TAXATION LAW REVIEW

Learning Module - Definition, Nature, Characteristics, Kinds, Sources of Tax, and Tax
laws, rules, regulations and taxpayer’s suit

Introduction

In this module, we will continue with the discussion on topics under general principles of
taxation.

Learning Outcomes

At the end of this module, you should be able to:

1. Define tax
2. Understand the nature of taxes
3. Determine the characteristic of taxes
4. Enumerate the kinds of taxes
5. Identify the sources of tax laws
6. Know how tax laws, rules and regulations, and tax penal provisions and its non-
retroactive application are constructed and interpreted
7. Understand the concept and nature of taxpayer’s suit
8. Distinguish taxpayer’s suit from a citizen’s suit
9. Identify the requisites of a taxpayer’s suit

I. GENERAL PRINCIPLES OF TAXATION

I. Definition, Nature and Characteristics of Taxes

TAX means an enforced and apportioned contribution usually monetary in form,

levied by the lawmaking body on persons and property subject to its jurisdiction for the
precise purpose of supporting governmental needs.

Taxes are the lifeblood of the government without which the government can
neither exist nor function.

• Taxes are obligations created by law.

• It is the money paid to the government in return for its services and
protection.
• It is a statutory liability imposed on all inhabitants of the state.
• A tax creates a civil liability on the part of the delinquent taxpayer although
non-payment thereof creates a criminal liability which could subject the
taxpayer to criminal prosecution under existing laws. Hence, in taxation, it
is one’s civil liability to pay taxes that gives rise to criminal liability, not
the other way around as in criminal cases where criminal liability gives rise
to civil liability. (Republic vs. Patanao, July 12, 1967)
 ESSENTIAL CHARACTERISTICS OF TAX

1. Enforced contribution
2. Payable in the form of money
3. Levied by some rule of apportionment usually based on ability to pay
(secondarily on the basis of benefits received)
4. Levied on persons, property or business, acts, transactions, right or privileges.
5. Levied by the State which has jurisdiction over the object taxed
6. Levied by the lawmaking body of the State
7. Levied for public purposes

J. Requisites of a Valid Tax

a. A valid tax should be within the jurisdiction of the taxing authority.

b. That the assessment and collection of certain kinds (The same as the inherent
limitations of the power of taxation) should be for a public purpose.
c. The rule of taxation should be uniform.
d. That either the person or property of taxes guarantees against injustice to
individuals, especially by way or notice and opportunity for hearing be
provided.
e. The tax must not impinge on the inherent and Constitutional limitations on the
power of taxation.

K. Tax as distinguished from other forms of exactions

a. Tax and Special Assessment

A special assessment is in the nature of a tax upon property levied according

to benefits conferred on the property. The whole theory of a special assessment
is based on the doctrine that the property against which it is levied derives some
special benefit from the improvement.

The distinctions between a special assessment and a tax are:

i. a special assessment can be levied only on land;

ii. a special assessment cannot, as a rule, be made a personal liability of
the persons assessed;
iii. a special assessment is based wholly on benefits; and
iv. a special assessment is exceptional both as to time and locality. The
imposition of a charge on all property, real and personal, in a prescribed
area, is a tax, not an assessment, although the purpose is to make a local
improvement on a street or highway. A charge imposed only on
property owners benefited is a special assessment rather than a tax.

The power to levy such assessments is undoubtedly an exercise of

the taxing power, but the exercise of the taxing power in imposing an
 assessment does not necessarily make the assessment a tax. (1 Cooley,
106-107)

b. Tax and License

i. A Tax is levied in the exercise of the taxing power; License fees emanate
from the police power of the state;
ii. The purpose of the tax is to generate revenues; License fees are imposed
for regulatory purposes. (Victorias Milling Co. v. Municipality of
Victorias, L-21183, September 27,1968)
iii. The amount of the exaction or charge if it is to be a license fee must
only be of sufficient amount to include expenses of issuing a license;
cost of necessary inspection or police surveillance. (Cu Unjeng v.
Patstone, 42 Phil. 818; City oflloilo v. Villanueva, 105 Phil. 337)
iv. The imposition is a tax, if its primary purpose is to generate
revenue, and regulation is merely incidental; but if regulation is the
primary purpose, the fact that incidental revenue is also obtained
does not make the imposition a tax. (PDC v. Quezon City, 172 SCRA
629)
v. In Gerochi v. Department of Energy [527 SCRA 696, 715-717], the
Supreme Court held that in exacting the Universal Charge through
Section 34 of the Electric Power Industry Reform Act of 2001 (EPIRA),
the State's police power, particularly its regulatory dimension is
invoked. Such can be deduced from Section 34 which enumerates the
purposes for which the Universal Charge is imposed and which can be
amply discerned as regulatory in character. From the said purposes, it
can be gleaned that the assailed Universal Charge is not a tax, but an
exaction in the exercise of the State's police power.

c. Tax and Toll

Toll is a demand of proprietorship, an amount charged for the cost and

maintenance of the property used; Tax is a demand of sovereignty for the
purpose of raising public revenues.

d. Tax and Penalty

Tax is a civil liability. A person is criminally liable in taxation only when

he fails to satisfy his civil obligation to pay taxes. (Republic v. Patanao, L-
22356, July 21, 1967)

e. Tax and Debt

A tax is not a debt for the reason that a tax does not depend upon the consent
of the taxpayer and there is no express or implied contract to pay taxes. Taxes:
 i. are not contracts between the parties, either expressed or implied; but
they are the positive acts of the government through its various agents,
binding upon the inhabitants, and to the making and enforcing of which
their personal consent individually is not required;
ii. cannot be assigned as debts, or be proved in bankruptcy as such; nor, if
uncollected, are the assets which can be seized by attachment or other
judicial processes, and subjected to the payment of municipal
indebtedness;
iii. are not the subject of set-off either on behalf of the state or the
municipality for which they are imposed, or of the collector, or on behalf
of the person taxed, as against such state, municipality or collector;
iv. do not draw interest, as do sums of money owing upon a contract.
According to Judge Cooley, the proceedings to collect taxes are not
barred by the ordinary statutes of limitation; the law abolishing
imprisonment for debt has no application to taxes and the remedies for
their collection may include an arrest if the legislature so provides.

L. Kinds of Taxes

As to incidence (Who pays the burden of taxation?

a. Direct and Indirect — A direct tax is a tax for which a taxpayer is directly
liable on the transaction or business it engages in. Examples are the custom
duties and ad valorem taxes paid by the oil companies to the Bureau of Customs
for their importation of crude oil, and the specific and ad valorem taxes they
pay to the Bureau of Internal Revenue after converting the crude oil into
petroleum products. On the other hand, indirect tax is a tax primarily paid by
persons who can shift the burden upon someone else. For example, the excise
and ad valorem taxes that oil companies pay to the Bureau of Internal Revenue
upon removal of petroleum products from its refinery can be shifted to its buyer
like the NPC, by adding them to the "cash" and/or "selling price."

Based on the possibility of shifting the incidence of taxation, or as to who

shall bear the burden of taxation, taxes may be classified into either direct tax
or indirect tax. In context, direct taxes are those that are exacted from the very
person who, it is intended or desired, should pay them.

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. Stated elsewise, indirect taxes are taxes wherein the liability
for the payment of the tax 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. When the seller
passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability
to pay it, to the purchaser as part of the price of goods sold or services rendered.
 It bears to stress that the liability for the payment of the indirect taxes lies
only with the seller of the goods or services, not in the buyer thereof. Thus, one
cannot invoke one's exemption privilege to avoid the passing on or the shifting
of the VAT to him by the manufacturers/suppliers of the goods he purchased.
Hence, it is important to determine if the tax exemption granted to a taxpayer
specifically includes the indirect tax which is shifted to him as part of the
purchase price, otherwise it is presumed that the tax exemption embraces only
those taxes for which the buyer is directly liable. (Commissioner of Internal
Revenue v. Philippine Long Distance Telephone Company, 478 SCRA 61
[2005])

As to amount (Excise tax)

b. Specific and ad valorem — A specific tax is imposed and based on weight or
volume capacity or any other physical unit of measurement, whereas ad
valorem tax is based on selling price or other specified value of the goods. (Sec.
129, NIRC) Examples of specific tax are excise taxes on distilled spirits,
tobacco products and petroleum products. Examples of ad valorem tax include
excise tax on automobiles and non-essential goods.

As to purpose
c. General and special — A general tax is imposed solely to raise revenue for the
government, such as: income tax, donor's tax, estate tax and value-added tax.
On the other hand, special tax is imposed and collected to achieve a particular
legitimate object of government. An example of special tax is oil price
stabilization fund.

In Osmefia v. Orbos, supra, the Supreme Court held that the contribution to
OPSF is collected to protect the local consumers by stabilizing and subsidizing
domestic pump rates.

As to authority
d. National and local — A national tax is imposed by the national government
(e.g., revenue taxes under the NIRC and custom duties), while local tax is levied
and collected by the local government (e.g., real property tax and business tax).

The Supreme Court ruling laid down in the case of Meralco v. CBAA (L-
46245, May 3, 1982) classifying real property tax as national tax is deemed
superseded by the effectivity of R.A. 7160 on January 1,1992.

As to subject matter
e. Personal and property — A personal tax is of fixed amount imposed on
individuals, whether citizens or not, residing within a specified territory,
without regard to their property or occupation (e.g., community tax), while
property tax is imposed on property, real or personal, in proportion to its value
(e.g., real estate tax).
 A tax on the exercise of right or privilege or performance of an act is
generally regarded as excise tax (e.g., income tax, estate tax, donor's tax and
value added tax).

As to rate
f. Progressive (or graduated) and regressive — A progressive tax is one
whereby the rate increases as the tax base (amount) increases. Examples are
income tax, estate and donor's tax under the NIRC. On the other hand,
regressive tax is one where the tax rate decreases as the tax base increases.

In Tolentino, et al. v. Secretary of Finance, EVAT En Banc Resolution,

October 30, 1995, the Supreme Court ruled that value-added tax is a form of
regressive tax.

Proportion or flat rate is unitary or single rate. (Eg. 12% VAT)

Degressive tax – The increase in tax rate is not proportionate to the increase
of tax base.

Mixed tax – At certain point it is progressive, then regressive.

M. Sources of Tax Laws

https://www.bir.gov.ph/index.php/legal-matters/tax-guide-on-philippine-taxation.html
a. Constitution
b. Statutes and Presidential Decrees
c. Executive Orders
d. Local Ordinances (Provincial, city, municipality, and barangay
e. Revenue Regulations promulgated by the Department of Finance
f. Administrative issuances or BIR Rulings
g. Judicial decisions
h. Tax treaties and conventions with foreign countries
N. Construction and Interpretation of

TAX LAWS

8. Deliberation of Congress. Tax statutes are to receive a reasonable construction

with a view to carrying out their purpose and intent

9. Where there is doubt – in every case of doubt, tax statues (such as certain
provision of the tax law enumerating who are taxable) are construed strictly
against the government and liberally in favour of the taxpayer. Taxes, being
burdens, are not to be extended by implication or presumed beyond what the
statute expressly declares.
 10. The rule of strict construction as against the government is not applicable where
the language of the tax statute is plain and there is no doubt as to the legislative
intent

Tax law or tax provision is interpreted strictly against the government and
liberally in favour of the taxpayer while tax exemption law or provision is
interpreted strictly against the taxpayer or person claiming the exemption and
liberally in favour of the government.

TAX EXEMPTIONS AND EXCLUSIONS

The intention of the legislature to grant tax exemptions must be expressed in clear
and unmistakable terms, it can never be implied from language that will admit of any
other reasonable construction. Exemptions are never presumed; the burden is upon the
claimant to establish his right to exemption beyond reasonable doubt.

Since taxation is the rule and exemption the exception, the intention to make an
exception ought to be expressed in clear and unambiguous terms; it cannot be taken to
have been intended when the language of the statute on which it depends is doubtful or
uncertain; and the burden of establishing it is upon him who claims it. Moreover, if an
exemption is found to exist, it must not be enlarged by the construction, since the
reasonable presumption is that the state has granted in express terms all it intended to
grant at all, and that unless the privilege is limited to the very terms of the statute, the
favor would be extended beyond dispute in ordinary cases. It applies not only to the
power to grant exemptions, which must be strictly construed, but also to the
exemption's construction as irrevocable, to the period of duration of the exemption, to
the amount of the exemption, to the scope of the exemption, to charter or contract
exemptions as well as other exemptions, and to a statute exempting property from
retroactive assessments. Since an exemption will never be presumed, the fact that the
charter of a corporation contains no provision at all for taxation, and that there is no
reservation of the power to alter, amend or repeal the same, does not prevent the state
from afterwards taxing the corporation. (2 Cooley Taxation, 1403-U14)

However, there are exceptions to the strict construction rule, to wit:

1. The rule of strict construction does not apply where the statute granting the
exemption expressly provides for a liberal interpretation;
2. The rule of strict construction does not apply to special taxes relating to
special cases and affecting only special classes of persons;
3. While in some cases it is held that the strict construction rule applies equally
well to alleged exemptions of municipal property, the better rule is that strict
construction of exemption statutes applies to exemptions of property held in
 private ownership but not to exemptions of public property. In case of
property owned by the state or the city or other public corporation, an
express exemption should not be construed with the same degree of
strictness that applies to exemptions contrary to the policy of the state, since
as to such property "exemption is the rule and taxation the exemption;" (2
Cooley Taxation, 1414-1415)
4. Exemptions to traditional exemptees, such as those in favor of religious and
charitable institutions; (Ibid.)
5. Exemptions in favor of the government, its political subdivisions or
instrumentalities. In Maceda v. Macaraig, Jr., 197 SCRA 771, the Supreme
Court held: "it is a recognized principle that the rule on strict interpretation
does not apply in the case of exemptions in favor of a governmental political
subdivision or instrumentality." The basis for applying the rule of strict
construction granting 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 taxpayers. The reason for the rule does not
apply in the case of exemptions running to the benefit of the government
itself or its agencies. In such a case, the practical effect of an exemption is
merely to reduce the amount of money that has to be handled by government
in the course of its operations;
6. If the taxpayer falls within the purview of exemption by clear legislative
intent. (CIR v. Arnoldus Carpentry Shop, G.R. No. 71122, March 25, 1988)

MEANING OF STRICT CONSTRUCTION RULE

When it is said that exemptions must be strictly construed in favor of the

taxing power, this does not mean that if there is a possibility of a doubt it is to be at
once resolved against the exemption. It simply means that if, after the application
of all rules of interpretation for the purpose of ascertaining the intention of the
legislature, a well founded doubt exists, then the ambiguity occurs which may be
settled by the rule of strict construction. (2 Cooley, 1415-1418)

TAX RULES AND REGULATIONS

The Secretary of Finance, upon recommendation of the CIR, shall

promulgate all needful rules and regulations for the effective enforcement of the
provisions of the NIRC. (Sec. 244)

It is an elementary rule in administrative law that administrative

regulations and policies enacted by administrative bodies to interpret the law which
they are entrusted to enforce have the force of law and entitled to great respect.
They have in their favor a presumption of legality [Gonzales v. Land Bank, 183
SCRA 520(1990)]

Requisites for validity and effectivity of regulations

 (1) Reasonable
(2) Within the authority conferred
(3) Not contrary to law and the Constitution (Art. 7, Civil Code)
(4) Must be published

There are two kinds of administrative issuances: the legislative rules and
the interpretative rules. A legislative rule is in the nature of subordinate legislation,
designed to implement a primary legislation by providing the details thereof. An
interpretative rule, on the other hand, is designed to provide guidelines to the law,
which the administrative agency is in charge of enforcing. An administrative rule
should be published if it substantially adds to or increases the burden of those
governed. When an administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance for it gives no real
consequence more than what the law itself has already prescribed. When, upon the
other hand, the administrative rule goes beyond merely providing for the means
that can facilitate or render least cumbersome the implementation of the law but
substantially adds to or increases the burden of those governed, it behooves the
agency to accord at least to those directly affected a chance to be heard, and
thereafter to be duly informed, before that new issuance is given the force and effect
of law. (Commissioner v. Court of Appeals, G.R.No. 119761 [1996]).

The power to interpret the provisions of the Tax Code and other tax laws is
under the exclusive and original jurisdiction of the Commissioner of Internal
Revenue subject to review by the Secretary of Finance (Sec. 4, par.1, NIRC).

Revenue regulations are the formal interpretation of the provisions of the

NIRC and other laws by the Secretary of Finance upon the recommendation of the
Commissioner of Internal Revenue.

The Commissioner has the sole authority to issue rulings, but he also has
the power to delegate said authority to his subordinates. He cannot, however,
delegate to any of his subordinate officials the power to issue rulings of first
impression (i.e., question involved is new and important) or to reverse, revoke or
modify any existing ruling of the BIR (Sec. 7[B], NIRC).

PENAL PROVISIONS OF TAX LAWS

Penal provisions are given strict construction so as not to extend the plain
terms thereof that might create offenses by mere implication not so intended by the
legislative body. (RP v. Martin, G.R. No. L-38019, May 16, 1980)

It is not legitimate to stretch the language of a rule, however beneficent its

intention, beyond the fair and ordinary meaning of its language.

A penal statute should be construed strictly against the State and in favor of
the accused. The reason for this principle is the tenderness of the law for the rights
 of individuals and the object is to establish a certain rule by conformity to which
mankind would be safe, and the discretion of the court limited.(People v. Purisima,
86 SCRA 524 [1978]).

NON-RETROACTIVE APPLICATION TO TAXPAYERS

APPLICATION OF TAX LAWS – the general rule is that tax laws are
prospective in operation. The reason is that the nature and amount of the tax could
not be foreseen and understood by the taxpayer at the time the transaction, which
the law seeks to tax, was completed.

▪ While it is not favoured, a statute may nevertheless operate retroactively,

provided, it is clearly the legislative intent (it is expressly stated in the
effectivity clause of the law; such as the law is made retroactive as provided
in the effectivity clause of the law)
▪ The application of our tax laws is subject to the provisions of tax treaties
(tax laws are subordinated by the tax treaties or tax treaties are superior than
tax laws) entered into by the Philippines with foreign countries.

O. Taxpayer’s Suit

NATURE AND CONCEPT

It is a case where the act complained of directly involves the illegal disbursement
of public funds collected through taxation.

AS DISTINGUISHED FROM A CITIZEN’S SUIT

Citizen’s suit, defined. A case which is in the nature of a public right, if not the
duty of every citizen to institute in protection of the general public.

In the taxpayer’s suit, the plaintiff is affected by the expenditure of public funds,
while in the citizen’s suit; he is but the mere instrument of the public concern.

Furthermore, as held by the New York Supreme Court in People ex rel Case v.
Collins: "In matter of mere public right, however…the people are the real parties…It
is at least the right, if not the duty, of every citizen to interfere and see that a public
offence be properly pursued and punished, and that a public grievance be remedied."

With respect to taxpayer’s suits, Terr v. Jordan held that "the right of a citizen and
a taxpayer to maintain an action in courts to restrain the unlawful use of public funds
to his injury cannot be denied." (David vs. Macapagal-Arroyo, G.R. No. 171396, May
3, 2006)

REQUISITES OF A TAXPAYER’S SUIT

 1. That money is being extracted and spent in violation of specific constitutional
protections against abuses of legislative power;
2. That public money is being deflected to any improper purpose; and
3. That the petitioner seeks to restrain respondents from wasting public funds
through the enforcement of an invalid or unconstitutional law.

Taxpayer's suit requires illegal expenditure of public money. In Maceda v.

Macaraig, Jr. [197 SCRA 771], the Supreme Court sustained the right of Senator
Maceda as taxpayer to file a petition questioning the legality of the tax refund to NPC
by way of tax credit certificates and use of said assigned tax certificate by oil companies
to pay for their tax and duty liabilities to the BIR and Bureau of Customs.

However, in the case of Gonzales v. Marcos [65 SCRA 624], the Supreme Court
held that the taxpayer has no legal personality to assail the validity of Executive Order
No. 30 creating the Cultural Center of the Philippines. Assailed order does not involve
the use of public funds. There was finding to the effect that the funds came from
donations and contributions and not by taxation. Accordingly, there was that absence
of the requisite pecuniary or monetary interest.

In the recent case of Abaya v. Ebdane, Jr. [515 SCRA 720, 757-758], the Supreme
Court stressed that the prevailing doctrine in the taxpayer's suits is to allow taxpayers
to question contracts entered into by the national government or government-owned
and controlled corporations allegedly in contravention of law. A taxpayer is allowed
to sue where there is a claim that public funds are illegally disbursed, or that
public money is being deflected to any improper purpose, or that there is a
wastage of public funds through the enforcement of an invalid or unconstitutional
law. Significantly, a taxpayer need not be a party to the contract to challenge its
validity.

“Double Nexus Test”

It is a test utilized in determining whether a party has standing as a taxpayer

promulgated in the US case of Flast v. Cohen. In order to be a proper party, a person
must:
1. Establish a logical link between his status (as taxpayer) and the type of
legislative enactment concerned. He must sue on the basis of an
unconstitutional exercise of congressional power under taxing and spending
clause in the articles of the Constitution
2. Establish a nexus between his status (as taxpayer) and the precise nature of the
constitutional infringement which he alleges.

Principle of Transcendental Importance

However, the SC has discretion as to whether or not entertain a taxpayer’s suit

and could brush aside the lack of locus standi where the issues are of transcendental
importance in keeping with the court’s duty to determine that public offices have not
abused the discretion given to them. (Kilosbayan v. Guingona, G.R. No. 113375, May
5, 1994)

The following determines the importance of transcendental importance:

a. The character of the funds or other assets involved in the case;
b. The presence of a clear case of disregard of a constitutional or statutory
prohibition by the public respondent agency or instrumentality of the
government;
c. The lack of any other party with a more direct and specific interest in raising
the questions being raised. (Francisco, Jr. v. House of Representatives, G.R.
No. 160261, Nov. 10, 2003)

Doctrine of Ripeness for Review

This doctrine is the similar to that of exhaustion of administrative remedies except

that it applies to the rule making and to administrative action which is embodied neither
in rules and regulations nor in adjudication or final order.

Note: It is applicable when the interest of the plaintiff is subjected to or imminently

threatened with substantial injury; if the statute is self-executing; when a party is
immediately confronted with the problem of complying or violating a statute and there
is a risk of criminal penalties; or when plaintiff is harmed by the vagueness of the
statute.