I.

General Principles of Taxation

a. Definition, Concept and Purpose of Taxation

Taxation is the exercise of the sovereign power to raise revenues for the expenses of the government

The power to tax:

 An essential and inherent attribute which belongs as a matter of right, to every independent government
 Needs no express conferment by the people before it can be exercised 
 Purely legislative thus cannot be delegated to the executive and judicial branch of the government without conflicting with the theory of
separation of powers
 Thus, the legislature has the power to determine what tax shall be imposed, why it shall be imposed, how it will be imposed, against
whom it will be imposed, and where it shall be imposed

Concept of Taxation
1. Revenue Raising Measure
The process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government; a
method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its
burdens [51 Am. Jur. 34; 1 Cooley 72-93].

2. As a Power
a. It refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.
b. Is described as 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. [Paseo Realty & Development Corporation v. CA, G.R. No. 119286 (2004)]

Purposes of Taxation

Primary purpose is to raise revenue for the expenses of the government.

Primary purpose of taxation is to provide funds or property with which to promote the general welfare and protection of its citizens. Fees
may be properly regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is,
at least, one of the real and substantial purposes, then the exaction is
properly called a tax. [PAL v. Edu, G.R. No. L-41383 (1988)]

The secondary purposes of taxation are the following:

1. Special or Regulatory 

Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected
with public interest as to be within the police power of the State. 
Taxation is often employed as a device for regulation by means of which certain effects or conditions envisioned by governments may be
achieved. Taxes may be levied with a regulatory purpose to provide means for the rehabilitation
and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state.

These regulatory purposes are also known as Sumptuary. Thus, taxation can:
a) Strengthen anemic enterprises or provide incentives to greater production through grant of tax exemptions or the creation of conditions
conducive to their growth.

b) Protect local industries against foreign competition by imposing additional taxes on imported goods, or encourage foreign trade by
providing tax incentives on imported goods.

c) Be a bargaining tool by setting tariff rates first at a relatively high level before trade negotiations are entered into with another country.

d) Halt inflation in periods of prosperity to curb spending power; ward off depression in periods of slump to expand business.

e) Reduce inequalities in wealth and incomes, as for instance, the estate, donor's and income taxes, their payers being the recipients of
unearned wealth or mostly in the higher income brackets. Progressive system of taxation prevents the undue concentration of wealth in the
hands of a few individuals.

Progressivity is keystoned on the principle that those who are able to pay shoulder the bigger portion of the tax burden. [Mamalateo]

f) Taxes may be levied to promote science and invention [see RA. No. 5448] or to finance educational activities [see RA. No. 5447] or to
improve the efficiency of local police forces in the maintenance of peace and order through grant of subsidy [see RA. No. 6141].

g) Be an implement of the police power to promote the general welfare.

h) Protect local industries from foreign competition.

Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to
be within the police power of the state. [Caltex v. COA, G.R. No. 92585 (1992)]

i) To address push for the government’s health measure, just like what happened in the landmark legislation on sin taxes in 2012 [see R.A.
No. 10351].

2. Promotion Of General Welfare 

Taxation may be used as an implement of police power in order to promote the general welfare of the people.
 
3. Reduction of Social Inequity 
With more taxes coming from those who are able to pay, the government will have more funds to provide for the social amelioration programs.

4. Encourage Economic Growth 

Taxation does not only pertain to impositions of burden or payment of taxes. It also covers the grant of tax exemptions and reliefs in order to
encourage investments here in the Philippines. 

5. Protectionism 
Taxation also serves a toll by providing structures, and mechanics for the imposition of emergency measures, including tariffs

b. Nature and Characteristics of Taxation (Civil in nature; Principle of Nationality)

 Tax Laws are civil and not penal in nature although there are penalties provided for their violation.
 Purpose of imposing penalty is for the timely payment of taxes and to punish evasion and neglect of duty
 Offense is committed against the State thus the Executive has the power to pardon. 
 It is an attribute of sovereignty and thus legislative in character
 Inherent attribute of sovereignty; the government chiefly relies on taxation to obtain the means to carry on its operations.
 Taxes are essentials thus the dictum “taxes are the lifeblood of the government”
 It is an enforced proportional contribution from persons and properties (legal obligation); 
 Imposed by the State by virtue of its sovereignty; and 
 It is levied for the support of the Government

Nature:
1. Inherent in sovereignty
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 upposed to provide [Phil. Guaranty Co., Inc. v. Commissioner, G.R. No. L-22074 (1965)].

Taxation as an Inherent Power

 The power to tax is inherent only with respect to the State
 For LGUs, their power to tax is a direct grant of the Constitution

2. Essentially a legislative function

The power to tax is peculiarly and exclusively legislative and cannot be exercised by the executive or judicial branch of the government [ 1 Cooley
160-161].
Hence, only Congress, our national legislative body, can impose taxes. The levy of a tax, however, may also be made by a local legislative body
subject to such limitations as may be provided by law. It includes the authority to:
a. Determine the nature, purpose, extent, coverage, apportionment, situs, and method of collection of the tax;
 b. Grant tax exemptions or condonations; and
c. Specify or provide for the administrative as well as judicial remedies that either the government or the taxpayers may avail
themselves in the proper implementation of the tax measure.

3. Subject to constitutional and inherent limitations

The power to tax is said to be the strongest of all the powers of government. It is unlimited, plenary, comprehensive and supreme, in the
absence of constitutional restrictions, the principal check on its abuse resting in the responsibility of members of Congress to their constituents.
However, the power of taxation is subject to constitutional and inherent limitations [Mamalateo]. These limitations are those provided in the
fundamental law or implied therefrom, while the rest spring from the nature of the taxing power itself although they may or may not be provided
in the Constitution.

CHARACTERISTICS
1. Enforced contribution
Its imposition is in no way dependent upon the will or assent of the person taxed. It is not contractual, either express or implied, but positive acts
of government;

2. Generally payable in the form of money

Although the law may provide payment in kind (e.g. backpay certificates under Sec. 2, R.A. No. 304, as amended);

3. Proportionate in character
Laid by some rule of apportionment which is usually based on ability to pay.
“The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.” [Sec. 28 (1), Art. VI,
1987 Constitution];
4. Personal to the taxpayer;
5. Levied on persons, property, rights, acts, privileges, or transactions;
6. Levied by the State which has jurisdiction or control over the subject to be taxed;
7. Levied by the law-making body of the State.
The power to tax is a legislative power but is also granted to local governments, subject to such guidelines and limitations as law may be provided
by law.

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” [Sec. 5, Art. X, 1987 Constitution];

8. Levied for public purpose.

Revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. [ Gaston v. Republic
Planters Bank, G.R. No. 77194 (1988)]. The public purpose or purposes of the imposition is implied in the levy of tax. [ Mendoza v. Municipality,
G.R. No. L-7373 (1954)]. A tax levied for a private purpose constitutes a taking of property without due process of law; and
9. It is also an important characteristic of most taxes that they are commonly required to be paid at regular periods or intervals every year.
c. Power of Taxation as distinguished from Police Power and Power of Eminent Domain

When the distinction of exercise of powers is relevant

The distinction is important when the one exercising it is the LGU (mere delegated authority).
Since Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain and Taxation, the distinction between
police power and the power to tax, which could be significant if the exercising authority were mere political subdivisions (since delegation by it to
such political subdivisions of one power does not necessarily include the other), would not be of any moment when, Congress itself exercises the
power. [NTC v. CA, G.R. No. 127937 (1999)]

Taxation Police Power Eminent Domain

Purpose  Raise revenue to defray Promote public welfare through Take private property for public use 
expenses of the government  regulations 

Scope All persons and property and All persons, property, privileges, and Only the particular property comprehended 
rights  rights

Basis Public necessity  Public necessity and the right of the Public necessity, private property is taken for
State to self-protection and self- public use 
preservation 

Amount of No limit as to amount Limited to the cost of regulations  No exaction. Government pays just compensation
Execution involved or amount to the owner of the property 
imposed 

Exercising The State and political State and political subdivisions  The State, its political subdivisions,  may be
Authority subdivisions (LGUs) granted to public service companies or public
utilities

d. Theory and Basis of Taxation

1. Lifeblood Theory - Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Without taxes the
government can neither exist nor endure. 
2. Necessity Theory - Taxation is a power emanating from necessity thus it is a necessary burden to preserve the State’s sovereignty and a means
to give the citizenry an army to resist an aggression. 
3. Benefits-Protection Theory (Doctrine of Symbiotic Relationship) - Every person who is able to contribute his share in running the
government. In return the government must respond in the form of tangible and intangible benefits intended to improve the lives of the people.
4. Jurisdiction over subject and objects
The limited powers of sovereignty are confined to objects within the respective spheres of governmental control. These objects are the proper
subjects or objects of taxation and none else.

e. Principles of a Sound Tax System

Fiscal adequacy
The sources of tax revenue should coincide with, and approximate the needs of, government expenditures. The revenue should be elastic or
capable of expanding or contracting annually in response to variations in public expenditures.

Administrative feasibility
Tax laws should be capable of convenient, just and effective administration. Each tax should be:
 capable of uniform enforcement by government officials,
 convenient as to the time, place, and manner of payment, and
 not unduly burdensome upon, or discouraging to business activity.

Theoretical justice or equality

The tax burden should be in proportion to the taxpayer's ability to pay. This is the so-called ability to pay principle. Taxation should be uniform
as well as equitable

Note: The non-observance of the above principles will not necessarily render the tax imposed invalid except to the extent those specific
constitutional limitations are violated. [De Leon]

f. Scope and Limitation of Taxation

i. Inherent Limitations

1. Inherent Limitations
The following are the inherent limitations of taxation:
a. Public Purpose
b. Inherently Legislative
c. Territorial
d. International Comity
e. Exemption of Government Entities, Agencies, and Instrumentalities

PUBLIC PURPOSE
The proceeds of the tax must be used:
a. for the support of the State; or
b. for some recognized objects of government or directly to promote the welfare of the
community.
Test: Whether the statute is designed to promote the public interest, as opposed to the furtherance of the advantage of individuals, although each
advantage to individuals might incidentally serve the public. [Pascual v. Sec. of Public Works, G.R. No. L-10405 (1960)]
The protection and promotion of the sugar industry is a matter of public concern; the legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. [Lutz v. Araneta, G.R. No. L-7859 (1955)]
The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over
another. [Tio v. Videogram, G.R. No. L-75697 (1987)]

Tests in Determining Public Purpose:

a. Duty Test
Whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a
government to provide.
b. Promotion of General Welfare Test
Whether the proceeds of the tax will directly promote the welfare of the community in equal measure.
c. Character of the Direct Object of the Expenditure
It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax and not the magnitude of the
interests to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited
by their promotion.

Incidental advantage to the public or to the State, which results from the promotion of private enterprises or business, does not justify their aid
with public money. [Pascual v. Sec. of Public Works, supra]

INHERENTLY LEGISLATIVE

a. Stated in another way, taxation may exceptionally be delegated, subject to such well-settled limitations as:
b. The delegation shall not contravene any constitutional provision or the inherent limitations of taxation;
c. The delegation is effected either by:
i. the Constitution; or
ii. by validly enacted legislative measures or statute; and
d. The delegated levy power, except when the delegation is by an express provision of the Constitution itself, should only be in favor of the
local legislative body of the local or municipal government concerned. [Vitug and Acosta]

General Rule: Delegata potestas non potest delegari. The power to tax is exclusively vested in the legislative body and it may not be re-delegated.
Judge Cooley enunciates the doctrine in the following oft-quoted language: "One of the settled maxims in constitutional law is that the power
conferred upon the legislature to make laws cannot be delegated by that department to any other body or authority. Where the sovereign power of
the state has located the authority, there it must remain; and by the constitutional agency alone the laws must be made until the Constitution itself
is charged." [People v. Vera, G.R. No. L-45685 (1937)]

Legislature has the power to determine the:

 a. Nature (kind),
b. Object (purpose),
c. Extent (rate),
d. Coverage (subjects) and
e. Situs (place) of taxation.

Exceptions

a. Delegation to local governments - This exception is in line with the general principle that the power to create municipal
corporations for purposes of local self-government carries with it, by necessary implication, the power to confer the power to tax on
such local governments. (1 Cooley 190). This is logical for after all, municipal corporations are merely instrumentalities of the state for
the better administration of the government in respect to matters of local concern. [Pepsi-Cola Bottling Co. of the Phil. Inc. v. Mun. of
Tanauan, G.R. No. L-31156 (1976)].

Under the new Constitution, however, LGUs are now expressly given the power to create its own sources of revenue and to levy taxes,
fees and charges, subject to such guidelines and limitations as the Congress may provide which must be consistent with the basic
policy of local autonomy. [Art. X, Sec 5, 1987 Constitution]

b. Delegation to the President

1. to enter into Executive agreements; and
2. to ratify treaties which grant tax exemption subject to Senate concurrence.

The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it
may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of
the national development program of the Government. [Art. 6, Sec. 28(2), 1987 Constitution]

c. Delegation to administrative agencies - Limited to the administrative implementation that calls for some degree of discretionary
powers under sufficient standards expressed by law or implied from the policy and purposes of the Act.

There are certain aspects of the taxing process that are not legislative and they may, therefore, be vested in an administrative body. The
powers which are not legislative include:
o the power to value property for purposes of taxation pursuant to fixed rules;
o the power to assess and collect the taxes; and
o the power to perform any of the innumerable details of computation, appraisement, and adjustment, and the delegation
of such details.

The exercise of the above powers is really not an exception to the rule as no delegation of the strictly legislative power to tax is
involved.
The powers which cannot be delegated include:
 the determination of the subjects to be taxed;
 the purpose of the tax, the amount or rate of the tax;
 the manner, means, and agencies of collection; and
 the prescribing of the necessary rules with respect thereto.
TERRITORIAL
Rule: A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege
derived from the laws of another state and therein exercise and enjoyed. [51 Am.Jur. 87-88].

Reasons:
 Tax laws (and this is true of all laws) do not operate beyond a country's territorial limits.
 Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is
supposed to be a compensation.

Note: Where privity of relationship exists. It does not mean, however, that a person outside of state is no longer subject to its taxing powers. The
fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. A person may be
taxed where there is between him and the taxing state, a privity of the relationship justifying the levy. Thus, the citizen's income may be taxed
even if he resides abroad as the personal (as distinguished from territorial) jurisdiction of his government over him remains. In this case, the basis
of the power to tax is not dependent on the source of the income nor upon the location of the property nor upon the residence of the taxpayer but
upon his relation as a citizen to the state. As such citizen, he is entitled, wherever he may be, inside or outside of his country, to the protection of
his government.

INTERNATIONAL COMITY

Comity - respect accorded by nations to each other because they are sovereign equals. Thus, the property or income of a foreign state or
government may not be the subject of taxation by another state.

Reasons:
a. In par in parem non habet imperium. As between equals there is no sovereign (Doctrine of Sovereign Equality among states under
international law). One state cannot exercise its sovereign powers over another.)

b. In international law, a foreign government may not be sued without its consent. Therefore, it is useless to impose a tax which could not be
collected.

Usage among states that when a foreign sovereign enters the territorial jurisdiction 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 other.

EXEMPTION OF GOVERNMENT ENTITIES, AGENCIES, AND INSTRUMENTALITIES

If the taxing authority is the National Government:

General Rule: Agencies and instrumentalities of the government are exempt from tax.

Note: Unless otherwise provided by law, the exemption applies only to government entities through which the government
immediately and directly exercises its sovereign powers. With respect to government-owned or controlled corporations performing
proprietary (not governmental) functions, they are generally subject to tax unless exempted under Section 27(C) of the Tax Code or, in
certain cases, if there is a tax exemption provisions in their charters or the law creating them in line with the rule that a specific law
overrides a general law.

Reasons for the exemption:

a. To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so
laid and thus, the government would be taxing itself to raise money to pay over for itself.
b. This immunity also rests upon fundamental principles of government, being necessary in order that the functions of
government shall not be unduly impeded. [1 Cooley 263.
c. The practical effect of an exemption running to the benefit of the government is merely to reduce the amount of money that
has to be handled by the government in the course of its operations: For these reasons, provisions granting exemptions to
government agencies may be construed liberally in favor of non-tax liability of such agencies. [Maceda v. Macaraig, Jr.,
G.R. No. 88291 (1991)].

Exception: There is no constitutional prohibition against the government taxing itself. [Coll. v. Bisaya Land Transportation, 105 Phil.
338 (1959)].

If the taxing authority is a local government unit: RA 7160 expressly prohibits LGUs from levying tax on the National Government, its agencies
and instrumentalities and other LGUs. [Sec. 133 (o), LGC]

a. National Government 

- The State can tax itself, its political subdivisions, government agencies, and instrumentalities since there is no prohibition in the Constitution. 

- Agencies performing governmental functions are tax exempt unless expressly taxed 

- Agencies performing proprietary functions are subject to tax unless expressly exempted

 Government Owned and Controlled Corporation refers to any agency organized as a stock or non-stock corporation with functions
relating to public needs, owned by the Government directly or through its instrumentalities either wholly or in case of stock corporations,
to the extent of at least 51% of its capital stock. 
 Agency refers to any of the various units of the government, local government or a distinct unit therein 
  Instrumentality refers to any agency of the National Government, not integrated within the department framework vested within special
functions. The term shall include regulatory agencies, chartered institutions, and government owned and controlled corporations
 GR: Section 27 (C) of the Tax Code, all government-owned and controlled corporation, agencies, or instrumentalities are subject to tax
except Government Service Insurance System (GSIS), Social Security System (SSS), and Philippine Health Insurance Corporation
(PHIC)
 R.A. No. 10026 granted income taxation exemption to local water districts 
 TRAIN LAW removed PCSO from income tax exemption thus now subject to income tax
 Government educational institutions are also exempt from income tax

b. Local Government 
 The local government cannot impose tax, fee, or charge to the national government and its properties this doctrine emanates from the
“supremacy” of the national government over local government 
 PAGCOR is a government owned or controlled corporation with an original charter. PAGCOR has a dual role, to operate and regulate
gambling casinos. The latter role is governmental which places it in the category of an agency or instrumentality of the government.

ii. Constitutional LimitationsThe Constitutional provisions do not give rise to the power to tax but merely imposes limitations on what would
otherwise be an invincible power. 

1. Section 1. Article III. 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 the laws.

a. Due Process Clause

Due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of
property. (Sison U. Ancheta, 130 SCRA 654, July 25, 1984)

Due process consists of two components: substantive due process which requires the intrinsic validity of the law in interfering. with the
rights of the person to his life. liberty, or property; and procedural due process which consists of the two basic rights. of notice and
hearing, as well as the guarantee of being heard by an impartial and competent tribunal. (Secretary of Justice u. Ralph Lantion, G.R. No.
139465, January 18, 2000)

In taxation, substantive due process requires that the enactment of the tax law must be within the powers of the Congress granted by the
Constitution.

b. Equal Protection Clause 

This simply means persons similarly situated should be treated alike as to rights and obligations. The equal protection clause under our
Constitution does not guarantee absolute equality, but only equality among equals

Thus, a different treatment is allowed when there's a substantial distinction among the taxpayers.
 For difference in treatment to be allowed, there must be a classification of taxpayers. And for the classification to be valid, the following
essential requisites must be present:
a. Rest on substantial distinction
b. Be germane to the purpose of the law 
c. Not be limited to existing conditions only and 
d. Apply equally to all members of the same class 

2. Section 5. Article III. 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.

Provision contains two (2) clauses:

a) The non-establishment clause - covers the prohibition to establish a national or official religion since in that case, there will be
appropriation from taxes paid by the people
b) The free-exercise clause - the basis of tax exemptions granted to religious institutions

 3. Section 10, Article III. No law impairing the obligation of contracts shall be passed.
An impairment of an obligation of contract is a change in the terms of a legal contract between parties, either in the time or mode of performance,
or imposes new conditions, or dispenses with those expresses, or authorizes for its satisfaction something different from that provided in terms.

The purpose of the non-impairment clause is to safeguard the integrity of contracts against unwarranted interference by the State.

The non-impairment clause applies to the power of taxation but not to police power and power of eminent domain. This

If a tax exemption is contractual, a law revoking such exemption impaired the obligation of contract.

A tax exemption provided under a franchise may be revoked by Congress because no franchise or right be granted except under the condition that
it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires.

Prohibition against imprisonment for non-payment of poll tax

4. Section 20, Article III. No person shall be imprisoned for debt or non-payment of a poll tax.
Poll tax is a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the
occupation or business in which they may be engaged. A common example of poll tax is a community tax (cedula). 

5. Section 24. Article VI. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application,
and private bills, shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.
The reason is that it directly affects the property rights of the people. 
Uniformity and equality of taxation
6. Section 28(1). Article VI. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation.
Uniformity in taxation 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.
 Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at the same rate. 
 To satisfy this requirement, it is enough that the statute or ordinance applies equally to all persons, forms and corporations placed in
similar situations.
 A tax is progressive when the rate increases as the tax base increases.

7. Section 28(2) Article VI. The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations
and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within
the framework of the national development program of the Government. 

8. Section 28(3) Article VI. Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.
The exemption in favor of property used exclusively for charitable or educational purposes is "not limited to property actually indispensable"
therefore but extends to facilities which are "incidental to and reasonably necessary for" the accomplishment of said purposes. such as, in the case
of hospitals, "a school for training”.  (Herrera vs Quezon City Board of Assessment Appeals) 

Under the 1973 and 1987 Constitutions and even in the Local Government Code, in order to be entitled to the exemption, it must be proved, by
clear and unequivocal proof, that: (a) the institution is a religious, charitable and educational institution; and (b) its real properties are actually,
directly and exclusively used for religious, charitable and educational purposes. 

"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.

Charity may be applied to almost anything that tends to promote the well-doing and well-being of social man.

The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is
maintained for gain, profit, or private advantage.

9. Section 28(4) Article VI. No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members
of the Congress.
The requirement of majority concurrence pertains to the total membership of the Congress and not simply the majority of the quorum in a given
business day.

10. Section 5, Article X. 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.
The power to tax of LGUs is no longer by virtue of a valid delegation of authority by Congress, but pursuant to a direct authority as conferred by
Section 5, Article X of the 1987 Constitution. This power, however, is still subject to guidelines and limitations which Congress may provide
which must be consistent with the basic policy of local autonomy.

11. Section 4(3)(4). Article XIV. 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. Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on
dividends and provisions for reinvestment.
The revenues and assets of non-stock, non-profit educational institutions proved to have been used actually, directly, and exclusively for
educational purposes are exempt from duties and taxes.

Stages or Aspects of Taxation (LAP-R)

Levy - determination of the (PIPIE) persons, property or excises to be taxed, the sum or sums to be raised, the due date, time and manner of
levying and collecting taxes. (done by the Congress)
Assessment and Collection - manner of enforcement of the obligation on the part of those who are taxed. (Executive)
Payment - act of compliance by taxpayer. (Taxpayer)
Refund - the recovery of any tax alleged to have been illegally assessed or collected

Definition, Nature and Characteristics of Taxes

TAXES
1. Are enforced proportional contributions from persons and property levied by the law-making body of the State by virtue of its sovereignty for
the support of the government and all public needs.
2. Are the enforced proportional and pecuniary contributions from persons and property levied by the law-making body of the state having
jurisdiction over the subject of the burden for the support of the government and public needs.
3. Are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it.
[CIR v. Algue, supra]

ESSENTIAL CHARACTERISTICS
1. It is a forced charge, imposition or contribution. As such, it operates ad infinitum.
2. It is assessed in accordance with some reasonable rule of apportionment which means that conformably with the constitutional mandate for
Congress to evolve a progressive tax system, taxes must be based on taxpayer’s ability to pay. [Art VI, Sec 28[a], 1987 Constitution] [Art VI, Sec
28[a], 1987 Constitution]
3. It is a pecuniary burden payable in money.
4. It is imposed by the State on persons, property, or exercise within its jurisdiction, in accordance with the principle of territoriality.
5. It is levied by the legislative body of the State.
6. It is levied for a public purpose.
7. It is personal to the taxpayer.

Requisites of a valid tax

1. For a public purpose;
2. Rule of taxation should be uniform;
3. The person or property taxed is within the jurisdiction of the taxing authority;
4. Assessment and collection is in consonance with the due process clause; AND
5. The tax must not infringe on the inherent and constitutional limitations of the power of taxation.

Tax as distinguished from other forms of exaction

Tarriff
Taxes Tariff
All embracing term to include various kinds of enforced A kind of tax imposed on articles which are
contributions upon persons for the attainment of public traded
purposes. Intentionally.

Toll
Taxes Toll
Paid for the support of the government Paid for the use of another's property.

Demand of sovereignty Demand of proprietorship

Generally, no limit on the amount collected as long as it is Amount paid depends upon the cost of
not excessive, unreasonable or confiscatory construction or maintenance of the public
improvement used.
Imposed only by the government Imposed by the government or by
private individuals or entities.

A toll is a sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge or
the like, of a public nature. [1 Cooley 77]

The view has been expressed, however, that the taking of tolls is only another method of taxing the public for the cost of the
construction and repair of the improvement for the use of which the toll is charged. [71 Am. Jur. 2d 351.]

License fee
License and Regulatory Fee
Taxes
Imposed under the taxing power of the state for purposes of Levied under the police power of the State.
revenue.
Forced contributions for the purpose of maintaining Exacted primarily to regulate certain business or
government
functions. occupations.
Generally unlimited as to amount Should not unreasonably exceed the expenses of
issuing the license and of
supervision.
Imposed on persons, property and the right to exercise a Imposed only on the right to exercise a privilege
privilege.
Failure to pay does not necessarily make the act or business Failure to pay makes the act or business illegal.
illegal. Penalty for non- payment: Surcharges; or
Imprisonment (except poll tax).

License or permit fee is a charge imposed under the police power for purposes of regulation.

License is in the nature of a special privilege, of a permission or authority to do what is within its terms. It makes lawful an act which would
otherwise be unlawful. A license granted by the State is always revocable. [Gonzalo Sy Trading vs. Central Bank of the Phil., G.R. No. L-41480
(1976)]

Special Assessment
Taxes Special Assessment
Levied not only on land Levied only on land
Imposed regardless of public improvements Imposed because of an increase in value of land
benefited by public improvement
Contribution of a taxpayer for the support of the Contribution of a person for the construction of a
government public improvement
It has general application both as to time and place Exceptional both as to time and locality
A special assessment is not a personal liability of the person assessed, i.e., his liability is limited only to the land involved. It is based
wholly on benefits (not necessity).

A charge imposed only on property owners benefited is a special assessment rather than a tax notwithstanding that the statute calls it a
tax. The rule is that an exemption from taxation does not include exemption from special assessment. But the power to tax carries with
it the power to levy a special assessment.
Note: The term "special levy" is the name used in the present Local Government Code (RA. No. 7160). A province, city, or municipality, or the
National Government, may impose a special levy on lands especially benefited by public works or improvements financed by it. [Sec. 240, RA
7160]

Debt
Taxes Debt
Based on laws Generally based on contract, express or
implied.
Generally cannot be assigned Assignable
Generally paid in money May be paid in kind
Cannot be a subject of set off or compensation Can be a subject of set off or compensation (see
Art. 1279, Civil Code)
Imprisonment is a sanction for non- payment of tax, A person cannot be imprisoned for non- payment
except poll tax of debt (except when it arises from a
crime)
Governed by the special prescriptive periods provided Governed by the ordinary periods of
for in the NIRC prescription
Does not draw interest except only when delinquent Draws interest when it is so stipulated or where
there is default
Imposed only by public authority Can be imposed by private individual

Kinds of taxes

a. Situs of Taxation

Meaning: Situs of taxation literally means the place of taxation.

 The state where the subject to be taxed has a situs may rightfully levy and collect the
tax; and
  The situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question.
Within the territorial jurisdiction, the taxing authority may determine the situs.

The determination of the situs of taxation depends on various factors including the:
1. Nature of the tax;
2. Subject matter thereof (person, property, act or activity)
3. Possible protection and benefit that may accrue both to the government and the taxpayer;
4. Residence of the taxpayer
5. Citizenship of the taxpayer; and
5. Source of the income.

b. Construction and Interpretation of

i. Tax Laws

General Rule: Tax laws are construed strictly against the government and liberally in favor of the taxpayer. [Manila
Railroad Co. v. Coll. Of Customs, G.R. No. L-30264 (1929)].

No person or property is subject to taxation unless within the terms or plain import of a taxing statute. [see 72 Am. Jur. 2d
44] Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. [Coll. v. La
Tondena, G.R. No. L-10431 (1962)

Thus, a tax payable by “individuals” does not apply to “corporations. Tax statutes offering rewards are liberally
construed in favor of informers. [Penid v. Virata, G.R. No. L-44004 (1983)].

Exceptions:
a. The rule of strict construction as against the government is not applicable where the language of the statute is plain and
there is no doubt as to the legislative intent [see 51 Am. Jur. 368]. E.g. Word “individual” was changed by the law to
“person”. This clearly indicates that the tax applies to both natural and juridical persons, unless otherwise expressly
provided.
b. The rule does not apply where the taxpayer claims exemption from the tax.

Tax statutes are to receive a reasonable construction or interpretation with a view to carrying out their purpose and intent.
They should not be construed as to permit the taxpayer easily to evade the payment of tax. [Carbon Steel Co. v. Lewellyn,
251 U.S. 201].

Thus, the good faith of the taxpayer is not a sufficient justification for exemption from the payment of surcharges imposed
by the law for failing to pay tax within the period required by law.
ii. Tax exemption and exclusion
 Tax exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. [NPC v.
Albay, G.R. No. 87479 (1990)]

General Rule: In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against
the taxpayer. [Republic Flour Mills v. Comm. & CTA, G.R. No. L-25602 (1970)]

a. NPC v. Albay [supra]: Tax exemptions must be shown to exist clearly and categorically and supported by clear legal
provisions.
b. Floro Cement v. Gorospe [supra]: Claims for an exemption must be able to point out some provision of law creating the
right, and cannot be allowed to exist upon a mere vague implication or inference.
c. RCPI v Provincial Assessor of South Cotabato [G.R. No. 144486 (2005)]: Exemptions are strictly construed against the
taxpayer and liberally in favor of the taxing authority—it is the taxpayer’s duty to justify the exemption by words too
plain to be mistaken and too categorical to be misinterpreted.
d. CIR v. CA [supra]: Refunds are in the nature of exemption and must be construed strictly against the
grantee/taxpayer.
e. Quezon City v. ABS-CBN Broadcasting Corporation [G.R. No. 166408 (2008)]: Since taxation is the rule and
exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms

Exceptions:
a. When the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall be resolved in favor
of exemption;
b. When the exemption is in favor of the government itself or its agencies, or of religious, charitable, and educational
institutions because the general rule is that they are exempt from tax.
c. When the exemption is granted under special circumstances to special classes of persons.
d. If there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent, the
rule on strict construction does not apply. [Comm. v. Arnoldus Carpentry Shop, Inc., G.R. No. 71122 (1988)]

iii. Tax rules and regulations

General Rule: 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, NIRC]

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 are entitled to great respect. They
have in their favor a presumption of legality [Gonzales v. Land Bank, G.R. No. 76759 (1990)]

It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the provisions of the enabling
statute if such rule or regulation is to be valid. In case of conflict between a statute and an administrative order, the former
must prevail. [Fort Bonifacio Development Corp v. CIR, GR 175707 (2014)
Requisites for validity and effectivity of regulations
a. Reasonable;
b. Within the authority conferred;
c. Not contrary to law and the Constitution
[Art. 7, NCC]; and
d. Must be published.

Tax regulations whose purpose is to enforce or implement existing law must comply with the following requisites to be
effective [RP v. Pilipinas Shell Petroleum Corp., G.R. No. 173918 (2008)]:
a. Be published in a newspaper of general
circulation [Art. 2, NCC]; AND
b. Filed with the UP Law Center Office of the
National Administrative Register (ONAR)
[Ch 2, Book VII, EO 292]

Administrative interpretations and opinions: 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.

General rule: The Commissioner has the sole authority to issue rulings but he also has the power to delegate said
authority to his subordinates with the rank equivalent to a division chief or higher.

Exceptions: The Commissioner may not delegate the following:

a. The power to recommend the promulgation of rules and regulations by the Secretary of Finance;
b. The power to issue rulings of first impression or to reverse, revoke, or modify any existing ruling of the Bureau; and
c. The power to compromise or abate any tax liability as provided by Sec. 204 and 205 of the NIRC

Exception to the exception: BUT assessments issued by RDOs involving (a) Php500,000 or less, and (b) minor criminal
violations as determined by the Secretary of Finance as recommended by the
Commissioner, may be compromised by a Regional Evaluation Board [Sec. 7, NIRC].

Decisions of the Supreme Court applying or interpreting existing tax laws are binding on all subordinate courts and have
the force and effect of law. As provided for in Article 8 of the Civil Code, they “form part of the law of the land.”
 The same is also true with respect to decisions of the Court of Tax Appeals. However, by the nature of its jurisdiction, the
decisions of this court are still appealable to the Supreme Court
by a petition for review on certiorari (Rule 45). [Sec. 11, RA 9282]

iv. Penal provisions of tax laws

 Penal provisions of tax laws must be strictly construed. 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, G.R. No.
L-42050-66 (1978)]
v. Nonretroactive application to taxpayers
General rule: Rulings do not have retroactive application if
the revocation, modification, or reversal will be prejudicial to the taxpayer.

Exceptions:
a. Taxpayer’s deliberate misstatement or omission of facts
b. BIR’s gathered facts is materially different from the facts from which the ruling was based on
c. Taxpayer acted in bad faith

Note: The rule on non-retroactivity of rulings may be applied only if the parties in the ruling involve the taxpayer
himself/itself. The taxpayer cannot invoke the rulings granted in favor of the other taxpayers.
c. Sources of Tax Laws
I. 1987 Constitution

The constitution provides the limitation on the power to tax. The following are drafted out of the constitution:

 The rule of taxation shall be uniform and equitable. The congress shall evolve a progressive system of
taxation (Article VI, Section 28, paragraph 1).
 All money collected on any tax levied for a special purpose shall be treated as a 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. (Article VI,
Section 29, paragraph 3).
 The Congress may, by law, authorize the President to fix within specified limits, and subject to such
limitations and restriction as it may impose, tari ff rates, import and export quotas, tonnage and wharfage
dues, and other duties or imposts within the framework of the national development of the Government
(Article VI, Section 28, paragraph 2). The President shall have the power to veto any particular item or
 items in an appropriation, revenue or tari ff bill, but the veto shall not a ffect the item or items to which he
does not object. (Article VI, Section 27, second paragraph).
 The Supreme Court shall have the power to review, revise, reverse, modify or a ffirm on appeal or
certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in x x
x all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation
thereto. (Article VIII, Section 5).
 Tax exemptions are limited to those granted by law. However, no law granting any tax exemption shall be
passed without the concurrence of a majority of all the members of the Congress (Article VI, Section 28,
par. 4). The Constitution expressly grants tax exemption on certain entities/institutions such as (1)
Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, and nonprofit
cemeteries and all lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes (Article VI, Section 28, paragraph 3). (2) non-stock non-profit
educational institutions used actually, directly, and exclusively for educational purposes. (Article XVI,
Section 4(3)).
 In addition to national taxes, the Constitution provides for local government taxation (Article X, Section
5) (Article X, Section 6). Parenthetically, the Local Government Code provides that all government units
are granted general tax powers, as well as other revenue-raising powers like the imposition of service fees
and charges, in addition to those specifically granted to each of the local government units. But no such
taxes, fees and charges shall be imposed without a public hearing having been held prior to the enactment
of the ordinance. The levy must not be unjust, excessive, oppressive, confiscatory, or contrary to a
declared national economic policy (Section 186 and 187). Further, there are common limitations to the
grant of the power to tax the local government, such that taxes like income tax, documentary stamp tax,
etc. cannot be imposed by the local government.
II. Laws
 The basic source of Philippine Tax Laws is the National Internal Revenue Law, which codifies all tax
provisions, the latest of which is embodied in Republic Act No. 8424 (“The Tax Reform Act of 1997”). It
amended previous national internal revenue codes, which was approved on December 11, 1997. A copy
of the Tax Reform Act of (1997), which took effect on January 1, 1998.
III. Treaties
 The Philippines has entered into several tax treaties for the avoidance of double taxation and prevention
of fiscal evasion with respect to income taxes. At present, there are 31 Philippine Tax Treaties in force.

IV. Administrative Material

 The Secretary of Finance, upon the recommendation of the Commissioner, promulgates needful rules and
regulations for the effective enforcement of the Provisions of the Tax Code (Section 244, Tax Code of
1997). The Commissioner of Internal Revenue, however, has the exclusive and original power to interpret
the provisions of the Tax Code, but subject to review by the secretary of finance."
 Administrative issuances which may be relied upon in interpreting the provisions of the Tax Code, which
are assigned by he Secretary of Finance, or the Commissioner of Internal Revenue, or his duly authorized
 representative, come in the form of Revenue Regulations, Revenue Memorandum Rulings, Revenue
Memorandum Circulars, and BIR rulings."
 Revenue regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for the e ffective
enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes.
 Revenue Memorandum Orders (RMO) are issuances that provide directives or instructions; prescribe
guidelines; and outline processes, operations, activities, workflows, methods, and procedures necessary in
the implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of
operations ,except auditing.
 Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of
Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a
specific set of facts, with or without established precedents, and which the Commissioner may issue from
time to time for the purpose of providing taxpayers guidance on he tax consequences in specific
situations. BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null
and void ab initio."
 Revenue Memorandum Circulars (RMCs) are issuances publish pertinent and applicable portions, as well
as amplifications, of laws, rules, regulations and precedents issued by the BIR and other
agencies/offices."
 BIR rulings are the official position of the Bureau to queries raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax laws.
V. Case Law
 In the Philippines, Supreme Court decisions form part of the law of the land. As such, decisions by the
Supreme Court in the exercise of its power, to review, revise, reverse, modify, or certiorari, as the law or
the Rules of Court may provide, final judgements and orders of lower Courts arises involving the legality
of any tax, Impost, assessment, or toll, or any penalty imposed in relation thereto are adhered to and
recognized as binding interpretations of Philippine Tax law. Court of appeals decisions which have
become final and executory are also recognized interpretations of Philippine tax law.
VI. Local Government Tax Law
 Local Government Taxation in the Philippines is based on the constitutional grant of the power to tax the
local governments.
 Local Taxes may be imposed, as the Constitution grants, to each local government unit, the power to
create its own sources of revenues and to levy taxes, fees, and charges which shall accrue to the local
governments (Article X, Section 5). With respect to national taxes, local Government units shall have a
just share, as determined by law, in the national taxes, which shall be automatically released to them
(Article X, Section 6).
 However, there are certain taxes, such as the following, may not be imposed by local government units:
(Section 133, Local Government Code and Tax Law and Jurisprudence by Vitug and Acosta)
VII. National Tax Research Center (NTRC)
  Constituted under Presidential Decree 74, the NTRC is mandated to conduct continuing research in
taxation to restructure the tax system and raise the level of tax consciousness among the Filipinos, to
achieve a faster rate of economic growth and to bring about a more equitable distribution of wealth and
income.

d. Doctrines in Taxation
i. Prospectivity of Tax Laws
General rule: Tax laws are prospective in operation.
Reason: Nature and amount of the tax under tax laws enacted after the transaction could not have been foreseen and
understood by the taxpayer at the time of the transaction.
Exception: Tax laws may be applied retroactively provided it is expressly declared or it is clearly the legislative intent
(increase taxes on income already earned) except when retroactive application would be so harsh and oppressive.)
[Republic v. Fernandez, G.R. No. L-9141 (1956)

 Statutes are prospective and not retroactive in their operation, laws being the formulation of rules for the
future, not the past. [Curata v. Philippine Ports Authority, G.R. Nos. 154211-12 (2009)]
 The language of the statute must clearly demand or press that it shall have a retroactive effect. [Lorenzo
v. Posadas, supra]
Exception to the exception: Collection of interest in tax cases is not penal in nature; it is but a just
compensation to the
State. Thus, the constitutional prohibition against ex post facto laws is not applicable to the collection of
interest on back taxes. [Central Azucarera v. CTA, G.R. No. L-23236 (1967)]

ii. Imprescriptibility of Taxes

 Unless otherwise provided by law, taxes are imprescriptible. [CIR v. Ayala Securities Corporation G.R.
No. L-29485 (1980)]
 The law on prescription, being a remedial measure, should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed.
[Commissioner v. Standard Chartered Bank, G.R. No. 192173 (2015)]
iii. Double taxation
 Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing the
same person twice by the same jurisdiction for the same thing.” [Swedish Match Phils., Inc. v. Treasurer, G.R.
No. 181277 (2013)
iv. Power to Tax involves Power to Destroy
 The power to tax includes the power to destroy if it is used validly as an implement of the police power in
discouraging and in effect, ultimately prohibiting certain things or enterprises inimical to the public welfare, x x x
But where the power to tax is used solely for the purpose of raising revenues, the modern view is that it cannot be
allowed to confiscate or destroy. If this is sought to be done, the tax may be successfully attacked as an inordinate
 and unconstitutional exercise of the discretion that is usually vested exclusively in the legislature in ascertaining
the amount of the tax. (Cruz, Constitutional Law, 2000 Ed., p. 87)
v. Escape from Taxation
1. Shifting of tax burden
 The act of transferring the burden of a tax from the original payer or the one on whom the tax was assessed or
imposed to someone else. What is transferred is not the payment of the tax but the burden of the tax. All indirect
taxes may be shifted; direct taxes cannot be shifted.
 Ways of shifting the tax burden
1. Forward shifting - When the burden of the tax is transferred from a factor of production through the factors of
distribution until it finally settles on the ultimate purchaser or consumer. Examples: VAT, percentage tax.
2. Backward shifting - When the burden of the tax is transferred from the consumer or purchaser through the
factors of distribution to the factor of production. ! Example: Consumer or purchaser may shift tax imposed on
him to retailer by purchasing only after the price is reduced, and from the latter to the wholesaler, and finally to
the manufacturer or producer.
3. Onward shifting - When the tax is shifted two or more times either forward or backward.
 Factors determining tax shifting
1. Elasticity of demand and supply - The more the elasticity, the lower the incidence on the sales and the higher
the incidence on supply.
2. Nature of markets – In an oligopolistic market (i.e. few sellers and many buyers) tax shifting to buyers is high
since few sellers can team up to determine the market price. In a situation where there are many buyers and
sellers, a large portion of tax will be borne by sellers. For a monopolistic market, the entire tax burden falls on the
shoulders of the buyer.
3. Government policy on pricing – In the case of government price control, the supplier cannot increase prices,
hence cannot shift tax burden to buyers and vice versa.
4. Geographical location – If taxes are imposed on certain regions, it is hard to shift them to consumers because
consumers will move to regions with low taxes.
5. Nature of tax (Direct or Indirect tax) – Direct tax e.g. PAYE (pay-as-you-earn) cannot be shifted whatsoever
while indirect taxes can be shifted through increase in prices.
6. Rate of tax – If the rate is too high, shifting can occur backwards or forwards; if the rate is too low, it may be
absorbed by the manufacturer.
7. Time available for adjustment – The person who can adjust faster (buyer or seller) will be able to shift the tax
e.g. if the buyer can shift to substitute goods, the seller will bear the tax burden.
8. The tax point
 Taxes that can be shifted
1. Value-added Tax
2. Percentage Tax
3. Excise Tax
2. Tax avoidance
  The 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. It is politely called “tax minimization” and is NOT
punishable by law.

Example: A person refrains from engaging in some activity or enjoying some privilege in order to avoid the
incidental taxation or to lower his tax bracket for a taxable year.
3. Tax evasion
 is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is also known
as “tax dodging.” It is punishable by law.

Example: Deliberate failure to report a taxable income or property; deliberate reduction of income that has been
received; overstatement of expenses
 Elements of Tax Evasion
a. The end to be achieved. Example: the payment of less than that known by the taxpayer to be legally due, or in
paying no tax when such is due;
b. An accompanying state of mind described as being “evil,” “in bad faith,” “willful,” or “deliberate and not
accidental”; and
c. A course of action (or failure of action) which is unlawful.
vi. Exemption from taxation
Meaning of exemption from taxation
 The grant of immunity to particular persons or corporations or to persons or corporations of a particular class
from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It
is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected. It is
strictly construed against the taxpayer.
 It is a waiver of the government's right to collect the amounts that would have been collectible under our tax laws.
Thus, when the law speaks of a tax exemption, it should be understood as freedom from the imposition and
payment of a particular tax.
 Taxation is the rule; exemption is the exception. He who claims exemption must be able to justify his claim or
right thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to be misinterpreted.” If
not expressly mentioned in the law, it must at least be within its purview by clear legislative intent.
vii. Doctrine of Equitable Recoupment
 The doctrine of equitable recoupment allows a taxpayer whose claim for refund has been barred by prescription to
offset such claims against a current assessment.
 The doctrine also allows the government to offset taxes that have not been collected from the taxpayer against a
current claim for refund, although the government is time-barred from collecting the previous taxes.
 The doctrine finds NO application in this jurisdiction
viii. Compensation and set-off
 General rule: Taxes cannot be subject to compensation [South African Airways v. CIR, G.R. No. 180356 (2010)]
Reasons:
 a. This would adversely affect the government revenue system [Philex Mining v. CA, G.R. No. 125704 (1998)].
b. 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. We find no cogent reason to deviate from the aforementioned distinction.
[South African Airways v. CIR, supra]
 Exception: If the claims against the government have been recognized and an amount has already been
appropriated for that purpose. Where both claims have already become: a. Due, b. Demandable, and c. Fully
liquidated, compensation takes place by operation of law under Art. 1200 in relation to Articles 1279 and 1290
of the NCC, and both debts are extinguished to the concurrent amount
ix. Compromise and tax amnesty
 Compromise - a contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to
one already commenced [Art. 2028, Civil Code]. It involves a reduction of the taxpayer’s liability.
Requisites of a tax compromise:
a. The taxpayer must have a tax liability.
b. There must be an offer (by the taxpayer or Commissioner) of an amount to be paid by the taxpayer. c. There
must be acceptance (by the Commissioner or the taxpayer, as the case may be) of the offer in settlement of the
original claim.
 Tax Amnesty - a tax amnesty partakes of an absolute forgiveness or waiver by the Government of its right to
collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax evaders, who
wish to relent and are willing to reform a chance to do so and become a part of the new society with a clean slate.

A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the
amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of
the taxing authority.
x. Taxpayer’s suit
1. Nature and concept
2. As distinguished from a citizen’s suit
3. Requisites of a taxpayer’s suit challenging the constitutionality of tax measure or act of a taxing authority
a. Concept of locus standi
b. Doctrine of transcendental importance
c. Doctrine of ripeness for judicial determination

II. Organization and Functions of The Bureau of Internal Revenue

a. Rule-making authority of the Secretary of Finance
i. Authority of Secretary of Finance to promulgate rules and regulations
ii. Specific provisions to be contained in rules and regulations
iii. Non-retroactivity of rulings
b. Jurisdiction, Power and Functions of the Commissioner of Internal Revenue
 i. Powers and duties of the Bureau of Internal Revenue
ii. Power of the Commission of Internal Revenue to interpret tax laws and to decide tax cases.
iii. Non-retroactivity of rulings

III. National Internal Revenue Code as amended by TRAIN Law

A. Income taxation

1. INCOME TAX SYSTEMS

a. Global Tax Systems

- A system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of
the taxpayer.

b. Schedular Tax Systems

- A system employed where the income tax treatment varies and made to depend on the kind or category of taxable income of the
taxpayer.

c. Semi-Schedular or Semi-Global Tax System

- A system where income not subject to final income tax are grouped together and after deducting allowable deduction, as single tax
rate is used to determine the tax liabilities.
- For income subject to final income tax, different tax rates apply.

NOTE: The Philippines adopt the Semi-Scheduler or Semi-Global Tax System.

GLOBAL TAX SYSTEM SCHEDULAR TAX SYSTEM

Incomes are not classified or categorized but
grouped together into one taxable income.
There is a single or uniform tax rate applicable to
all income.
The system usually applies to corporation.
Incomes are classified and categorized into
different taxable incomes.
Tax rates vary depending on the classification or
category of taxable income.
The system usually applies to individual.

2. FEATURES OF THE PHILIPPINE INCOME TAX LAW

a. Direct Tax – the tax burden is borne by the income recipient upon whom the tax is imposed.
b. Progressive – the tax rate increases as the tax base increases. It is founded on the ability to pay principle and is consistent with Sec. 28,
Art. VI, 1987 Constitution.
c. Comprehensive – The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship
principle, the residence principle, and the source principle. Any of the three principles is enough to justify the imposition of income tax on
 the income of a resident citizen and a domestic corporation that are taxed on a worldwide income.
d. Semi-Schedular or Semi-Global Tax System – The Philippines follows the semi-schedular or semi-global system of income taxation,
although certain passive investment incomes and capital gains from sale of capital assets (namely: (a) shares of stock of domestic
corporations, and (b) real property) are subject to final taxes at preferential tax rates.

3. CRITERIA IN IMPOSING INCOME TAX

a. Citizenship Principle – a citizen of the Philippines residing therein is taxable on all income derived from whatever sources whether
within or without the Philippines, while citizen of the Philippines not residing therein is taxable only on income derived from sources
within the Philippines.

b. Residences Principle – all income derived from sources within the Philippines by person residing in the Philippines whether citizen or
not, or domestic or foreign corporation, are subject to income tax.

c. Source Principle – all income derived from sources within the Philippines are subject to income tax.

4. TYPES OF PHILIPPINE INCOME TAX

a. Graduated income tax and fixed tax on gross sales or receipts for individuals
b. Normal corporate income tax on corporations
c. Minimum corporate income tax on corporations
d. Special income tax on certain corporations
e. Capital gains tax on sale or exchange of shares of stock of a domestic corporation classified as capital assets
f. Capital gains tax on sale or exchange of real property classified as capital asset
g. Final withholding tax on certain passive investment income paid to residents
h. Final withholding tax on income payments made to non-residents
i. Fringe benefits tax on fringe benefits of supervisory or managerial employees
j. Branch profit remittance tax
k. Tax on improperly accumulated earnings of corporations

5. TAXABLE PERIOD

"Taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is
computed. Taxable year includes, in the case of return made for a fractional part of a year under the provisions of Title II (Tax on Income), the
period for which such return is made [Sec. 22 (P), NIRC].

a. Calendar Period – accounting period of 12 months ending on the last day of December. Instances when the Calendar Year is used for the
computation of income.
b. Fiscal Period – accounting period of 12 months ending on the last day of any month other than December [Sec. 22(Q), NIRC].
 c. Short Period – accounting period which starts after the first month of the tax year or ends before the last month of the tax year (less than
12 months). Instances whereby short accounting period arises.

GENERAL RULE: Taxable income shall be computed based on the taxpayer’s annual accounting period, which may be fiscal year or calendar
year.

EXCEPTION: Taxable income shall be computed based on the basis of calendar year only if:
a. If the taxpayer's annual accounting period is other than a fiscal year; or
b. If the taxpayer has no annual accounting period; or
c. If the taxpayer does not keep books of accounts; or
d. If the taxpayer is an individual [Sec. 43, NIRC].

6. KINDS OF TAXPAYERS

a. Individual Taxpayers

i. Citizens

a. Resident Citizens – a citizen of the Philippine residing therein. A citizen of the Philippine residing abroad with no intention to reside thereat
permanently is a resident citizen. A resident citizen is taxable on all income derived from all sources within and without the Philippines. (Section
23(A), Section 24(A)(1)(a), NIRC)

b. Non-Resident Citizens
a. Philippine citizen who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite
intention to reside therein.
b. Philippine citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment
on a permanent basis.
c. Philippine citizen who works and derives income from abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year (183 DAYS).
d. Philippine citizen previously considered as non-resident citizen and who arrives during the taxable year to reside permanently in
the Philippines Æ Treated as NRC with respect to his income derived from sources abroad until his arrival in the Philippines.
(Section 22(E), NIRC)
ii. Aliens

1. Resident Alien – an individual whose residence is within the Philippines and who is not a citizen thereof. (Section 22(F), NIRC)

a. No/Indefinite Intention = RESIDENT: If he lives in the Philippines and has no definite intention as to his stay, he is a resident. A
mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient.
 b. Definite Intention = TRANSIENT: One who comes to the Philippines for a definite purpose, which in its nature may be promptly
accomplished, is a transient.

EXCEPTION: Definite Intention but such cannot be promptly accomplished; If his purpose is of such nature that an extended
stay may be necessary for its accomplishment, and thus the alien makes his home temporarily in the Philippines, then he becomes a
resident.

2. Non-Resident Alien
a. Engaged in trade or business within the Philippines – if the aggregate period of his stay in the Philippines is more than 180 days
during any calendar year.

b. Not engaged in trade or business within the Philippines – if the aggregate period of his stay in the Philippines does not exceed 180
days.

iii. Special Class of Individual Employees

a. Minimum Wage Earner
1. Worker in the private sector paid the statutory minimum wage; or
2. Employee in the public sector with compensation income not more than the statutory minimum wage in the non-agricultural sector
where he/she is assigned. (Section 22 (HH), NIRC)

b. Corporations

INCLUDES: All types of corporations, partnerships (no matter how created or organized), joint stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, whether or not registered with the SEC.

EXCLUDES: General professional partnerships (GPP); joint venture or consortium formed for the purpose of (1) undertaking construction
projects or (2) engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a
service contract with the government. [Sec. 22 (B), NIRC]

i. Domestic Corporation – a corporation created or organized in the Philippines or under its laws. (Section 22(C),NIRC) Domestic corporation,
like resident citizen, is taxable in all income derived from all sources within and without the Philippines. (Section 23(E), NIRC)

ii. Foreign Corporation – a corporation created or organized under any law except the Philippine law. (Section 22(D), NIRC) Foreign
corporation may either be resident or non-resident foreign corporation.

a. Resident Foreign Corporation – a foreign corporation engaged in trade or business within the Philippines. (Section 22 (H), NIRC)

b. Non-Resident Foreign Corporation – a foreign corporation not engaged in trade or business within the Philippines, but still derives
income from the Philippines.
iii. Joint Venture and Consortium
To constitute a “joint venture”, a certain factors are essential. Each party to the venture must make a contribution, not necessarily of
capital, but by way of services, skill, knowledge, material or money; profits must be shared among the parties; there must be a joint proprietary
interest and right of mutual control over the subject matter of the enterprise; and usually, there is single business transaction.

GENERAL RULE: An unincorporated joint venture is taxed like a corporation. The share of the joint venture partners will no longer be taxable
to them because they partake in the nature of intercorporate dividends.

EXCEPTION: an unincorporated joint venture formed for the purpose of undertaking a construction project or engaging in petroleum operations
pursuant to the consortium agreement with the Philippine Government is not subject to the corporate income tax. Only the joint venture partners
will be taxed on their respective shares in the income of the joint ventures. (Sec. 22(B), NIRC)

Two elements necessary to exempt a joint venture or consortium from tax

a. The joint venture must be an unincorporated entity formed by two or more persons.
b. The joint venture was formed for the purpose of undertaking a construction project, or engaging in the petroleum and other energy
operations with operating contract with the government.

c. Partnership

Two (2) kinds of partnership

Trade Partnership – a partnership engaged in trade or business. This partnership falls within the definition of corporation and, thus, the tax
treatment is the same as that of a corporation.

d. General Professional Partnership – a partnership formed by persons for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business. (Section 22(B), NIRC)

NOTE: Exempt from imposition of income tax. BUT, persons engaging in business as partners in a general professional partnership shall be liable
for income tax only in their separate and individual capacities. (Section 26, NIRC)

e. Estate and Trust

ESTATE
Created by operation of law when an individual die, leaving properties to his compulsory or other heirs.

TRUST
A legal arrangement whereby the owner of property transfers ownership to a person who is to hold and control the property belonging to the
owner’s instructions, for the benefit of a designated person.

Income tax imposed on individuals shall apply to income of estates or of any kind of property held in trust. [Sec. 60 (A), NIRC]

Exceptions:
 Employee’s trust (Sec. 60, NIRC);
 Revocable trusts (Sec. 63, NIRC);
 Income for Benefit of Grantor (Sec. 64, NIRC)

 Taxable income of the estate or trust is computed in the same manner as an individual, subject to certain special rules. (Sec 61, NIRC)

f. Co-ownership

There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. [Art. 484, NCC] It may be created by
succession or donation.

When Co-ownership is not subject to tax

When the activities are limited to the preservation of the co-owned property and to the collection of the income from the property. Each co-owner
is taxed individually on his distributive share in the income of the co-ownership.

When Co-ownership is subject to tax

a. When a co-ownership is formed or established voluntarily, or upon agreement of the parties;
b. When the individual co-owner reinvested his share, and
c. When the inherited property remained undivided for more than ten years, and no attempt was ever made to divide to same among the co-heirs,
nor was the property under administration proceedings nor held in trust, the property should be considered as owned by an unregistered
partnership.

Automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived from them are used
as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. [Ona v.
CIR, G.R. No. L-19342 (1972)]