Module 1 - General principles

a. Definition of Taxation

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.

b. Definition of Taxes

c. TAXES: are enforced proportional contributions from the persons and property levied by the
law-making body of the State by virtue of its sovereignty in support of government and for
public needs.

d. Attributes of Taxation

e. Characteristics of Taxes/Requisites of a Valid Tax

- Inherent in the State

- Inherently Legislative
- For a Public Purpose

f. Kinds of taxes

i. As to subject matter

a) Personal, poll or capitation – those imposed upon residents of a territory, regardless of

citizenship, property, occupation, business.

b) Property – those imposed upon real and personal property depending on their value.

c) Excise or privilege – those imposed upon the performance of an act, enjoyment of a

privilege, or engaging in an occupation, profession or business.

ii. As to incidence

a) Direct – where the burden for the payment of the tax as well as the impact falls on the
same person; as such, the person who pays is the person who is statutory liable to pay
the tax (e.g., income tax);
b) Indirect – where the incidence falls on one person but the burden falls another. (e.g.,
VAT).

iii. As to amount

a) Specific – amounts fixed and is imposed by the head or number or some

measurement, hence, no valuation is needed except for the list of things to be taxed.
b) Ad valorem – one which is based on the value of the object to be taxed

iv. As to rate/progression

a) Progressive – tax rates increase as the tax base or bracket increases.

 b) Regressive – tax rate decreases as tax base or bracket increases.

c) Proportionate – tax is based on a fixed percentage of the amount of the property, receipts
or other bases to be taxed.

v. As to authority imposing the tax

a) National – levied by the national government and enforced by the BIR;

b) Local – levied by the local government through its sanggunian and enforced by the
treasurer.

a. Taxation as Inherent Power of State

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. (Pepsi-Cola Bottling Co. of the
Philippines vs. Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27, 1976)

b. Taxation distinguished from 2 other inherent powers

a. 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.

b. Eminent Domain is the power of the State to forcibly acquire private property, upon
payment of just compensation, for some intended public use

c. Police Power is the power of the State to regulate liberty and property for the promotion of
general welfare

SIMILARITIES:

a. Inherent in the State and need not be conferred by the Constitution;

b. Indispensable in that the State cannot continue or be effective unless it is able to exercise
the same;

c. Methods whereby the State interferes with private rights;

d. Presuppose an equivalent compensation, tangible or otherwise, for the private rights

interfered with; and

e. Primarily exercised by the legislature.

DIFFERENCES:

Taxation Police Power Eminent Domain

Purpose Raise Revenue Promote public Facilitate the taking
welfare through of private property
regulations for public use
Amount of Exaction No limit BUT must Limited to the cost of No specific amount
be equal to the needs regulation and BUT just
of the government issuance of license or compensation must
surveillance fees be paid to the owner
which is equivalent to
 the market value of
the property
Benefits Received No direct benefit; No direct benefit; Direct benefit in the
only general benefit only a healthy form of just
of protection economic standard of compensation
society
Non-impairment of Contracts may NOT Contracts MAY be Contracts MAY be
Contracts be impaired impaired impaired
Transfer of Taxes become part of No transfer but only Transfer in favor of
Property Rights the public funds restraint in exercise the State
Scope All persons, property, All persons, property Only upon a
and excises and privileges particular property
Who exercises the Only by the Only by the May be by 1) the
power government and its government and its government or its
political subdivisions political subdivisions political subdivisions
OR 2) public service
companies or public
utilities granted with
such power.

c. Purposes/Objectives of Taxation

a. Primary Purpose – to raise revenues to defray the costs of running the government.

b. Secondary/Sumptuary Purposes:

i. Promotion of general welfare – taxation may be used to implement police power

(e.g., grant of VAT exemption and Discounts to Senior Citizens);

ii. 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, motor vehicle registration fee);

iii. 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)

iv. 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);

v. 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)

d. Aspects/Stages of Taxation

a. Levy – The determination by Congress of the subject and object of taxation as well as the
rate (Domondon, 9th ed, p. 29). It refers to the enactment of tax laws or statutes (Dimaampao,
2011 ed, p. 14).
 Note: This is NOT the “Levy” under Sec. 207 of NIRC, which refers to the remedy of the
Government to collect taxes.

b. Assessment and Collection

Assessment is the determination of the correct amount of taxes that should be paid by the
taxpayer; it may likewise refer to the notice received by the taxpayer containing a demand for a
definite amount to be paid providing therefor a due date within which to make the payment.

Collection is the enforcement of a previous assessment.

c. Payment - the act of compliance by the taxpayer, including such options, schemes or
remedies as may be legally open or available to him.

d. Refund - the taxpayer asks for restitution of the money paid as tax which is either
excessive or erroneous.

e. Characteristics/Principles of a Sound Tax System

a. Fiscal Adequacy – revenue raised must be sufficient to meet government/public

expenditures and other public needs. (Chavez vs. Ongpin; GR No. 76778; June 6, 1990)

b. 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. (Kapatiran ng Mga Naglilingkod sa Pamahalaan v. Tan; June 30,
1988)

c. 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.

NOTE: Non-observance of Fiscal Adequacy and Administrative Feasibility will render the
tax measure unsound but not unconstitutional. However, non-observance of the Principle of
Theoretical Justice is invalid because the Constitution itself requires that taxation must be
equitable non-observance of the Principle of Theoretical Justice is invalid because the
Constitution itself requires that taxation must be equitable

f. Taxes as distinguished from other impositions/exactions/levies

COMPARED TO:
i. License Fees/Charges

Tax License Fee

Basis Taxation power Police power
Purpose Revenue Regulation
Limitation on Subject only to inherent and Limited to the cost of issuance of
Amount constitutional limitations license and cost of inspection
and surveillance
 When paid After the start of business Before the start of business
Surrender vis- Cannot be surrendered except Lawful consideration not
a-vis necessity for lawful consideration necessary
of
consideration
Effect of Will not render the business Will render the business illegal
non- illegal BUT criminal
payment prosecution will result

ii. Special Assessment (Sec. 240, Local Government Code)

Sec. 240, LGC: Special Levy by Local Government Units. - A province, city or
municipality may impose a special levy on the lands comprised within its territorial
jurisdiction specially benefited by public works projects or improvements funded by
the local government unit concerned: Provided, however, That the special levy shall
not exceed sixty percent (60%) of the actual cost of such projects and improvements,
including the costs of acquiring land and such other real property in connection
therewith: Provided, further, That the special levy shall not apply to lands exempt from
basic real property tax and the remainder of the land portions of which have been
donated to the local government unit concerned for the construction of such projects or
improvements.
Tax Special Assessment (LGC)
Definition Demand of sovereignty Special levy on lands comprised within the
for raising revenue territorial jurisdiction of a Province, City or
Municipality specially benefitted by public
works, projects, improvements funded by the
LGU concerned

Subject Imposed on lands, persons, Imposed on land only

property, income, business,
etc.
Liability Personal Non-personal

Basis Based on necessity (and Based solely on benefits

partially on benefits)

Application General Special to a particular time and place

iii. Toll Fees

Tax Toll
Definition Demand of sovereignty for Amount charged for the cost and
raising revenue maintenance of property used

Purpose For support of the government As compensation for use of another's

property

Determinatio Determined by the sovereign Determined by the cost of the property or

n of Amount improvement

Who may Imposed by the State Imposed by the government or private

impose individual
 iv. Customs Duties

Tax Custom Duties

Purpose Raising revenue Controlling the flow of the goods of the
country
Broadness Broader term Tariff or tax on the importation (usually) or
exportation (unusually) of goods

v. Debt

Tax Debt
Basis Law Contract/ judgment

Effect of failure to pay Civil and criminal Civil liability only (No imprisonment)
liability
Mode of payment Money Money, property or service

Assignability/ No Yes
Transmissibility
Subjectivity to No Yes
Compensation/Set-off
Interest Yes, if deficient or General Rule: no interest, unless
delinquent. expressly stipulated or after demand is
made

Authority Public authority Private individuals

Prescription Determined by the Determined by the Civil Code

Tax Code

g. Taxes vs. Set Off/Legal Compensation

Rule on Compensation under the Civil Code

Requisites for Legal Compensation (Art. 1279, Civil Code)

- Parties must be mutual principal debtors and creditors in their own right
- Both debts must be due
- Both debts must be liquidated and demandable
- Debts must pertain to sums of money or if consumables, they must be of the same kind
and quality
- The claim must be clearly demandable, i.e., no controversy as to the claim.

Are taxes subject to set-off?

 General Rule: No. There can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government. (Francia
vs. IAC)

Taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. There is a material distinction
between a tax and debt. Debts are due to the Government in its corporate capacity, while
taxes are due to the Government in its sovereign capacity. (Philex Mining vs. CIR)

The reason on which the general rule is based, is that taxes are not in the nature of contracts
between the party and party but grow out of duty to, and are the positive acts of the
government to the making and enforcing of which, the personal consent of individual
taxpayers is not required. (Republic vs. Mambulao, as cited in Francia vs. IAC)

Except: if the claim against the government was already subjected to appropriation and
recognized by the court in an estate settlement proceeding as against estate tax liability of the
estate, and both are within the jurisdiction of the probate court. (Domingo vs. Garlitos)

a. Equitable Recoupment

b. Lifeblood Doctrine

LIFEBLOOD THEORY - Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. (Commissioner of Internal Revenue vs. Algue; GR
No. L-28896; Feb. 17, 1988)

c. Necessity Theory

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. (71 Am. Jur. 2d 346)

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. (Phil. Guaranty Co., Inc. vs. CIR; GR No. L-22074; April 30, 965)

d. Benefits-Protection Theory

BENEFITS-PROTECTION 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. (Commissioner of Internal Revenue vs. Algue, supra)
e. Power to Tax involves the Power to Destroy

“THE POWER TO TAX IS THE POWER TO DESTROY”

According to Justice Marshall: The power to tax includes the power to destroy. 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. (McCulloch vs.
Maryland, 4 Wheat, 316 4 L ed. 579, 607)

However, according to Justice Holmes: The power to tax is not the power to destroy as long as
this court (Supreme Court) sits.

Taxpayers may seek redress before the courts in case of illegal imposition of taxes and
irregularities. The Constitution, as the fundamental law, overrides any legislative or executive
act that runs counter to it. In any case, therefore, where it can be demonstrated that the
challenged statutory provision fails to abide by its command, then the court must declare and
adjudge it null. (Sison Jr. v. Ancheta; G.R. No. L-59431; July 25, 1984)

f. Kinds of Double Taxation

a. Kinds

Double Taxation means taxing the same person for the same tax period and the same activity
twice, by the same jurisdiction.

Double taxation in strict sense/Direct Double Taxation 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.

Double Taxation in Broad sense/Indirect Double Taxation is the opposite of direct double
taxation and is not legally objectionable. The absence of one or more of the foregoing
requisites of obnoxious direct tax makes it indirect.

Constitutionality of double taxation: Double taxation in its stricter sense is unconstitutional

but that in the broader sense is not necessarily so.

Our Constitution does not prohibit double taxation. However, double taxation will not be
allowed if it results in a violation of the equal protection clause.

b. Modes of eliminating double taxation

i. Tax Deduction - an amount subtracted from the gross income to arrive at taxable income

ii. Tax Credit - an amount subtracted from an individual’s or entity’s tax liability (tax due)
to arrive at the tax liability still due.
 A deduction differs from a tax credit, in that a deduction reduces taxable income while a credit
reduces tax liability.

iii. Tax Treaties (RMO No. 72-2010 dated Aug. 25, 2010 and RMO No. 8-2017 dated
October 24, 2010)

A tax treaty sets out the respective rights to tax of the state of source (situs) and the state of
residence with regard to certain cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are given the right
to tax, although the amount of tax that may be imposed by the state of source is limited.

It applies whenever the state of source is given full or limited right to tax. The treaty makes it
incumbent upon the state of residence to allow relief in order to avoid double taxation.

Under RMO No. 72-2010 – taxpayers availing of tax treaty relief must submit a Tax Treaty
Relief Application with the BIR International Tax Affairs Division on/before the date of
transaction.

Under RMO No. 8-2017 – for those availing of tax treaty relief for Royalties, Interests and
Dividends, what they will file is a Certificate of Residency for Tax Treaty Relief (CORTT
Form) with the ITAD and RDO NO. 39. Residency for Tax Treaty Relief (CORTT Form) with
the ITAD and RDO NO. 39.

g. Kinds of Tax Exemptions

h. Principles/Interpretations/Construction on Tax Laws and Tax Exemptions

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.

"a statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication.” (CIR vs. CA, CTA and Ateneo de Manila University, GR No. 115349, April 18,
1997)

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.

Tax exemptions are never presumed. It must be established and proved by the taxpayer; must
be limited to what the law says; and personal to the person entitled to the same.

i. Prospectivity of Tax Laws

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)

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)

The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive
system of taxation." The constitutional provision has been interpreted to mean simply that
"direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second
ed. (1977)). Indeed, the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system.

Resort to indirect taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. (Tolentino vs. the SOF and the CIR, GR No. 115525, October 30,
1995)

j. Prescriptability/Imprescriptability of Taxes

k. Forms of Escape from Taxation

a. 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 evasion connotes the integration of three factors:

i. the end to be achieved, i.e., the payment of less than that known by the taxpayer to be
legally due, or the non-payment of tax when it is shown that a tax is due;
ii. An accompanying state of mind which is described as being "evil," in "bad faith,"
"willful," or "deliberate and not accidental"; and

iii. A course of action or failure of action which is unlawful. (CIR vs. Estate of Benigno
Toda, Jr., GR No. 147188, Sept. 14, 2004)

b. 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)

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 arm’s length. 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. (CIR vs. Estate of Benigno
Toda, Jr., GR No. 147188, Sept. 14, 2004) further or additional civil or criminal liabilities.
(CIR vs. Estate of Benigno Toda, Jr., GR No. 147188, Sept. 14, 2004)

c. Tax Amnesty

Nature and Benefits

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. (Metropolitan Bank and Trust Co. v.
Commissioner of Internal Revenue, G.R. No. 178797, 4 August 2009)

Distinguished with tax exemption:

Tax Amnesty Tax Exemption

Immunity from all criminal and civil obligations Immunity from civil liability only
from non-payment of taxes
It is a general pardon given to all taxpayers Immunity or privilege granted to qualified
taxpayers from a charge or burden of which
others are subjected (Florer vs. Sheridan, 137 Ind.
28, 36 NE 365)
It applies only to past tax periods. (People vs. Applies prospectively after the grant of the
Castañeda, G.R. No. L-46881, September 15, exemption or from qualification therefrom
1988)

Current Amnesty Law – RA No. 11213 dated Feb. 14, 2019

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

- 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
 - 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
- 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 thing we wish to address.”

Amnesty on Estate Tax: applies to estates of decedents who died on or before Dec. 31, 2017.
The amnesty tax is 6% of the net estate

valued at the time of death or P5,000 whichever is higher, imposed on every transfer of the
property/ies (X to Y, Y to Z, Z to A – each will be subject to a separate amnesty tax).

Immunities and Privileges: Estates covered by the Estate Tax Amnesty, which have fully
complied with the conditions set forth above, including the payment of the estate amnesty tax
shall be immune from the payment of all estate taxes for taxable year 2017 and prior years, and
from all appurtenant civil, criminal and administrative cases and penalties under the Tax Code,
as amended

Amnesty on Delinquencies: all national internal revenue taxes collected by the BIR, including
VAT and excise taxes collected by the Bureau of Customs.

Delinquencies covered and Applicable Rates:

Delinquency Covered Applicable Rate

Delinquencies and assessments, which have become final 40% of the basic tax assessed
and executory, including delinquent tax account, where the
application for compromise has been requested but was
denied by the
Pending criminal cases with the DOJ or the courts for tax 60% of the basic tax assessed
evasion
Tax casesand other of
subject criminal offenses
final and underjudgment
executory the Tax by
Code,
the 50% of the basic tax assessed
courts on or before the IRR takes effect.
Withholding tax agents who withheld taxes but failed to 100% of the basic tax assessed
remit the same to the BIR

Immunities and Privileges: The tax delinquency of those who avail of the Tax Amnesty on
Delinquencies and have fully complied with all the conditions and upon payment of the
amnesty tax shall be considered settled and the criminal case under Sec. 18(c) of the Tax Code,
as amended, as such relate to the taxpayer’s assets, liabilities, networth and internal revenue
taxes that are subject of the tax amnesty, and from such other investigations or suits.
 d. 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.

Basic Principles Regarding Tax Exemption

 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. (Asiatic Petroleum Co. vs.
Llanes, 49 Phil. 466; see also House vs. Posadas, 53 Phil. 338)." (Collector of Int.
Revenue vs. Manila Jockey Club, Inc., G.R. No. L-8755, March 24, 1956)
 He who claims exemption should prove his factual and legal basis for exemption.
(Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, G.R.
No. 147295, February 16, 2007)
 Tax exemptions are strictly construed against the person claiming it. (Esso Standard
Eastern, Inc. vs. Acting Commissioner of Customs; GR No. L-21841; Oct. 28, 1966)
 Constitutional grant of exemptions are self-executing.
 In the same way that taxes are personal, tax exemptions are also personal.
 Deductions from income tax purposes partake of the nature of tax exemptions,
therefore should also be construed strictly against the taxpayer. (Commissioner of
Internal Revenue vs. General Foods (Phils), Inc.; GR No. 143672; April 24, 2003)
 Same treatments are given to tax refunds. (Commissioner of Internal Revenue v.
Eastern Telecommunications Phils., Inc., G.R. No.163835, July 7, 2010)

Grounds for Tax Exemption

i. Contract – the grant of tax exemption is usually contained in the charter of the corporation to
which the exemption is granted.

ii. Public policy - to encourage new and necessary industries, or to foster charitable institutions.

iii. Reciprocity – to reduce the rigors of international double or multiple taxation, tax exemptions
maybe granted in treaties. A tax exemption is a personal privilege of the grantee and therefore
not assignable; it is generally revocable by the government, unless founded on contract

and must not be discriminatory.

Revocation of Tax Exemption: If the grant of an exemption does not constitute a contract, but
merely “a spontaneous concession by the legislature, not connected with any service or duty
imposed” it is REVOCABLE by the power which made the grant.

Thus, if the basis of the tax exemptions is by virtue of a franchise granted by Congress, the
exemption may be revoked.

However, if the tax exemption constitutes a binding contract and for a valuable consideration,
the government cannot unilaterally revoke the tax exemption.

e. Compromise and Abatement - these are powers granted to the Commissioner of Internal
Revenue to reduce tax liabilities and/or penalties.

GROUNDS FOR COMPROMISE OF CIVIL LIABILITY:

- Where the assessment is of doubtful validity;

 - When the financial position of the taxpayer demonstrates clear inability to pay the tax.

GROUNDS FOR ABATEMENT:

i. The tax or any portion thereof appears to have been unjustly or excessively assessed; or

ii. The administration and collection costs involved do not justify collection of the amount
due

f. Shifting - the burden of payment is transferred from the statutory taxpayer to another
without violating the law (e.g., VAT);

g. 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.

h. 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.

l. Difference between Tax Evasion vs. Tax Avoidance

-see above-

m. Tax refund

n. Tax credit

o. Tax amnesty

-see above-

p. Compromise vs. abatement

-see above-

q. Judicial Review of Taxation

r. Taxpayer’s Suit

The decision to entertain a taxpayer’s suit is discretionary upon the Court. It can choose to
strictly apply the rule or take a liberal stance depending on the controversy involved.
Advocates for a strict application of the rule believe that leniency would open floodgates to
numerous suits, which could hamper the government from performing its job.

Such possibility, however, is not only remote but also negligible compared to what is at stake -
"the lifeblood of the State". For this reason, when the issue hinges on the illegal disbursement
of public funds, a liberal approach should be preferred as it is more in keeping with truth and
justice. (Namba vs. Lara)

Requisites: for a taxpayer’s suit to prosper, the following must be met:

a. Public funds derived from taxation are disbursed by a political subdivision or

instrumentality and in doing so, a law is violated or some irregularity is committed and
 b. The petitioner is directly affected by the alleged act.

As to the second requisite, the court, in recent cases, has relaxed the stringent "direct injury
test" bearing in mind that locus standi is a procedural technicality. By invoking
"transcendental importance", "paramount public interest", or "far-reaching
implications", ordinary citizens and taxpayers were allowed to sue even if they failed to
show direct injury. In cases where serious legal issues were raised or where public
expenditures of millions of pesos were involved, the court did not hesitate to give standing
to taxpayers. (Namba vs. Lara)

s. Read selected cases

a. CIR vs. ALGUE, INC. [G.R. No. L-28896. February 17, 1988.]
b. REPUBLIC vs. MAMBULAO LUMBER [G.R. No. L-17725. February 28, 1962.]
c. ENGRACIO FRANCIA vs. IAC [G.R. No. L-67649. June 28, 1988.]
d. MELECIO R. DOMINGO vs. HON. LORENZO C. GARLITOS [G.R. No. L-18994. June
29, 1963.]
e. Executive Secretary vs. Southwing Heavy Industries (G.R. No. 164171, February 20, 2006)
f. John Hay People’s Alternative Coalition vs. Lim (G.R. No. 119775, October 24, 2003)
g. Delpher Trades Corp and Pacheco vs. IAC (G.R. No. L-69259, January 26, 1988)
h. CIR vs. Lincoln Philippine Life Insurance (G.R. No. 119176, March 19, 2002)
i. CIR vs. Estate of Benigno Toda (G.R. No. 147188, September 14, 2004)
j. City of Iloilo vs. Smart Communications (G.R. No. 167260, February 27, 2009)
k. National Power Corporation vs. CBAA (G.R. No. 171470, January 30, 2009)
l. Winebrenner & Inigo Insurance Brokers, Inc. vs. CIR (G.R. 206526, January 28, 2015)
m. Fluor Daniel Phil. Inc. vs. CIR (G.R. 200620, March 18, 2015)
n. China Banking Corp. vs. CIR (G.R. 172509, February 4, 2015)
o. CBK Power Co. Ltd. Vs. CIR (G.R. 193383-84, January 14, 2015)
p. Philippine National Bank vs. CIR (G.R. 206019, March 18, 2015)
q. Covanta Energy Philippine Holdings Inc. vs. CIR, G.R. 203160, January 24, 2018
r. Philippine Airlines vs. CIR, G.R. 206079-80, January 17, 2018
s. University Physicians Services Inc. vs. CIR, G.R. 205955, March 7, 2018
t. Bank of the Philippine Islands vs. CIR, G.R. 224327, June 11, 2018
u. Asian Transmission Corp. vs. CIR, G.R. 230861, Sept. 19, 2018
v. Land Bank of the Phil. Vs. Cacayuran, G.R. 191867, April 22, 2015