bears repeating that Revenue
memorandum circulars are considered administrative rulings (in the sense of more specific
and less general interpretation of tax laws) which are issued from time to time by the CIR.
It is widely accepted that the interpretation upon a 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.
Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply and implement.

TAXPAYERS SUIT

State the principle behind Taxpayer’s Suit. What are its requisites?

It is hornbook principle that a taxpayer is allowed to sue where there is a claim that public funds
are illegally disbursed, or that public money is being deflected to any improper purpose, or that
there is wastage of public funds through the enforcement of an invalid or unconstitutional law. A
person suing as a taxpayer, however, m show that the act complained of directly involves the
illegal disbursement of public funds derived from taxation. In other words, for a taxpayer’s suit
to prosper, two requisites m be met namely, (1) public funds derived from taxation are disbursed
by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity
is committed; and (2) the petitioner is directly affected by the alleged act. ( Land Bank of the
Philippines v. Eduardo M. Cacayuran, G.R. No. 191667, April 17 2013).

In Abaya v. Ebdane, Jr., 515 SCRA 720, the Supreme Court stressed that the prevailing doctrine
in the taxpayer’s suit is to allow taxpayers to question contracts entered into by the national
government or government-owned and -controlled corporations allegedly in contravention of law.
A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or
that public money is being deflected to any improper purpose, or that there is a wastage of public
funds through the enforcement of an invalid or unconstitutional law. Significantly, a taxpayer
need not be a party to the contract to challenge its validity.

When does a taxpayer deemed to have standing in a Taxpayer’s Suit?

A taxpayer is deemed to have a standing to raise a constitutional issue when it is established that
public funds from taxation have been disbursed in alleged contravention of the law or the
Constitution. In the case of De Llana v. COA, 665 SCRA 176, petitioner claims that the issuance
of Circular No 89-299 has led to the dissipation of public funds through numerous irregularities in
government financial transactions. These transactions have allegedly been left unchecked by the
lifting of the pre-audit performed by COA, which, petitioner argues, is its Constitutional duty.
Thus, petitioner has standing to file this suit as a taxpayer, since he would be adversely affected
by the illegal use of public money.

Page 30 of 31
Page 31 of 31