MODULE 1

BASIC PRINCIPLES OF TAXATION

Prepared by:
MOHAMMAD L. AMPASO, CPA, CTT
LEARNING OUTCOMES
At the end of this lecture, the students shall be able to:

1. Describe the nature, scope, classification, and essential characteristics of taxation.

2. Discuss the importance and purpose of taxation.

3. Differentiate the three inherent powers of the State.

4. Explain the principles of a sound tax system.

5. Identify and explain the constitutional limitations of taxation.

6. Differentiate tax evasion from tax avoidance.

7. Evaluate payment of tax if it qualifies as double taxation.

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TAXATION
Is the inherent power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the
government. It is a manner of apportioning the costs of the government among those who, in some measure, are privileged to enjoy its
benefits and must bear its burdens.

INHERENT TO THE STATE: It is inherent in character because its exercise is guaranteed by the mere existence of the state. It could be
exercised even in the absence of a constitutional grant. The power to tax proceeds upon the theory that the existence of a government is a
necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent state or
government.

SCOPE OF LEGISLATIVE POWER TO TAX

1. The determination of purposes for which taxes shall be levied provided it is for the benefit of the public.
2. The determination of subjects of taxation such as the person, property or occupation within its jurisdiction.
3. The determination as to the amount or rate of tax unless constitutionally prohibited.
4. The determination as to the kind of tax to be collected (i.e. property tax, income tax, inheritance tax, etc.).
5. The determination of agencies to collect the taxes.
6. The power to specify or provide for administrative and judicial remedies.
7. The power to grant tax exemptions and condonations.

THEORY AND BASIS

1. Life Blood Theory – Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.

2. Necessity Theory - government is necessary; however, it cannot continue without the means of paying for its existence; hence, it has the
right to compel all citizens and property within its power to contribute for the same purpose.

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's
sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil
servants to serve, public improvement designed for the enjoyment of the citizenry and those which come within the State's territory, and
facilities and protection which a government is supposed to provide.

3. Symbiotic relationship theory - It is said that taxes are what we pay for a civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard
earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The
government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people
and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those in the seat of power.

PURPOSE OF TAXATION
1. Primary – to raise revenues; to support the existence of the State and enable the state to promote the general welfare.
2. Secondary – non-revenue or sumptuary
a. Promotion of general welfare – taxation may be used to implement police power (e.g., grant of VAT exemption and Discounts to
Senior Citizens);
b. Regulation - where taxes are levied on excises or privileges for purposes of rehabilitation and stabilization of threatened industry
which is affected by public interest or to discourage consumption of harmful products (e.g., excise taxes on cigarettes and alcohol);
c. Reduction of Social Inequity – This is made possible through the progressive system of taxation where the objective is to prevent the
undue concentration of wealth in the hands of few individuals. Progressivity is keystoned on the principle that those who are able to
pay should shoulder the bigger portion of the tax burden. (e.g., Income tax)

d. Encouragement of economic growth – tax incentives and reliefs may be granted to encourage investment (i.e., Income Tax Holiday,
5% preferential Gross Income Tax for PEZA registered entities);
e. Protectionism – for the protection of local industries, in case of foreign importations, protective tariffs and customs duties and fees
(e.g., Special Duties imposed by the Bureau of Customs)

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CHARACTERISTICS OF THE POWER TO TAX (CUPS)
1. Comprehensive – it covers persons, businesses, activities, professions, rights and privileges.
2. Unlimited – it is so unlimited in force and searching in extent that courts scarcely venture to declare that it is subject to any restrictions,
except those that such rests in the discretion of the authority which exercises it.
3. Plenary – it is complete; unqualified; absolute. Under the Tax Code, the BIR may avail of certain remedies to ensure collection of taxes.
4. Supreme – insofar as the selection of the subject of taxation is concerned.

PRINCIPLES OF A SOUND TAX SYSTEM (FAT)

1. Fiscal Adequacy – revenue raised must be sufficient to meet government/public expenditures and other public needs.
2. Administrative Feasibility – tax laws must be clear and concise; capable of effective and efficient enforcement; convenient as to time
and manner of payment, must not obstruct business growth and economic development.

The VAT law cannot be considered as violative of the Administrative Feasibility principle because it is principally aimed to rationalize the
system on taxes of goods and services. Thus, simplifying tax administration and making the system more equitable to enable the
country to attain economic recovery.

3. Theoretical Justice – must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory). Art. VI, Sec. 28(1) of the 1987
Constitution mandates that the rule on taxation must be uniform and equitable and that the State evolve a progressive system of taxation.

DOUBLE TAXATION IN STRICT SENSE IS WHEN:

1. Both taxes are imposed on the same property or subject matter;
2. For the same purpose;
3. Imposed by the same taxing authority;
4. Within the same jurisdiction;
5. During the same taxing period;
6. Covering the same kind or character of tax.

FORMS OF ESCAPE FROM TAXATION

1. Shifting – the burden of payment is transferred from the statutory taxpayer to another without violating the law (e.g., VAT);
2. Capitalization – the reduction in the price of the taxed object equal to the capitalized value of future taxes the purchaser is expected to
be called upon to pay.
3. Transformation - for manufacturers or producers, upon whom tax are imposed, fearing the loss of his market if he should add to the
price, pays the tax and endeavor to recoup himself by improving his process of production, thereby producing his units at a lower cost.
4. Tax Avoidance – exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or
income, in order to avoid or reduce tax liability. Also known as “tax minimization.” (e.g. utilizing all permissible allowable deductions)
5. Tax Exemption – grant of immunity to particular persons or corporations of a particular class from a tax which persons or corporations
generally within the same rate or taxing district are obliged to pay.
6. Tax Evasion – use of a taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax. Also known as “tax dodging,” it
presupposes malice, fraud, bad faith, or willful intent on the part of the taxpayer either to under declare income or over declare deductions
to defeat tax liability.

TAX EXEMPTION
1. Exemptions are highly disfavored by law and he who claims an exemption must be able to justify his claim by the clearest grant of law. An
exemption from the common burden cannot be permitted to exist upon vague implication.
2. He who claims exemption should prove his factual and legal basis for exemption.
3. Tax exemptions are strictly construed against the person claiming it.
4. Constitutional grant of exemptions are self-executing.
5. In the same way that taxes are personal, tax exemptions are also personal.
6. Deductions from income tax purposes partake of the nature of tax exemptions, therefore should also be construed strictly against the
taxpayer.
7. Same treatments are given to tax refunds.

KINDS OF TAX EXEMPTION

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As to Form:
a. Express - Expressly granted by the Constitution, statutes, treaties, franchises or similar legislative acts.
b. Implied - When particular persons, properties, or exercise are deemed exempt as they fall outside the scope of the taxing provision itself.
c. Contractual - Are those agreed to by the taxing authority in contract lawfully entered into by them under enabling laws.
As to Basis:
a. Constitutional Exemptions – Immunities from taxation which originate from the Constitution.
b. Statutory Exemptions – those which emanate from legislation.
As to Extent:
a. Total Exemption – connotes absolute immunity.
b. Partial Exemption – one where a collection of a part of the tax is dispensed with.

COMPENSATION OR SET-OFF
GENERAL RULE : taxes cannot be the subject of a set-off or compensation because of the lifeblood doctrine; they are not contractual
obligations but arise out of duty to the government; and the government and the taxpayer are not mutually debtors and creditors of each other.

Taxes are of a distinct kind, essence and nature, and these impositions cannot be classed in merely the same category as ordinary obligations;
the applicable laws and principles governing each are peculiar, not necessary common, to each; and public policy is better sub served if the
integrity and independence of taxes are maintained.

A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.

TAX AMNESTY
Refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and power to impose penalties on persons or
entities guilty of violating a tax law. Tax amnesty aims to grant a general reprieve to tax evaders who wish to come clean by giving them an
opportunity to straighten out their records.

Distinguished with tax exemption:

Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes. It is a general pardon given to all taxpayers.
It applies only to past tax periods. It applies to past tax liabilities.
Tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden of which others are
subjected. It applies prospectively after the grant of exemption or qualification therefrom.

TAX AMNESTY ACT (Republic Act No. 11213): towards the policy of the State in protecting and enhancing revenue administration and
collection, the State shall:

a. Provide a one-time opportunity to settle estate tax obligations through an estate tax amnesty program that will give reasonable relief to
estates with deficiency estate taxes
b. Enhance revenue collection by providing a tax amnesty on delinquencies to minimize administrative costs in pursuing tax cases and declog
the dockets of the BIR and the courts; and
c. Provide a more equitable tax system by adopting a comprehensive tax reform program that will simplify the requirements on tax
amnesties with the use of simplified forms and utilization of information technology in broading the tax base.

General Amnesty

The law originally includes a general tax amnesty to cover all other taxes, but this portion of the law (Title III) was vetoed entirely by the
President stating that “without the provisions breaking down the walls of bank secrecy, setting the legal framework for us to comply with
international standards on exchange of information for tax purposes, and safeguarding against those who abuse the amnesty by
declaring an untruthful asset or net worth, a general amnesty that is overgenerous and unregulated would create an environment ripe for
future tax evasion, the very

CONSTRUCTION AND INTERPRETATION OF TAX LAWS:

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Tax laws must be construed reasonably to carry out the purpose, intent and the objective of the law.

As a rule, if the tax law is clear and free of ambiguity, it will be applied in its literal import. If there is doubt as to its validity or if it is ambiguous,
the law will be construed strictly against the Government and liberally in favor of the taxpayer.

Tax Exemptions; Deductions and Refund: in case of ambiguity, the law will be construed strictly against the taxpayer and liberally in favor of the
government,

EXCEPT:
1. Where the statute granting exemption expressly provides for a liberal interpretation;
2. Special taxes relating to special cases and affecting only special classes of persons;
3. Property held in private ownership;
4. Traditional exemptees, such as those in favor of religious and charitable institutions;
5. In favor of the government, its political subdivisions or instruments; and
6. By clear legislative intent.

TAXATION AND THE OTHER INHERENT POWERS

1. Taxation is the power of the State to demand from the members of society their proportionate share or contribution in the maintenance of the
government.
2. Eminent Domain is the power of the State to forcibly acquire private property, upon payment of just compensation, for some intended
public use
3. Police Power is the power of the State to regulate liberty and property for the promotion of general welfare

SIMILARTITIES:
1. Inherent in the State and need not be conferred by the Constitution;
2. Indispensable in that the State cannot continue or be effective unless it is able to exercise the same;
3. Methods whereby the State interferes with private rights;
4. Presuppose an equivalent compensation, tangible or otherwise, for the private rights interfered with; and
5. Primarily exercised by the legislature.

DIFFERENCES:

Taxation Police Power Eminent Domain

Raise revenue Promote public welfare Facilitate the taking of private

Purpose
through regulations property for public use

No limit BUT must be equal to Limited to the cost of regulation No specific amount BUT just
the needs of the government and issuance of license or compensation must be paid to the
surveillance fees owner which is equivalent to the
Amount of Exaction market value of the property

Benefits Received No direct benefit; only general No direct benefit; only a Direct benefit in the form of
benefit of protection healthy economic standard just compensation
of society

Non-impairment Contracts may NOT be impaired Contracts MAY be impaired Contracts MAY be impaired
of Contracts

Transfer of Taxes become part of the public No transfer but only restraint Transfer in favor of the State
Property Rights funds
in its exercise

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 All persons, property and excises All persons, property and privileges Only upon a particular property
Scope

Only by the government and its Only by the government and its May be by (1) the government
Who exercises political subdivisions political subdivisions or its political subdivisions OR
the power (2) public service companies or
public utilities granted with such
power.

INHERENT LIMITATIONS

A. IT MUST BE FOR A PUBLIC PURPOSE

A revenue measure must be laid for a public purpose determined by the legislature. The proceeds of the tax must be used either for the
support of the State or for some recognized objective of government or directly to promote the welfare of the community.

The public purpose must exist at the time the law is enacted.

B. EXEMPTION OF GOVERNMENT ENTITIIES, AGENCIES AND INSTRUMENTALITIES

As a rule, the government, its agencies and instrumentalities performing governmental function are exempt from VAT. This is because taxes
are financial burdens imposed for the purpose of raising revenues to defray the cost of the operation of the Government, and a tax on property
of the Government, whether national or local, would merely have the effect of taking money from one pocket to put it in another pocket.

Exceptions:
1. Agencies performing proprietary functions;
2. When the charter creating the agency or instrumentality or the law provides that they are subject to tax.
3. If the government wishes to tax itself.

GOCCs: performing proprietary functions are taxable similar to a corporation. However, Sec. 27(c) of the Tax Code provides for the
following corporations as exempt:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Local Water Districts

PAGCOR: is no longer exempt from income tax by its omission from the above list. However, PAGCOR remains exempt from income tax
for its income arising from casino operations which are subject to franchise tax in lieu of all taxes.
PCSO: was removed under the TRAIN and is thus taxable beginning January 1, 2018.

C. THE POWER TO TAX IS INHERENTLY LEGISLATIVE (NON-DELEGABILITY)

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 Taxation is the inherent power of the state and it is exercised primarily by the Legislature as delegates of the people. In accordance with the
latin maxim, potestas delegatas non delegare potest, which means, what has been delegated can no longer be delegated, as a rule, only the
Congress (to whom the legislative power has been delegated by the people) can exercise this power.

Exceptions:

1. Delegation to Local Government – the Constitution, as implemented by the Local Government Code, empowers the local government
units (LGU) to create its own sources of revenue and to levy taxes, fees and charges which shall accrue exclusively to the LGU. (Sec. 5,
Art. X of the Constitution)

2. Delegation to the President – the Constitution, as implemented by the Tariff and Customs Code, allows the President to fix tariff rates,
import and export quotas, tonnage and wharfage dues and other duties or imposts. (Sec. 28[2], Art. VI of the Constitution)

Likewise, the President may exercise emergency powers (Sec. 23[2], Art. VI of the Constitution) and enter into executive agreements or
treaties which may contain tax exemption provisions subject to the concurrence of the Senate. (Sec. 27, Art. VII of the Constitution)

3. Delegation to Administrative Agencies – administrative agencies may issue rules and regulations to implement tax laws, under their
quasi-legislative powers.

Note: Technically, no. 3 is not really an exception as the powers of the administrative agencies are limited to implementing and/or
interpreting the tax laws issued by Congress.

D. INTERNATIONAL COMITY
The principle of international comity recognizes that States are co-equal sovereigns such that one cannot exercise its inherent sovereign
powers over another, including the power to tax.

States find it mutually advantageous to create self-imposed restraints on their taxing powers with reference to properties of foreign
governments. Moreover, when on state enters the territory of another, there is an implied understanding that the former does not intend
to degrade its dignity by placing itself under the jurisdiction of the latter, note that a foreign state cannot be sued without its consent,
thus it would be useless to impose or assess a tax which cannot be collected.

E. TERRITORIAL IN APPLICATION (SITUS)

Tax is territorial in application in the sense that the object and/or subject of the tax must be within the territorial jurisdiction of a State. As
such, income earned by non-residents and aliens are not subject to tax in the Philippines unless they are earned herein – here the
subject of the tax is the income. On the other hand, resident citizens are subject to income tax for their worldwide income – here the
object of the tax is the individual who is subject to the protection of the State.

CONSTITUTIONAL LIMITATIONS
A. DUE PROCESS REQUIREMENT

Art. III, Sec. 1: No person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied the equal
protection of laws.

Procedural due process: requires that taxpayers must be notified of the assessment in writing and must state the fact and the law upon which
it is based. Moreover, assessments and collection must not be arbitrary.

Substantive due process: requires that assessments must not be harsh, oppressive or confiscatory; it must be made under authority of a valid
law; and must be imposed within the territorial jurisdiction of the State.

Specific Cases:

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 1. There is a denial of due process on account of the passage of an ordinance in the City of Manila which imposes a permit fee of P50.00 on
aliens as a condition to employment or engaging in any business or occupation, where it appears that under said ordinance, the City
Mayor of Manila could withhold or refuse issuance of such permit at will. Aliens, once admitted in the Philippines, cannot be deprived of
life without due process of law and this guarantee includes the means of livelihood (Villegas vs. Hiu Chiong Tsai Pao Ho, G.R. No. L-
29646, November 10, 1978)

2. Due process was not violated when the VAT law (EO 273) was promulgated. Petitioners failed to show that EO 273 was issued
capriciously and whimsically or in arbitrary or despotic manner by passion or personal hostility since it appears that a comprehensive
study of the VAT was made before EO 273 was issued (Kapatiran vs. CIR, G.R. No. L-81311, June 30, 1988).

3. The modified schedular income tax whereby individual income was classified into three different classes under different tax rates
(compensation, business/other income and passive investment income) is not a denial of due process because there is no proof of
arbitrariness in the imposition of tax rates (Sison vs. Ancheta, G.R. No. 59431, July 25, 1984).

4. Section 112 (B) allows a VAT registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to
the extent that such input taxes have not been applied against output taxes. The input tax is not a property or property right within the
constitutional purview of the due process clause. A VAT-registered person’s entitlement to the creditable input tax is merely a statutory
privilege (Abakada Guro Party List vs. Ermita, Ibid.).

B. EQUAL PROTECTION OF THE LAWS

Art. III, Sec. 1: No person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied the equal
protection of laws.

The requirement of equal protection of the laws requires that the law must apply equally to all persons within the same class. As such, providing
for a classification and applying the law only to a particular class is not violative of the constitutional right so long as it comes from a valid
classification.

Requisites for a valid classification:

1. Must be based upon substantial distinctions;

2. Must be germane to the purpose of law;

3. Must apply to both present and future conditions; and

4. Must apply equally to all members of a class.

Two ways by which equal protection clause is violated:

1. When classification is made when there should be none

2. When classification is not made when called for

Specific Cases:

1. If the ordinance is intended to apply to a specific taxpayer and to no one else regardless of whether or not other entities belonging to the
same class are established in the future, it is a violation of the equal protection clause, but if intended to apply also to similar entities
which may be established in the future, then the tax ordinance is valid (Ormoc Sugar Central vs. CIR, G.R. No. L-23794, February 17,
1968)

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 2. The fact that the taxpayer is the only sugar central or refinery in the municipality where the tax ordinance is enacted does not make said
ordinance discriminatory. The reason is that since other refineries to be established in the future would also be taxable, no singling out of
the taxpayer to its disadvantage has ever taken place (Victorias Milling Co., Inc. vs. Municipality of Victoria, G.R. No. L-21183, September
27, 1968)

3. The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of
taxes is a class by itself, and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not
treated alike (Juan Luna Subd. Vs. Sarmiento, G.R. No. L-3538, May 28, 1952)

4. A local ordinance which levies an ad valorem tax on motor vehicles registered in Manila without also taxing those which are registered
outside the city but which enters the city and use its streets occasionally violates the rule on the equality of taxation (Assoc. of Customs
Brokers vs. Municipality Board of Manila, G.R. No. L-4375, May 22, 1953).

5. With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions, Section 114
par. C merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding system. Since it has not
been shown that the class subject to the 5% final withholding tax has been unreasonably narrowed, there is no reason to invalidate the
provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who
deal with the government (Abakada Guro Party List vs. Ermita, Ibid.).

C. UNIFORMITY AND PRGRESSIVITY OF TAXATION

Art. VI, Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

UNIFORMITY means that all taxable articles or kinds of property of the same classes shall be taxed at the same rate. A tax is uniform when it
operates with the same force and effect in every place where the subject of it is found. (Commissioner vs. Lingayen Gulf Elec. Co., G.R. No. L-
23771, August 4, 1988)

Amusement Tax: Uniformity is not disregarded if a tax is levied on admission to cinema, theaters, vaudeville companies, theatrical shows and
boxing exhibitions but does not tax other places of amusement such as race tracks, cockpits, cabarets, concert halls, circuses and other places
of amusement. (Eastern Theatrical Co. vs. Alfonso, G.R. No. L-1104, May 31, 1949)

Uniformity vs. Equitability vs. Equality

 Uniformity – All taxable property shall be alike to be subjected to tax

 Equitability – The burden of taxation falls to those better able to pay.

 Equality – When the burden of the tax falls equally and impartially upon all persons and property subject to it.

PROGRESSIVITY means that the tax rate increases as the tax base thereof increases. Our income tax system is one good example of such
progressivity because it is built on the principle of the taxpayer’s ability to pay. Taxation is progressive when its rate goes up depending on the
resources of the person affected (Reyes vs. Almanzor, G.R. Nos. 49839-46, April 26, 1991)

D. NO IMPRISONMENT FOR PAYMENT OF POLL TAX

Art. III, Sec. 20. No person shall be imprisoned for debt or non-payment of a poll tax.

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Poll Tax is a tax on individuals residing within a specified territory, whether citizens or not, without regard to their property or the occupation in
which they may be engaged.

E. EXEMPTION FROM PROPERTY TAX OF REGILIOUS, CHARITABLE AND EDUCATIONAL INSTITUTIONS

Property Tax: The tax exemption under this constitutional provision covers property taxes only. As Chief Justice Hilario G. Davide, Jr., then a
member of the 1986 Constitutional Commission, explained: ". . . what is exempted is not the institution itself . . .; those exempted from real
estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes."
(Lung Center of the Philippines vs. Quezon City, GR No. 144104, June 29, 2004)

Estate and donor’s tax are excise taxes on the privilege to transfer property gratuitously. Accordingly, the above exemption does not cover
estate and donor’s tax unless specifically provided under the Tax Code. (see Sections 101(A)(3) and 101(B)(2) of the Tax Code)

“Exclusive”: is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is
defined, “in a manner to exclude; as enjoying a privilege exclusively.” If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to taxation. The words “dominant use” or “principal use” cannot be substituted for the
words “used exclusively” without doing violence to the Constitution and the law (Lung Center of the Phil. vs. Quezon City, G.R. No. 144104,
June 29, 2004).

Actual and Direct Use is necessary: To be exempt from tax, the lands, buildings and improvements must not only be exclusively but also
actually and directly used for religious and charitable purposes (Province of Abra vs. Hernando, G.R. No. L-49336, August 31, 1981)

Thus, even if a property is owned by a religious, educational or charitable institution, if it is rented out and used for activities other than the main
purpose of the institutions, it will be subject to tax and not covered by the exemption. Note that in Real Property Taxation, the actual use is
determinative of assessment and taxability NOT OWNERSHIP.

Incidental Use: the exemption likewise covers activities which are incidental to the main activity. As such, canteens owned and operated by
the school, as well as libraries are covered by the exemption extended to schools.

If the use is not incidental, exemption does not apply: While the use of the second floor of the main building for residential purposes of the
Director and his family may find justification under the concept of incidental use, which is complimentary to the main or primary purpose, i.e.,
educational, the lease of the first floor to the Northern Marketing Corporation cannot be considered incidental to the purpose of education.
Since only a portion is used for the purpose of commerce, it is only fair that half of the assessed tax be returned to the school involved (Abra
Valley vs. Aquino, G.R. No. L-39086, June 15, 1988).

Only the portion used for commercial purpose are subject to the tax: While portions of the hospital are used for the treatment of patients
and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals
for their clinics and a canteen. Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital
leased to private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied by the hospital and portions
of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. (Lung Center of the Phil. vs. Quezon
City, G.R. No. 144104, June 29, 2004).

Receipt of Donation: The institution does not lose its character as a charitable institution simply because the gift or donation is in the form of
subsidies granted by the government.

F. EXEMPTION OF NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS

Art. XIV, Sec. 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. Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided by law.

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Coverage: the above exemption does not only cover property tax but also income tax unlike the exemption of religious and educational
institutions provided under (E) above which covers only property taxes.

The tax exemption granted is conditioned only on the actual, direct and exclusive USE of their revenues and assets for educational purposes.

Revenues: the exemption extends to the non-stock, non-profit educational institution on all revenues that is USED for educational purposes,
regardless of its source.

Assets: the property, to be considered exempt from real property tax, the test is USE also, not ownership.

Thus, if the institution earns rental income from a commercial entity but uses such rental for educational purposes, it is exempt from income tax,
local business tax, and/or VAT, but NOT real property tax.

Limitation under Section 30 of the Tax Code: the last paragraph of Sec. 30 (Exempt Entities) under the Tax Code provides that “income from
whatever kind and character of the foregoing corporations from any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax”.

While Sec. 30 covers non-stock, non-profit educational institutions, the above limitation on exemption does not apply to it. Thus, even if it
derives income from activities conducted for profit, the income remains exempt as long as it is actually, directly and exclusively used for
educational purposes. (Commissioner of Internal Revenue vs. De La Salle University, Inc., GR No. 196596, November 9, 2016)

Proprietary educational institutions: are subject to 10% income tax on their taxable income under Sec. 27(B) of the Tax Code. The same
provision provides that if income from unrelated trade, business or other activity exceeds 50% of the total gross income, the tax shall be the
30% Regular Corporate Income Tax.

G. GRANT OF EXEMPTION REQUIRES THE MAJORITY VOTE OF CONGRESS

Art. VI, Sec. 28(4): No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the
Congress.

Rationale: in order to prevent the indiscriminate grant of tax exemptions.

H. PROHIBITION ON TAX LEVIED FOR SPECIAL PURPOSE

Art. VI, Sec. 29(3): All money collected or any tax levied for special purposes shall be treated as special fund and paid out for such
purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to
the general funds of the government.

I. VETO POWER OF THE PRESIDENT

Art. VI, Sec. 27(2): The President shall have the power to veto any particular item or items in an appropriation, revenue or tariff bill but the
veto shall not affect the item or items which he does not object.

J. REVENUE OR TARIFF BILL MUST EXCLUSIVELY ORIGINATE FROM THE LOWER HOUSE

Art. VI, Sec. 24: All appropriation, revenue or tariff bills, bills authorizing the increase of public debts, bills of local application and private
bills, shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.
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 K. LOCAL GOVERNMENT’S POWER TO TAX

Art. X, Sec. 5: Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and
charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local governments.

L. NO APPROPRIATION FOR RELIGIOUS PURPOSES

Art. VI, Sec. 29(2): No public money or property shall be appropriated applied, paid or employed, directly or indirectly, for the use, benefit
or support of any sect, church, denomination, sectarian institution or system of religion, or of any priest, preacher, minister, other religious
teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium.

M. RELIGIOUS FREEDOM

Art. III, Sec. 5: No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise
and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be
required for the exercise of civil or political rights.

Sale of Bibles at cost or at a low premium: The Constitutional guaranty of the free exercise of religion carries with it the right to disseminate
religious information. Any restraint on such right can only be justified on the ground that there is a clear and present danger of any substantive
evil which the State has the right to prevent.

Activities simply and purely for propagation of faith are exempt (i.e., sale of bibles and religious articles by non-stock, non-profit organizations at
minimal profit). A license tax, which, unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional because it
lays a prior restraint on the exercise of its right. Hence, although its application to others is valid, its application to the press or to religious
groups, such as the Jehovah’s Witnesses, in connection with the latter’s sale of religious books and pamphlets, is unconstitutional (American
Bible Society v. City of Manila, G.R. L-9637, April 1957)

N. NON-IMPAIRMENT OF CONTRACTS

Art. III, Sec. 10: No law impairing the obligation of contracts shall be passed.

Revocability of Tax Exemption: A law which changes the terms of the contract by making new conditions, or changing those in the contract,
or dispenses with those expressed, impairs the obligation.

However, the non-impairment rule does not apply to public utility franchises since a franchise is subject to amendment, alteration or repeal by
the Congress when the public interest so requires (Article XII, Section 11). This is so because under the Constitution [now Section 11, Article
XII, 1987 Constitution], the legislature can impair a grantee’s franchise since a franchise is subject to amendment, alteration or repeal by the
Congress when the public interest so requires. (Cagayan Electric Power & Light Co., Inc. vs. CIR, G.R. No. L-60126, September 25, 1985)

Rules applicable to revocation:

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 a. When the exemption is unilaterally granted by law and the same is withdrawn by virtue of another law, there is no violation.

b. When the exemption is bilaterally agreed upon between the government and the taxpayer, it cannot be withdrawn without impairing the
contract.

c. When the exemption is granted under a franchise, it may be revoked because a franchise is subject to amendment, alteration, or repeal
by Congress.

O. NON-IMPAIRMENT OF THE JURISDICTION OF THE SUPREME COURT

Art. VIII, Sec. 5[2]: The Supreme Court shall have the power to review, revise, modify or affirm on appeal or certiorari as the law or the
Rules of Court may provide, final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment,
or toll, or any penalty imposed in relation thereto.

Thus, Congress cannot enact a law which makes the decisions of the Court of Tax Appeals final and non-appealable to the Supreme Court.

SITUS OF TAXATION
 This shall mean the place of taxation.
 The state which has jurisdiction to tax the person, property or transactions may rightfully levy and collect the tax.

Object Situs of Taxation

Business, Occupation Transaction Place of business, occupation or transaction
Real and Tangible Personal Property Location of property
Intangible Real Property Domicile of the owner unless the property has acquired a business
status in another jurisdiction
Income Place where earned, citizenship or
domicile of the owner
Gratuitous transfer of property Residence or citizenship of the taxpayer or location of the property

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REFERENCES:

Ballada, W. (2019). Income and Business Taxation. DomDane Publishers. Manila, Philippines.

Banggawan, R. B. (2019). Income Taxation. Real Excellence Publishing. Baguio City, Philippines.

Reyes, V. (2019). A Study on Income Tax Law and Accounting under the Train Law. GIC Enterprises. Metro Manila.

Cruz, I. (2015). Constitutional Law 1. Manila, Philippines

Bureau of Internal Revenue, BIR. Revenue Regulations, Revenue Memorandum Circulars and other issuances.

Double Taxation Agreements (DTAs)

Instructor’s Materials

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