PM REYES NOTES ON TAXATION I:

GENERAL PRINCIPLES
Concept, Nature and Characteristics of
Taxation and Taxes
Q1.What is taxation?
Taxation is the power by which the sovereign raises
revenue to defray the expenses of government. It is a
way of apportioning the cost of government among
those who is some measure are privileged to enjoy
its benefits and must bear its burden.
Q1.1. What is the rationale of taxation?
In CIR VS. ALGUE [158 SCRA 9], the Supreme Court
stated that taxes are what we pay for civilized
society. Hence, despite the natural reluctance to
surrender part of one’s hard-earned income, every
person who is able must contribute his share in the
running of the government and the latter, for its part,
is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of
the people and enhance their moral and material
values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat
of power
2. It is proportionate in character;
3. It is generally payable in money;
4. It is levied on persons or property; Page | 1
5. It is levied by the State which has jurisdiction
over the person or property;
6. It is levied by the law-making body; and
7. It is levied for public purpose or purposes
Q1.4. What is the lifeblood theory?
According to this theory, the existence of government
is a necessity; it cannot exist nor endure without the
means to pay its expenses; and for those means, the
government has the right to compel all its citizens
and property within its limits to contribute in the form
of taxes.
Taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance.
On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate
the very reason for government itself. It is therefore
necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of
the common good, may be achieved. (CIR VS. ALGUE
[158 SCRA 9]).

Taxation is a necessary burden to preserve the
States sovereignty and to allow the State to protect
the citizenry and provide them with services.
(PHILIPPINE GUARANTY V. CIR [13 SCRA 775])
Q1.2. What is the benefits-received
principle?
According to this principle, the basis of taxation is
found in the reciprocal duties of protection and
support between the State and its inhabitants. In
return for his contribution, the taxpayer receives the
general advantages and protection which the
government affords the taxpayer and his property.
Q1.3. What are the essential
characteristics of a tax?
The essential characteristics of a tax are:
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 (CIR V.
CEBU PORTLAND [156 SCRA 535]).
Q1.4.1 Where is the application of the
lifeblood theory manifested?
It is illustrated in the following cases:
1. The prohibition against set-off of taxes [see
Section 204(C), NIRC]
2. The prohibition against the issuance of an
injunction to restrain the collection of taxes
3. Presumption of correctness of assessments
In CIR V. CEBU PORTLAND [156 SCRA 535], the
taxpayer argued that that the deficiency assessment

1. It is a enforced contribution;

PM REYES NOTES ON TAXATION I: GENERAL PRINCIPLES (Updated 28 December 2012)

BY PIERRE M ARTIN DE LEON REYES

This reviewer is a compilation of personal notes in Taxation One and notes and lectures from Atty. Gruba and Atty. Montero. References have
also been made to the following books: DE LEON & DE LEON, J R. THE FUNDAMENTALS OF TAXATION (2012); DE LEON & DE LEON, JR.
COMPREHENSIVE REVIEW OF TAXATION (2010); VITUG & ACOSTA. T AX LAW AND JURISPRUDENCE (2006); DOMONDON, TAXATION VOLUME 1
GENERAL PRINCIPLES (2009); CO-UNTIAN, JR. TAX DIGEST (2009); and MAMALATEO, REVIEWER ON TAXATION (2008).

Possessors are granted the right to reproduce and distribute this reviewer as well as the right to convert the work to any medium for the
purpose of preservation and/or continued distribution provided that the author’s name remains clearly associated with the work and that no
alterations of the form and content are made.
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
cannot be enforced because it is still being contested. Q1.4.2 What is the exception to the
The Supreme Court held that this argument loses prohibition on the issuance of an
sight of the urgency of the need to collect taxes as injunction to restrain the collection of
the lifeblood of the government. If the payment of taxes?
taxes could be postponed by simply questioning heir
validity, the machinery of the state would grind to a
An injunction may be issued to restrain the collection
halt and all government functions would be
of taxes “when in the opinion of the Court the
paralyzed.
collection may jeopardize the interest of the
Government and/or the taxpayer, the Court at any
In PHILIPPINE G UARANTY V. CIR [13 SCRA 775], the
stage of the proceeding may suspend the said
Supreme Court stated that the requirement that the
collection and require the taxpayer either to deposit
withholding agent should withhold the
the amount claimed or to file a surety bond for not
tax before addressing a query to the Commissioner
more than double the amount with the Court.”
of Internal Revenue is not without meaning for it is in
(Section 11, RA 1125, as amended by RA 9282).
keeping with the general operation of our tax laws:
payment precedes defense. Likewise, validity of a tax
In resolving the issue of whether the CTA may issue
cannot be assailed until after the taxpayer has paid
writs of injunction to enjoin the CIR from collecting
the tax under protest. By questioning a tax’s legality
taxes due in the exercise of its original jurisdiction,
without first paying it, a taxpayer, in collusion with
the Supreme Court held in CIR VS. J.C. YUSECO that
BIR officials, can unduly delay, if not totally evade,
nowhere does the law vest in the CTA original
the payment of such tax.
jurisdiction to issue writs of prohibition or injunction
independently of, and apart from, an appealed case.
In CIR v. CTA [234 SCRA 348], the Supreme Court
The writ of prohibition or injunction that it may issue
held that government cannot and must not be
to suspend the collection of taxes, is merely ancillary
stopped in matters involving taxes as “they are the
to and in furtherance of its appellate jurisdiction.
lifeblood of the nation through which the government
Taxes being the chief source of revenue for the
agencies continue to operate and with which the
government to keep it running, must be paid
State effects its functions for the welfare of its
immediately and without delay. A taxpayer who feels
constituents.
aggrieved by a decision of a revenue officer and
appeals to the CTA must pay the tax assessed,
In PHILIPPINE NATIONAL OIL COMPANY VS. CA [457
except if the CTA opines that collection would
SCRA 32], the Supreme Court held that the
jeopardize the interest of the Government and/or
Government cannot be estopped from collecting
taxpayer, it could suspend the collection and require
taxes by the mistake, negligence, or omission of its
the taxpayer to deposit the amount claimed or to file
agents. Upon taxation depends the Government’s
a bond
ability to serve the people for whose benefit the taxes
are collected. Neglect or omission of government
officials entrusted to collect taxes should not be Q1.5. What are the aspects of taxation
allowed to bring harm or detriment to the people. (three stages of taxation)?
The three stages or aspects of taxation are:
In SEC. OF FINANCE VS. ORO MAURA SHIPPING LINES
[593 SCRA 14], the Supreme Court opined that
1. Levy – This refers to the enactment of a law by
assuming further that MARINA merely committed a
Congress imposing a tax
mistake in approving the vessel’s proposed cost and
2. Assessment and collection – This is the act of
that the Collector of the Port of Manila similarly erred,
administration and implementation of the tax law
we reiterate the legal principle that estoppel generally
by the executive department through the
finds no application against the State when it acts to
administrative agencies
rectify mistakes, errors, irregularities, or illegal acts of
3. Payment – This is the act of compliance by the
its officials and agents irrespective of rank. The rule
taxpayer
holds true even if the rectification prejudices parties
who had meanwhile received benefits.

PIERRE MARTIN DE LEON REYES 2

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
Q1.6. What are the basic principles of a
sound tax system?
The basic principles are the following:
1. Fiscal Adequacy – The source of government
revenue must be sufficient to meet governmental
expenditures and other public needs
2. Theoretical Justice – a good tax system must
be based on the taxpayer’s ability to pay
3. Administrative feasibility – taxes should be
capable of being effectively enforced.
In CHAVEZ V. ONGPIN [186 SCRA 331], at issue was
the increase, via an Executive Order, of the property
values for purposes of real property taxes. The
Supreme Court held that to continue collecting at
valuations arrived at several years ago is not in
consonance with a sound tax system. Fiscal
adequacy requires that the sources of revenue must
be adequate to meet government expenditures.
In DIAZ V. SEC. OF FINANCE [654 SCRA 97], one of the
grounds raised in assailing the validity of the
imposition of VAT on the collection of toll way
operators was that it violated the principle of
administrative feasibility.1 The Supreme Court held
that while administrative feasibility is a canon of a
sound tax system, the non-observance thereof will
not render a tax imposition invalid except to the
extent that specific constitutional or statutory
limitations are impaired.
Q1.7. What are the non-revenue (or
sumptuary) objectives of taxation?
1. Taxation can strengthen anemic enterprises;
2. Taxes may be increased in period of prosperity to
curb spending power and halt inflation and
lowered in periods of slump to expand business
and ward off depression
3. Taxes on imports may be increased to protect
local industries
4. Taxes on imported goods may be used as a
bargaining tool by a country by setting trarrif rates
first at a relatively high level before trade
negotiations
1 2. Legislative in character
The petitioner asserted that the substantiation requirements for
claiming the input VAT were impractical and incapable of
implementation as in order to claim input VAT, the name, address
and TIN of the toll way user must be indicated in the VAT receipt or
invoice. In addition, the rounding off of the toll rate and putting the
excess collection in an escrow is illegal while the giving of the
change to meet the exact toll rate would be a logistical nightmare.
PIERRE MARTIN DE LEON REYES
5. Taxes can discourage certain business (e.g.
tobacco and alcohol)
6. Taxes can also minimize inequity
In PHILIPPINE COCONUT PRODUCERS FEDERATION VS.
PCGG [178 SCRA 236], the Supreme Court held that
the coconut industry is one of the major industries
supporting the national economy. It is therefore, the
State’s concern to make it a strong and secure
source not only of the livelihood of a significant
segment of the population but also of export earnings
the sustained growth of which is one of the
imperatives of economic stability.
In PHILIPPINE HEALTH CARE PROVIDERS VS. CIR
[554 SCRA 411], the Supreme Court, on the issue of
whether Health maintenance organizations (HMOs)
were exempt from Documentary Stamp Tax (DST),
held that it is not the purpose of the government to
throttle private business. On the contrary, the
government ought to encourage private enterprise.
HMOs, just like any concern organized for a lawful
economic activity have a right to maintain a legitimate
business. Hence, HMOs should not be arbitrarily and
unjustly included in the DST coverage.
Q2.What is the nature of the power of
taxation?
The power of taxation is:
1. An inherent attribute of sovereignty
The power of taxation is inherent in the State, being
an attribute of sovereignty. 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 abuse is to be found only in the
responsibility of the legislature which imposes the tax
on the constituency who are to pay it. (MACTAN CEBU
INTERNATIONAL AIRPORT AUTHORITY VS. MARCOS [261
SCRA 667])
The power of taxation can exist apart from
constitutions and without being expressly conferred
by the people. It can be exercised by the government
even if the Constitution is entirely silent on the
subject
The power of taxation is essentially a legislative
function. Taxation is an attribute of sovereignty. It is
the strongest of all powers of the government. There
is a presumption in favor of legislative determination.
3
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
Public policy decrees that since upon the prompt
collection of revenue depends the very existence of
government itself, whatever determination shall be
arrived at by the legislature should not be interfered
with, unless there be a clear violation of some
constitutional inhibition. (SARASOLA VS. T RINIDAD [40
PHIL.252])
The legislature has the inherent power to select the
subjects of taxation and to grant exemptions. The
reason for this is that classification has been a device
for fitting tax programs to local needs and usages in
order to achieve an equitable distribution of the tax
burden (GOMEZ V. PALOMAR [25 SCRA 827].
In responding to the issue on why the taxes collected
under the Sugar Stabilization Fund should be
exclusively spent in aid of the sugar industry and not
for other industries in need of similar protection, the
Supreme Court in LUTZ V. ARANETA [98 SCRA 149]
held that the Legislature is free to select the subjects
of taxation and it may determine within reasonable
bounds what is necessary for its protection and
expedients for its promotion.
3. Generally not delegated to executive or
judicial departments
c. When the delegation relates merely to
administrative implementation what may call
for some degree of discretionary powers
under a set of sufficient standards expressed
by law (see MACEDA VS. MACARAIG [197
SCRA 771])
4. Subject to constitutional and inherent
limitations
The power of taxation is not absolute. It subject to
certain limitations or restrictions.
In REYES V. ALMANZOR [196 SCRA 322], the Supreme
Court held that while the power to tax is the strongest
of all the powers of government, it is not unconfined
as there are restrictions. Adversely affecting as it
does property rights, both due process and equal
protection clauses of the Constitution may be
properly invoked to invalidate in appropriate cases a
revenue measure.
Q2.1. What is the scope of the
legislature’s taxing power?
The legislative taxing power or discretion extends to
the following:

As a general rule, the power to tax is purely 1. nature (kind of tax to be collected);
legislative and it cannot be delegated. 2. object (purpose for which the tax shall be levied);
3. extent (amount or rate of tax to be collected);
As exceptions, delegation is allowed in the following 4. coverage (the persons, property or occupation to
cases: be taxed);
5. apportionment of the tax (general or limited to a
a. Local governments in respect of matters of local particular locality or partly general or partly local);
concern to be exercise by the local legislative 6. method of collection; and
bodies (see Sec. 5, Article 10, 1987 7. situs (place) of taxation.
Constitution)
Q2.2. Differentiate the power to tax from
Note, however, that a municipal corporation has police power and the power of
no inherent right to impose taxes. Its power to tax eminent domain.
must always yield to a legislative act which is
superior having been passed by the state itself
which has the inherent power to tax. (see BASCO TAXATION EMINENT POLICE
DOMAIN POWER
VS. PAGCOR [197 SCRA 52)
Authority Only by the May be Only by
b. When allowed by the Constitution. Thus, the who government exercised by government or
Congress may, by law, authorize the President to exercises the or its political government or its political
power subdivisions political subdivisions
fix within specified limits and subject to such
subdivisions
limitations and restrictions as it may impose, tariff AND granted
rates, import and export quotas, tonnage and to public
wharfage dues, and other duties or imposts utilities
within the framework of the national development Purpose The property The property The use of the
is taken for is taken for properly is
program of the Government (see Sec. 28(2), the support of public use and regulated for
Article 6, 1987 Constitution) the must be promoting the

PIERRE MARTIN DE LEON REYES 4

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
government compensated general welfare be engaged (e.g. community
and is not
tax)
compensable
Persons Operates on Operates on Operates on a Property Tax Taxes assessed on all
affected a community an individual community or property or all property of a
or class of as owner of a class of certain class within the
individuals particular individuals jurisdiction of the taxing
property
Effect The money There is a There is no power (e.g. real estate tax)
contributed transfer of the transfer of title. Excise Tax Taxes laid upon the
becomes part right to At most, there manufacture, sale or
of the public property is restraint on consumption of commodities
funds the injurious
use of property within the country; upon
Benefits It is assumed He receives The person licenses to pursue certain
received that the the market affected occupations and upon
individual value of the receives corporate privileges (e.g.
receives the property taken indirect benefits
equivalent of from him as may arise value-added tax)
the tax in the from the
form of maintenance of As to who bears the burden
protection a healthy
and benefits economic
he receives standard of Direct Tax Taxes wherein both the tax
from the society liability as well as the impact
government or burden of the tax falls on
Amount of Generally, No amount Amount the same person (e.g.
imposition there is no imposed but imposed should
limit on the rather the not be more corporate and individual
amount of tax owner is paid than sufficient income tax)
that may be the market to cover license Indirect Tax Taxes wherein the tax liability
imposed value of and necessary
property taken expenses
falls on one person but the
Relationship Subject to Inferior to the Relatively free burden thereof may be
to certain impairment of from shifted or passed to another.
Constitution constitutional obligations of constitutional (e.g. value-added tax,
limitations; contracts limitations; it is
including the prohibition; superior to the
percentage taxes)
impairment of government impairment of
obligation of cannot contract As to purpose
contracts expropriate provision
property
which under a
General Taxes Taxes levied for the general
contract it had or ordinary purposes of
previously Government (e.g. income tax,
bound itself to value-added tax)
purchase
Special Taxes Taxes levied for a special
purpose (e.g. protective
Classifications and Distinctions tariffs, custom duties)

Q3.How are taxes classified? As to determination of amount (Tax Rates)

TAX DEFINITION Specific Taxes Tax which imposes a specific

sum by the head or number
As to subject matter or by some standard of
weight or measurement and
Personal Tax Taxes of a fixed amount upon which requires no
all persons of a certain class assessment beyond a listing
within the jurisdiction of the and classification of the
taxing power without regard subjects to be taxed (e.g.
to the amount of their taxes on distilled spirits)
property or the occupations of Ad Valorem Tax upon the value of the
businesses in which they may Taxes article or thing subject of

PIERRE MARTIN DE LEON REYES 5

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
taxation (e.g. real estate tax)
As to scope or authority imposing the tax
National Taxes Taxes levied by the National
Government (e.g. national
internal revenue taxes)
Local Taxes Taxes levied by the local
governments subject to such
guidelines and limitations as
the Congress may provide
(e.g. real estate tax)
According to graduation
(Tax base and Tax Rate)
Progressive Taxes imposed where the tax
taxes rate increases as the tax
base increases (e.g. income
tax)
Regressive Taxes imposed where the tax
taxes rate decreases as the tax
base increases.
Mixed The tax rates are partly
progressive and partly
regressive
Proportionate The tax rates are fixed (in
amounts or in percentage) on
a flat tax base) (e.g. real
estate tax)
Q3.1. How do you determine if a tax is a
property tax or an excise tax?
As held in the case of ASSOCIATION OF CUSTOMS
BROKERS VS. MUNICIPAL BOARD OF MANILA [95 PHIL.
107], a tax is in its nature an excise. It does not
become a property tax because it is proportioned in
amount to the value of the property used in
connection with the occupation, privilege or act which
is taxed. Every excise necessarily must finally fall
upon and be paid by property and so may be
indirectly a tax upon property; but if it is really
imposed upon the performance of an act, enjoyment
of a privilege, or the engaging in an occupation, it will
be considered an excise.
Q3.2. How do you determine if a tax is
direct or indirect?
Direct taxes are taxes wherein both the incidence
and liability for the payment of the tax as well as the
impact or burden of the tax falls on the same person.
On the other hand, indirect tax are taxes wherein
PIERRE MARTIN DE LEON REYES
the incidence of or the tax liability for the payment of
the tax falls on one person but the burden thereof can
be shifted or passed to another.
In CIR v. PLDT [478 SCRA 61]), the Supreme Court
distinguished direct taxes from indirect taxes by
stating that direct taxes are those that are extracted
from the very person who, it is intended or desired,
should pay them while indirect taxes are those that
are demanded, in the first instance, from, or are paid
by, one person in the expectation and intention that
he can shift the burden to someone else.
Q3.2.1 In the refund of indirect taxes,
who is the proper party to
claim the said refund?
In the refund of indirect taxes, the statutory taxpayer
is the proper party who can claim the refund (SILKAIR
VS. CIR [544 SCRA 100])
As held in the case of EXXONMOBIL V. CIR [640 SCRA
203], in the case of indirect taxes, it is the
manufacturer of the goods who is entitled to claim
any refund thereof. Indirect taxes paid by the
manufacturers or producers of the goods cannot be
refunded to the purchasers of the goods because the
purchasers are not the taxpayers (see CONTEX
CORPORATION VS. CIR [433 SCRA 577])
The liability for the payment of the indirect tax lies
only with the seller of the goods or services, not in
the buyer thereof. In indirect taxes, when the seller
passes on the tax to his buyer, he, in effect, shifts the
burden, not the liability to pay it, to the purchaser as
part of the price of goods sold or rendered (CIR v.
PLDT).
Q3.2.2 How were indirect taxes
distinguished from withholding
taxes in the recent case of Asia
International Auctioneers v. CIR
[G.R. 179115, Sept. 26, 2012]?
Indirect taxes, like VAT and excise tax, are different
from withholding taxes. To distinguish, in indirect
taxes, the incidence of taxation falls on one person
but the burden thereof can be shifted or passed on
to another person, such as when the tax is imposed
upon goods before reaching the consumer who
ultimately pays for it. On the other hand, in case of
withholding taxes, the incidence and burden of
taxation fall on the same entity, the statutory
taxpayer. The burden of taxation is not shifted to the
withholding agent who merely collects, by
withholding, the tax due from income payments to
6
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
entities arising from certain transactions and remits
the same to the government. 1. a special assessment can be levied only on land;
2. a special assessment cannot (at least in most
Q4.Distinguish taxes from other states) be made a personal liability of the person
impositions/exactions assessed;
3. a special assessment is based wholly on
benefits; and
Q4.1. How do you distinguish a tax from 4. a special assessment is exceptional both as to
a toll? time and locality.

Toll Tax Q4.4. How do you distinguish a tax from

Demand of proprietorship Demand of sovereignty a debt?
Paid for use of another’s Paid for the support of
property government Debt Tax
Amount depends upon Generally, no limit on the Generally based on Based on law
the cost of construction amount of tax that may contract
or maintenance of the be imposed Assignable Cannot generally be
public improvement used assigned
Imposed by the Imposed only by the May be paid in kind Generally payable in
government or private government money
individuals or entities May be the subject of Cannot be the subject of
set-off or compensation set-off
Person cannot be Imprisonment is a
Q4.2. How do you distinguish a tax from
imprisoned for non- sanction for non-payment
a penalty? payment
Governed by ordinary Governed by prescriptive
Penalty Tax periods of prescription periods provided under
Imposed as a Violation of tax laws may tax laws
punishment for violation give rise to imposition of Draws interest when it is Does not draw interest
of law or acts deemed a penalty so stipulated except only when
injurious delinquent
Designed to regulate Generally intended to
conduct raise revenue
Q4.5. How do you distinguish a tax from
May be imposed by the Imposed only by the
government or private government
a subsidy?
individuals or entities A subsidy is a legislative grant of money in aid of a
private enterprise deemed to promote a public
In the case of REPUBLIC OF THE PHILIPPINES VS. welfare. It is not a tax although it may be necessary
PATANAO [20 SCRA 712], the Supreme Court held to raise the money to pay the subsidy by means of a
that the acquittal of the taxpayer in the criminal tax.
proceeding does not necessarily entail exoneration
from his liability to pay the taxes.
Q4.6. How do you distinguish a tax from
customs duties and fees
Q4.3. How do you distinguish a tax from
a special assessment? 2 Customs Duties and fees are those charged upon
commodities on their being imported in or exported
As held in the case of T HE APOSTOLIC PREFECT OF from the country. Customs duties are taxes but a tax
THE M OUNTAIN PROVINCE V. T REASURER OF BAGUIO [71 is a broader term to include not only customs duties
PHIL. 547], the difference between a special but other taxes as well.
assessment and a tax is that:

2
A special assessment is a demand for contribution to help defray
the cost of improvement on real property owners of a particular
locale directly benefited by such improvement.

PIERRE MARTIN DE LEON REYES 7

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
Q4.7. How do you distinguish a tax from
revenue
Revenue is a broad term that includes not only taxes
but income from other sources as well.
Q4.8. How do you distinguish a tax from
a license fee?
As held in the case of PROGRESSIVE DEVELOPMENT
CORPORATION VS. QUEZON CITY [172 SCRA 629], the
term "tax" frequently applies to all kinds of exactions
of monies which become public funds. It is often
loosely used to include levies for revenue as well as
levies for regulatory purposes such that license fees
are frequently called taxes although license fee is a
legal concept distinguishable from tax: a license fee
is imposed in the exercise of police power primarily
for purposes of regulation, while a tax is imposed
under the taxing power primarily for purposes of
raising revenues (see also COMPANIA GENERAL DE
T ABACOS DE FILIPINAS V. CITY OF MANILA [8 SCRA
367].
Q4.8.1 What are the three types of license
fees?
The three types of license fees are:
1. License for the regulation of useful occupation or
enterprises
2. License for the regulation or restriction of non-
useful occupation or enterprises
3. License for revenue only3
(See VICTORIAS MILLING CO. VS. CIR [22 SCRA 13])
Q4.8.2 What is the importance of
determining whether a particular
imposition is a tax or a license
fee?
It is necessary because some limitations apply only
to one and not to the other, and for the reason that
exemption from taxes may not include exemption
from license fees.
Q4.8.3 What is a license tax and how do
you distinguish it from a license
fee?
As explained by the Supreme Court in the case of
VICTORIAS MILLING CO. VS. CIR [22 SCRA 13], the
term "license tax" has not acquired a fixed meaning.
3
This shouldn’t be a type of license fee. It is instead a license tax.
PIERRE MARTIN DE LEON REYES
It is often "used indiscriminately to designate
impositions exacted for the exercise of various
privileges." It does not refer solely to a license for
regulation. In many instances, it refers to "revenue-
raising exactions on privileges or activities." On the
other hand, license fees are commonly called taxes.
But, legally speaking, license taxes are "for the
purpose of raising revenues," in contrast to license
fees which are imposed "in the exercise of police
power for purposes of regulation."
Q4.8.4 What should be the extent of the
exaction for it to be considered a
license fee?
As held in the case of G.A. CUUNJIENG V. PATSTONE
[42 PHIL 818], the amount of the exaction must only
be of sufficient amount to include the cost of
licensing, regulating and surveillance.
Q4.8.4.1 Does the above rule apply to
all types of license fees?
No. In the case of license fees for non-useful
occupations, wider discretion in fixing the amount is
given to municipal corporations and the exaction may
be very large without necessarily being a tax. This is
so because municipal corporations are authorized to
enact ordinances to provide for the health and safety
and promote the morality, peace and general welfare
of its inhabitants. Thus, in the case of PHYSICAL
T HERAPY ORGANIZATION OF THE PHILIPPINES V.
MUNICIPAL BOARD OF THE CITY OF MANILA [101 PHIL.
1142], the Supreme Court found the imposed license
fee as reasonable as the practice of hygienic and
aesthetic massage not as a useful and beneficial
occupation which will promote and is conducive to
public morals.
Q5.How do you determine if an imposition is
a tax or a (regulatory) fee?
In determining whether an imposition is a tax or a
regulatory fee, one must inquire into the following:
1. The purpose of the imposition
2. The amount of the exaction
3. The designation
8
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
Q5.1. How do you distinguish a tax from
a regulatory fee in terms of their Q5.1.2.1. When the exaction is
imposed to make a private
purpose?
company viable, is it a fee
A fee is imposed for purposes of regulation (in or a tax?
exercise of police power) while a tax is imposed for
The exaction should be considered a tax. In
revenue generation purpose (the power of taxation).
PLANTERS PRODUCT V. FERTIPHIL CORPORATION [548
SCRA 485], an Letter of Instruction was issue
If the generating of revenue is the primary purpose
imposing a capital recovery component on the
and regulation is merely incidental, the imposition is a
domestic sales of all fertilizer grades and such
tax; but if the regulation is the primary purpose, the
exaction shall be collected until adequate capital was
fact that incidentally revenue is also obtained does
raised to make Planters Product, a private company,
not make the imposition a tax (PROGRESSIVE
viable. The Supreme Court held that the levy was
DEVELOPMENT CORPORATION V. Q UEZON CITY [172
invalid for not serving a public purpose as the
SCRA 629]).
ultimate beneficiary was a private company. Hence,
the primary purpose was for revenue generation.
Q5.1.1. When an exaction is imposed to
discourage certain businesses, is Q5.1.2.2. Are royalty fees (on a per
the exaction a tax? liter basis) imposed on the
movement of petroleum
No, it is a regulatory fee. In COMPANIA GENERAL DE
fuel to and from special
T ABACOS DE FILIPINAS V. CITY OF MANILA [8 SCRA
economic zones a tax or a
367], the Supreme Court held that the municipal
fee?
license fees for the privilege to engage in the
business of selling liquor or alcoholic beverages were The royalty fees imposed on the movement of
imposed for regulatory purposes as such products petroleum fuel are regulatory fees. As held in
are potentially harmful to public health and morals. CHEVRON PHILIPPINES V. BCDA [630 SCRA 521], the
royalty fees were exacted on a per liter basis
Q5.1.2. When an exaction is imposed to because the higher the volume of fuel entering the
provide means for the special economic zone, the greater the extent and
rehabilitation and stabilization of a frequency of supervision and inspection required to
threatened industry, is the ensure safety, security and order within the zone.
exaction a tax?
Q5.1.2.3. Should margin fees be
considered a tax or a fee?
Jurisprudence provides that such exactions are
considered regulatory fees in light of their purpose.
Margin fees are regulatory fees. In ESSO STANDARD
EASTERN V. CIR [175 SCRA 149], the company
In OSMENA V. ORBOS [220 SCRA 703], in determining
sought to deduct the margin fees it paid from its
whether the taxes collected for the Oil Price
gross income. The Supreme Court held that the
Stabilization Fund are taxes or regulatory fees, the
margin fees cannot be deducted as they are not
Supreme Court stated that while the funds were
taxes. Margin fees are imposed to curb excessive
referred to as taxes, they were exacted not under the
demand upon the international reserves in order to
power of taxation, but in the exercise of the police
stabilize the currency. It is applied to strengthen the
power of the State. The main objective was not
country’s international reserves and is not imposed
revenue but to stabilize the price of oil and petroleum
for revenue purposes. Hence, as they are not taxes,
products.
they cannot be considered as a deductible business
.
expense.
In REPUBLIC V. BACOLOD-MURCIA MILLING [17 SCRA
632], in determining whether the levy for the
Q5.1.2.4. Should universal charges
Philippine Sugar Institute Fund is a fee or a tax, the
(for electricity end-users)
Supreme Court held that such levy was not so much
be considered a tax or a
an exercise of the power of taxation but an exercise
fee?
of the police power to aid and support the sugar
industry.

PIERRE MARTIN DE LEON REYES 9

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
Universal charges are regulatory fees. In GEROCHI V.
DOE, in determining whether the Universal Charge
imposed on electricity end-users by distributors is a
tax, the Supreme Court held in the negative and
stated that the universal charge is a regulatory fee
levied to ensure the viability of the country’s electric
power industry
Q5.2. How do you distinguish a tax from
a regulatory fee in terms of the
amount of the exaction?
If the amount levied is too high and/or if the amount
levied is not related to costs of regulation, the
exaction should be considered a tax as it is levied for
revenue purposes.
In VILLEGAS V. HIU CHIONG T SAI PAO HO [86 SCRA
270], in determining whether the exaction of P50.00
from aliens securing an employment permit (from the
Mayor of Manila) is a fee or a tax, the Supreme Court
held that the amount was too excessive and that
there was no logic or justification in the exaction from
aliens who have been cleared for employment. The
Court opined that it was obvious that the purpose of
the exaction is to raise money under the guise of
regulation.
In PLANTERS PRODUCT V. FERTIPHIL CORPORATION
[548 SCRA 485], the Supreme Court held that the
amount collected from the imposition on the domestic
sales of fertilizer grades was too excessive to serve a
mere regulatory purpose.
In AMERICAN MAIL LINE V. CITY OF BASILAN [2 SCRA
309], the Supreme Court stated that for fees to be
regulatory in nature, the same must be no more than
sufficient to cover the actual cost of inspection or
examination.
In ANGELES UNIVERSITY V. CITY OF ANGELES [G.R.
189999, JUNE 27, 2012], the Supreme Court held that
a charge which bears no relation at all to the cost of
inspection and regulation may be held to be a tax
rather than an exercise of the police power.
Q5.2.1. Can an imposition which, at first,
was regulatory in nature be
considered a tax because of the
substantial increase in the amount
collected?
Yes. In PAL V. EDU [164 SCRA 320], in determining
whether the motor vehicle registration fees (MVRF)
were taxes or fees, the Supreme Court held that
PIERRE MARTIN DE LEON REYES
while the MVRFs were originally intended for
regulation, as motor vehicles became absolute
necessities and vehicular traffic exploded in number,
the registration of vehicles because a convenient way
of raising revenues. Thus, their nature has become
that of taxes notwithstanding the fact one-fifth or less
of the amount collected is set aside for operating
expenses of the agency administering the program.
Q5.3. Does designation matter in
determining whether an exaction
is a fee or a tax?
No. In VICTORIAS MILLING CO. VS. CIR [22 SCRA 13],
the Supreme Court stated that the designation given
by the authorities does not decide whether the
imposition is properly a tax or a fee.
Q5.4. Which factor then should be given
importance?
The purpose of the exaction is the primary factor to
consider. In GEROCHI V. DOE [527 SCRA 696], the
Supreme Court stated the conservative and pivotal
distinction between the power of taxation and police
power rests in the purpose for which the charge is
made.
Q5.5. Can an exaction be considered
both a tax and a regulatory fee?
No, simply because they are levied for different
purposes. The power to regulate as an exercise of
police power does not include the power to impose
fees for revenue purposes (G.A. CUUNJIENG V.
PATSTONE [42 PHIL 818]; AMERICAN MAIL LINE V. CITY
OF BASILAN [2 SCRA 309])
However, in PCGG v. COJUANGCO, the Supreme
Court stated that the coco levy funds were raised
through the State’s police and taxing powers.
The implication of this statement from the court is that
it is possible for an exaction to be both a tax and a
fee. This statement should be disregarded along with
other cases which associates or links the three
powers of the State in relation to exactions such as in
the cases of LUTZ V. ARANETA [98 SCRA 148] and
ESSO EASTERN STANDARD V. CIR [175 SCRA 149]
where the Court stated that the power of tax may be
used as an implement of police power as well as the
case of CIR VS. CENTRAL L UZON DRUG CORPORATION,
where the Supreme Court stated that taxation power
can also be used as an implement for the exercise of
the power of eminent domain.
10
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
The three powers of the State are separate and
distinct from one another. As stated by the Court in
AMERICAN MAIL LINE V. CITY OF BUTUAN [2 SCRA
309], the power to regulate as an exercise of police
power does not include the power to impose fees for
revenue purposes. Thus, the rule is plain and simple:
if the imposition is for revenue purposes, it is a
tax and it is in the exercise of the power to tax; if
it is for regulatory purposes, it is a fee and it is in
the exercise of police power.
Limitations on the Power of Taxation
A. Inherent Limitations
Q6.What are the inherent limitations on the
power to tax?
The inherent limitations are those limitations which
exist despite the absence of an express constitutional
provision thereon.
The inherent limitations are:
1. Public purpose
2. Non-delegability of the taxing power
3. Territoriality or situs of taxation
4. Tax exemption of the State
5. Principle of Comity
Q6.1. What is meant by “public purpose”
as an inherent limitation on the
power to tax?
The right of taxation can only be used in aid of a
public purpose. In PASCUAL V. SECRETARY OF PUBLIC
WORKS [110 SCRA 331], the Supreme Court
explained that the right of the legislature to
appropriate public funds is correlative with its right to
tax and as such the power of taxation may only be
exercised for public purposes. In that case, the
appropriation of public funds for the construction of
feeder roads on land owned by a private person is
invalid for being made for other than a public
purpose.
The rule can also be seen in PEPSI COLA V.
MUNICIPALITY OF T ANUAN [69 SCRA 460] where the
Supreme Court held that one of the requisites for the
valid exercise of the power of tax is that the tax must
be for a public purpose.
PIERRE MARTIN DE LEON REYES
In T IO VS. VIDEOGRAM REGULATORY BOARD [151
SCRA 208], the Supreme Court held that the levy of
30% tax on videogram operators is for a public
purpose. It was imposed primarily to answer the need
for regulating the video industry, particularly rampant
film piracy and flagrant violation of intellectual
property rights.
Q6.2. Is the power to tax delegable?
Yes. In PEPSI COLA V. MUNICIPALITY OF T ANUAN [69
SCRA 460], the Supreme Court opined that the
power of taxation may be delegated to local
governments in respect of matters of local concern.
The legislative power to create political corporations
for purposes of local self-government carries with it
the power to confer on such local governments the
power to tax.
It must be noted, however, that the power is not
inherent in the local government unlike in the national
government. In MANILA ELECTRIC COMPANY VS.
PROVINCE OF LAGUNA [306 SCRA 750], the Supreme
Court held that local governments do not have the
inherent power to tax except to the extent that such
power might be delegated to them either by basic law
or by statute. Under the now prevailing Constitution,
where there is neither a grant nor a prohibition by
statue, the tax power of LGUs must be deemed to
exist although Congress may provide statutory
limitations and guidelines
Q6.3. What is meant by “territoriality or
situs of taxation” as a limitation on
the power of taxation?
However broad the power of taxation may be as to its
character and no matter how searching it is in its
extent, such power is necessarily limited only to
persons, property or businesses within its
jurisdiction.
Thus, in ILOILO BOTTLERS INC. VS. CITY OF ILOILO [164
SCRA 607], the Supreme Court, on the issue of
whether a bottling company which sells soft drinks in
Iloilo City but operates its bottling plant in another is
liable for the excise tax imposed by said City on the
distribution, manufacture and bottling of soft drinks,
held that since truck sales were made in the City, the
acts or privileges of the company is within its
jurisdiction.
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 PM REYES NOTES ON TAXATION I:
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In CIR V. MARUBENI [204 SCRA 377], what was
involved was a contract on a turn-key basis4 which
the CIR sought to tax as an indivisible contract. The
Supreme Court held that the contract actually
involved two taxing jurisdictions. While the
construction and installation work were completed in
the Philippines, some pieces of equipment and
supplies were completely designed and engineered
in Japan. These services made and completed in
Japan are not subject to contractor’s tax as they are
rendered outside the taxing jurisdiction of the
Philippines.
In REAGAN v. CIR [30 SCRA 968], the Supreme
Court held that bases under lease to the US under
the Military Bases Agreement remain part of
Philippine territory. It is not foreign territory for
purposes of income tax legislation. The power to tax
has been preserved except for those matters where
an appropriate exemption was provided for.
Q6.4. Can local governments tax the
national government, its agencies,
and instrumentalities?
No. In MIAA v. CA [495 SCRA 591], the Supreme
Court, in resolving the issue on whether the lands
and buildings owned by the Manila International
Airport Authority were subject to real property tax,
ruled in the negative. The Supreme Court opined that
since MIAA is not a GOCC but instead as
government instrumentality vested with corporate
powers or a government corporate entity, it is exempt
from real property tax. By express provision of the
Local Government Code, local governments cannot
levy taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities.
Furthermore, the said lands and buildings are
property of the public dominion and therefore owned
by the State. They are devoted to public use. Thus,
they cannot be auctioned as they are outside the
commerce of man. However, the portions of the
property leased to private entities are subject to real
property tax.
Q6.5. What is the principle of comity in
relation to the power to tax?
4 5
In a turn key contract, the contractor is entrusted to design,
construct, commission and handover the project to the employer in
a completed state.
PIERRE MARTIN DE LEON REYES
As held in T ANADA V. ANGARA [272 SCRA 18], By
their voluntary act, nations may surrender some
aspects of their state power in exchange for greater
benefits granted or derived from a convention of pact.
The underlying consideration in this partial surrender
of sovereignty is the reciprocal commitment of the
other contracting states in granting the same privilege
and immunities to the Philippines, its officials and its
citizens. The point is that a portion of sovereignty
may be waived without violating the Constitution,
based on the rationale that the Philippines "adopts
the generally accepted principles of international law
as part of the law of the land and adheres to the
policy of . . . cooperation and amity with all nations."
Note that the principle of comity entails an exchange
in benefits. Thus, in SEA-LAND SERVICE V. CA [357
SCRA 441], the Supreme Court ruled that the hauling
and transport of household goods and personal
effects of U.S. military personnel were not tax exempt
under the RP-US Military Bases Agreement as they
do not directly contribute to the defense and security
of the Philippines.
In CIR v. Mitsubishi Metal Corp [181 SCRA 214],
the Supreme Court held that scrupulous care must be
taken when international comity is invoked on the
representation that funds involved in the loans are
those of a foreign government as we should avoid
opening the floodgates to the violation of our tax
laws.
Q6.6. What are other inherent limitations
to the power to tax?
The other recognized limitations are:
1. Reconciliation of conflicting interests of tax
authorities and taxpayers;
5
2. Prospective application;
3. Promptness in payment;
4. Injunction against Collection of taxes;
5. Inapplicability of Estoppel against the State;
and
6. No legal compensation between Taxes and
Debts
As a general rule, taxes must only be imposed prospectively. As
an exception, taxes may be imposed retroactively if the law
expressly provides.
12
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
B. Constitutional Limitations
Q7.What are the direct constitutional
provisions on the power to tax?
The direct constitutional provisions on taxation are:
1. Non-imprisonment for non-payment of poll-tax
(Article 3, Sec. 20)
2. The rule which requires that revenue,
appropriation and tariff bills shall originate
exclusively in the House of Representatives
(Article 6, Section 24)
3. Uniformity, equitability and progressivity of
taxation (Article 6, Section 28, par. 1).
4. Limitations in congressional power to delegate to
the president the authority to fix tariff rates,
import and export quotas, etc (Article 6, Section
28, par. 2)
5. Tax exemption of properties actually, directly,
and exlusively used for religious, charitable and
educational purposes (Article 6, Section 28,
par. 3)
6. Voting requirement in connection with the
legislative grant of tax exemption (Article 6,
Section 28, par. 4)
7. The provision which mandates that money
collected on a tax levied for a public purpose
shall be paid out for such purpose only (Article 6,
Section 29, par. 3)
8. Non-impairment of the Supreme Court’s
jurisdiction in tax cases (Article 8, Sec. 5, par.
2(b))
9. Power of local governments to create its own
souces of revenue and to levy axes subject to
Congressional limitations (Article 10, Section 6)
10. Exemption from taxes of the revenues and assets
of educational institutions including grants,
endowments, donations or contributions. (Article
16, Section 4, par. 3)
Q8.What are the general (indirect)
constitutional provisions on the power to
tax?
The general constitutional limitations are:
1. Due process
2. Equal protection
3. Religious Freedom
4. Payment of just compensation
5. Non-Impairment of Contracts
PIERRE MARTIN DE LEON REYES
(i) Due Process
Q8.1. How is the “due process” clause
applied to taxation?
In PEPSI-COLA BOTTLING COMPANY VS. MUNICIPALITY
OF T ANAUAN, LEYTE [69 SCRA 460], the Supreme
Court held that taking of property without due process
of law may not be passed over under the guise of
taxing power, except when the latter is exercised
lawfully 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 taxes notice
and opportunity for hearing are provided.
(ii) Uniformity, Equitable, and
Progressive
Q8.2. What is meant by “uniformity”?
Uniformity requires that all subjects or objects of
taxation similarly situated are to be treated alike or
put on equal footing both in privileges and liabilities
(SISON V. ANCHETA [130 SCRA 654]; see also CIR V.
LINGAYEN GULF [164 SCRA 27])
Q8.3. How does the principle of
“uniformity” relate to the equal
protection clause?
The test of uniformity Is based on the requisites for a
valid classification under the equal protection clause.
As held in SISON V. ANCHETA [130 SCRA 654],
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:
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.
Q8.3.1. Is there a violation of the
uniformity of taxation or equal
protection when the State gives
preferential tax treatment to
13
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
locators inside special economic
zones?
No. As held in T IU V. CA [301 SCRA 278], there are
substantial differences between the big investors who
are being lured to establish and operate their
industries in the special economic zones and those
business operators outside the zones. One of these
is that the former bring in billion-peso investments
and thousands of new jobs. The Supreme Court also
stated that the equal protection guarantee does not
require territorial uniformity of laws.
Q8.3.1.1. Should tax incentives be
uniform for all special
economic zones?
Not necessarily. In JOHN HAY V. LIM [414 SCRA 356],
at issue was the extension of benefits given to the
Subic SEZ under RA 7227 to the John Hay SEZ via a
proclamation, the Supreme Court ruled that tax
exemptions must be strictly and expressly provided
for and that the power to grant exemption is only
within Congress. The same rationale was used with
respect to locators in the Clark SEZ in the case of
COCONUT OIL REFINERS ASSOCIATION V. T ORRES [465
SCRA 48].
The implication of these two cases is that special
economic zones can have different tax incentives.
However, it must be noted that by virtue of RA 9400,
the same incentives have been granted to Clark,
John Hay, Poro Point and Morong SEZs.
Q8.3.2. Does the Attrition Law (RA 9335),
which gives incentives to BOR/BOC
employees, violate the equal
protection clause?
No. In ABAKADA GURO PARTY-LIST V. PURISIMA [562
SCRA 251], the Supreme Court held that there was
no violation of the equal protection clause. The equal
protection clause recognizes a valid classification,
that is, a classification that has a reasonable
foundation or rational basis and not arbitrary. The
subject of the Attrition Law was revenue generation
and collection of the BIR and BOC, thus, the
incentives and sanctions should logically pertain to
them and not to other government agencies. This has
been reiterated in the recent case of BOCEA V.
T EVES [G.R. 181704, DEC. 6, 2011].
PIERRE MARTIN DE LEON REYES
Q8.3.3. Does the classification freeze
scheme6 under RA 9334 violate
the equal protection clause?
No. In BRITISH AMERICAN T OBACCO V. CAMACHO [562
SCRA 511], 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.
Q8.3.4. Does RR 17-99 (implementing RA
8240 but applying the higher tax
rule on the January 1, 2000
increase)7 violate the equal
protection clause?
Yes. In CIR v. FORTUNE T OBACCO [658 SCRA 289],
the 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.
Q8.3.5. Does the adoption of a gross
system of income taxation to
compensation income and a
system of net income taxation as
regards professional and
business income violate the rule
on uniformity?
No. In SISON V. ANCHETA [130 SCRA 654], the
Supreme Court noted that taxpayers who are
recipients of compensation income have practically
6
Under the classification freeze scheme, after a brand of cigarette
is classified based on its current net retail price, the classification is
frozen and only Congress can thereafter reclassify the same.
Under this scheme, it would be possible that over time the net
retail price of a previously classified brand would increase to a
point that its net retail price pierces tha tax bracket to which it was
previously classified byt nonetheless it would still be subject to the
excise tax rate under the lower tax bracket.
7
RA 8240 which took effect January 1, 1997 provides for a shift
from ad valorem taxes to specific taxes on cigarettes. The law
provided that (1) the specific tax due from any brand of cigarette
within 3 years shall not be lower than the tax due before the new
law (higher tax rule) and (2) the specific tax rate shall be increased
by 12% on January 1, 2000. In effect, what RR 17-99 did was to
implement the higher tax rule for the January 1, 2000 increase.
14
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
no overhead expenses and thus, they should not be
entitled to make deductions for income tax purposes.
On the other hand, professionals and businessmen
have no uniformity in terms of costs or expenses
necessary to produce their income. Thus, it would be
unjust to disregard such disparities and giving them
all zero deductions and impose on all the same tax
rates.
Q8.3.6. Does the rule on uniformity
require territorial uniformity?
No. As held in T IU V. CA [301 SCRA 278], the equal
protection guarantee does not require territorial
uniformity of laws. In VILLANUEVA V. CITY OF ILOILO
[26 SCRA 578], 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.
The statement made by the Court in CIR V. LINGAYEN
GULF [164 SCRA 27] to the effect that “a tax is
uniform when it operates with the same force and
effect in every place where the subject of it is found”
should not be taken to mean that territorial uniformity
is required.
Q8.3.7. A municipal ordinance was
passed imposing a tax on the sale
of soft drinks or carbonated
beverages by agents/consignees
of dealers doing business outside
the municipality. Is there a
violation of the equal protection
clause?
Yes. As held in PEPSI-COLA V. CITY OF BUTUAN [24
SCRA 789], under the said 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.
Q8.3.8. A tax ordinance was passed
expressly providing for the entity
which shall be subject to tax. Is
PIERRE MARTIN DE LEON REYES
there a violation of the equal
protection clause?
Yes. In ORMOC SUGAR V. T REASURER [22 SCRA 603],
the 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.
Q8.4. What is meant by “equitable”?
Equitable means fair, just, reasonable and
proportionate to one’s ability to pay.
In ABAKADA G URO PARTY-LIST V. ERMITA [469 SCRA
1], 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.
In KAPATIRAN V. T AN [163 SCRA 372], the Supreme
Court held that EO 2788 is equitable as it is imposed
only on sales of goods or services by persons
engaged in a business with an aggregate gross
annual sales exceeding P200,000 while small corner
sari-sari stores are consequently exempt as well as
sales of farm and marine products.
Q8.5. Should the system of taxation be
always progressive?
No. The Supreme Court in T OLENTINO VS. SECRETARY
OF FINANCE [249 SCRA 628] explained that what
Congress is required by the Constitution to do is only
to "evolve a progressive system of taxation." This is a
directive to Congress, just like the directive to it to
give priority to the enactment of laws for the
enhancement of human dignity and the reduction of
social, economic and political inequalities or for the
promotion of the right to "quality education." These
provisions are put in the Constitution as moral
incentives to legislation, not as judicially enforceable
rights. Thus, even if the VAT is regressive because it
is an indirect tax, it is not prohibited by the
Constitution.
8
EO 278 imposing a 10% VAT on the value added by every seller
with aggregate gross annual sales of articles and/ or services
exceeding P200,000 to his purchase of goods and services
15
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
(iii) Non-Impairment 9 worship, as well as its rights of dissemination of
religious beliefs.
Q9.When can the non-impairment clause be
Q11. What are special entities that are
rightly invoked against the withdrawal of
granted tax exemptions by the
a tax exemption?
Constitution?
In PROVINCE OF MISAMIS ORIENTAL V. CAGAYAN
ELECTRIC [181 SCRA 38], the Supreme Court held Under Article VI, Section 28, the following are
that the non-impairment clause may be rightly exempt from real property taxes:
invoked against contractual tax exemptions.
Contractual tax exemptions are those agreed by the 1. Charitable institutions
taxing authority in contracts, such as those contained 2. Churches
in government bonds or debentures, lawfully entered 3. Parsonages or convents appurtenant thereto
into by them under enabling laws in which the 4. Mosques
government, acting in its private capacity, sheds its 5. Non-profit cemeteries; and
cloak of authority and waives its government 6. All lands, buildings, and improvements, actually,
immunity (see also MERALCO V. PROVINCE OF L AGUNA directly and exclusively used for religious,
[306 SCRA 750]) charitable or educational purposes.

Q9.1. Is a tax exemption embodied in a
legislative franchise a contractual
tax exemption (such that it impairs
the obligations of contracts when
revoked)?
No. As held in PROVINCE OF MISAMIS ORIENTAL V.
CAGAYAN ELECTRIC [181 SCRA 38], a franchise does
not take the nature of a contractual tax exemption,
which cannot be revoked without impairing the
obligations of contracts. A legislative franchise can be
withdrawn through amendment or repeal. (see also
CAGAYAN ELECTRIC POWER V. CIR [138 SCRA 629];
LEALDA ELECTRIC V. CIR [7 SCRA 928].)
(iii) Taxation of Special Entities
Q10. A municipality passed an ordinance
which imposes a tax on the sale of
bibles. Is the ordinance valid?
No. As held in AMERICAN BIBLE SOCIETY VS. CITY OF
MANILA [101 SCRA 386], the municipal ordinances
imposing a tax on the sale of bibles were declared
unconstitutional as it would impair the free exercise
and enjoyment of its religious profession and
9 altogether to the charitable object which it is intended
To impair an obligation of a contract is to alter or change the
terms or effect of the contract and thus in contemplation of the law
weaken the position or rights of one or all of the parties to it. A law
which changes the terms of a contract by making new conditions
or changing those in the contract or dispenses with those
expressed impairs its obligations.
The exemption provided for under Article VI, Section
28 pertains only to real property taxes (LLADOC V.
CIR [14 SCRA 292]).
Under Article XIV, Section 4(3), all revenues and
assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and
duties.
Q11.1. If a hospital also admits paying
patients, does it lose its character
as a charitable institution?
No. In CIR V. BISHOP OF MISSIONARY DISTRICT [14
SCRA 991], the Supreme Court held that the
admission of pay patients does not detract from the
charitable character of a hospital if its funds are
devoted exclusively to the maintenance of the
institution as a public charity (see also HERRERA V.
QCBAA [3 SCRA 186])
In LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY
[433 SCRA 119], the Supreme Court stated that, as a
general principle, a charitable institution does not
lose its character as such and its exemption from
taxes simply because it derives income from paying
patients , whether out-patient or confined in the
hospital or receives subsidies from the government,
as long as the money received is devoted or used
to achieve, and no money inures to the private
benefit of the persons managing or operating the
institution.

PIERRE MARTIN DE LEON REYES 16

 PM REYES NOTES ON TAXATION I:
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Q11.2. Does the phrase “actually, directly,
and exclusively used” mean that
the exemption shall only cover
property actually indispensable to
the institution?
No. As held in HERRERA V. QCBAA [3 SCRA 186],
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.
Q11.2.1. A hospital has a school for
training nurses and midwifes.
Substantial profit is derived
from the operation of the said
school. Is the school exempt
from taxes?
As to the “lands, buildings, and improvements,” such
is beyond the taxing power of the State irrespective
of the substantial profits as “all lands, buildings and
improvements used exclusively for religious,
charitable or educational purposes” are exempt from
real property taxes. The school is a facility incidental
or reasonably necessary for the accomplishment of
the purposes of the hospital as the students practice
therein. (see HERRERA V. QCBAA [3 SCRA 186])
As to the profits, it will be exempt from taxes if it
proves that it is within the coverage of Article XIV,
Section 4(3) which exempts all revenues and assets
of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational
purposes
Q11.2.2. Is a vegetable garden and an
unused cemetery adjacent to a
convent exempt from payment
of real property taxes?
Yes. As held in BISHOP OF SEGOVIA V. PROV. BOARD
OF ILOCOS NORTE [51 SCRA 352], 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.
PIERRE MARTIN DE LEON REYES
Q11.3. YMCA is a non-stock, non-profit
institution with religious,
charitable and educational
objectives. YMCA leased part of its
premises to small canteen owners
and charged parking fees on the
lots beside its building. Can the
CIR tax YMCA for such income?
Yes. In CIR V. CA [298 SCRA 83], 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 (non-profit 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
non-stock, non-profit educational institution under
Article XIV, Section 4(3) of the Constitution.
Q11.4. The Philippine Lung Center leased
portions of its real property out for
commercial purposes. Are these
exempt from real property taxes?
No. In LUNG CENTER OF THE PHILIPPINES V. QUEZON
CITY [433 SCRA 119], 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.
Q11.5. St. Lukes Medical Center is a
hospital organized as a non-stock
and non-profit corporation. It
admits both paying and non-
paying patients. The CIR claimed
that St. Lukes was liable for
income tax at 10% as provided
under Section 27(B)10 of the NIRC.
St. Lukes argues that it is a non-
stock, non-profit institution for
charitable and social welfare
purposes exempt from income tax
10
Section 27(B) provides that proprietary educational institutions
and hospitals which are non-profit shal pay a tax of ten percent
(10%) on their taxable income
17
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
under Section 30(E) and (G) of the charitable purposes shall not be exempt from real
NIRC.11 Decide. property taxes. Consistent with the ruling in CIR V.
CA [298 SCRA 83], profits realized from real property
by exempt institutions from whatever source or
St. Lukes cannot claim full tax exemption under wherever used are taxable.
Section 30 because it has paying patients and this is
notwithstanding the fact that it is a non-profit hospital.
For Section 27(B) to apply, the hospital must be non- Situs of Taxation and Double Taxation
profit which means that no net income or asset
accrues to or benefits any member or specific person
Q12. Define “situs of taxation.”
and all the activities of the hospital are non-profit. On
the other hand, Section 30(E) and (G), while Situs of taxation means the place of taxation. The
providing for an exemption is qualified by the last rule is that the State where the subject to be taxed
paragraph which, in turn, provides that activities has a situs may rightfully levy and collect the tax; and
conducted for profit shall be taxable. Section 30(E) the situs is necessarily in the state which has
and (G) requires that an institution be operated jurisdiction or which exercises dominion over the
exclusively for charitable purposes to be completely subject in taxation.
exempt from income tax. In this case, however, St.
Lukes is not operated exclusively for charitable Q13. What is the effect of multiplicity of
purposes insofar as its revenues from paying patients
situs of taxation?
are concerned. Such revenue is subject to income
tax at 10% under Section 27(B).
Due to the variance in the concept of “domicile” for
tax purposes and considering the multiple
Q11.5.1. Is the existence of paying
relationships that may arise with respect to intangible
patients material to the real
property and the use to which the property may have
property tax exemption of the
been devoted, all of which may receive the protection
building, land and
of the laws of jurisdiction other than the domicile of
improvements of St. Lukes?
the owner thereto, the same income or intangible
property may be subject to taxation in several taxing
No. The lands, buildings, and improvements of St.
jurisdictions.
Lukes remain exempt from real property taxes even if
it admits paying patients. This is consistent with the
ruling in LUNG CENTER OF THE PHILIPPINES V. QUEZON Q13.1. How do we address multiplicity of
CITY [433 SCRA 119] where the Supreme Court held situs of taxation?
that a charitable institution does not lose its character
as such and its exemption from real property taxes The taxing jurisdiction may:
simply because it derives income from paying
patients 1. provide for exemptions or allowance of deduction
or tax credit for foreign taxes; and/or
Q11.5.2. If St. Lukes were to lease to 2. enter into tax treaties with other States.
private persons portions of its
property for profit, is the
property and the profits Q14. What is double taxation?
exempt from taxes?
Double taxation is defined as taxing the same
The property will not be exempt from real property property twice when it should be taxed but once. It
taxes and also the profits will not be exempt from has also been defined as taxing the same person
income tax. Pursuant to the ruling in LUNG CENTER OF twice by the same jurisdiction over the same thing. It
THE PHILIPPINES V. Q UEZON CITY [433 SCRA 119], is sometimes known as “duplicate taxation.”
those portions of real property not actually used for
Q14.1. What are the two types of double
11
Section 30(E), NIRC provides that a non-stock corporation or taxation?
association organized and operated exclusively for charitable
purposes is exempt from income tax while Section 30(G) provides
that a civic league or organization not organized for profit but Double taxation may be direct or indirect. Direct
operated exclusively for the promotion of social welfare is likewise double taxation or double taxation in the
exempt.

PIERRE MARTIN DE LEON REYES 18

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
objectionable or prohibited sense means that the
same property is taxed twice when it should be taxed
only once and that both taxes are imposed on the
same subject matter for the same purpose, by the
same taxing authority within the same jurisdiction
during the same taxing period and covering the same
kind of tax. On the other hand, indirect double
taxation or double taxation that is not legally
objectionable is one where some elements of direct
double taxation are absent.
Q14.2. Is double taxation prohibited
under the Constitution
No. The Constitution does not prohibit double
taxation. However, while not forbidden, it is not
something favored. It should be avoided and
prevented whenever possible
Q14.3. What are the elements of (direct)
double taxation?
As provided in the case of CITY OF MANILA VS. COCA-
COLA BOTTLERS [595 SCRA 299], there is double
taxation if the two taxes are imposed:
1. On the same subject matter
2. For the same purpose
3. By the same taxing authority
4. Within the same jurisdiction
5. During the same taxing period
6. The taxes must be of the same kind or character
Q14.3.1. Bank A’s gross receipts from
passive income is subject to
20% final withholding tax. At
the same time, the total gross
receipt of Bank A is subject to
5% gross receipts tax (GRT). Is
the imposition of the FWT and
GRT a form of double
taxation?
No. First, the taxes herein are imposed on two
different subject matters. The subject matter of the
FWT is the passive income generated in the form of
interest on deposits and yield on deposit substitutes,
while the subject matter of the GRT is the privilege of
engaging in the business of banking. Second,
although both taxes are national in scope because
they are imposed by the same taxing authority -- the
national government under the Tax Code -- and
operate within the same Philippine jurisdiction for the
same purpose of raising revenues, the taxing periods
they affect are different. The FWT is deducted and
PIERRE MARTIN DE LEON REYES
withheld as soon as the income is earned, and is paid
after every calendar quarter in which it is earned. On
the other hand, the GRT is neither deducted nor
withheld, but is paid only after every taxable quarter
in which it is earned. Third, these two taxes are of
different kinds or characters. The FWT is an income
tax subject to withholding, while the GRT is a
percentage tax not subject to withholding. Hence,
there is no double taxation. (see CIR VS. SOLIDBANK
CORP [416 SCRA 436]; CHINA BANKING CORP VS. CA
[403 SCRA 634])
Q14.3.2. Under the Tax Code, Bank A is
subject to 1% reserve
deficiency tax if it incurs
reserve deficiencies. Under
the General Banking Law,
Bank A must 1/10 of 1% for
incurring reserve deficiencies.
Is there double taxation?
No. One is a penalty; 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. (REPUBLIC BANK VS. CTA
[213 SCRA 266])
Q14.3.3. A City passed an ordinance
imposing license tax on
persons engaged in the
business of operating
tenement houses. Is there
double taxation given that
buildings pay real estate taxes
and also income taxes besides
the tenement tax imposed by
the ordinance?
No. 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 subject-matter, for the same purpose, by
the same State, Government, or taxing authority,
within the same jurisdiction or taxing 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 (income tax) and still taxable
under the ordinance, the argument against double
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 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
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. (VILLANUEVA V. CITY OF ILOILO [26 SCRA
578])
Q14.3.4. A municipality imposed a
storage fee for the storage of
copra within its jurisdiction. A
multinational company doing
business in the Philippines
stored copra in its warehouse
located in the municipality and
was thus assessed the storage
fee. The MNC argues that it
was already being taxed for
the manufacture of copra so
there was double taxation.
Decide.
There is no double taxation. In PROCTER & GAMBLE V.
MUNICIPALITY OF JAGNA [94 SCRA 894], 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.
Q14.3.5. A municipality enacted two
ordinances. 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. Is there
double taxation?
Yes. All the elements of double taxation are present.
However, it must be noted, that while the factual
milieu provided is similar to the case of PEPSI COLA V.
MUNICIPALITY OF T ANUAN [69 SCRA 460], Supreme
Court ruled that there was no double taxation in the
said case because the second ordinance repealed
the first ordinance. Otherwise, there would have been
double taxation.
PIERRE MARTIN DE LEON REYES
Q14.3.6. A city passed two ordinances.
The first ordinance imposed a
tax on the privilege of selling
liquor while the second
ordinance imposed a tax on
the sales of liquor. Is there
double taxation?
No. In COMPANIA GENERAL DE T ABACOS V. CITY OF
MANILA [8 SCRA 367], 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.
Q14.3.7. Company A, engaged in the
manufacture of tobacco, is
subject to the payment of
tobacco inspection fees aside
from other taxes it pays to the
national government. Is there
double taxation?
No. Tobacco Inspection fees are undoubtedly
National Internal Revenue taxes, they being one of
the miscellaneous taxes provided for under the Tax
Code. The Code specifically provides for the
collection and manner of payment of the said
inspection fees. Tobacco inspection fees are levied
and collected for purposes of regulation and control.
Tobacco inspection fees are of a different kind and
character from other taxes imposed. (LA SUERTE VS.
CTA [134 SCRA 36])
Q14.3.8. A city ordinance imposed a
license fee on any person,
firm, entity or corporation
doing business in the City. A
contends that the ordinance
constitutes double taxation as
he already pays taxes imposed
by the national government. Is
A correct?
No. It has been expressly affirmed by the Supreme
Court that such an argument against double taxation
may not be invoked where one tax is imposed by the
state and the other is imposed by the city, it being
widely recognized that there is nothing inherently
obnoxious in the requirement that license fees or
taxes be exacted with respect to the same
20
 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
occupation, calling or activity by both the state and
the political subdivisions thereof. (CITY OF BAGUIO VS.
DE LEON [25 SCRA 938])
Q14.4. A local government unit wishes to
levy excise taxes on quarry
resources found within its
jurisdiction. The national
government argues that it may not
do so as such articles are already
taxed by the NIRC. Decide.
The local government unit may levy a tax on quarry
resources extracted from public lands but not from
private lands. In PROVINCE OF BULACAN V. CA [299
SCRA 442], 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.
Forms of Escape from Taxation
Q15. What is the difference between tax
avoidance and tax evasion?
Tax avoidance and tax evasion are the two most
common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at
arms length. Hence, as held in that case, that the
execution of two sales under the corporation’s tax
planning scheme was prompted more on the
mitigation of tax liabilities than for legitimate business
purposes and constitutes tax evasion. Tax evasion,
on the other hand, is a scheme used outside of those
lawful means and when availed of, it usually subjects
the taxpayer to further or additional civil or criminal
liabilities.
Q15.1. What is the “substance over form”
doctrine?
The doctrine provides that taxability is determined by
the reality of the transaction rather than the
appearance which may be contrived.
PIERRE MARTIN DE LEON REYES
Q15.2. Husband and wife own a lot of real
estate. Upon advice of their
lawyer, they decided to organize a
corporation to take control of their
properties. The husband and wife
were issued 2,500 original
unissued no par value shares of
stock in exchange for their
properties. Is the scheme
designed to avoid taxes or evade
taxes?
This is only a case of tax avoidance. In DELPHER
T RADES CORPORATION V. I NTERMEDIATE APPELLATE
COURT [157 SCRA 349], the Supreme Court opined
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
form by organizing the corporation to take control of
properties and at the same save on inheritance
taxes.12
Q15.3. What are the three factors to be
considered in determining if a
scheme is designed to evade
taxes?
The three factors to be considered are:
1. The end to be achieved which is payment of less
taxes;
2. An evil or deliberate state of mind; and
3. A course of action which is unlawful.
Q15.3.1. ABC corporation sold its
building to A, who in turn, sold
during the same day the same
property to XYZ Corporation.
12
If the properties were to be held by the spouses in the case, it
would be tied to the succession proceedings and the consequential
payment of estate taxes when the owner dies. On the other hand,
a corporation does not die and can hold the property for a period of
at least 50 years.
21
 PM REYES NOTES ON TAXATION I:
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Is the scheme designed to
avoid taxes or evade taxes?
This is a case of tax evasion. In CIR VS. T HE ESTATE
OF BENIGNO T ODA, JR. [483 SCRA 293], the Supreme
Court held that the three factors in tax evasion were
present. The two transfers were tainted with fraud
since the intermediary transfer (from the corporation
to a natural person) was prompted only by the desire
to mitigate tax liabilities and not for any business
purpose.
Nature, Construction, Application
and Sources of Tax Laws
Q16. What are the sources of Tax Laws?
The sources of tax laws are:
1. Constitution;
2. NIRC as amended – RA 9648;
3. Tariff and Custom Code as amended – RA 8181;
4. Local Government Code;
5. Local Tax Ordinance/City/Municipal Tax Code;
6. Tax Treaties/International Agreements;
7. Presidential Decree/ Executive Order;
8. Decisions of SC/CTA/CA; and
9. Revenue Rules and Regulations, Rulings
implemented by the BIR
Q17. Do tax laws continue in force during a
period of enemy occupation?
Yes. In HILADO V. CIR [100 SCRA 288], the Supreme
Court held that internal revenue laws are not
political in nature and as such were continued in
force during the period of enemy occupation and in
effect actually enforced by the occupation
government. Income tax returns filed during such
period and income tax payments effected are
considered valid and legal.
Q18. How are tax statutes construed and
interpreted?
Tax statutes are construed liberally in favor of the
taxpayers and strictly against the taxing authority.
Q18.1. What is the basis for applying the rule
of liberal construction as to tax
statutes?
PIERRE MARTIN DE LEON REYES
As held in the case of PHILIPPINE HEALTH CARE
PROVIDERS V. CIR [554 SCRA 411], tax statutes are
strictly construed against the taxing authority
because taxation is a destructive power which
interferes with the personal and property rights of the
people and takes from them a portion of their
property for the support of the government.
Q18.2. Do rules and regulations issued by
administrative or executive officers
(implementing tax laws) have the
force and effect of law
Yes. Rules and regulations issued by administrative
or executive officers pursuant to the procedure or
authority granted by law upon the administrative
agency have the force and effect, or partake of the
nature of a statute and are just as binding as if they
have been written in the statute itself. As such, they
have the force and effect of law and enjoy the
presumption of constitutionality and legality until they
are set aside with finality in an appropriate case by a
competent court (Abakada Guro Party List vs.
Purisima [562 SCRA 251])
Q18.2.1. Is the construction of a tax law
by an administrative official
binding on his successor?
No. As held in HILADO V. CIR [100 SCRA 288], the
construction of statutes by administrative officials is
not binding on their successors if thereafter the latter
become satisfied that a different construction should
be given.
Q19. Can tax statutes be applied
retroactively?
Yes. While, as a general rule, taxes must only be
imposed prospectively, taxes, as an exception, may
be imposed retroactively if the law expressly
provides.
Hence, in resolving the issue of whether a statute
favorable to a taxpayer-heir can be given retroactive
effect, the Supreme Court held in LORENZO VS.
POSADAS [64 PHIL. 353] that inheritance taxation is
governed by the statute in force at the time of the
death of the decedent, unless the language of the
statute clearly demands or expresses that it shall
have a retroactive effect which is not the case. And
such Revenue laws are not to be classed penal laws,
so even if favorable, should not be given retroactive
effect.
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 PM REYES NOTES ON TAXATION I:
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Q20. Can BIR issuances be applied involved is null and void for being contrary to the law,
retroactively? such as the previous rulings on the PEACe bonds.

Generally, yes. However, as provided in Section 246 Q20.1.1. Is the failure of a taxpayer to
of the NIRC, rulings and circulars, rules and consult the BIR before relying
regulations promulgated by the CIR would have no on a BIR Ruling imply bad
retroactive application if to so apply them would be faith on the part of the former?
prejudicial to the taxpayers
No. In CIR V. CA [267 SCRA 557], the Supreme
In CIR V. CA [267 SCRA 557], the taxpayer relied and Court in resolving the argument that failure to consult
implemented a computation by virtue of a BIR Ruling. with the BIR amounted to bad faith opined that such
The said issuance was later reversed in a failure does not imply bad faith especially when the
subsequent BIR Ruling. The Supreme Court held that BIR Ruling relied upon was clear and categorical
the later BIR ruling cannot be given retroactive leaving no room for interpretation.
application as such would be prejudicial to the
taxpayer. The same doctrine was applied in the case Exemption from Taxation
of ABS-CBN V. CTA [108 SCRA 143] with regard to
its reliance on a Memorandum Circular on the Q21. What is a tax exemption?
withholding of taxes on film rentals which was
revoked by a subsequent memorandum circular. A tax exemption is defined as a grant of immunity,
express or implied, to particular persons or
Q20.1. When can BIR issuances be given corporations from the obligation to pay taxes.
retroactive application even if such
would be prejudicial to taxpayers? Q21.1. Who has the power to grant tax
exemptions?
Section 246 of the NIRC provides for the following
exceptions: Both the power to tax and to exempt certain persons
are vested in the legislature. In particular, Article VI,
1. Where the taxpayer deliberately misstates or Section 28 of the Constitution provides that “No law
omits material facts from his return or any granting any tax exemption shall be passed without
document required of him by the BIR; the concurrence of a majority of all the Members of
2. Where the facts subsequently gathered by the the Congress.”
BIR are materially different from the facts on
which the ruling is based; or Since municipal corporations do not have the
3. Where the taxpayer acted in bad faith. inherent power to tax, they also have no inherent
power to grant exemptions from taxation.
Jurisprudence also provides for another exception. In
PBCOM V. CIR [302 SCRA 241], The Supreme Court
Q21.2. What is the rationale behind
opined that the non-retroactivity of rulings by the CIR
is inapplicable where the nullity of the issuance was tax exemptions?
declared by the Courts and not by the CIR.
Tax exemptions are given because:
In BIR RULING NO. 370-2011, the issue was whether
RCBC is liable to pay the final withholding tax on 1. Public interest will be served by the exemption
interest income realized from the purchase of PEAce allowed; and
13 2. Such public benefit or interest is sufficient to
Bonds. Relying upon previous BIR Rulings in 2001,
RCBC paid no final tax upon the issuance of the offset the monetary loss entailed in the grant of
bonds. However, the rulings were all reversed by a the exemption
BIR Ruling in 2004. RCBC invoked the non-
retroactivity principle of BIR Rulings. The Supreme Q21.3. What are the grounds of tax
Court in resolving this matter stated that the non- exemption?
retroactivity principle does not apply when the ruling
Tax exemption may be based on:
13
Poverty Eradication and Alleviation Certificate (PEAce) Bond

PIERRE MARTIN DE LEON REYES 23

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
1. Contract;
2. Some ground of public policy; and
3. Treaty created on grounds of reciprocity or to
lessen the rigors of international double or
multiple taxation
Q21.4. What is the nature of tax
exemptions?
Tax exemptions are:
1. Mere personal privileges to the grantees;
2. Generally revocable by the government unless
founded on contract which is protected by the
non-impairment clause;
3. Implies a waiver on the part of the Government of
its right to collect what otherwise would be due;
and
4. Not necessarily discriminatory so long as the
exemption has a rational basis.
Q21.5. What are the kinds of tax
exemptions?
Tax exemptions may be:
As to source
Constitutional Exemption originates from
the Constitution
Statutory Emanating from legislation
As to manner of creation
Express Expressly granted by organic
or statute law
Implied Whenever particular persons,
properties, or excises are
deemed exempt as they fall
outside the scope of the
taxing provision.
As to scope of extent
Total When certain persons,
property or transactions are
exempted from all taxes
Partial When certain persons,
property or transactions are
exempted from certain taxes
As to object
PIERRE MARTIN DE LEON REYES
Personal Those granted directly in
favor of such persons as are
within the contemplation of
the law granting the
exemption
Impersonal Those granted directly in
favor of a certain class of
property
Q21.6. Can there be a tax exemption
on the ground of equity?
No. The Supreme Court held in DAVAO GULF V. CIR
[293 SCRA 76], that there is no tax exemption solely
on the ground of equity.
Q21.7. Can tax exemptions be merely
implied?
No. In NDC V. CIR [151 SCRA 472], at issue was
whether the undertaking signed by the Secretary of
Finance in the promissory note can be considered an
exemption on taxes on the interest remitted. The
Supreme Court ruled in the negative and opined that
tax exemptions cannot be merely implied but must be
categorically and unmistakably expressed.
Q21.10.1. What is the “legislative grace”
concept”?
The legislative grace concept provides that any tax
relief provided is the result of specific acts of
Congress that must be applied and interpreted
strictly. In NDC V. CIR [151 SCRA 472], the Supreme
Court ruled that the fact that the Secretary of Finance
guaranteed the loans of the NDC cannot be taken to
mean that the payments of NDC to the Japanese
creditors are exempt from withholding since the
undertaking was not tantamount to a waiver of
collection to taxes which must be express.
Q21.8. Is a tax exemption a vested right?
No. The Supreme Court in REPUBLIC V. CAGUIOA [536
SCRA 194] held that there is no vested right in a tax
exemption and more so when the latest expression of
legislative intent renders it continuance doubtful. In
the said case, RA 7227 granted private domestic
corporations doing business in the Subic SEZ tax
exemptions on importations of general merchandise.
However, RA 9334 withdrew the tax exemption on
the importations of cigars, cigarettes, distilled spirits,
fermented liquors and wines.
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 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
Q21.9. Are salaries of judges taxable?
Yes. In NITAFAN V. CIR [152 SCRA 284], the Supreme
Court held that the salaries of members of the
judiciary are subject to income tax as applied to all
taxpayers. The payment of income tax by Justices
and Judges do not fall within the constitutional
protection against decrease of their salaries during
their continuance in office.
Q21.10. May an exemption be
withdrawn at the pleasure of
the taxing authority?
Yes. Since taxation is the rule and exemption
therefrom is the exception, the exemption may be
withdrawn at the pleasure of the taxing authority.
(MCIAA V. MARCOS [261 SCRA 667])
Hence, in MCIAA V. MARCOS [261 SCRA 667], the
Supreme Court noted that Section 234 of the the
Local Government Code unequivocally withdrew
exemptions from payments of real property taxes
granted to natural or juridical persons, including
government-owned and control corporations. Since
MCIAA is a GOCC, it follows that its exemption
granted under a charter prior to the LGC has been
withdrawn.
In SMART V. CITY OF DAVAO [565 SCRA 237], the
Supreme Court noted that the “in lieu of all taxes”
clause in its charter has become functus officio with
the abolition of franchise tax on telecommunications
companies in accordance with the VAT law.
Q21.10.1. Is there an exception to the
above doctrine?
Yes. The exemption cannot be withdrawn if the
exception was granted to private parties based on
material consideration of a mutual nature, which then
becomes contractual and thus covered by the non-
impairment clause of the Constitution (MCIAA V.
MARCOS [261 SCRA 667]).
Q21.11. How are tax exemptions
construed and interpreted?
As held in the case of QUEZON CITY V. ABS-CBN [567
SCRA 495], statutes granting tax exemptions are
construed stricissimi juris against the taxpayer and
liberally in favor of the taxing authority. He who
claims an exemption from his share of common
PIERRE MARTIN DE LEON REYES
burden must justify his claim that the legislature
intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor
are they presumed.
Taxation is the rule and exemption is the exception.
The burden of proof rests upon the party claiming the
exemption to prove that it is in fact covered by the
exemption so claimed (CIR V. MITSUBISHI METAL [181
SCRA 215]).
In LUZON STEVEDORING V. CTA [163 SCRA 647], in
resolving the issue on whether “tugboats” are
embraced and included in the term “cargo vessel,”
the Supreme Court ruled in the negative. Any claim
for exemption from the tax statute should be strictly
construed against the taxpayer. Thus, tugboats
cannot be considered cargo vessels as they are not
meant to carry and transport persons or goods by
themselves but are mainly for towing.
In MERALCO V. VERA [67 SCRA 352], the issue to be
resolved was whether MERALCO was exempt from
excise tax on its poles, wires, and transformers. The
Supreme Court held that the “in lieu of all taxes”
provision is limited in scope to taxes “upon the
privileges, earnings, income, franchise and poles,
wires, transformers, and insulators of the grantee.”
Construing this provision strictly against MERALCO,
the Supreme Court held that the provision covers
only an exemption from property taxes on the poles,
wires, and transformers.
Q21.11.1. What is the basis for applying
the rule of strict construction
to tax exemptions?
The basis for applying the rule of strict construction to
statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to
the affirmative or levying provisions of tax statutes, is
to minimize differential treatment and foster
impartiality, fairness, and equality of treatment among
tax payers.
Q21.11.2. What is the precondition that
must be met before one can
apply the principles of tax
exemption?
Before applying the principles of tax exemption,
doctrine of strict interpretation must first be applied.
There must first be a determination who are covered
by the tax statute before a determination of who are
exempted.
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 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
violation of a revenue or tax. (REPUBLIC V. IAC [196
In CIR V. CA & ADMU [271 SCRA 605], the Supreme SCRA 335].
Court, before resolving the issue on whether the
Institute of Philippine Culture (IPC) of the Ateneo De Q22.1. How are tax amnesties construed?
Manila University was an independent contractor
(and as such liable for contractor’s tax), noted that it
is an error to apply the principle of tax exemption As held in the case of CIR V. MARUBENI CORPORATION
without first applying the well-settled doctrine of strict [204 SCRA 377], a tax amnesty, much like a tax
14
interpretation in the imposition of taxes. The exemption, is never favored nor presumed in law. If
Supreme Court found that the IPC never sold its granted, the terms of the amnesty, like that of a tax
services for a fee to anyone or was ever engaged in exemption, must be construed strictly against the
a business apart from or independently from the taxpayer and liberally in favor of the taxing authority.
academic purposes of the Ateneo. Thus, it is not an
independent contractor. Q23. What is a tax condonation/remission?
Q21.11.3. Is the rule of strict The condonation of a tax liability is equivalent and is
construction to tax in the nature of a tax exemption. Hence, it is a grant
exemptions applicable to of immunity, express or implied, to particular persons
government political or corporations from the obligation to pay taxes.
subdivisions and
instrumentalities?
Q23.1. How are tax condonations
No. As held in the case of MACEDA V. MACARAIG [197 construed?
SCRA 771], it is a recognized principle that the rule
on strict interpretation does not apply in the case of As held in SURIGAO CONSOLIDATE MINING VS. CIR [9
exemptions in favor of a government political SCRA 728], being in the nature of tax exemptions, it
subdivision or instrumentality. should be sustained only when expressed in explicit
terms, and it cannot be extended beyond the plain
Q21.11.4. Why is the rule of strict meaning of those terms. Hence, it must construed
construction to tax strictly against the grantee and liberally in favor of the
exemptions inapplicable to taxing authority.
government political
subdivisions and
Q24. Can the seller claim an exemption on
instrumentalities?
indirect taxes if it sold products to
The reason for the rule does not apply in the case of buyers who, under the law, are tax-
exemptions running to the benefit of the government exempt entities?
itself or its agencies. In such case the practical effect
of an exemption is merely to reduce the amount of No. The seller cannot claim an exemption or a refund
money that has to be handled by government in the on the indirect taxes it paid for those goods sold or
course of its operations. For these reasons, services rendered to an entity exempt from indirect
provisions granting exemptions to government taxes. As a tax-exempt entity, the buyer is exempted
agencies may be construed liberally, in favor of non from absorbing the burden of indirect taxation and it
tax liability of such agencies. (MACEDA V. MACARAIG is the seller then that shall shoulder this burden. The
[197 SCRA 771]) tax exemption of the buyer cannot be the basis of a
claim for tax exemption of the manufacturer
(PHILIPPINE ACETYLENE V. CIR [20 SCRA 1056])
Q22. What is a tax amnesty?
In PHILIPPINE ACETYLENE V. CIR [20 SCRA 1056],
A tax amnesty is a general pardon or intentional
Philippine Acetylene claimed an exception on the
overlooking by the State of its authority to impose
indirect taxes it paid for the oxygen and acetylene
penalties on persons otherwise guilty of evasion or
gases it sold to NPC. The Supreme Court ruled that
NPC is a tax-exempt entity and the said tax is due
14
Remember that, under this doctrine, tax statutes are construed from the manufacturer.
liberally in favor of the taxpayers and strictly against the taxing
authority

PIERRE MARTIN DE LEON REYES 26

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
In CIR V. GOTAMCO [148 SCRA 36], at issue was fairly, equally and uniformly, lest the tax collector kill
whether Gotamco & Sons should pay the contractor’s the "hen that lays the golden egg". And, in order to
tax (an indirect tax) on gross receipts it realized from maintain the general public's trust and confidence in
the construction of the WHO building in Manila. The the Government this power must be used justly and
Supreme Court ruled in the affirmative. The Court not treacherously. (see REYES V. ALMANZOR [196
opined that WHO, as a tax-exempt entity, cannot be SCRA 322]; CIR V. T OKYO SHIPPING [244 SCRA 332])
made liable for the indirect taxes.
B. Set-off of Taxes
In MACEDA V. MACARAIG [197 SCRA 771], the
Supreme Court ruled that the tax burden may not be
Q26. Can taxes be the subject of
shifted to the NPC, a tax-exempt entity, by the oil
companies. As NPC is exempt from direct and
compensation between the
indirect taxation, it must be held exempted from government and the taxpayer?
absorbing the economic burden of taxation. Thus, the
No. As held in CALTEX VS. COA [208 SCRA 727,
oil companies must absorb all or part of the economic
taxes cannot be the subject of compensation
burden of the taxes. Had not NPC been exempt from
because the government and taxpayer are not
indirect taxes, the oil companies could have shift the
mutually creditors and debtors of each other. A claim
burden to NPC.
for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off (FRANCIA V. IAC
In CIR v. PILIPINAS SHELL [G.R. 188497, APRIL 25,
[162 SCRA 753]).
2012], Shell claimed a refund for excise taxes it paid
on the sales of gas and fuel oils to various
There can be no off-setting of taxes against the
international carriers. The Supreme Court held that
claims that the taxpayer may have against the
the Section 135 of the NIRC which grants exemption
government. A person cannot refuse to pay taxes on
from excise tax on petroleum products to
the ground that the government owes him an amount
international l carriers is construed to mean that the
equal or greater than the tax being collected (PHILEX
manufacturer cannot pas on the tax to the carriers by
MINING V. CIR [294 SCRA 687]).
incorporating the excise tax into the selling rice or
effectively shifting the tax burden. The seller shall
Taxes cannot be the subject of set-off because they
shoulder the burden of the indirect taxes.
are not in the nature of contracts between parties but
grow out of a duty to, and, are positive acts, of the
Certain Doctrines in Taxation Government, to the making and enforcing of which,
the personal consent of the taxpayer is not required
A. Power to Tax Involves Power to (REPUBLIC V. MAMBULAO LUMBER [4 SCRA 622])
Destroy
Q26.1. Is there an exception to the
general rule disallowing set-off
Q25. Explain the doctrine of the power to
between taxes and debts?
tax as involving the power to destroy
as laid down in Roxas v. CTA? Yes. As held in DOMINGO V. GARLITOS [8 SCRA 443],
If the obligation to pay taxes and the taxpayer’s claim
In holding that the sale of farm lands to landless
against the government are both overdue,
farmers is not considered as engaging in the
demandable, as well as fully liquidated,
business of selling real estate and hence, taxable
compensation takes place by operation of law and
only at 50% instead of a 100%, the Supreme Court
both obligations are extinguished to their concurrent
held in ROXAS VS. CTA [23 SCRA 276] that it should
amounts. In the said case, the taxypayer who has
be borne in mind that the sale of the Nasugbu farm
been assessed municipal taxes was allowed to
lands to the very farmers who tilled them for
assign in favor of the municipality a final judgment
generations was not only in consonance with, but
obtained by him against the said municipality to cover
more in obedience to the request and pursuant to the
the assessment.
policy of our Government to allocate lands to the
landless. 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

PIERRE MARTIN DE LEON REYES 27

 PM REYES NOTES ON TAXATION I:
GENERAL PRINCIPLES
Q26.2. Can taxes paid in excess be set-off
with other taxes due?
No. Excess taxes paid cannot be the subject of set-
off against other taxes payable to the government.
The CIR can instead grant a refund or a tax credit for
taxes erroneously or illegally paid (see Section
204(c), NIRC)
C. Taxpayer’s Suit
Q27. What are the requisites of a taxpayer’s
suit?
As laid down in ANTI-GRAFT LEAGUE V. SAN JUAN
[260 SCRA 251], the requisites of a taxpayer’s suit
are:
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;
2. petitioner is directly affected by the alleged ultra
vires act
The prevailing doctrine in taxpayer’s suit is to allow
taxpayers to question contracts entered into by the
national government or GOCCs allegedly in
contravention of law. A taxpayer need not be a party
to the contract to challenge its validity (Abaya v.
Ebdane [515 SCRA 720])
Hence, in LOZADA V. COMELEC [120 SCRA 337], it
was held that the petitioner’s action for mandamus to
compel the COMELEC to hold a special collection is
not considered a taxpayer’s suit because it does not
involve public expenditure. Further, there is no
allegation that tax money is spent illegally. Also, in
JOYA V. PCGG [225 SCRA 568], the Supreme Court
held that such was not a taxpayer’s suit because the
case did not involve a misapplication of public funds.
In fact, the paintings and antique silverware alleged
to have been public properties were acquire from
private sources and not with public money.
D. The Principle of Solutio Indebiti15
Q28. Is solutio indebiti applicable
taxation?
15
Under Article 2154 of the Civil Code, solutio indebiti arises when
something has been received when there was no right to demand
it and the same was unduly delivered through mistake.
PIERRE MARTIN DE LEON REYES
Yes. In the case of FILINVEST DEVELOPMENT
CORPORATION VS. CIR [529 SCRA 605[, the Court
held that in the field of taxation where the State
exacts strict compliance upon its citizens, the State
must likewise deal with taxpayers with fairness and
honesty. Hence, under the principle of solutio
indebiti, the Government has to restore to petitioner
the sums representing erroneous payments of taxes.
E. Prescription
Q29. Are taxes imprescriptible?
As a general rule, taxes are imprescriptible.
However, as an exception, the tax law may provide
otherwise.
Q29.1. What is the rationale behind
providing for a statute of
limitations in the collection of
taxes?
As held in the case of REPUBLIC VS. ABLAZA [108 PHIL
1105, the law prescribing a limitation of actions for
the collection of the income tax is beneficial both to
the Government and to its citizens; to the
Government because tax officers would be obliged to
act promptly in the making of assessment, and to
citizens because after the lapse of the period of
prescription citizens would have a feeling of security
against unscrupulous tax agents who will always find
an excuse to inspect the books of taxpayers, not to
determine the latter's real liability, but to take
advantage of every opportunity to molest peaceful,
law-abiding citizens.
Q29.2. How should said statute of
limitations in taxation be
construed?
The law on prescription being a remedial measure
should be liberally construed in order to afford
protection. As a collar, the exceptions to the law on
prescription should be strictly construed. Thus, in the
case of CIR VS. PHILIPPINE NATIONAL BANK, the Court
to held that even if the 2-year prescriptive period for a
claim for tax refund has already lapsed, the same
may be suspended for equity and special
circumstances.
28