TAX$1$MEMORY$AID$ ATTY.
$MONTERO$ CROMBONDS$201242013$
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GENERAL$PRINCIPLES$
! intangible! benefits! intended! to! improve! the! lives! of! the! people! and!
I. Concept,$Nature$and$Characteristics$of$Taxation$and$Taxes$
$ select! the! subjects! of! taxation,! and! it! has! been! repeatedly! held! that!
1. CIR!v.!CTA!(July!21,!1994)!4!Government!cannot!and!must!not!be!estopped!
particularly!in!matters!involving!taxes.!Taxes!are!the!lifeblood!of!the!nation!
through! which! the! government! agencies! continue! to! operate! and! with!
which!the!State!effects!its!functions!for!the!welfare!of!its!constituents.!
2. CIR!v.!Cebu!Portland!4!The!lifeblood!theory!states!that!an!assessment!of!a!
tax! is! enforceable! despite! it! being! contested! because! of! the! urgency! to!
collect!taxes,!this!being!the!government’s!primary!source!of!revenue!
3. Reyes!v.!Almanzor!4!Adversely!effecting!as!it!does!property!rights,!both!the!
due!process!and!equal!protection!clauses!of!the!Constitution!may!properly!
be!invoked!to!invalidate!in!appropriate!cases!a!revenue!measure.!The!due!
process!clause!may!be!invoked!where!a!taxing!statute!is!so!arbitrary!that!it!
finds!no!support!in!the!Constitution.!It!is!therefore!necessary!to!reconcile!
the!apparently!conflicting!interests!of!the!authorities!and!the!taxpayers!so!
that!the!real!purpose!of!taxations,!which!is!the!promotion!of!the!common!
good,!may!be!achieved!
4. Phil.! Guaranty! v.! CIR! 4! Validity! of! a! tax! cannot! be! assailed! until! after! the!
taxpayer! has! paid! the! tax! under! protest.! By! questioning! a! tax’s! legality!
without!first!paying!it,!a!taxpayer,!in!collusion!with!BIR!officials,!can!unduly!
delay,!if!not!totally!evade!the!payment!of!such!tax.!
5. CIR! v.! Algue! 4! Despite! the! natural! reluctance! to! surrender! part! of! one's!
hard4earned!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!
enhance!their!moral!and!material!values.!
6. Lutz!v.!Araneta!4!It!is!inherent!in!the!power!to!tax!that!a!state!be!free!to!
“inequalities! which! result! from! a! singling! out! of! one! particular! class! for!
taxation!or!exemption!infringe!no!constitutional!limitation!
7. Gomez! v.! Palomar! 4! The! eradication! of! a! dreaded! disease! is! a! public!
purpose,! but! if! by! public! purpose! the! petitioner! means! benefit! to! a!
taxpayer! as! a! return! for! what! he! pays,! then! it! is! sufficient! answer! to! say!
that! the! only! benefit! to! which! the! taxpayer! is! constitutionally! entitled! is!
that!derived!from!his!enjoyment!of!the!privileges!of!living!in!an!organized!
society,! established! and! safeguarded! by! the! devotion! of! taxes! to! public!
purposes.!
8. Chavez!v.!Ongpin!4!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.$$
9. Diaz!v.!Sec.!of!Finance!4!Under!Sec!108!of!NIRC,!VAT!is!levied!on!the!gross!
receipts!derived!from!the!sale!or!exchange!of!services!as!well!as!from!the!
use!or!lease!of!properties.!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!all4encompassing!meaning.!!The!listing!of!specific!services!are!
intended! to! illustrate! how! pervasive! and! broad! is! the! VAT's! reach! rather!
than! establish! concrete! limits! to! its! application.! ! Thus,! every! activity! that!
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can! be! imagined! as! a! form! of! "service"! rendered! for! a! fee! should! be! 12. Progressive! Development! Corp.! v.! CIR! 4! License! fee!is! a! legal! concept!
deemed!included!unless!some!provision!of!law!especially!excludes!it.! distinguishable! from!tax.!If! the! generating! of! revenue! is! the! primary!
! purpose! and! regulation! is! merely! incidental,! the! imposition! is! a! tax.! If!
II. Classifications$and$Distinctions$ regulation!is!the!primary!purpose,!the!fact!that!incidentally!revenue!is!also!
$ obtained!does!not!make!the!imposition!a!tax.!License!fee!is!regulatory!
10. Association!of!Customs!Brokers!v.!Municipal!Board!4!!If!a!tax!is!in!its!nature! 13. PAL! v.! Edu! 4! the! legislative! intent! and! purpose! behind! the! law! requiring!
an!excise,!it!does!not!become!a!property!tax!because!it!is!proportioned!in! owners!of!vehicles!to!pay!for!their!registration!is!mainly!to!raise!funds!for!
amount! to! the! value! of! the! property! used! in! connection! with! the! the! construction! and! maintenance! of! highways! and! to! a! much! lesser!
occupation,! privilege! or! act! which! is! taxed.! Every! excise! necessarily! must! degree,! pay! for! the! operating! expenses! of! the! administering! agency.! It! is!
finally! fall! upon! and! be! paid! by! property! and! so! may! be! indirectly! a! tax! possible! for! an! exaction! to! be! both! tax! and! regulation.! License! fees! are!
upon!property;!but!if!it!is!really!imposed!upon!the!performance!of!an!act,! often!looked!to!as!a!source!of!revenue!as!well!as!a!means!of!regulation.!If!
enjoyment! of! a! privilege,! or! the! engaging! in! an! occupation,! it! will! be! the! purpose! is! primarily! revenue,! or! if! revenue! is! at! least! one! of! the! real!
considered!an!excise.!The!character!of!the!tax!as!a!property!tax!or!a!license! and! substantial! purposes,! then! the! exaction! is! properly! called! a! tax.!
or! occupation! tax! must! be! determined! by! its! incidents,! and! from! the! (Calalang)!These!exactions!are!sometimes!called!regulatory!taxes.!Indeed,!
natural!and!legal!effect!of!the!language!employed!in!the!act!or!ordinance,! taxation! may! be! made! the! implement! of! the! state’s! police! power! (Lutz! v!
and!not!by!the!name!by!which!it!is!described,!or!by!the!mode!adopted!in! Araneta)!
fixing!its!amount.!If!it!is!clearly!a!property!tax,!it!will!be!so!regarded,!even! 14. Villegas!v.!Hiu!Chiong!Tsai!Pao!Ho!4!The!contention!that!City!Ordinance!No.!
though!nominally!and!in!form!it!is!a!license!or!occupation!tax;!and,!on!the! 6537!is!not!a!purely!tax!or!revenue!measure!because!its!principal!purpose!
other!hand,!if!the!tax!is!levied!upon!persons!on!account!of!their!business,!it! is! regulatory! in! nature! has! no! merit.! While! it! is! true! that! the! first! part!
will! be! construed! as! a! license! or! occupation! tax,! even! though! it! is! which!requires!that!the!alien!shall!secure!an!employment!permit!from!the!
graduated!according!to!the!property!used!in!such!business,!or!on!the!gross! Mayor!involves!the!exercise!of!discretion!and!judgment!in!the!processing!
receipts!of!the!business.! and! approval! or! disapproval! of! applications! for! employment! permits! and!
11. Esso!Standard!v.!CIR!4!that!margin!fees!are!NOT!revenue!measures,!but!“an! therefore! is! regulatory! in! character! the! second! part! which! requires! the!
exaction! designed! to! curb! the! excessive! demands! upon! our! international! payment! of! P50.00! as! employee's! fee! is! not! regulatory! but! a! revenue!
reserve.”!Margin!fees!are!a!police!power!measure!and!not!an!exercise!of! measure.! There! is! no! logic! or! justification! in! exacting! P50.00! from! aliens!
the!state’s!power!to!tax.! who!have!been!cleared!for!employment.!It!is!obvious!that!the!purpose!of!
the!ordinance!is!to!raise!money!under!the!guise!of!regulation.!!

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15. Compania! General! de! Tabacos! de! Filipinas! v.! City! of! Manila! 4! The! term!
"tax"! applies—generally! speaking—to! all! kinds! of! exaction! which! become!
public!funds.!The!term!is!often!loosely!used!to!include!levies!for!revenue!as!
well! as! levies! for! regulatory! purposes.! Thus! license! fees! are! commonly!
called! taxes.! Legally! speaking,! license! fee! is! a! legal! concept! quite! distinct!
from! tax;! the! former! is! imposed! in! the! exercise! of! police! power! for!
purposes!of!regulation,!while!the!latter!is!imposed!under!the!taxing!power!
for!the!purpose!of!raising!revenues!
16. American! Mail! Lines! v.! City! of! Basilan! 4! The! power! to! regulate! as! an!
exercise! of! police! power! does! not! include! the! power! to! impose! fees! for!
revenue1 purposes.! Basilan! argues! that! it! imposed! these! fees! purely! as! a!
regulatory! measure! in! the! exercise! of! its! police! power.! It! has! been! held!
that!fees!for!purely!regulatory!purposes!“may!only!be!of!sufficient!amount!
to!include!the!expenses!of!issuing!the!license!and!the!cost!of!the!necessary!
inspection!or!police!surveillance,!taking!into!account!not!only!the!expense!
of!direct!regulation!but!also!incidental!expenses…regulatory!fee!“must!be!
more!than!sufficient!to!cover!the!actual!cost!of!inspection!or!examination!
as!nearly!as!the!same!can!be!estimated.$
17. Osmena!v.!Orbos!4!!Quoting!Gaston!case:!stabilization!fees!collected!are!in!
the! nature! of! a! tax,! which! is! within! the! power! of! the! State! to! impose! for!
the! promotion! of! the! sugar! industry.! The! tax! collected! is! not! in! a! pure!
exercise! of! the! taxing! power.!It! is! levied! with! a! regulatory! purpose,! to!
provide! a! means! for! the! stabilization! of! the! sugar! industry.! The! levy! is!
primarily!in!the!exercise!of!the!police!power!of!the!State.!
18. Republic!v.!Bacolod4Murcia!Milling!Co.!4!If!the!proceeds!collected!pursuant!
to!RA!632!are!indeed!special!assessments,!then!they!may!be!devoted!only!
to!the!specific!purpose!for!which!the!assessment!was!authorized,!a!special!
CROMBONDS$201242013$
assessment!being!a!levy!upon!property!predicated!on!the!doctrine!that!the!
property! against! which! it! is! levied! derives! some! special! benefit! from! the!
improvement.$ Special! assessment! is! not! a! tax! measure! intended! to! raise!
revenues!for!the!Government.!Consequently,!once!it!has!been!determined!
that! no! benefit! accrues! or! inures! to! the! property! owners! paying! the!
assessment,! or! that! the! proceeds! from! the! said! assessment! are! being!
misapplied!to!the!prejudice!of!those!against!whom!it!has!been!levied,!then!
the!authority!assessment!ceases.!$
19. Victorias! Milling! Co.! v.! Municipality! of! Victorias! 4! The! use! of! the! term!
"municipal!license!tax"!does!not!necessarily!connote!the!idea!that!the!tax!
is! imposed! as! a! revenue! measure! in! the! guise! of! a! license! tax.! For! really,!
this! runs! counter! to! the! declared! purpose! to! make! money.! Besides,! the!
term! "license! tax"! has! not! acquired! a! fixed! meaning.! It! is! often! "used!
indiscriminately! to! designate! impositions! exacted! for! the! exercise! of!
various!privileges.!In!many!instances,!it!refers!to!"revenue4raising!exactions!
on!privileges!or!activities".!On!the!other!hand,!license1fees!are!commonly!
called!taxes.!But!legally!speaking,!the!latter!are!"'for!the!purpose!of!raising!
revenues",!in!contrast!to!the!f!former!which!are!imposed!"in!the!exercise!
of!the!police!power!for!purposes!of!regulation".!
20. PCGG!v.!Cojuangco!–!The!SC!ruled!that!the!government!rightly!owned!the!
UCPB! shares! which! were! bought! using! the! coco! levy! fund.! The! coco! levy!
fund! was! generated! by! enforced! contributions! which! were! intended! for!
the!rehabilitation!and!stabilization!of!the!threatened!coconut!industry.!It!is!
thus!a!tax!imposed!by!the!government.!Since!the!shares!were!bought!using!
taxes,!the!UCPB!shares!rightfully!belonged!to!the!government.!
21. CIR!v.!PLDT!4!Direct!taxes!are!those!that!are!exacted!from!the!very!person!
who,!it!is!intended!or!desired,!should!pay!them—they!are!impositions!for!
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which! a! taxpayer! is! directly! liable! on! the! transaction! or! business! he! is! 24. Chevron!v.!BCDA!4!In!distinguishing!tax!and!regulation!as!a!form!of!police!
engaged! in.! Indirect! taxes! are! those! that! are! demanded,! in! the! first! power,! the! determining! factor! is! the! purpose! of! the! implemented!
instance,!from,!or!are!paid!by,!one!person!in!the!expectation!and!intention! measure.! If! the! purpose! is! primarily! to! raise! revenue,! then! it! will! be!
that! he! can! shift! the! burden! to! someone! else—stated! elsewise,! indirect! deemed!a!tax!even!though!the!measure!results!in!some!form!of!regulation.!
taxes!are!taxes!wherein!the!liability!for!the!payment!of!the!tax!falls!on!one! On! the! other! hand,! if! the! purpose! is! primarily! to! regulate,! then! it! is!
person! but! the! burden! thereof! can! be! shifted! or! passed! on! to! another! deemed!a!regulation!and!an!exercise!of!the!police!power!of!the!state,!even!
person,!such!as!when!the!tax!is!imposed!upon!goods!before!reaching!the! though!incidentally,!revenue!is!generated.!
consumer!who!ultimately!pays!for!it.!VAT!is!indirect!tax.!Advance!sales!tax! 25. Angeles!University!Foundation!v.!City!of!Angeles!4!Building!permit!fees!are!
has! attributes! of! indirect! tax.! Compensating! tax! takes! the! nature! of! an! not! impositions! on! property! but! on! the! activity! subject! of! government!
excise!tax.!! regulation.! While! it! may! be! argued! that! the! fees! relate! to! particular!
22. Gerochi!v.!Dept.!Of!Energy!4! properties,! i.e.,! buildings! and! structures,! they! are! actually! imposed! on!
Power1to1tax1 Police1Power11 certain!activities!the!owner!may!conduct!either!to!build!such!structures!or!
• an! incident! of! sovereignty! and! is! • the! power! of! the! state! to!
to! repair,! alter,! renovate! or! demolish! the! same.! A1 charge1 of1 a1 fixed1 sum1
unlimited! in! its! range,! acknowledging! promote! public! welfare! by!
in! its! very! nature! no! limits,! so! that! restraining! and! regulating! which1bears1no1relation1at1all1to1the1cost1of1inspection1and1regulation1may1
security! against! its! abuse! is! to! be! the! use! of! liberty! and!
be1held1to1be1a1tax1rather1than1an1exercise1of1the1police1power.!
found!only!in!the!responsibility!of!the! property.!!
legislature! which! imposes! the! tax! on! • the! power! to! "regulate"! 26. Asia!International!Auctioneers!Inc.!CIR!4!Indirect!taxes,!like!VAT!and!excise!
the!constituency!that!is!to!pay!it.! means! the! power! to! tax,!are!different!from!withholding!taxes.!To!distinguish,!in!indirect!taxes,!
• The!theory!behind!the!exercise!of!the! protect,! foster,! promote,!
power! to! tax! emanates! from! preserve,!and!control,!with! the!incidence!of!taxation!falls!on!one!person!but!the!burden!thereof!can!be!
necessity;! without! taxes,! government! due! regard! for! the! shifted!or!passed!on!to!another!person,!such!as!when!the!tax!is!imposed!
cannot! fulfill! its! mandate! of! interests,! first! and!
promoting! the! general! welfare! and! foremost,! of! the! public,! upon!goods!before!reaching!the!consumer!who!ultimately!pays!for!it.26!On!
well4being!of!the!people.! then!of!the!utility!and!of!its! the!other!hand,!in!case!of!withholding!taxes,!the!incidence!and!burden!of!
patrons.!
! taxation! fall! on! the! same! entity,! the! statutory! taxpayer.! The! burden! of!

23. Planters!Products!v.!Fertphil!Corp.!4!The!power!to!tax!exists!for!the!general! taxation! is! not! shifted! to! the! withholding! agent! who! merely! collects,! by!

welfare,!hence,!implicit!in!its!power!is!the!limitation!that!it!should!be!used! withholding,! the! tax! due! from! income! payments! to! entities! arising! from!

only! for! a! public! purpose—it! would! be! a! robbery! for! the! State! to! tax! its! certain! transactions! and! remits! the! same! to! the! government.! Due! to! this!

citizens!and!use!the!funds!generated!for!a!private!purpose.! difference,! the! deficiency! VAT! and! excise! tax! cannot! be! “deemed”! as!
withholding!taxes!merely!because!they!constitute!indirect!taxes.!

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! of! certain! kinds! of! taxes! notice! and! opportunity! for! hearing! are!
III. Limitations$of$the$Power$of$Taxation$
A. Inherent$Limitations$
27. Pascual! v.! Sec.! of! Public! Works! 4$ Legislature! is! without! power! to!
appropriate!public!revenue!for!anything!but!a!public!purpose.$It!is!the!
essential!character!of!the!direct!object!of!the!expenditure!which!must!
determine!its!validity!as!justifying!a!tax,!and!not!the!magnitude!of!the!
interest!to!be!affected!nor!the!degree!to!which!the!general!advantage!
of! the! community,! and! thus! the! public! welfare,! may! be! ultimately!
benefited!by!their!promotion.!Incidental!to!the!public!or!to!the!state,!
which! results! from! the! promotion! of! private! interest! and! the!
prosperity!of!private!enterprises!or!business,!does!not!justify!their!aid!
by!the!use!public!money.$
28. Pepsi4Cola! Bottling! Company! v.! Municipality! of! Tanuan! 4! it’s! purely!
legislative!and!may!not!be!delegated!to!the!2!other!branches,!EXCEPT!
in! the! case! of! municipal! corporations.! Legislative! powers! may! be!
delegated!to!local!governments!in!respect!of!matters!of!local!concern.!
taking!of!the!property!is!in!the!lawful!exercise!of!the!taxing!power,!as!
when!(1)!the!tax!is!for!a!public!purpose;!(2)!the!rule!on!uniformity!of!
taxation!is!observed;!(3)!either!the!person!or!property!taxed!is!within!
the! jurisdiction! of! the! government! levying! the! tax;! and! (4)! in! the!
assessment! and! collection! of! certain! kinds! of! taxes! notice! and!
opportunity!for!hearing!are!provided.!taking!of!the!property!is!in!the!
lawful!exercise!of!the!taxing!power,!as!when!(1)!the!tax!is!for!a!public!
purpose;!(2)!the!rule!on!uniformity!of!taxation!is!observed;!(3)!either!
the! person! or! property! taxed! is! within! the! jurisdiction! of! the!
government!levying!the!tax;!and!(4)!in!the!assessment!and!collection!
CROMBONDS$201242013$
provided!
29. MIAA!v.!City!of!Paranaque!4!Section!133!of!the!Local!Government!Code!
states! that! "unless! otherwise! provided"! in! the! Code,! local!
governments! cannot! tax! national! government! instrumentalities,! such!
as! MIAA.! The! real! properties! of! MIAA! are!owned! by! the! Republic!of!
the!Philippines!and!thus!exempt!from!real!estate!tax.!!Section!133!of!
the!Local!Government!Code!states!that!"unless!otherwise!provided"!in!
the! Code,! local! governments! cannot! tax! national! government!
instrumentalities.!
30. Sea4Land! Services! v.! CA! 4! The! RP4US! Military! Bases! Agreement!
exempts! from! income! taxation! the! income! derive! by! its! corporations!
or! nationals! and! residents! from! the! construction,! maintenance,!
operation! and! defense! of! bases! or! any! tax! in! nature! of! a! license! in!
respect! of! any! work! or! service! for! the! US! in! connection! with! the!
construction,!maintenance,!operation!and!defense!of!bases.!
st
31. 31 ! Infantry! Post! Exchange! v.! Posadas! 4! Only! those! agencies! through!
which!the!Federal!Government!immediately!and!directly!exercises!its!
sovereign! powers! are! immune! from! the! taxing! power! of! the! states.!
The!reason!upon!which!the!rule!rests!must!be!the!guiding!principle!to!
control! its! operation.! The! limitations! upon! the! taxing! power! of! the!
state! must! receive! a! practical! construction! which! does! not! seriously!
impair! the! taxing! power! of! the! Government! imposing! the! tax.! The!
effect!of!the!tax!upon!the!functions!of!the!Government!and!the!nature!
of! the! governmental! agency! determine! finally! the! extent! of! the!
exemption.! We! would! consider! the! effects! of! the! sales! tax! upon! the!
United!States!Army,!and!the!nature!of!an!Army!Post!Exchange.!The!tax!
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laid!upon!Philippine!merchants!who!sell!to!Army!Post!Exchanges!does!
not!interfere!with!the!supremacy!of!the!United!States!Government,!or!
with!the!operations!of!its!instrumentality,!the!United!States!Army,!to!
such!an!extent!or!in!such!a!manner!as!to!render!the!tax!illegal.!The!tax!
does!not!deprive!the!Army!of!the!power!to!serve!the!Government!as!it!
was!intended!to!serve!it,!or!hinder!the!efficient!exercise!of!its!power.!!
32. Reagan! v.! CIR! 4! The! Philippines! being! independent! and! sovereign,! its!
authority!may!be!exercised!over!its!entire!domain.!Any!state!may,!by!
its!consent,!express!or!implied,!submit!to!a!restriction!of!its!sovereign!
rights.!It!is!not!precluded!from!allowing!another!power!to!participate!
in! the! exercise! of! jurisdictional! right! over! certain! portions! of! its!
territory.!If!it!does!so,!it!by!no!means!follows!that!such!areas!become!
impressed! with! an! alien! character.! They! retain! their! status! as! native!
soil.!So!it!is!with!the!bases!under!lease!to!the!American!armed!forces!
by! virtue! of! the! military! bases! agreement! of! 1947.! They! are! not! and!
cannot! be! foreign! territory.! This! country's! jurisdictional! rights,!
certainly! not! excluding! the! power! to! tax,! have! been! preserved.! As! to!
certain! tax! matters,! an! appropriate! exemption! was! provided! for.!
Reagan!relies!on!provision!which!states!that!!!a!"national!of!the!United!
States!serving!in!or!employed!in!the!Philippines!in!connection!with!the!
construction,! maintenance,! operation! or! defense! of! the! bases! and!
residing!in!the!Philippines!only!by!reason!of!such!employment"!is!not!
to! be! taxed! on! his! income! unless! "derived! from! Philippine! source! or!
sources! other! than! the! United! States! sources."! Source! (transaction)!
clearly!was!Philippine.!
33. CIR!v.!Mitsubishi!Metal!Corp.!4!There!was!no!mention!of!Eximbank!in!
the! loan! and! sales! agreement! between! Atlas! and! Mitsubishi.! There!
CROMBONDS$201242013$
was!definitely!no!agency!between!Mitsubishi!and!Eximbank.!The!loan!
and! sales! agreement! between! Atlas! and! Mitsubishi! are! totally!
independent! from! the! loan! agreement! between! Mitsubishi! and!
Eximbank.! It! is! also! well! settled! that! in! contracts! of! loan,! when! the!
money! is! transferred! to! the! borrower,! the! money! becomes! the!
property! of! the! borrower! and! not! that! of! the! lender.! Therefore,! the!
money!ceased!to!be!the!property!of!Eximbank.!
34. CIR! v.! Marubeni! Corp.! 4! Marubeni,! however,! was! able! to! sufficiently!
prove! in! trial! that! not! all! its! work! was! performed! in! the! Philippines!
because! some! of! them! were! completed! in! Japan! (and! in! fact!
subcontracted)!in!accordance!with!the!provisions!of!the!contracts.!All!
services! for! the! design,! fabrication,! engineering! and! manufacture! of!
the!materials!and!equipment!under!Japanese!Yen!Portion!I!were!made!
and! completed! in! Japan.! These! services! were! rendered! outside!
Philippines’! taxing! jurisdiction! and! are! therefore! not! subject! to!
contractor’s!tax.!
!
B. Constitutional$Limitations$
i. Uniformity$
35. Tiu!v.!CA!4!The$fundamental!right!of!equal!protection!of!the!laws!is!
not! absolute,! but! is! subject! to! reasonable!
classification.!Classification,! to! be! valid,! must! (1)! rest! on!
substantial!distinctions,!(2)!be!germane!to!the!purpose!of!the!law,!
(3)!not!be!limited!to!existing!conditions!only,!and!(4)!apply!equally!
to! all! members! of! the! same! class.! The! objective! is! to! establish! a!
“self4sustaining,! industrial,! commercial,! financial! and! investment!
center”! in! the! area.!!There! will,! therefore,! be! a! long4term!
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!
difference!between!such!investment!center!and!the!areas!outside!
it.!
36. John! Hay! People’s! Alternative! Coalition! 4! While! the! grant! of!
economic!incentives!may!be!essential!to!the!creation!and!success!
of! SEZs,! free! trade! zones! and! the! like,! the! grant! thereof! to! the!
John!Hay!SEZ!cannot!be!sustained.!!The!incentives!under!R.A.!No.!
7227!are!exclusive!only!to!the!Subic!SEZ,!hence,!the!extension!of!
the!same!to!the!John!Hay!SEZ!finds!no!support!therein.!The!claim!
of!statutory!exemption!of!the!John!Hay!SEZ!from!taxation!should!
be! manifest! and! unmistakable! from! the! language! of! the! law! on!
which!it!is!based;!it!must!be!expressly!granted!in!a!statute!stated!
in!a!language!too!clear!to!be!mistaken.!Tax!exemption!cannot!be!
implied! as! it! must! be! categorically! and! unmistakably! expressed.!
The! challenged! grant! of! tax! exemption! would! circumvent! the!
Constitution’s! imposition! that! a! law! granting! any! tax! exemption!
must! have! the! concurrence! of! a! majority! of! all! the! members! of!
Congress.!In!the!same!vein,!the!other!kinds!of!privileges!extended!
to! the! John! Hay! SEZ! are! by! tradition! and! usage! for! Congress! to!
legislate!upon.$
37. Coconut! Oil! Refiners! Association! Inc.! v.! BCDA! 4! ! (Should! tax!
incentives! be! uniform! for! all! special! economic! zones?! Not!
necessarily)! While! Section! 12! of! Republic! Act! No.! 7227! expressly!
provides! for! the! grant! of! incentives! to! the! SSEZ,! it! fails! to! make!
any!similar!grant!in!favor!of!other!economic!zones,!including!the!
CSEZ.! Tax! and! duty4free! incentives! being! in! the! nature! of! tax!
exemptions,! the! basis! thereof! should! be! categorically! and!
unmistakably! expressed! from! the! language! of! the! statute.!
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Consequently,! in! the! absence! of! any! express! grant! of! tax! and!
duty4free! privileges! to! the! CSEZ! in! Republic! Act! No.! 7227,! there!
would!be!no!legal!basis!to!uphold!the!questioned!portions!of!two!
issuances:! Section! 5! of! Executive! Order! No.! 80! and! Section! 4! of!
BCDA!Board!Resolution!No.!934054034,!which!both!pertain!to!the!
CSEZ.!
38. Tolentino!v.!Sec.!of!Finance!4!!As!to!the!question!of!whether!our!
system! of! taxation! should! always! be! regressive,! the! Court!said!
that! the! Constitution! does! not! really! prohibit! the! imposition! of!
indirect! taxes! which,! like! the! VAT,! are! regressive.! What! it! simply!
provides! is! that! Congress! shall! "evolve1a! progressive! system! of!
taxation."! The! constitutional! provision! has! been! interpreted! to!
mean! simply! that! "direct! taxes! are! .! .! .! to! be! preferred! [and]! as!
much! as! possible,! indirect! taxes! should! be! minimized."! Indeed,!
the! mandate! to! Congress! is! not! to1prescribe,! but! to!evolve,! a!
progressive!tax!system.!!
39. Abakada!Guro!Party!List!v.!Ermita!4!the!Supreme!Court!ruled!that!
the! 12%! VAT! imposition! was! equitable! as! it! imposes! safeguards!
and! limits! in! the! form! of! VAT! exemption! granted! to! gross! sales!
below!P1.5!million.!!
40. Misamis!Oriental!Association!of!Coco!Traders!v.!Dep.!of!Finance!!4!
The! Constitution! does! not! forbid! the! differential! treatment! of!
persons!so!long!as!there!is!a!reasonable!basis!for!classifying!them!
differently.! In! this! case,! there! is! a! material! or! substantial!
difference!between!coconut!farmers!and!copra!producers,!on!the!
one! hand,! and! copra! traders! and! dealers,! on! the! other.! The!
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!
farmers/! producers! PRODUCE! and! SELL! copra,! while! traders! and!
dealers!merely!SELL!copra.!!
41. CIR!v.!Lingayen!Gulf!Electric!Power!Co.!Inc.!4!A!tax!is!uniform!when!
it! operates! with! the! same! force! and! effect! in! every! place! where!
the! subject! of! it! is! found.! Herein,! the! 5%! franchise! tax! rate!
provided! in! Sec.! 259! of! the! NIRC! was! never! intended! to! have! a!
universal! application.! Sec.! 259! expressly! allows! the! payment! of!
taxes! at! rates! lower! than! 5%! when! the! charter! granting! the!
franchise! precludes! the! imposition! of! a! higher! tax.! RA! 3843! (the!
charter)! did! not! only! fix! and! specify! a! franchise! tax! of! 2%! on! its!
gross!receipts,!but!made!it!in!lieu!of!any!and!all!taxes,!all!laws!to!
the!contrary!notwithstanding.!
42. Kapatiran! ng! mga! Naglilingkod! sa! Pamahalaan! ng! Pilipinas! Inc.! v.!
Tan! –! The! Supreme! Court! held! that! EO! 278! (ie,! an! EO! that!
imposed! a! 10%! VAT! on! the! value! added! by! every! seller! with!
aggregage!gross!annual!sales!of!articles!and/or!services!exceeding!
P200,000!to!his!purchase!of!goods!and!services)!is!equitable!as!it!
is! imposed! only! on! sales! of! goods! and! services! by! persons!
engaged! in! a! business! with! an! aggregate! gross! annual! sales!
exceeding! P200,000! while! small! corner! sari4sari! stores! are!
condquently! exempt,! as! well! as! sales! of! farm! and! marine!
products.!
43. Sison! v.! Ancheta! –! Uniformity! of! taxation! is! quite! similar! to! the!
standard!of!equal!protection.!!
• Under! the! equal! protection! clause,! for! a! classification! to! be!
valid,!it!must:!(SGNE)!
1. Rest!on!substantial!distinctions;!
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2. Be!germane!to!the!purpose!of!the!law;!
3. Not!be!limited!to!existing!conditions!only;!and!
4. Apply!equally!to!all!members!of!the!same!class.!
44. Villanueva!v.!City!Iloilo!4!!In!determining!whether!the!imposition!of!
a! municipal! license! tax! on! tenement! houses! violates! the! equal!
protection! clause! as! such! taxes! are! not! imposed! in! other! cities,!
the!Supreme!Court!ruled!in!the!negative!as!the!rule!on!uniformity!
does!not!require!taxes!for!the!same!purpose!should!be!imposed!in!
different! territorial! subdivisions! at! the! same! time.! It! is! enough!
that! the! tax! falls! equally! and! impartially! on! all! owners! or!
operations!of!tenement!houses!similarly!classified!or!situated.!!
45. Pepsi4Cola! Bottling! Co.! of! the! Phil.! v.! City! of! Butuan! 4! Under! the!
subject! municipal! ordinance,! sales! of! local! dealers! not! acting! for!
or! on! behalf! of! merchants! established! outside! the! municipality!
would! be! exempt! from! the! tax! while! those! acting! as! agents! and!
consignees!of!dealers!outside!the!municipality!would!have!to!pay!
the!tax.!The!Supreme!Court!ruled!that!this!was!a!violation!of!the!
uniformity!required!by!the!Constitution.!!
46. Ormoc! Sugar! Company! v.! Treasurer! of! Ormoc! 4! Supreme! Court!
held!that!a!reasonable!classification!should!be!in!terms!applicable!
to!future!conditions.!The!taxing!ordinance!should!not!be!singular!
and! exclusive! as! to! exclude! any! subsequently! established! entity!
from!the!coverage!of!the!tax.!!
47. Phil.! Trust! Co.! v.! Yatco! 4! The! rule! of! uniformity! does! not! call! for!
perfect! uniformity! or! perfect! equality,! because! this! is! hardly!
attainable.!The!method!of!assessment!prescribed!in!section!1502,!
in! relation! to! section! 1499,! of! the! Revised! Administrative! Code,!
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!
for! domestic! banks! while! different! from! that! prescribed! for!
foreign!banks!is!permissible.!A!state!may!impose!a!different!rate!
of!taxation!upon!a!foreign!corporation!(in!this!case,!the!National!
City!Bank!of!New!York)!for!the!privilege!of!doing!business!within!
the! state! than! it! applies! to! its! own! corporations! upon! the!
franchise,!which!the!state!grants!in!creating!them.!
48. British! American! Tobacco! v.! Camacho! 4! The! Supreme! Court! held!
that!the!classification!freeze!does!not!violate!the!equal!protection!
clause!as!it!passes!the!rational!basis!test!and!is!meant!to!improve!
the! efficiency! and! effectivity! of! the! tax! administration! over! sin!
products!while!trying!to!balance!the!same!with!state!interests.!It!
addresses!the!concerns!in!the!simplification!of!tax!administration!
of! sin! products,! elimination! of! potential! areas! for! abuse! and!
corruption! in! tax! collection,! buoyant! and! stable! revenue!
generation,!and!ease!of!projection!of!revenues.!!
49. Abakada! Guro! Partylist! v.! Purisima! 4! The! equal! protection! clause!
recognizes!a!valid!classification,!that!is,!a!classification!that!has!a!
reasonable! foundation! or! rational! basis! and! not! arbitrary.! The!
subject! of! the! Attrition! Law! was! revenue! generation! and!
collection!of!the!BIR!and!BOC,!thus,!the!incentives!and!sanctions!
should! logically! pertain! to! them! and! not! to! other! government!
agencies.!The!EPC!is!not!violated.!
50. CIR! v.! Fortune! Tobacco! Corp.! 4! Supreme! Court! ruled! that! the!
higher! tax! rule! only! applies! on! the! transition! period.! To!
implement! the! higher! tax! rule! on! the! January! 1,! 2000! increase!
would!violate!the!rule!of!uniformity!since!brands!belonging!to!the!
same!category!would!be!imposed!with!different!tax!rates.!!
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51. Bureau!of!Customs!Employees’!Association!v.!Teves!4!With!respect!
to!RA!9335,! its! expressed! public! policy! is! the! optimization! of! the!
revenue4generation! capability! and! collection! of! the! BIR! and! the!
BOC.! Since! the! subject! of! the! law! is! the! revenue4generation!
capability! and! collection! of! the! BIR! and! the! BOC,! the! incentives!
and/or! sanctions! provided! in! the! law! should! logically! pertain! to!
the! said! agencies.! Moreover,! the! law! concerns! only! the! BIR! and!
the!BOC!because!they!have!the!common!distinct!primary!function!
of! generating! revenues! for! the! national! government! through! the!
collection!of!taxes,!customs!duties,!fees!and!charges.!Indubitably,!
such! substantial! distinction! is! germane! and! intimately! related! to!
the! purpose! of! the! law.! Hence,! the! classification! and! treatment!
accorded!to!the!BIR!and!the!BOC!under!RA![No.]!9335!fully!satisfy!
the!demands!of!equal!protection.!
!
ii. Non4impairment$
52. Meralco! v.! Province! of! Laguna! –! Tax! exemptions! granted! under!
franchises! are! not! contracts! (see! Art! XII,! Sec.! 11! of! the!
Constitution).!A!franchise!partakes!of!the!nature!of!a!grant,!which!
is! beyond! the! purview! of! the! non4impairment! clause.! Also,! tax!
exemptions! under! franchises! should! be! distinguished! from!
contractual!tax!exemptions.!The!latter!are!those!agreed!to!by!the!
taxing! authority! in! contracts.! (Examples! are! government! bonds!
and! debentures)! In! such! cases,! the! government! acts! in! a! private!
capacity! and! waives! its! governmental! immunity.! Contractual! tax!
exemptions!may!not!be!revoked!without!impairing!the!obligations!
of!contracts.!
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!
53. Province!of!Misamis!Oriental!v.!Cagayan!Electric!Power!and!Light! enjoyment! of! its! religious! profession! and! worship,! as! well! as! its!
Co.!4!the!Supreme!Court!held!that!the!non4impairment!clause!may! rights!of!disseminiationa!of!religious!beliefs.!
be!rightly!invoked!against!contractual!tax!exemptions.!Contractual! 58. CIR!v.!Bishop!of!the!Missionary!District!of!the!Phil.!–!The!Supreme!
tax! exemptions! are! those! agreed! by! the! taxing! authority! in! Court! held! that! the! admission! of! pay! patients! does! not! detract!
contracts,! such! as! those! contained! in! government! bonds! or! from!the!charitable!character!of!a!hospital!if!its!funds!are!devoted!
debentures,!lawfully!entered!into!by!them!under!enabling!laws!in! exclusively! to! the! maintenance! of! the! institution! as! a! public!
which! the! government,! acting! in! its! private! capacity,! sheds! its! charity.!!
cloak!of!authority!and!waives!its!government!immunity!! • Requisites!for!a!valid!claim!for!tax!exemption:![DIU]!
54. Cagayan!Electric!Power!and!Light!Co.!v.!CIR!–!(similar!to!case!no.! 1. The!imported!articles!have!been!donated!
53)!! 2. Donee! must! be! a! duly! incorporated! or! established!
55. Lealda!v.!CIR!4!(similar!to!cases!no.!53!and!54)!! international! civic! organization,! religious! or!
56. Casanovas! v.! Hord! –! The! concessions! granted! by! the! Gov’t! of! charitable!society,!or!institution!for!civic!or!religious!
Spain! to! the! plaintiff! constitute! contracts! between! the! parties! or!charitable!purposes.!
and,! thus,! was! infringed! by! Act! 1189.! Power! to! grant! tax! 3. The! articles! so! imported! must! have! been! donated!
exemption! is! vested! in! the! state.! If! it! grants! one,! we! must! for! the! use! of! the! organization! for! free! distribution!
determine!first!if!the!grant!is!a!contract!or!not.!If!it!is!a!contract! and!not!for!barter,!sale!or!hire.!
between! the! state! and! the! grantee,! then! the! tax! exemption! 59. Llladoc! v.! CIR! 4! The! exemption! provided! for! under! Article! VI,!
cannot! just! be! removed! by! the! sate! through! subsequent! Section!28!pertains!only!to!real!property!taxes!
legislations!at!will.! • Article!VI,!§28!–!the!following!are!exempt!from!real!property!
! taxes:!
! 1. Charitable!institutions!
! 2. Churches!
iii. Taxation$of$Special$Entities$ 3. Parsonages!or!convents!appurtenant!thereto!
57. American! Bible! Society! v.! City! of! Manila! –! The! municipal! 4. Mosques!
ordinances! imposing! a! tax! on! the! sale! of! bibles! were! declared! 5. Non4profit!cemeteries;!and!
unconstitutional! as! it! would! impair! the! free! exercise! and!

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!
6. All! lands,! buildings! and! improvements,! actually,!
directly!and!exclusively!used!for!religious,!charitable!
or!educational!purposes.![ADE]!
60. Herrera! v.! Quezon! City! Board! of! Assessment! Appeals! –! The!
exemption! in! favor! of! property! used! exclusively! for! charitable! or!
educational! purposes! is! not! limited! to! property! actually!
indispensable! but! extends! to! facilities! which! are! incidental! to! or!
reasonably!necessary!for!the!accomplishment!of!its!purposes.!![IR]!
61. Bishop!of!Nueva!Segovia!v.!Provincial!Board!of!Ilocos!Norte!–!The!
exemption! from! the! payment! of! the! land! tax! in! favor! of! the!
convent! includes! not! only! the! land! actually! occupied! by! the!
building,! but! also! the! adjacent! ground! or! vegetable! garden!
destined!to!the!incidental!use!of!the!parish!priest!in!his!ordinary!
life.! The! unused! cemetery! is! also! exempt! as! it! is! not! used! for!
commercial!purposes!and!instead!is!used!as!a!place!for!those!who!
participate!in!the!religious!festivities.!!
62. CIR!v.!CA!–!As!to!the!exemption!from!real!property!tax!of!exempt!
organizations,!the!Supreme!Court!ruled!that!the!income!from!the!
lease! and! parking! fees! were! not! exempt.! The! last! paragraph! of!
Section! 27! of! the! NIRC! clearly! provides! that! profits! realized! by!
exempt! organizations! (non4profit! clubs)! from! real! property! from!
whatever!source!and!wherever!used!are!taxable.!The!Court!noted!
that! while! YMCA! is! exempt! from! real! property! taxes,! it! is! not!
exempt!from!income!tax!on!the!rentals!from!its!property.!Further,!
YMCA! failed! to! prove! that! it! was! a! non4stock,! non4profit!
educational!institution!un!!
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63. Lung!Center!of!the!Phils.!v.!Quezon!City!–!The!Supreme!Court!held!
that! the! hospital! was! not! exempt! from! real! property! tax! on! the!
portions!of!its!property!not!actually,!directly,!and!exclusively!used!
for! charitable! purposes.! Thus,! those! leased! out! for! commercial!
purposes! are! subject! to! real! property! tax.! Those! used! by! the!
hospital!even!if!used!for!paying!patients!remain!exempt!from!real!
property!taxes.!!
64. CIR!v.!St.!Luke’s!Medical!Center!4!!St.!Luke’s!cannot!claim!full!tax!
exemption! under! Section! 30! because! it! has! paying! patients! and!
this!is!notwithstanding!the!fact!that!it!is!a!non4profit!hostpital.!For!
Section! 27(B)! to! apply,! the! hospital! must! be! non4profit! which!
means! that! no! net! income! or! asset! accrues! to! or! benefits! any!
member!or!specific!person!and!all!the!activities!of!the!hospital!are!
non4profit.! On! the! other! hand,! Section! 30(E)! and! (G),! while!
providing! for! an! exemption,! is! qualified! by! the! last! paragraph!
which,! in! turn,! provides! that! activities! conducted! for! profit! shall!
be! taxable.! Section! 30(E)! and! (G)! requires! that! an! institution! be!
operated! exclusively! for! charitable! purposes! to! be! completely!
exempt! from! income! tax.! In! this! case,! however,! St.! Luke’s! is! not!
perated!exclusively!for!charitable!purposes!insofar!as!its!revenues!
from! paying! patiesnts! are! concerned.! Such! revenue! is! subject! to!
income!tax!at!10%!under!Section!27(B).!
!
!
!
IV. Situs$of$Taxation$and$Double$Taxation$
!
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65. Republic!Bank!v.!CTA!–!Under!the!Tax!Code,!Bank!A!is!subject!to!1%!reserve!
deficienty! tax! if! it! incurs! reserve! deficiencies.! Under! the! General! Banking!
Law,! Bank! A! must! pay! 1/10! of! 1%! for! incurring! reserve! deficiencies.! The!
Court! said! that! there! is! no! double! taxation! in! this! case! because! one! is! a!
penalty,!while!the!other!is!a!tax.!The!payment!of!1/10!of!1%!for!incurring!
reserve! deficiencies! is! clearly! a! penalty! as! the! primary! purpose! is!
regulation;!while!the!payment!of!1%!for!the!same!violation!is!a!tax!for!the!
generation!of!income!which!is!the!primary!purpose!for!this!instance.!!
66. P&G! v.! Municipality! of! Jagna! 4! The! Supreme! Court! stated! that! there! is!
double! taxation! when! the! same! person! is! taxed! twice! by! the! same!
jurisdiction!for!the!same!thing.!A!tax!on!products!is!different!from!a!tax!on!
the! privilege! of! storing! copra! in! a! bodega! situated! within! the! territorial!
jurisdiction! of! the! municipality.! Furthermore,! in! the! former,! the! taxing!
authority! is! the! national! government! while! in! the! latter;! the! taxing!
authority!is!the!local!government.!!
67. Pepsi4Cola!Bottling!Co.!v.!Municipality!of!Tanauan!4!A!municipality!enacted!
two!ordinances!(Ord.!Nos.!23!and!27).!The!first!levies!and!collects!from!soft!
drinks!producers!a!tax!for!every!bottle!corked!while!the!second!levies!and!
collects! on! soft! drinks! produced! and! manufactured! within! its! territorial!
jurisdiction.!The!SC!said!that,!while!all!the!elements!of!double!taxation!are!
present,!there!is!still!no!double!taxation!because!Ord.!27!repealed!Ord.!23.!
Otherwise,!there!would!have!been!double!taxation.!
68. Villanueva! v.! City! of! Iloilo! 4! In! order! to! constitute! double! taxation! in! the!
objectionable!or!prohibited!sense!the!same!property!must!be!taxed!twice!
when! it! should! be! taxed! but! once;! both! taxes! must! be! imposed! on! the!
same!property!or!subject4matter,!for!the!same!purpose,!by!the!same!State,!
Government,! or! taxing! authority,! within! the! same! jurisdiction! or! taxing!
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district,!during!the!same!taxing!period,!and!they!must!be!the!same!kind!or!
character! of! tax.”! It! has! been! shown! that! a! real! estate! tax! and! the!
tenement! tax! imposed! by! the! ordinance,! although! imposed! by! the! same!
taxing!authority,!are!not!of!the!same!kind!or!character.!Furthermore,!while!
it!is!true!that!they!are!taxable!as!real!estate!dealers!and!still!taxable!under!
the!ordinance,!the!argument!against!double!taxation!may!not!be!invoked.!
The! same! tax! may! be! imposed! by! the! national! government! as! well! as! by!
the! local! government.! There! is! nothing! inherently! obnoxious! in! the!
exaction! of! license! fees! or! taxes! with! respect! to! the! same! occupation,!
calling!or!activity!by!both!the!State!and!a!political!subdivision!thereof.!
69. Compania! General! de! Tabacos! de! Filipinas! v.! City! of! Manila! –! Two!
ordinances! were! passed.! One! taxed! the! privilege! to! sell! liquor! while! the!
other!taxed!the!sale!of!liquor.!The!Supreme!Court!held!that!both!a!license!
fee!and!a!tax!may!be!imposed!on!the!same!business!and!occupation!and!
such!as!not!a!violation!of!the!rule!against!double!taxation.!The!impositions!
are! of! a! different! character.! The! first! is! a! license! fee! for! the! privilege! of!
engaging! in! the! sale! of! liquor! in! the! exercise! of! police! power! while! the!
other!is!imposed!for!revenue!purposes!based!on!the!sales!made.!!
70. Province! of! Bulacan! v.! CA! 4! The! local! government! unit! may! levy! a! tax! on!
quarry!resources!extracted!from!public!lands!but!not!from!private!lands.!In!
this!case,!the!Supreme!Court!stated!that!the!NIRC!levies!a!tax!on!all!quarry!
resources! whether! extracted! from! public! or! private! land.! Thus,! the! local!
government! unit! cannot! impose! taxes! on! quarry! resources! as! they! are!
already!taxed!under!the!NIRC.!However,!by!express!provision!in!the!Local!
Government!Code,!the!LGU!may!levy!on!quarry!resources!extracted!from!
public!land.!!
!
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!
V. Forms$of$Escape$from$Taxation$
! 1.
71. Delpher! Trades! Corp.! v.! IAC! –! Spouses,! who! own! real! estate! and! upon!
advice! of! their! lawyer,! decided! to! organize! a! corporation! to! take! control!
over!their!properties.!The!SC!said!that!this!is!a!case!of!tax!avoidance.!The!
SC! said! that! there! was! nothing! wrong! or! objectionable! about! the! "estate!
planning"! scheme! resorted! to! by! the! taxpayers.! The! legal! right! of! a!
taxpayer!to!decrease!the!amount!of!what!otherwise!could!be!his!taxes!or!
altogether! avoid! them,! by! means! which! the! law! permits,! cannot! be!
doubted.! In! the! said! case,! the! taxpayers! acquired! 2,500! original! unissued!
no! par! value! shares! of! stocks! of! the! corporation! in! exchange! for! their!
properties.!By!virtue!of!this!exchange,!the!taxpayers!became!stockholders!
of! the! corporation! by! subscription.! In! effect,! they! changed! the! nature! of!
their!ownership!from!unincorporated!to!incorporated!for!by!organizing!the!
corporation! to! take! control! of! properties! and! at! the! same! time! save! on!
inheritance!taxes.!
72. Heng! Tong! Textiles! v.! CIR! 444! Tax! was! minimized! by! the! advance! sales! tax!
paid! by! Pan! Asiatic! upon! removal! of! the! goods! from! Customs)! being!
credited! against! the! tax! on! the! actual! gross! selling! price! paid! by! the!
importer! Heng! Tong.! An! attempt! to! minimize! one's! tax! does! not!
necessarily! constitute! fraud.! A! taxpayer! may! diminish! his! liability! by! any!
means!which!the!law!permits.!!
73. CIR!v.!Toda!444!CIC!sold!a!property!for!P100M!to!Altonaga,!who!sold!it!on!
the! same! day! to! RMI! for! P200M.! The! execution! of! the! two! sales! was!
calculated! to! mislead! the! BIR! with! the! end! in! view! of! reducing! the!
consequent!income!tax!liability!from!35%!corporate!tax!to!5%!capital!gains!
tax.!!
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• 3!Factors!of!Tax!Evasion:!(E4S4C)!
The!end!to!be!achieved!!
2. An! accompanying! state! of! mind! which! is! described! as! being!
evil,!in!bad!faith,!willfull!or!deliberate!and!not!accidental!
3. A!course!of!action!or!failure!of!action!which!is!unlawful!
!
VI. Exemption$from$Taxation$
!
74. Luzon!Stevedoring!Corp.!v.!CTA!444!“Tugboats”!are!not!the!same!as!“cargo!
vessels.”! The! general! rule! is! that! any! claim! for! exemption! from! the! tax!
statute!should!be!strictly!construed!against!the!taxpayer.!
75. Manila! Electric! v.! Vera! 444! The! provision! in! Meralco's! franchise! that! the!
payment!of!the!percentage!tax!on!the!gross!earnings!shall!be!"in!lieu!of!all!
taxes! and! assessments! of! whatsoever! nature,! and! whatsoever! authority"!
is!not1to! be! given! a! literal! meaning! as! to! preclude! the! imposition! of! the!
compensating! tax.! What! the! above! provision! exempts! petitioner! from,! is!
the! payment! of! property,! tax! on! its! poles,! wires,! transformers,! and!
insulators;! it! does! not! exempt! it! from! payment! of! taxes! which,! by! mere!
necessity!or!consequence!alone,!fall!upon!property.$!
76. Davao! Gulf! Lumber! Corp.! v.! CIR! 444! A! tax! cannot! be! imposed! unless! it! is!
supported!by!the!clear!and!express!language!of!a!statute.!Once!the!tax!is!
unquestionably!imposed,!a!claim!of!exemption!from!tax!payments!must!be!
clearly!shown!and!based!on!language!in!the!law!too!plain!to!be!mistaken.!A!
partial! refund,! is! in! the! nature! of! a! tax! exemption,!and! hence! it! must! be!
construed!strictissimi!juris1against!the!grantee.!There!is!no!tax!exemption!
solely!on!the!ground!of!equity.!
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!
77. CIR! v.! CA! and! ADMU! 444! It! is! obviously! both! illogical! and! impractical! to!
determine! who! are! exempted! without! first! determining! who! are! covered!
by!the!aforesaid!provision.!CIR!should!have!determined!first!if!Ateneo!was!
an! independent! contractor,! applying! the! rule! of! strict! interpretation! of!
laws! imposing! taxes! and! other! burdens! on! the! populace,! before! asking!
Ateneo!to!prove!its!exemption.!
78. Caltex! Phils.! v.! COA! 444! The! rule! of!ejusdem1 generis1states! that! where!
general!words!follow!an!enumeration!of!persons!or!things,!by!words!of!a!
particular! and! specific! meaning,! such! general! words! are! not! to! be!
construed! in! their! widest! extent,! but! are! held! to! be! as! applying! only! to!
persons!or!things!of!the!same!kind!or!class!as!those!specifically!mentioned.!
“Other! factors”! in! accordance! with! the! enumeration! must! relate! to! cost!
underrecovery! incurred! as! a! result! of! the! reduction! of! domestic! prices! of!
petroleum!products.!
79. National! Development! Co.! v.! CIR! 444! There! is! nothing! in! the! Secretary! of!
Finance’s!undertaking!that!exempts!the!interests!from!taxes.!NDC!has!not!
established! a! clear! waiver! therein! of! the! right! to! tax! interests.! Tax!
exemptions! cannot! be! merely! implied! but! must! be! categorically! and!
unmistakably! expressed.!Any! doubt! concerning! this! question! must! be!
resolved!in!favor!of!the!taxing!power.!!!
80. Republic! v.! Caguioa! 444! An! exemption! granted! on! imporatations! of! cigars,!
cigarettes,! distilled! spirits,! fermented! liquors! and! wines! within! the! Subic!
SEZ!can!be!withdrawn.!There!is!no!vested!right!in!a!tax!exemption,!more!so!
when! the! latest! expression! of! legislative! intent! renders! its! continuance!
doubtful.! Being! a! mere! statutory! privilege,! a! tax! exemption! may! be!
modified!or!withdrawn!at!will!by!the!granting!authority.!
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81. Smart!Communications!v.!City!of!Davao!444!The!"in!lieu!of!all!taxes"!clause!
in! a! legislative! franchise! should! categorically! state! that! the! exemption!
applies!to!both!local!and!national!taxes;!otherwise,!the!exemption!claimed!
should! be! strictly! construed! against! the! taxpayer! and! liberally! in! favor! of!
the! taxing! authority.! The! imposition! of! local! franchise! tax! is! not!
inconsistent! with! the! advent! of! the! Expanded! VAT! Law,! which! renders!
functus!officio!the!franchise!tax!paid!to!the!national!government.!
82. Nitafan! v.! CIR! 444! The! intent! of! the! framers! of! the! Constitution! (citing! a!
Father! Bernas! reference)! was! to! make! the! salaries! of! members! of! the!
Judiciary! taxable.! The! imposition! of! income! tax! upon! the! salary! of! judges!
does!not!constitute!a!diminution!prohibited!by!the!Constitution.!!
83. CIR! v.! Mitsubishi! Metal! Corp.! 444! Mitsubishi! is! not! a! mere! conduit! of!
Eximbank!whose!investments!in!the!Philippines!on!loans!are!exempt!from!
taxes! under! the! Tax! Code.! Taxation! is! the! rule! and! exemption! is! the!
exception.!The!burden!of!proof!rests!upon!the!party!claiming!exemption!to!
prove!that!it!is!in!fact!covered!by!the!exemption!so!claimed.!
84. PLDT!v.!City!of!Davao!444!The!fact!that!PLDT’s!existing!franchises!contain!“in!
lieu! of! all! taxes”! clauses,! does! not! mean! that! the! same! grant! of! tax!
exemption! must! be! deemed! to! have! become! ipso! facto! part! of! its!
previously! granted! telecommunications! franchise.! Tax! exemptions! are!
highly! disfavored.!The! right! of! taxation! will! not! be! held! to! have! been!
surrendered,!unless!the!intention!to!surrender!is!manifested!by!words!too!
plain!to!be!mistaken.!
85. Mactan!Cebu!Internation!Airport!Authority!v.!Marcos!444!As!a!general!rule,!
the!power!to!tax!is!an!incident!of!sovereignty!and!is!unlimited!in!its!range,!
acknowledging!in!its!very!nature!no!limits,!so!that!security!against!its!abuse!
is! to! be! found! only! in! the! responsibility! of! the! legislature! which! imposes!
14!
TAX$1$MEMORY$AID$ ATTY.$MONTERO$
!
the! tax! on! the! constituency! who! are! to! pay! it.! Nevertheless,! effective!
limitations! thereon! may! be! imposed! by! the! people! through! their!
Constitutions.!
• Under!an!earlier!law,!MCIAA!is!exempt!from!the!payment!of!realty!
taxes.! Since! taxation! is! the! rule! and! exemption! therefrom! the!
exception,!the!exemption!may!thus!be!withdrawn!at!the!pleasure!
of!the!taxing!authority.!!
• Exception! –! 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!non4impairment!
clause!of!the!Constitution.$!
86. CIR! v.! Robertson! 444! An! examination! of! the! words! used! and! the!
circumstances!in!which!they!were!used,!shows!the!basic!intendment!in!the!
RP4US! Military! Bases! Agreement! to! exempt! all! US! citizens! working! in! the!
Military! Bases! from! the! burden! of! paying! Philippine! Income! Tax! without!
distinction!as!to!whether!born!locally!or!born!in!their!country!of!origin.1Ubi1
lex1 non1 distinguit1 nec1 nos1 distinguere1 debemos1(one! must! not! distinguish!
where!the!law!does!not!distinguish).!
87. Republic! v.! IAC! (April! 26,! 1991)! 444! The! Pastor! spouses! were! granted! not!
merely! an! exemption,! but! an! amnesty! for! their! past! tax! failings.! The!
Government! is! estopped! from! colleting! the! difference! between! the!
deficiency! tax! assessment! and! the! amount! already! paid! by! them! as!
amnesty!tax.!!
• A!tax!amnesty,!being!a!general!pardon!or!intentional!overlooking!
by! the! State! of! its! authority! to! impose! penalties! on! persons!
otherwise! guilty! of! evasion! or! violation! of! a! revenue! or! tax! law,!
partakes!of!an!absolute!forgiveness!or!waiver!by!the!Government!
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of!its!right!to!collect!what!otherwise!would!be!due!it,!and!in!this!
sense,! prejudicial! thereto,! particularly! to! give! tax! evaders,! who!
wish! to! relent! and! are! willing! to! reform! a! chance! to! do! so! and!
thereby!become!a!part!of!the!new!society!with!a!clean!slate.!
• The!rule!is!that!in1case1of1doubt,!tax!statutes!are!to!be!construed!
strictly! against! the! Government! and! liberally! in! favor! of! the!
taxpayer,! for! taxes,! being! burdens,! are! not! to! be! presumed!
beyond!what!the!applicable!statute!expressly!and!clearly!declares.!
88. Phil.! Acetylene! Co.! Inc.! v.! CIR! 444! Sales! tax! must! be! paid! by! the!
manufacturer!or!producer!(Phil.!Aceylene)!even!if!the!sale!is!made!to!tax4
exempt! entities! like! the! National! Power! Corporation,! an! agency! of! the!
Philippine! Government,! and! to! the! Voice! of! America,! an! agency! of! the!
United!States!Government.!
• It!may!indeed!be!that!the!economic!burden!of!the!tax!finally!falls!
on! the! purchaser;! when! it! does! the! tax! becomes! a! part! of! the!
price! which! the! purchaser! must! pay.! 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!on!the!amount!of!the!tax.!!
• But! the! tax! burden! may! not! even! be! shifted! to! the! purchaser! 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.!
89. CIR! v.! Gotamco! &! Sons.! Inc.! 444! Gotamco! is! not! liable! to! pay! for! 3%!
contractors!tax!as!there!was!a!specific!exemption!from!“indirect!taxes”!in!
the!World!Health!Organization’s!Host!Agreement!with!the!Philippines.!The!
3%!contractor's!tax!would!be!within!this!category!and!should!be!viewed!as!
15!
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!
a!form!of!an!"indirect!tax"!On!the!Organization,!as!the!payment!thereof!or!
its! inclusion! in! the! bid! price! would! have! meant! an! increase! in! the!
construction!cost!of!the!building.!
90. Maceda! v.! Macaraig! (main! and! MR)! 444! By! the! very! nature! of! indirect!
taxation,! the! economic! burden! of! such! taxation! is! expected! to! be! passed!
on! through! the! channels! of! commerce! to! the! user! or! consumer! of! the!
goods! sold.! However,! because! NPC! has! been! exempted! from! both! direct!
and!indirect!taxation,!the!NPC!must!be!held!exempted!from!absorbing!the!
economic!burden!of!indirect!taxation.!v!This!means,!on!the!one!hand,!that!
the! oil! companies! which! wish! to! sell! to! NPC! absorb! all! or! part! of! the!
economic!burden!of!the!taxes!previously!paid!to!BIR,!which!they!could!shift!
to! NPC! if! NPC! did! not! enjoy! exemption! from! indirect! taxes.! If! NPC!
nonetheless!purchases!such!oil!from!the!oil!companies!—!because!to!do!so!
may!be!more!convenient!and!ultimately!less!costly!for!NPC!than!NPC!itself!
importing!and!hauling!and!storing!the!oil!from!overseas!—!NPC!is!entitled!
to!be!reimbursed!by!the!BIR!for!that!part!of!the!buying!price!of!NPC!which!
verifiably!represents!the!tax!already!paid!by!the!oil!company4vendor!to!the!
BIR.!
91. Silkair!(Singapore)!v.!CIR!444!The!proper!party!to!question,!or!seek!a!refund!
of,!an!indirect!tax!is!the!statutory!taxpayer,!the!person!on!whom!the!tax!is!
imposed! by! law! and! who! paid! the! same! even! if! he! shifts! the! burden!
thereof! to! another.! Even! if! Petron! Corporation! passed! on! to! Silkair! the!
burden!of!the!tax,!the!additional!amount!billed!to!Silkair!for!jet!fuel!is!not!a!
tax!but!part!of!the!price!which!Silkair!had!to!pay!as!a!purchaser.!
92. CIR! v.! Pilipinas! Shell! Petroleum! Corp.! 444! Excise! taxes! levied! on! locally!
manufactured!petroleum!products!and!indigenous!petroleum!are!required!
to! be! paid! before! their! removal! from! the! place! of! production.! The!
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exemption! from! excise! tax! payment! on! petroleum! products! under! Sec.!
135(a)! is! conferred! on! international! carriers! who! purchased! the! same! for!
their! use! or! consumption! outside! the! Philippines.!Pilipinas! Shell! cannot!
shift!the!tax!burden!to!international!carriers!who!are!allowed!to!purchase!
its!petroleum!products!without!having!to!pay!the!added!cost!of!the!excise!
tax.!
!
VII. Nature,$Construction,$Application,$and$Sources$of$Tax$Laws$
!
93. Hilado!v.!CIR!444!Our!internal!revenue!laws!are!not!political!in!nature!and!as!
such!were!continued!in!force!during!the!period!of!enemy!occupation!and!
in!effect!were!actually!enforced!by!the!occupation!government.!!
94. CIR! v.! CA,! Alhambra! 444! Rulings! and! circulars,! rules! and! regulations!
promulgated! by! the! Commissioner! of! Internal! Revenue! would! have! no!
retroactive! application! if! to! so! apply! them! would! be! prejudicial! to! the!
taxpayers.!
• Exceptions:!
1. Taxpayer!deliberately!omits/misstates!facts!in!his!return!
2. Facts! subsequently! gathered! by! the! BIR! are! materially!
different!from!the!facts!on!which!the!ruling!is!based!
3. Taxpayer!acted!in!bad!faith!
95. ABS4CBN! v.! CTA! ! 444! Sec.! 27! of! the! Tax! Code! provides! that! ny! revocation,!
modification,!or!reversal!of!and!of!the!rules!and!regulations!promulgated!
in!accordance!with!the!preceding!section!or!any!of!the!rulings!or!circulars!
promulgated! by! the! Commissioner! of! Internal! Revenue!shall1 not1 be1 given1
retroactive1 application1 if1 the1 relocation,1 modification,1 or1 reversal1 will1 be1
prejudicial1to1the1taxpayers!(with!certain!exceptions).!
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!
th
96. Philippine! Bank! of! Communications! v.! CIR! 444! Adds! a! 4 ! exception:! non4
retroactivity! of! rulings! by! the! Commissioner! of! Internal! Revenue! is! not!
applicable!in!this!case!because!the!nullity!of!RMC!No.!7485!was!declared!by!
court!and!not!the!CIR.! b.
• It!is!widely!accepted!that!the!interpretation!placed!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.!
97. BIR! Ruling! No.! 37042011! 444! Non4retroactivity! shall! not! apply! where! the!
ruling! involved! is! null! and! void! for! being! contrary! to! law,! such! as! the!
previous!rulings!on!the!PEACe!bonds.!
! debt,!demand,!contract!or!judgment!as!is!allowed!to!be!set4off!under!
VIII. Certain$Doctrines$in$Taxation$
a. Power$to$Tax$Involves$Power$to$Destroy$
98. CIR!v.!Tokyo!Shipping!Co.!444!The!tax!was!paid!way!back!in!1980!and!
despite! the! clear! showing! that! it! was! erroneously! paid,! the!
government! succeeded! in! delaying! its! refund! for! fifteen! (15)! years.!
Fair! deal! is! expected! by! our! taxpayers! from! the! BIR! and! the! duty!
demands! that! BIR! should! refund! without! any! unreasonable! delay!
what!it!has!erroneously!collected.! c.
99. Reyes!v.!Almanzor!444!The!power!of!taxation!is!sometimes!called!also!
the!power!to!destroy.!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!
CROMBONDS$201242013$
public's!trust!and!confidence!in!the!Government!this!power!must!be!
used!justly!and!not!treacherously.!
!
Set4off$of$Taxes$
100. Philex! Mining! Corp.! v.! CIR! 444! Taxes! cannot! be! subject! to!
compensation! for! the! simple! reason! that! the! government! and! the!
taxpayer!are!not!creditors!and!debtors!of!each!other.!
101. Francia!v.!IAC!!444!!A!person!cannot!refuse!to!pay!a!tax!on!the!ground!
that! the! government! owes! him! an! amount! equal! to! or! greater! than!
the! tax! being! collected.! The! collection! of! a! tax! cannot! await! the!
results!of!a!lawsuit!against!the!government.!
102. Republic!v.!Mambulao!Lumber!Co.!444!A!claim!for!taxes!is!not!such!a!
the!statutes!of!set4off,!which!are!construed!uniformly,!in!the!light!of!
public!policy,!to!exclude!the!remedy!in!an!action!or!any!indebtedness!
of! the! state! or! municipality! to! one! who! is! liable! to! the! state! or!
municipality! for! taxes.! Neither! are! they! a! proper! subject! of!
recoupment!since!they!do!not!arise!out!of!the!contract!or!transaction!
sued!on.!
!
Taxpayer$Suit$
103. Anti4Graft! League! of! the! Phil.! v.! San! Juan! 444! To! constitute! a!
taxpayer’s!suit,!two!requisites!must!be!met:!!
1. !public! funds! are! disbursed! by! a! political! subdivision! or!
instrumentality! and! in! doing! so,! a! law! is! violated! or! some!
irregularity!is!committed,!and!
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!
2. that! the! petitioner! is! directly! affected! by! the! alleged! ultra!
vires!act!
104. Joya!v.!PCGG!444!No!question!involving!the!constitutionality!or!validity!
of!a!law!or!governmental!act!may!be!heard!and!decided!by!the!court!
unless! there! is! compliance! with! the! legal! requisites! for! judicial!
inquiry,! namely:! that! the! question! must! be! raised! by! the! proper!
party;!that!there!must!be!an!actual!case!or!controversy.!
105. Lozada!v.!COMELEC!444!It!is!only!when!an!act!complained!of!involves!
the! illegal! expenditure! of! public! money! that! the! so4called! taxpayer!
suit!may!be!allowed.!
106. Abaya! v.! Ebdane! 444! The! prevailing! doctrine! in! taxpayer’s! suits! is! to!
allow! taxpayers! to! question! contracts! entered! into! by! the! national!
government!or!GOCC’s!allegedly!in!contravention!of!law.!
!

! $

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!
INCOME$TAX$ 110. BIR! Ruling! 33400! –! Technoserve! International! Company! provides!

I. Definitions$ technical!services!for!overseas!and!domestic!projects.!It!sends!some!

A. Resident$citizens$and$resident$aliens$ of! its! employees! to! Japan! for! a! certain! period! to! work! with! its!

107. Garrison! vs.! Court! of! Appeals! 4! Petitioners! are! American! citizens! mother! company,! JGC! Corp.! Their! contracts! pass! thru! the! POEA.!

who!were!employed!at!the!US!Naval!Base!in!Subic.!They!claim!that! While! in! Japan,! they! are! paid! in! US! dollars! by! TIC.! In! ruling! for! the!

they! are! not! resident! aliens! because! they! do! not! intend! to! stay! in! proper! tax! treatment,! the! BIR! made! a! distinction! between! non4

the! Philippines.! Thus,! they! refused! to! file! their! income! tax! returns,! resident! citizens! and! overseas! contract! workers! (OCWs).! Non4

claiming!that!they!are!exempt!from!income!tax.!The!SC!ruled!that!a! resident! citizens! are! exempt! from! taxation! of! their! foreign4based!

foreigner! whose! purpose! for! coming! here! is! of! a! nature! that! income!if!they!have!stayed!abroad!for!at!least!183!days!in!a!taxable!

requires! his! prolonged! stay! for! its! accomplishment,! then! he! is! a! year.! For! OCWs,! their! foreign4based! income! are! tax! exempt!

resident!alien;!intention!to!go!back!to!his!country!is!irrelevant.!Thus,! regardless! of! length! of! time,! the! only! requirement! being! that! their!

they! are! not! transients! but! are! actually! resident! aliens.! The! Bases! contracts!pass!thru!and!are!registered!with!the!POEA.!!

Agreement!only!exempts!them!for!income!derived!from!US!sources.! 111. BIR!Ruling!DA!095405!–!Borromeo!is!a!US!citizen!who!was!applying!

They! must! still! file! their! ITRs! to! prove! that! they! did! not! receive! for!dual!citizenship.!He!asked!BIR!whether!he!will!be!required!to!pay!

Philippine4sourced!income!which!is!taxable.! income!tax!for!income!earned!in!the!US.!The!BIR!said!that!when!the!

! dual! citizenship! is! granted,! he! will! be! considered! as! a! non4resident!

B. Non4resident$citizens$$ citizen! and! as! such,! only! his! Philippine4sourced! income! is! taxable.!

108. RR! 1479! 4! The! phrase! “requires! him! to! physically! present! abroad! His!US4sourced!income!will!be!tax!exempt.!Only!resident!citizens!are!

most! of! the! time”! under! sec.! 22(e)! Tax! Code! means! the! contract! taxable!for!income!sourced!within!or!outside!of!the!Philippines.!

worker! must! have! been! outside! the! Philippines! for! a! period! of! not! !

less!than!183!days!during!the!taxable!year.!The!proof!of!intention!of! C. Non4resident$aliens$engaged$in$business$in$the$Philippines$

leaving!or!return!shall!be!attached!to!his!ITR.!It!also!provides!for!the! 112. Sec.!5!&!6,!RR!2!!4!An!alien!actually!present!in!the!Philippines!who!is!

manner!of!computing!his!income!tax!(beyond!scope).!!! not!a!mere!transient!or!sojourner!is!a!resident!of!the!Philippines!for!

109. RR!5401!–!Non4resident!citizens!are!no!longer!required!to!file!income! purposes! of! the! income! tax.! Whether! he! is! a! transient! or! not! is!

tax!returns!for!income!derived!from!sources!outside!the!Philippines! determined!by!his!intentions!with!regard!to!the!length!and!nature!of!

beginning!the!taxable!year!2001.!! his!stay.!A!mere!floating!intention!indefinite!as!to!time,!to!return!to!
another!country!is!not!sufficient!to!constitute!him!a!transient.!If!he!

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!
lives! in! the! Philippines! and! has! no! definite! intention! as! to! his! stay,!
he! is! a! resident.! One! who! comes! to! the! Philippines! for! a! definite!
purpose! which! in! its! nature! may! be! promptly! accomplished! is! a!
transient.! But! if! his! purpose! is! of! such! a! nature! that! an! extended!
stay!may!be!necessary!for!its!accomplishment,!and!to!that!end!the!
alien!makes!his!home!temporarily!in!the!Philippines,!he!becomes!a!
resident,!though!it!may!be!his!intention!at!all!times!to!return!to!his!
domicile! abroad! when! the! purpose! for! which! he! came! has! been!
consummated! or! abandoned.! He! retains! resident! status! until! he!
abandons! residence! and! actually! departs.! A! mere! intention! to!
change! his! status! does! not! automatically! convert! him! into! a! non4
resident!alien.!!!
! that! they! cannot! be! considered! to! have! formed! a! partnership!
D. Corporations$
113. AFISCO! Insurance! Corporation! vs.! CA! 4! The! 41! non4life! insurance!
companies! formed! themselves! into! a! pool! or! clearing! house! to!
facilitate! their! dealings! with! a! foreign! insurance! company.! This!
group!of!companies!had!its!own!executive!board!which!resembled!a!
board! of! directors.! It! also! has! a! common! fund.! Thus,! the! SC! ruled!
that! it! is! liable! for! corporate! income! tax.! It! is! actually! an!
unregistered! partnership! which! is! included! in! the! concept! of! a!
taxable!corporation!in!the!NIRC.!
114. Pascual! vs.! CIR! ! 4! Petitioners! bought! a! total! of! 5! parcels! of! land! in!
1966.!They!sold!2!parcels!to!Marenir!Dev’t.!Corp!in!1968.!They!sold!
the!3!to!Reyes!and!Samson!in!1970.!They!realized!profits!from!both!
sales!and!thus!paid!the!corresponding!capital!gains!taxes.!They!were!
however! assessed! a! deficiency! corporate! income! tax.! The! SC! ruled!
CROMBONDS$201242013$
that! they! are! NOT! liable! for! corporate! income! tax.! They! were! co4
owners! of! the! properties,! but! that! did! not! make! them! an!
unregistered! partnership! which! is! taxable! as! a! corporation.! There!
were!only!2!isolated!transactions,!thus,!there!was!no!habituality!to!
engage! in! business! and! earn! profit! which! would! indicate! that! a!
partnership!existed.!
115. Obillos!vs.!CIR!!4!Petitioners!in!this!case!are!siblings!who!were!given!
two!lots!in!Greenhills!by!their!father.!Their!father!gave!them!these!
lots!for!them!to!build!their!houses!but!since!they!were!not!able!to!
build!their!house!after!a!year,!petitioners!sold!the!land!and!earned!
profit! which! they! reported! for! purposes! of! capital! gains! tax.! They!
were! assessed! by! the! CIR! with! corporate! income! tax.! The! SC! ruled!
because!there!was!only!one!transaction.!Furthermore,!they!did!not!
contribute! anything! to! a! common! fund.! The! distribution! of! profits!
from!that!transaction!was!merely!incidental!to!the!dissolution!of!the!
co4ownership!they!had!over!the!lots.!!
116. Oña! vs.! CIR! ! 4! Lorenzo! Oña! and! his! children! are! the! heirs! and! co4
owners!of!an!estate!which!they!inherited!from!Oña’s!deceased!wife.!
Despite!a!partition!plan!approved!by!the!court,!the!properties!were!
not!really!divided!but!remained!under!the!management!of!Lorenzo.!
Lorenzo!sold!and!leased!some!of!these!lots!and!then!reinvested!the!
income! in! other! real! property! and! securities.! Petitioners! thus!
derived!income!from!these!investments.!The!SC!ruled!that!they!are!
liable! for! corporate! income! tax! because! they! have! formed! an!
unregistered! partnership! which! is! within! the! contemplation! of! a!
taxable!corporation.!For!tax!purposes,!the!co4ownership!of!inherited!
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!
properties! is! automatically! converted! into! an! unregistered!
partnership! the! moment! the! said! common! properties! and! income! II.
derived! therefrom! are! used! as! a! common! fund! with! intent! to!
produce! profits.! There! was! also! habituality! in! the! business!
conducted!by!Lorenzo!Oña.!
117. RR!1042012!4!Joint!ventures!are!not!taxable!as!corporations.!In!order!
to! be! taxed! as! such! certain! requirements! enumerated! must! be!
fulfilled.! Joint! ventures! involving! foreign! contractors! may! also! be!
treated! as! a! non4taxable! corporation! only! if! the! member! foreign!
contractor! is! covered! by! a! special! license! as! contractor! by! the!
Philippine! Contractors! Accreditation! Board! (PCAB)! of! the!
Department! of! Trade! and! Industry! (DTI);! and! the! construction!
project! is! certified! by! the! appropriate! Tendering! Agency!
(government! office)! that! the! project! is! a! foreign! financed/!
internationally4funded! project! and! that! international! bidding! is!
allowed!under!the!Bilateral!Agreement!entered!into!by!and!between!
the!Philippine!Government!and!the!foreign!/!international!financing!
institution! pursuant! to! the! implementing! rules! and! regulations! of!
Republic!Act!No.!4566!otherwise!known!as!Contractor’s!License!Law.!
118. BIR!Ruling!10842010!!4!The!joint!venture!between!Aurora!Properties!
Inc.!and!Avida!Land!Corp.!to!develop!a!subdivision!in!Laguna!is!not!
subject! to! income! tax! because! a! joint! venture! does! not! fall! under!
the! definition! of! a! taxable! corporation.! They! will! only! be! liable! for!
income! tax! when! they! actually! receive! income.! Avida! will! be! taxed!
on! the! marketing! fees! paid! to! it! by! Aurora! for! marketing! services.!
Avida!and!Aurora!will!be!taxed!on!the!income!they!derive!from!the!
sale!of!the!properties.!
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!
Income$
A. In$general$
119. Madrigal! vs.! Rafferty! ! 4! Vicente! Madrigal! filed! his! net! income!
(P296,302.73)! for! the! year! 1914! but! claimed! that! this! was! actually!
the! income! of! the! conjugal! partnership! with! his! spouse,! Susana!
Paterno.!He!claims!that!the!total!income!of!the!conjugal!partnership!
should!be!divided!into!two,!and!that!smaller!amount!should!be!the!
tax! base! of! the! income! tax.! The! SC! disagreed.! Our! tax! law! is!
patterned!after!the!US!tax!law.!US!Treasury!regulations!provide!that!
the!husband!must!report!the!aggregate!income!of!him!and!his!wife,!
subject!to!certain!conditions.!Thus,!their!income!is!considered!only!
as!one.!They!cannot!be!split!between!the!spouses.!!
120. Fisher! vs.! Trinidad! ! 4! Frederick! Fisher! is! a! stockholder! of! Philippine!
American! Drug! Company.! The! company! issued! stock! dividends! and!
Fisher! was! assessed! an! income! tax! deficiency! for! the! stock!
dividends.! The! SC! ruled! that! such! stock! dividends! are! not! income,!
and!are!thus!not!taxable!income.!Stock!dividends!are!undistributed!
increases!in!the!capital!of!the!corporation.!The!stockholder!doesn’t!
really!receive!any!gain!or!income.!What!he!gets!is!only!an!increased!
interest! in! the! capital! of! the! corporation.! An! income! subject! to!
taxation! under! the! law! must! be! an! actual! income! and! not! a!
promised!or!prospective!income.!
121. Limpan!Investment!Corporation!vs.!CIR!!!4!Limpan!Investment!Corp.!
is!engaged!in!the!business!of!leasing!out!real!properties.!They!were!
assessed!deficiency!taxes!for!underdeclared!rental!incomes.!During!
trial,!their!witness!admitted!to!underdeclaring!income,!but!reasoned!
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!
out! that! such! was! caused! by! them! not! being! able! to! collect! rent!
from! the! tenants.! Their! claim! that! they! were! unable! to! collect! was!
not!sufficiently!proven!by!clear!and!convincing!evidence,!thus,!they!
are! liable.! The! Court! also! ruled! that! the! payment! by! a! sub4tenant!
still!ought!to!be!declared!because!it!is!still!income,!regardless!of!its!
source.!
122. Conwi!vs.!Court!of!Tax!Appeals!4!Petitioners!are!Filipino!employees!
of!P&G!who!were!assigned!to!subsidiaries!outside!of!the!Philippines!
and! were! being! paid! in! US! dollars! as! compensation! for! services!
rendered.! In! their! income! tax! return,! they! used! the! dollar4to4peso!
conversion! rate! in! BIR! Ruling! No.! 704027! (P3.90:$1! from! Jan.! 1! to!
Feb!20,!1970;!P6.25:$1!from!Feb.!21!to!Dec.!31,!1970).!They!filed!an!
amended!ITR!using!the!par!value!of!the!peso!in!Sec.!48,!RA!265!(this!
was! a! lower! peso4to4dollar! ratio).! Their! claim! for! tax! refund! was!
denied.!The!proper!conversion!rate!should!be!the!free!market!rate!
since! the! par! value! only! applies! to! foreign! exchange! transactions,!
not!income!tax!payments.!There!were!no!forex!transactions!by!the!
petitioners! because! while! they! were! earning! in! dollars,! they! were!
also!spending!in!dollars,!thus,!no!conversion!occurs.!!!
123. CIR! v.! Glenshaw! Glass! Co.! 4! Respondents! in! these! cases! previously!
won! in! their! respective! anti4trust! cases! and! were! awarded!
exemplary! and! treble! (triple! of! actual/compensatory)! damages! by!
the!courts.!The!Court!ruled!that!such!damages!were!still!included!in!
gross!income!and!were!thus!taxable.!The!law!defines!gross!income!
to! include! “gains! or! profits! and! income! derived! from! any! source!
whatever.”! (Sec.! 32(A)! of! the! 1997! NIRC! uses! the! term,! “from!
whatever!source.”)!
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124. Murphy!vs.!Internal!Revenue!Service!!4!Murphy!won!a!case!against!
her!former!employer,!stating!that!she!suffered!mental!and!physical!
injuries!(bruxism)!when!she!was!blacklisted!by!her!former!employer.!
She! was! awarded! moral! damages.! The! Court! ruled! that! moral!
damages!cannot!be!considered!as!income!because!they!are!paid!to!
make! her! “emotionally! and! reputationally! whole”! and! not! to!
compensate! for! lost! wages.! It! is! more! in! the! nature! of! a! return! on!
capital! (i.e.! human! capital),! which! is! not! an! income.! (This! case! was!
reheard! by! the! same! court! in! a! later! year! and! was! overturned.)!
[“The!hardest!thing!in!the!world!to!understand!is!the!income!tax.”!–!
Albert!Einstein]!
!
B. Statutory$“inclusions”$
i. Compensation$for$services$
125. Old! Colony! Trust! Co.! vs.! CIR! 4! Through! a! board! resolution,!
American!Woolen!Company!resolved!to!shoulder!the!burden!of!
paying! the! taxes! due! on! the! incomes! of! its! officers,! with! the!
effect! that! such! officers! will! receive! their! salaries! without! any!
deductions! from! withheld! taxes.! The! Court! ruled! that! the!
amounts!paid!by!the!company!were!actually!additional!taxable!
income!of!the!officers.!These!were!additional!compensation!for!
their! services! which! were! included! in! their! gross! income.! (Sir’s!
comment:!Income!tax!is!a!direct!tax!which!cannot!be!passed!to!
another.)!
!
ii. Rents$
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126. Helvering!vs.!Bruun!4!Bruun!is!a!landowner!who!leased!his!land.!
Pursuant! to! the! lease! agreement,! the! lessee! tore! down! an! old!
building!and!built!a!new!one!which!had!a!higher!value!than!the!
old!building.!The!lessee!then!defaulted!on!the!rental!payments!
and! the! land! was! returned! to! Bruun! after! the! lease! was!
cancelled.! The! Court! ruled! that! the! difference! in! value! of! the!
new! building! and! the! old! building! (about! $51,000)! was! a!
realized!gain!and!was!thus!taxable.!Realization!of!gain!need!not!
be!cash!derived!from!the!sale!of!an!asset.!Gain!may!occur!as!a!
result! of! exchange! of! property,! payment! of! the! taxpayer’s!
indebtedness,!relief!from!liability!(as!was!the!case!in!Old!Colony!
v.!CIR,!supra),!or!other!profit!realized!from!the!completion!of!a!
transaction!(as!was!the!case!here).!
127. Section! 49,! RR! 2! 4! improvements! erected! by! lessee! and! not!
subject!to!removal!by!them!are!reportable!income!for!the!lessor!
in! the! either! of! the! following! manners:! (1)! income! at! the! time!
when! such! buildings! or! improvements! are! completed! the! fair!
market!value!or!(2)!lessor!may!spread!over!the!life!of!the!lease!
the! estimated! depreciated! value! of! such! buildings! or!
improvements! at! the! termination! of! the! lease! and! report! as!
income!for!each!year!of!the!lease!an!aliquot!part.!If!the!lessor!
comes! into! possession! or! control! of! the! property! prior! to! the!
time!originally!fixed!for!the!termination!of!the!lease,!the!lessor!
receives!additional!income!for!the!year!in!which!the!lease!is!so!
terminated! to! the! extent! that! the! value! of! such! buildings! or!
improvements! when! he! became! entitled! to! such! possession!
exceeds!the!amount!already!reported.!No!appreciation!in!value!
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due! to! causes! other! than! the! premature! termination! of! the!
lease! shall! be! included.! Conversely,! if! the! building! or!
improvements! are! destroyed! prior! to! the! expiration! of! the!
lease,!the!lessor!is!entitled!to!deduct!as!a!loss!for!the!year!when!
such!destruction!takes!place!the!amount!previously!reported!as!
income! because! of! the! erection! of! such! buildings! or!
improvements,!less!any!salvage!value!subject!to!the!lease!to!the!
extent!that!such!loss!was!not!compensated!for!by!insurance.!
!
iii. Dividends$
128. CIR!vs.!Court!of!Appeals!!4!ANSCOR!redeemed!common!shares!
from! Andres! Soriano’s! estate! in! 1968! and! 1969.! The! CIR! then!
assessed! ANSCOR! with! deficiency! withholding! tax4at4source.!
The! SC! agreed! with! the! CIR.! Normally,! stock! dividends! are! not!
taxable.!The!exception!is!when!the!corporation!“redeems!stock!
issued! as! a! dividend! at! such! time! and! in! such! manner! as! to!
make!the!distribution!and!cancellation!or!redemption,!in!whole!
or!in!part,!essentially!equivalent!to!the!distribution!of!a!taxable!
dividend,! the! amount! distributed! in! redemption! shall! be!
considered! as! taxable! income.”! Redeemed! stocks! can! be! from!
two! different! sources:! stock! representing! original! capital,! and!
stock!issued!as!dividends.!Those!of!the!first!kind!are!just!return!
on!capital!and!are!not!taxable!as!income.!Those!of!the!second!
kind! represents! a! gain! which! is! thus! taxable.! (Sir’s! comment:!
Some! people! actually! use! stock! dividends! to! circumvent! the!
law.! That’s! why! it’s! important! to! take! note! of! the! time! and!
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manner! by! which! these! stocks! are! redeemed! to! determine!
whether!these!are!really!legit!non4taxable!dividends.)!!
129. Wise!&!Co.,!Inc.!vs.!Meer!!4!Manila!Wine!Merchants,!Ltd.!(Hong!
Kong! company)! decided! to! sell! all! its! assets! to! Manila! Wine!
Merchants,! Inc.! (Manila! company).! From! the! sale! of! such,! it!
earned! income! which! were! distributed! as! dividends! to! its!
stockholders! which! included! Wise! &! Co.! Inc.! The! Court! ruled!
that! these! dividends! were! actually! liquidating! dividends! since!
the! HK! company! was! actually! closing! down.! The! stockholders!
are! liable! for! income! tax! from! the! liquidating! dividends! they!
received.! These! are! gains! to! the! stockholders.! Liquidating!
dividends! are! composed! of! two! parts:! a! return! OF! the!
investment! initially! paid! by! the! stockholder,! and! a! return! ON!
this! investment! in! the! form! of! retained! earnings! by! the!
company.!
130. Section! 2504256,! RR! 2! 4! if! forgiveness! of! indebtedness! was!
granted! as! compensation! for! services,! then! it! is! reportable!
income!for!the!individual.!If!it!was!done!without!consideration,!
it!is!a!gift!and!need!not!be!included!in!the!gross!income.!If!it!was!
a! corporation! that! forgave! a! stockholder,! the! transaction! has!
the!effect!of!payment!of!dividend.!
131. BIR! Ruling! 322487! 4! Liquidating! dividends! received! by!
stockholders,!in!excess!of!their!investment,!are!taxable.!Gain!=!
fair!market!value!of!liquidating!dividends!–!adjusted!cost!of!the!
share.!
132. BIR!Ruling!479411!4!CIR:!BIR!Ruling!39402!is!now!reversed.!Class!
notes:! 479411! is! vague,! did! not! specifically! say! what! it! is!
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reversing.!Is!it!that!liquidating!corporation!is!already!subject!to!
income! tax?! Sir! said! that! cannot! be! as! it’s! prohibited! by! the!
NIRC.!So!by!implication!it!is!probably!abandoning!the!32%!and!
applying!the!5/10%!tax!rate!for!liquidating!dividends!given!to!a!
shareholder!who!is!a!corporation.!
133. BIR!Ruling!039402!4!In!simple!terms,!the!dissolving!corporation,!
who!exchanges!stocks!for!real!property!as!liquidating!dividends,!
is! not! liable! for! tax! on! such! dividends! –! because! said!
corporation! has! no! gain.! For! a! shareholder! receiving! the!
liquidating! dividends,! he! is! subject! to! 25! %! ! or! 32%! (if!
corporation)!ordinary!income!tax!rate!on!his!gains,!and!not!the!
5%/10%!final!tax!rates.!
!
iv. “From$whatever$source”$
134. James! vs.! United! States! –! A! gain! constitutes! taxable! income!
when! its! recipient! has! such! control! over! it! that,! as! a! practical!
matter,! he! derives! readily! realizable! economic! value! from! it!
even!if!it!came!from!an!unlawful!source,!even!embezzlement.!
135. Section! 50,! RR! 2! –! Cancellation! or! forgiveness! of! debt! may!
amount!to!:!
• Payment! of! income! –! that’s! taxable.! A! person! performs!
service!for!a!creditor!who!cancels!his!debt.!
• A! capital! transaction! –! that’s! taxable.! A! corporation! forgives!
the!debt!of!a!stockholder,!that’s!like!paying!a!dividend.!
• A! gift! –! that’s! exempt.! A! creditor! merely! wants! to! benefit! a!
debtor!by!cancelling!the!debt!without!any!consideration.!
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136. RMC! 13480! –! Treatment! of! tax! refunds/tax! credits! when! is! applied! for! by! someone! who! has! already! severed! his!
received.! Atty.! Montero! said! that! tax! credits! are! not! income! connection!with!his!employer,!it!follows!that!the!terminal!leave!
even! if! successfully! refunded.! Being! previously! part! of! the! pay! (which! is! its! cash! value)! is! not! longer! compensation! for!
deductions,!a!refund!removes!them!from!being!deemed!as!part! services!rendered.!Hence,!it!cannot!be!viewed!as!salary!–!thus,!
of!such.! exempted!from!withholding!(income)!tax.!
! 141. Intercontinental! Broadcasting! vs.! Amarilla! 4! the! retirement!
v. Inventories$ benefits!to!be!exempt!from!the!withholding!tax,!the!taxpayer!is!
137. BIR!Ruling!DA!128408!4!CIR!granted!Shell’s!request!to!change!its! burdened!to!prove!the!concurrence!of!the!following!elements:!
inventory!system!so!that!the!latter!may!be!consistent!with!the! [P41045041]!
inventory! system! used! by! its! parent! company! and! other! sister! • A! reasonable! private! benefit! plan! (approved! by! the!
companies! around! the! world.! Basically,! when! you! want! to! BIR)!is!maintained!by!the!employer!
change!your!inventory!system!ask!permission!first!from!BIR!and! • The! retiring! official! or! employee! has! been! in! the!
give!valid!reasons.! service!of!the!same!employer!for!at!least!10!years!
! • The! retiring! official! or! employee! is! not! less! than! 50!
C. Exclusions$ years!of!age!at!the!time!of!his!retirement,!and!
i. Retirement$benefits,$etc.$$ • The!benefit!can!be!availed!of!only!once.!
138. CIR! vs.! CA,! GCL! 4! Interest! Income! earned! by! a! retirement! fund! 142. RMC! 2742011! –! Contributions! to! Pag4ibig,! GSIS,! SSS,! Life!
from! its! investments! are! exempted! from! final! Insurance,! Pre4Need! Plan! in! excess1 of1 the1 mandatory1 monthly1
withholding/income!tax.! contributions! (ie,! voluntary! contributions)! are! now! part! of! the!
139. CIR!vs.!CA,!Castaneda!4!Terminal!leave!pay!(payment!for!unused! gross! income! and! are,! therefore,! taxable.! Only!
leaves! after! retirement! 4! a! retirement! benefit),! received! by! a! mandatory/compulsory! contributions! are! exempt! from!
government! official! or! employee! is! not! subject! to! withholding! withholding!tax!on!compensation.!
(income)!tax!as!it!is!not!part!of!his/her!salary.! !
140. Re:! Request! of! Atty.! Bernardo! Zialcita! 4! The! commutation! of! ii. Income$derived$by$foreign$government$
leave! credits! is! commonly! known! as! terminal! leave,! which! is! 143. CIR! vs.! Mitsubishi! Metal! Corporation! 4! Income! derived! by! a!
applied! for! by! an! officer! or! employee! who! retires,! resigns! or! foreign! government! is! exempted! from! tax! but! that! does! not!
separated!from!the!service!through!no!fault!of!his!own.!Since!it! include!the!situation!where!a!corporation!registered!under!the!

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law!of!a!foreign!government!got!a!loan!from!such!government!
and! lent! the! money! obtain! from! such! loan! to! a! domestic!
corporation!and!thus!derived!interest!income!from!it.!In!such!a!
case,!it!is!the!foreign!corporation!who!earns!the!interest!income!
in! the! Philippines! and! not! the! foreign! government.! Being! so,!
such!income!is!not!exempt.!
! per!annum;!
iii. De$minimis/$PERA$
144. Republic! Act! 9505! –! Personal1 Equity1 and1 Retirement1 Account1
(PERA).!!
• Tax!treatment!of!contributions:!
o Contributor! shall! be! given! an! income! tax!
credit! equivalent! to! 5%! of! the! total! PERA!
contribution,! provided! that! there! can! be! no!
instance! of! a! refund! of! said! tax! credit! arising!
from! PERA! contributions.! If! contributor! is! an!
OFW,! he! shall! be! entitled! to! claim! tax! credit!
from! any! tax! payable! to! the! national!
government!under!the!NIRC.!
145. RR! 542011! –! The! following! is! an! exclusive1 list! of! de! minimis!
benefits!that!are!exempt!from!fringe!benefit!tax!(FBT),!income!
tax! (IT)! and! withholding! tax! (WT)! on! Compensation! Income! of!
both!managerial!and!rank!&!file!employees:!!
• Monetized! unused! vacation! leave! credits! of! private!
employees!not!exceeding!ten!days;!
• Monetized!value!of!vacation!and!sick!leave!credits!paid!
to!government!employees;!
CROMBONDS$201242013$
• Medical! cash! allowance! to! dependents! of! employees,!
not! exceeding! P750! per! employee! per!semester! of!
P125!per!month;!
• !Rice!Subsidy!of!P1,!500!or!one!(1)!sack!of!50kg!of!rice!
per!month!amounting!to!not!more!than!P1,500;!
• Uniform! and! clothing! allowance! not! exceeding! P4,000!
• Actual! medical! expenses! not! exceeding! P10,000! per!
annum;!
• Laundry!allowance!not!exceeding!P300!per!month;!
• Annual!achievement!awards!with!an!annual!monetary!
value!not!exceeding!P10,000;!
• Gifts! during! Christmas! and! major! anniversaries! not!
exceeding!P5,000!per!annum;!
• Daily!meal!allowance!for!overtime!work!and!night!shift!
not!exceeding!25%!of!the!basic!minimum!wage. !
146. RR!1742011!–!Implements1the1tax1provisions1of1RA195051or1PERA1
Act1 of1 2008.! A! Qualified! Contributor! shall! be! entitled! to! a! tax!
credit! in! the! amount! of! 5%! of! the! aggregate! Qualified! PERA!
Contributions! made! in! one! calendar! year.! An! employee!
qualified! contributor! shall! be! issued! a! Certificate! of!
Entitledment! to! 5%! tax! credit! while! a! self4employee! shall! be!
issued!a!PERA!TCC!by!the!Bureau.!However,!if!the!Contributor!is!
an!OFW,!he!shall!be!entitled!to!claim!the!5%!tax!credit!against!
any!national!revenue!tax!liabilities.!!
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147. RR! 842012! –! Amended1 regulation1 on1 de1 minimis1 benefits.!
Uniform! and! clothing! allowance! is! increased! to! P5,000!
(previously!at!P4,000).!
! losses! in! the! Philippines,! is! still! subject! to! withholding! tax! as! the!
III. $General$Principles$
$ reinsure! The! domestic! corporation! against! losses! arising! from! the!
IV. Source$of$Income$Rules$
A. Gross$income$from$sources$within$Phils.$$
148. CIR! vs.! Marubeni! Corporation! 4! ! If! a! project! in! the! Philippines! is!
divisible,! one! performed! abroad! and! the! other! performed! in! the!
country,!only!the!latter!part!will!be!taxable.!Otherwise,!if!indivisible,!
then!everything!is!taxable.!In!this!case!SC!said!it!was!divisibleT!
149. CIR! vs.! BOAC! 4! he! absence! of! flight! operations! to! and! from! the!
Philippines!is!not!determinative!of!the!source!of!income!or!the!site!
of! income! taxation.! For! the! source! of! income! to! be! considered! as!
coming! from! the! Philippines,! it! is! sufficient! that! the! income! is!
derived!from!activity!within!the!Philippines.!In!BOAC's!case,!the!sale!
of!tickets!in!the!Philippines!is!the!activity!that!produces!the!income.!
The!tickets!exchanged!hands!here!and!payments!for!fares!were!also!
made! here! in! Philippine! currency.! The! site! of! the! source! of!
payments! is! the! Philippines.! The! flow! of! wealth! proceeded! from,!
and! occurred! within,! Philippine! territory,! enjoying! the! protection!
accorded!by!the!Philippine!government!–!thus,!taxable.!
150. CIR!v.!CTA!and!Smith!Kline!&!French!Overseas!!4!Share!by!a!domestic!
corporation! for! the! operating! expenses! of! its! main! office/parent!
company! are! deductible! since! such! domestic! corporation! also!
benefits!from!the!operation!of!said!office/company.!
CROMBONDS$201242013$
151. Philippine!Guaranty!Co.,!Inc.!vs.!CIR!!4!Reinsurance!contracts!entered!
into! by! a! Domestic! insurance! company! with! a! foreign! insurance!
company! where! in! the! latter! will! assume! risk! of! the! former! for! its!
transactions! or! activities! that! constituted! the! undertaking! to!
original! insurances! in! the! Philippines! were! performed! in! the!
Philippines.!What!is!controlling!is!not!the!place!of!business,!but!the!
place!of!activity!that!created!the!income.!
152. Howden! &! Co.,! Ltd.! vs.! CIR! 4! The! source! of! an! income! is! the!
!
property,! activity! or! service! that! produced! the! income. The!
reinsurance! premiums! by! virtue! of! contracts,! had! for! their! source!
the! undertaking! to! indemnify! the! domestic! corporation! against!
liability.! Said! undertaking! is! the! activity! that! produced! the!
reinsurance! premiums,! and! the! same! took! place! in! the! Philippines.!
Thus,!taxable!by!the!BIR.!
153. Philippine! American! Life! Insurance! Company,! Inc.! vs.! CTA! 4!
Compensation! for! advisory! services! (rendered! by! a! non4resident!
foreign! corporation! not! doing! business! in! the! Philippines! to! a!
domestic! corporation)! is! taxable! since! it! is! considered! “rentals! and!
royalties!from!properties!located!in!the!Philippines”!
154. CIR! vs.! Baier4Nickel! 4! The! source! of! an! income! is! the! property,!
activity! or! service! that! produced! the! income.! With! respect! of!
rendition!of!labor!or!personal!service,!as!in!the!instant!case,!it!is!the!
place! where! the! labor! or! service! is! performed! that! determines! the!
source!of!income.!
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155. Quill! Corp.! vs.! North! Dakota! 444! applied! the! Bellas! Hess! case! bright!
line! rule! which! held! that! a! seller! whose! only! connection! with!
customers! in! the! State! is! by! common! carrier! or! by! mail! lacks! the!
substantial!nexus!required!of!the!Commerce!Clause!to!allow!a!State!
to! impose! the! duty! of! use! tax! collection.! Hence,! there! must! be!
physical! presence! in! a! state! for! a! corporation! to! be! liable! for! sales!
and!use!taxes.!
156. Vodafone! International! Holdings! B.V.! vs.! Union! of! India! &! Anr.! 444!
Vodafone! is! not! liable! to! pay! capital! gains! tax! to! the! Indian!
authorities! the! indirect! transfer! of! capital! assets! situated! in! India.!
The!transaction!between!between!Vodafone!(Netherlands)!and!CGP!
(Cayman!Islands)!is!one!between!two!non4residents!with!no!taxable!
presence!in!India.!!
• The! Indian! Tax! Code! states! that! “all! income! accruing! or!
arising,! whether! directly! or! indirectly,! through! or! from! any!
business!connection!in!India,!or!through!or!from!any!property!
in!India,!or!through!or!from!any!asset!or!source!of!income!in!
India,! or! through! the! transfer! of! a! capital! asset! situated! in!
India!shall!be!deemed!to!accrue!in!India.”!!
• The! terms! “directly! or! indirectly”! must! be! construed! to!
qualify!income!and!is!not!meant!to!expand!to!the!transfer!of!
capital!assets.!The!section!does!not!apply!to!indirect!transfers!
of!capital!assets!in!India.!
157. RAMO! 1486! 444! Imposes! tax! on! the! gross! income! generated! from!
constructive!trading!and!commission!income!derived!from!brokering!
activities!of!Philippine!branches!of!multinational!entities!engaged!in!
trading!activities.!
CROMBONDS$201242013$
158. RAMO! 1495! 444! Amended! and! superceded! RAMO! 1486! to! further!
determine! taxable! income! of! multinational! entities! to! include!
Philippine! branches! and! liaison! offices! engaged! in! soliciting! orders,!
purchaser,! service! contracts,! trading,! construction! and! other!
activities!in!the!Philippines.!
159. RAMO! 4486! 444! Guidelines! in! auditing! home! office! overhead!
expenses:!
1. Functional! analysis! –! determine! which! functions! are!
performed! by! the! home! office! and! that! which! is! by! the!
local!branch.!
2. On!the!basis!of!the!functional!analysis,!determine!whether!
the! expense! is! (a)! relevant/necessary! to! the! local! branch!
and!(b)!reasonable!and!ordinary.!
3. If! the! deductions! cannot! be! definitely! allocated,! a!
breakdown!or!schedule!of!home!or!foreign!office!expenses!
being!pro4rated!together!with!an!explanation!of!the!nature!
of!each!expense!is!required.!
!
V. Deductions$
A. Business$Expenses!444!Allowable!deductions!may!be!claimed!provided!that!
that! business! entity! complied! with! its! duty! to! withhold! taxes! paid! to! the!
government.!!
160. RA! 10028:! Expanded! Breastfeeding! Promotion! Act! 444! Expenses!
incurred!by!a!private!health!and!non4health!facility!establishment!
or!institution!pursuant!to!this!act!shall!be!deductible!expenses!for!
income! tax! purposes! up! to! twice! the! actual! amount! incurred!
provided:!
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1. That! the! deduction! shall! apply! for! the! taxable! period!
when!the!expenses!were!incurred!
2. That! the! facilities! shall! comply! with! this! Act! within! 6!
months!after!its!approval!
3. That!such!facilities!shall!secure!a!"Working!Mother4Baby4
Friendly! Certificate"! from! the! DOH! to! be! filed! with! the!
BIR.!
161. RA! 8502:! Jewelry! Industry! Development! Act! 444! Deduction! from!
taxable! income! of! fifty! percent! (50%)! of! expenses! incurred! in!
training! schemes! in! connection! with! the! Act! and! which! shall! be!
deductible!during!the!financial!year!the!expenses!were!incurred.!
162. RA!8525:!Adopt!a!School!Act!444!deduction!from!the!gross!income!
equivalent! to! fifty! percent! (50%)! of! expenses! incurred! in!
connection!with!the!said!act.!
163. RA! 999:! Free! Legal! Assistance! Act! ! 444! A! lawyer! or! professional!
partnerships!rendering!actual!free!legal!services,!as!defined!by!the!
Supreme! Court,! shall! be! entitled! to! an! allowable! deduction! from!
the!gross!income,!the!amount!that!could!have!been!collected!for!
the!actual!free!legal!services!rendered!or!up!to!ten!percent!(10%)!
of! the! gross! income! derived! from! the! actual! performance! of! the!
legal!profession,!whichever!is!lower.!
164. CIR! v.! Isabela! Cultural! Corp.! 444! The! professional! fees! incurred! in!
1984! and! 1985! cannot! be! claimed! as! deductions! in! 1986.! The!
failure!to!determine!the!exact!amount!of!the!expense!during!the!
taxable! year! cannot! be! attributed! solely! to! the! firm’s! delayed!
billing.!From!the!nature!of!the!claimed!deductions!and!the!span!of!
time!during!which!the!firm!was!retained,!ICC!can!be!expected!to!
CROMBONDS$201242013$
have! reasonably! known! the! retainer! fees! charged! by! the! firm! as!
well!as!the!compensation!for!its!legal!services.!The!expenses!could!
be!determined!and!were!already!incurred.!
165. CIR!v.!General!Foods!Phils.!Inc.!444!2!kinds!of!advertising:!
1. To!stimulate!the!current!sale!444!except!as!to!the!question!of!
the! reasonableness! of! amount,! there! is! no! doubt! such!
expenditures! are! deductible! as! business! expenses.! (Eg.!
Samsung!promo!for!a!limited!period!of!time)!
2. To! stimulate! the! future! sale! 444! involves! expenditures!
incurred,!in!whole!or!in!part,!to!create!or!maintain!some!form!
of! goodwill! for! the! taxpayer’s! trade! or! business! or! for! the!
industry! or! profession! of! which! the! taxpayer! is! a! member.!!!!
The! protection! of! brand! franchise! is! a! capital! expenditure!
which!should!be!spread!out!over!a!reasonable!period!of!time.!
(Eg.!Globe’s!general!advertisement)!
166. Aguinaldo! Industries! Corp.! v.! CIR! 444! The! bonus! given! to! the!
officers!as!profit!realized!from!the!sale!of!land!cannot!be!deemed!
a!deductible!expense.!The!sale!was!effected!through!a!broker!who!
was! paid! a! commission! for! his! services.! There! is! no! evidence! of!
any! service! actually! rendered! by! the! officers! which! could! be! the!
basis!of!a!selling!expense.!
• Distribution! of! profits! –! BIR! would! normally! treat! it! as!
“dividends”!in!order!for!it!not!to!be!deductible.!Business!
entities! on! the! other! hand! treat! it! as! “salaries”! in! order!
to!make!it!deductible!from!their!gross!income.!
167. Atlas!Consolidated!Mining!v.!CIR!444!Expenses!paid!P.K.!Macker!&!
Co.! (public! relations! firm)! as! compensation! for! services! carrying!
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on! the! selling! campaign! is! not! deductible! because! expenses!
relating!to!recapitalization!and!reorganization!of!the!corporation,!
promotion!expenses,!and!commission!or!fees!paid!for!the!sale!of!
stock! reorganization! are! capital! expenditures.! Likewise,! litigation!
expenses! incurred! in! defense! or! protection! of! title! are! capital! in!
nature! and! not! deductible.! Stock! listing! expenses! are! deductible!
because! these! are! usually! paid! annually! and! deducted! from! the!
year!incurred.!
168. Zamora!v.!CIR!444!Promotion!expenses!are!allowed!as!deductions,!
but! that! the! same! must! be! substantiated.! Since! the! aggregate!
expense!was!not!substantiated,!50%!was!considered!as!promotion!
expenses! and! 50%! as! Esperanza’s! personal! expenses.! This! is! fair!
and! reasonable! because! where! absolute! certainty! is! impossible,!
courts!should!make!as!close!an!approximation!as!it!can.!
• Compare!this!with!the!“Cohan!Rule”!in!the!US!which!is!an!
exception! to! stringent! recordkeeping! requirements,!
allowing!taxpayers!to!prove!by!"other!credible!evidence"!
that! they! actually! incurred! the! expenses! for! deductible!
purposes.!This!is!not!allowed!in!the!Philippines.!
169. CM!Hoskins!&!Co.!v.!CIR!444!Hoskins!&!Co.!may!not!be!allowed!to!
deduct! the! payment! of! P100,000! to! its! founder! and! controlling!
stockholder,!Hoskins!representing!50%!of!the!8%!supervision!fees!
the! company! received! as! managing! agent! for! Paradise! Farms.! It!
failed! to! satisfy! the! reasonableness! requirement! because! this!
would! total! an! amount! double! the! company’s! reported! net!
income.!
CROMBONDS$201242013$
170. Calanoc!v.!CIR!444!Expenses!paid!for!police!protection!is!illegal!as!it!
is!a!consideration!given!for!the!performance!by!the!police!of!the!
functions!required!of!them!to!be!rendered!by!law.!
171. Kuenzie!&!Streiff!Inc.!v.!CIR!444!the!bonuses!to!resident!officers!and!
employees! were! reasonable! taking! into! account! the! situation! at!
the!time!when!the!services!were!rendered:!unsettling!conditions!
after!the!war,!the!imposition!of!controls!on!exports!and!imports,!
and! the! use! of! foreign! exchange! which! resulted! in! diminution! of!
the!amount!of!business.!
172. RR! 1042002! 444! Authorizes! the! imposition! of! a! ceiling! on!
entertainment,!amusement,!and!recreational!expenses.!!Sellers!of!
goods!or!properties!are!allowed!to!deduct!0.5%!of!their!net!sales!
as! representation! expenses! while! sellers! of! services! are! granted!
1%!of!their!net!revenues!as!representation!expenses.!
173. RR! 142009! 444! Sales! discounts! given! to! persons! with! disabilities!
shall! be! deductible! from! gross! income! subject! to! certain!
conditions.!
174. RR! 742010! 444! Discounts! given! to! senior! citizens! on! certain! goods!
and!services!shall!be!deductible!from!gross!income.!Also,!private!
establishments! employing! senior! citizens! shall! be! entitled! to!
additional! deductions! from! gross! income! equivalent! to! fifteen!
(15%)! of! the! total! amount! paid! as! salaries! and! wages! to! senior!
citizens.!
!
!
B. Interest$
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175. Paper! Industries! Corp.! v.! CA! 444! General! rule! is! that! interest!
expenses! are! deductible! against! gross! income! and! this! certainly!
includes!interest!paid!under!loans!incurred!in!connection!with!the!
carrying!on!of!the!business!of!the!taxpayer.!
176. CIR! v.! Vda.! De! Prieto! 444! Although! interest! payment! for! delinquent!
taxes! is! not! deductible! as! tax! under! Section! 30(c)! of! the! Tax! Code! and!
section!80!of!the!Income!Tax!Regulations,!the!taxpayer!is!not!precluded!
thereby!from!claiming!said!interest!payment!as!deduction!under!section!
30(b)!of!the!same!Code!(now!34C!and!34B).! Tax!obligations!constitute!
indebtedness!for!purposes!of!deduction!from!gross!income!of!the!
amount!of!interest!paid!on!indebtedness!
177. RR!1342000!444!In!allowing!deductability!of!interest!expenses,!the!
following!are!required:!
1. the!interest!payment!arrangement!must!not!be!between!
related!taxpayers!
2. the! interest! must! not! be! incurred! to! finance! petroleum!
operations!
3. in! case! of! interest! incurred! to! acquire! property! used! in!
trade,! business,! or! exercise! of! profession,! the! same! was!
not!treated!as!a!capital!expenditure!
Provided,! that! limitation! in! that! the! amount! of! interest! expense!
paid! or! incurred! by! a! taxpayer! in! connection! with! his! trade,!
business,! or! exercise! of! a! profession! from! an! existing!
indebtedness!shall!be!reduced!by!an!amount!equal!to!38%!of!the!
interest! income! earned! which! had! been! subject! to! final!
withholding!taxes.!
CROMBONDS$201242013$
178. BIR! Ruling! No.! 006400! 444! PNB! may! not! claim! a! deduction! of!
interest! expense! from! treasury! bonds! as! payment! for! the!
government’s! liability.! Generally,! the! amount! of! interest! paid! or!
incurred! on! indebtedness! in! connection! with,! business,! trade,! or!
profession! is! allowed! as! deduction! from! gross! income.! The! allowable!
deduction!is!reduced!if!the!taxpayer!has!derived!certain!income!interest!
which! had! been! subjected! to! final! withholding! tax.! This! limitation! on!
the!deductibility!of!interest!expenses!applies!whether!or!not!a!tax!
arbitrage!scheme!was!entered!into!by!the!taxpayer.!
!
C. Taxes$
179. CIR!v.!Lednicky!444!The!right!to!deduct1income1taxes!paid!to!foreign!
government!from!the!taxpayer's!gross!income!is!given!only!as!an!
alternative!or!substitute!to!his!right!to!claim!a!tax1credit!for!such!
foreign! income! taxes! under! section! 30! (c)! (3)! and! (4).! In! effect,!
unless!the!alien!resident!has!a!right!to!claim!such!tax!credit!if!he!
so! chooses,! he! is! precluded! from! deducting! the! foreign! income!
taxes!from!his!gross!income.!This!is!to!prevent!the!taxpayer!from!
claiming! twice! the! benefits! of! his! payment! of! foreign! taxes,! by!
deduction!from!gross!income!(subs.!c41)!and!by!tax!credit!(subs.!c4
3).!
!
$
31!