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STUDY SUPPLEMENT FOR TAXATION - PHILIPPINES

Compiled by: WY

Sourced from various materials: NIRC, SC Decisions, CTA Decisions,

Mamalateo, Gruba, Dimaampao
Note: Case titles are shortened. You may view the full name of the parties
in their respective cases in the Supreme Court or in Lawphil. Some
decisions of the court quoted may also have been rearranged to better suit
your understanding.
This is just a supplement and, at most, I only included the basic items.
Another Note: Emphasis, if any, are sometimes personally supplied and
are not actually part of the cited jurisprudence.

*Lastly, please do not share, republish, or upload anywhere else. This

is for your own personal consumption only and is an exclusive benefit
to those enrolled in my class.

Date: August 2022

I. GENERAL PRINCIPLES

A. CONCEPT AND PURPOSE OF TAXATION

1. Definition

a. “Taxation” is the power by which the sovereign raises revenue

to defray the expenses of government. It is a way of
apportioning the cost of government among those who in some
measure are privileged to enjoy its benefits and must bear its
burden (51 Am. Jur. 34).

• Definiton of “Taxes”:

• Taxes are the enforced proportional

contributions exacted by the State from
persons and properties pursuant to its
sovereignty in order to support the
Gove1nment and to defray all the public
needs. Every tax has three elements, namely:
(a) it is an enforced proportional contribution
from persons and properties; (b) it is imposed
by the State by virtue of its sovereignty; and
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(c) it is levied for the support of the

Government. (Congressman Mandanas vs. Executive

Secretary Ochoa, G.R. No. 199802, July 3, 2018)

b. 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.
(Paseo Realty & Development Corp. vs. Court of Appeals, GR 119286)

c. Black’s Law Dictionary defines taxation as “the imposition or

assessment of a tax; the means by which the state obtains
revenue required for its activities.”

d. NATURE OF THE POWER OF TAXATION:

• Inherent and Legislative (FILM DEVELOPMENT COUNCIL

OF THE PHILIPPINES, vs. COLON HERITAGE REALTY

CORPORATION, GR No. 203754, June 16, 2015):

• The power of taxation, being an essential and

inherent attribute of sovereignty, belongs, as
a matter of right, to every independent
government, and needs no express
conferment by the people before it can be
exercised.

• It is purely legislative and, thus, cannot be

delegated to the executive and judicial
branches of government without running
afoul to the theory of separation of powers.

• Inherent nature:

• Being an inherent power, the legislature can

enact laws to raise revenues even without the
grant of said power in the Constitution. It
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must be noted that the Constitutional

provisions relating to the power of taxation do
not operate as grants of power to the
Government but instead merely constitute as
limitations upon a power which would
otherwise be practically without limit (Cooley,

Constitutional Limitations, 1927, 8th Ed. P. 787 – from

Mamalateo)

• The power of taxation is an essential and

inherent attribute of sovereignty, belonging as
a matter of right to every independent
government, without being expressly
conferred by the people. (PEPSI-COLA BOTTLING

vs. Tanauan, GR No. L-31156, Feb. 1976)

• The power of taxation is an inherent attribute

of sovereignty; the government chiefly relies
on taxation to obtain the means to carry on its
operations. Taxes are essential to its very
existence; hence, the dictum that "taxes are
the lifeblood of the government." For this
reason, the right of taxation cannot easily be
surrendered; statutes granting tax exemptions
are considered as a derogation of the
sovereign authority and are strictly construed
against the person or entity claiming the
exemption. Claims for tax refunds, when
based on statutes granting tax exemption or
tax refund, partake of the nature of an
exemption; thus, the rule of strict
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interpretation against the taxpayer-claimant

similarly applies. (CIR vs. EASTERN

TELECOMMUNICATIONS, GR No. 163835, July 2010)

• Do Local Government Units have the

INHERENT power to tax?

• No, the power of LGUs to tax

proceeds from the doctrine of
necessary implication and it is not
considered as an inherent power of
the LGU.

• By necessary implication, the

legislative power to create political
corporations for purposes of local
self-government carries with it the
power to confer on such local
governmental agencies the power to
tax. (PEPSI-COLA BOTTLING vs. Tanauan, GR
No. L-31156, Feb. 1976)

• Legislative nature:

• Taxation is a power that is purely legislative

and which the central legislative body cannot
delegate either to the executive or judicial
department of the government without
infringing upon the theory of separation of
powers. The exception, however, lies in the
case of municipal corporations, to which, said
theory does not apply. Legislative powers
may be delegated to local governments in
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respect of matters of local concern. This is

sanctioned by immemorial practice. By
necessary implication, the legislative power
to create political corporations for purposes of
local self-government carries with it the
power to confer on such local governmental
agencies the power to tax. Under the New
Constitution, local governments are granted
the autonomous authority to create their own
sources of revenue and to levy taxes. (PEPSI-

COLA BOTTLING vs. Tanauan, GR No. L-31156, Feb. 1976)

• Taxation is an inherent attribute of

sovereignty. It is a power that is purely
legislative. Essentially, this means that in the
legislature primarily lies the discretion to
determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs
(place) of taxation. It has the authority to
prescribe a certain tax at a specific rate for a
particular public purpose on persons or things
within its jurisdiction. In other words, the
legislature wields the power to define what
tax shall be imposed, why it should be
imposed, how much tax shall be imposed,
against whom (or what) it shall be imposed
and where it shall be imposed. (CREBA vs. Romulo,
G.R. No. 160756, March 2010)

e. SCOPE OF THE TAXING POWER

• As a general rule, the power to tax is plenary and

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unlimited in its range, acknowledging in its very nature

no limits, so that the principal check against its abuse
is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency
who are to pay it. Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like any
other statute, tax legislation carries a presumption of
constitutionality. (CREBA vs. Romulo, G.R. No. 160756)

2. Purpose

a. Primary Purpose:

• The primary purpose of taxation is to raise funds or

property to enable the State to promote the general
welfare and protection of its citizens. (51 Am. Jur. 34, from

Dimaampao)

• The raising of revenues is the principal object of

taxation. (Hon. Bagatsing vs. Ramirez, G.R. No. L-41631 December 17,
1976)

b. Other Purposes / Objectives:

• Regulatory / Promotion of General Welfare

• Taxation may be made the implement of the

state's police power. (Lutz vs. Araneta, G.R. No. L-7859,
December 22, 1955)

• In this jurisdiction, it is well-entrenched that

taxation may be made the implement of the
state’s police power. (Ferrer vs. Mayor Bautista, G.R.

No. 210551, June 30, 2015)

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• Reduction of Social Inequality

• In recent years, the power to tax has indeed

become a most effective tool to realize social
justice, public welfare, and the equitable
distribution of wealth. (CIR vs. Central Luzon Drug

Corporation, G.R. No. 159647 April 15, 2005)

• 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." (Tolentino vs. Secretary of Finance, G.R. No.
115455 October 30, 1995)

• Encourage economic growth by granting incentives

and exemptions

• Tax exemptions and tax reliefs may serve as

incentives to encourage investment in our
local industry and thereby promote economic
growth. (Dimaampao)

• Protectionism

• Taxes or Tariffs may be imposed on imported

items to protect our local industries.
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• Power of Taxation as an implement of the power of

eminent domain

• The taxation power can also be used as an

implement for the exercise of the power of
eminent domain. (CIR vs. Central Luzon Drug

Corporation, G.R. No. 159647 April 15, 2005)

• Tax credits given to the taxpayer may serve

as the just compensation for those whose
properties are taken under the power of
eminent domain.

c. Interaction between Primary Purpose and Other Purposes

of Taxation:

• In distinguishing tax and regulation as a form of police

power, the determining factor is the purpose of the
implemented measure. If the purpose is primarily to
raise revenue, then it will be deemed a tax even
though the measure results in some form of regulation.
On the other hand, if the purpose is primarily to
regulate, then it is deemed a regulation and an exercise
of the police power of the state, even though
incidentally, revenue is generated. Thus, in Gerochi v.
Department of Energy, the Court stated:

“The conservative and pivotal distinction between

these two (2) powers rests in the purpose for which the
charge is made. If generation of revenue is the primary
purpose and regulation is merely incidental, the
imposition is a tax; but if regulation is the primary
purpose, the fact that revenue is incidentally raised does
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not make the imposition a tax.” (Chevron vs. BCDA, G.R. No.

173863, September 15, 2010)

3. Distinguish: tax and other forms of exactions

a. Tax vs. Special Assessment

• A special assessment is in the nature of a tax upon

property levied according to benefits conferred on the
property.

• A special assessment can be levied only on land, while

a tax may be levied on persons, properties, or
activities;

• A special assessment cannot, as a rule, be made a

personal liability of the persons assessed, while a tax is
generally a personal liability;

• A special assessment is based wholly on benefits

conferred on the property, while a tax does not require
a direct conferral of benefits on the taxpayer;

• A special assessment I exceptional both as to time and

locality, while a tax may operate generally based on
the law imposing the tax.

b. Tax vs. License

• See distinction between the Power of Taxation and the

Police Power of the State.

c. Tax vs. Toll

• Toll is a demand of ownership or proprietorship, an

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

d. Tax vs. Penalty

• Tax is a civil liability. A penalty is a punishment for

the commission of a crime.

e. Tax vs. Debt

• A tax is based on law, while a debt is based on

contracts or judgments.

• Taxpayers may be imprisoned for their failure to pay

the tax (except poll tax), while there shall be no
imprisonment for failure to pay a debt.

• Taxes are generally payable in money, while a debt

may be payable in money, property, or services.

• A tax is generally not assignable, while a debt can be

assigned.

• A tax does not draw interest unless delinquent, while a

debt draws interest if stipulated or delayed.

• A tax is imposed by public authority while a debt can

be imposed by private individuals.

• The prescriptive period for taxes are determined under

the NIRC and other special laws, while the Civil Code
governs the prescriptive period of debts.

• Taxes are not subject of Set Off/Compensation

• It is settled that a taxpayer may not offset

taxes due from the claims that he may have
against the government. Taxes cannot be the
subject of compensation because the
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government and taxpayer are not mutually

creditors and debtors of each other and a
claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-
off. (Caltex vs. COA, G.R. No. 92585 May 8, 1992)

• However, in an exceptional case, “both the

claim of the Government for . . . taxes and the
claim of the intestate (taxpayer) for services
rendered have already become overdue and
demandable is well as fully liquidated.
Compensation, therefore, takes place by
operation of law.” (Domingo vs. Garlitos, G.R. No. L-

18994, June 29, 1963)

B. DISTINGUISH: POWER OF TAXATION, POLICE

POWER, AND EMINENT DOMAIN

Taxation Eminent Domain Police Power

May be exercised May be exercised only by May be exercised only
only by the the government or its by the government or
Authority who government or its political subdivisions OR its political
exercises the power political subdivisions may be granted to public subdivisions
service companies or public
utilities.
Primary purpose is Private property is taken Promotion of public
Purpose for raising revenues for public use welfare through
regulation
May operate on Operates on an individual May operate on
Persons Affected everyone as the owner of a particular everyone
property
The tax collected There is a transfer of the There is restraint on
Effect becomes part of right to property the rights to the
public funds property
Taxation Eminent Domain Police Power
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No direct benefit Affected property owner is No direct benefit

other than the given just compensation other than the general
Benefits Received
general benefit benefit received
received
Amount of No limits Only the property required Limited to the cost of
Imposition/exaction for public use is affected regulation

Relationship to the Inferior to the Inferior to the obligations Police power is

non-impairment obligations imposed imposed by contracts superior to the
clause of the by contracts obligations imposed
Constitution by contracts

C. THEORY AND BASIS OF TAXATION

1. Lifeblood theory

a. Taxes are the lifeblood of the government and so should be

collected without unnecessary hindrance. (CIR vs. Algue, Inc., G.R. No.
L-28896 February 17, 1988)

b. It is said that taxes are what we pay for civilization society.

Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. (CIR vs. Algue, Inc., G.R.

No. L-28896 February 17, 1988)

c. Taxes are the lifeblood of the Government and their prompt and
certain availability are imperious need. (Vera vs. Fernandez, G.R. No. L-
31364 March 30, 1979)

d. Although taxes are the lifeblood of the government, their

assessment and collection "should be made in accordance with
law as any arbitrariness will negate the very reason for
government itself." (CIR vs. Reyes, G.R. No. 159694, January 27, 2006)

2. Necessity theory

a. 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
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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. (The Philippine Guaranty

Co. vs. CIR, G.R. No. L-22074, April 30, 1965)

b. A principal attribute of sovereignty, the exercise of taxing

power derives its source from the very existence of the state
whose social contract with its citizens obliges it to promote
public interest and common good. The theory behind the
exercise of the power to tax emanates from necessity; without
taxes, government cannot fulfill its mandate of promoting the
general welfare and well-being of the people. (CIR vs. BPI, G.R. No.

134062, April 17, 2007)

3. Benefits-received theory

a. 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. (CIR vs. Algue, Inc., G.R. No. L-
28896 February 17, 1988)
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D. JURISDICTION OVER SUBJECT AND OBJECTS

1. It is inherent in the power to tax that a state be free to select the

subjects of taxation, and it has been repeatedly held that
"inequalities which result from a singling out of one particular class
for taxation, or exemption infringe no constitutional limitation"
(Lutz vs. Araneta, G.R. No. L-7859, December 22, 1955)

2. Taxation is an inherent attribute of sovereignty. It is a power that

is purely legislative. Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation. It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to
define what tax shall be imposed, why it should be imposed, how
much tax shall be imposed, against whom (or what) it shall be
imposed and where it shall be imposed. (CREBA vs. Romulo, G.R. No. 160756,
March 2010)

3. To begin with, it is settled that the legislature has the inherent

power to select the subjects of taxation and to grant exemptions.
This power has aptly been described as "of wide range and
flexibility." Indeed, it is said that in the field of taxation, more than
in other areas, the legislature possesses the greatest freedom in
classification. The reason for this is that, traditionally,
classification has been a device for fitting tax programs to local
needs and usages in order to achieve an equitable distribution of
the tax burden. That legislative classifications must be reasonable
is of course undenied. (Gomez vs. Palomar, G.R. No. L-23645, October 29, 1968)

4. Granted the power to select the subject of taxation, the State's

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power to grant exemption must likewise be conceded as a

necessary corollary. (Gomez vs. Palomar, G.R. No. L-23645, October 29, 1968)

E. PRINCIPLES OF A SOUND TAX SYSTEM / CANONS OF

TAXATION

1. Fiscal adequacy

a. Fiscal adequacy, which is one of the characteristics of a sound

tax system, requires that sources of revenues must be adequate
to meet government expenditures and their variations. (Chavez vs.

Ongpin, G.R. No. 76778, June 6, 1990)

b. Example of application: “Certainly, to continue collecting real

property taxes based on valuations arrived at several years ago,
in disregard of the increases in the value of real properties that
have occurred since then, is not in consonance with a sound tax
system.” (Chavez vs. Ongpin, G.R. No. 76778, June 6, 1990)

2. Theoretical justice

a. The Income Tax Law of the United States, extended to the

Philippine Islands, is the result of an effect on the part of the
legislators to put into statutory form this canon of taxation and
of social reform. The aim has been to mitigate the evils arising
from inequalities of wealth by a progressive scheme of taxation,
which places the burden on those best able to pay. (Madrival vs.

Rafferty, G.R. No. L-12287, August 7, 1918)

3. Administrative feasibility

a. Administrative feasibility is one of the canons of a sound tax

system. It simply means that the tax system should be capable
of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon,
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however, will not render a tax imposition invalid "except to the

extent that specific constitutional or statutory limitations are
impaired." Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate
any law or the Constitution. (Diaz vs. Secretary of Finance, G.R. No. 193007,
July 19, 2011)

F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON

TAXATION

1. Inherent Limitations

a. PUBLIC PURPOSE

• An inherent limitation on the power of taxation is

public purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely private
purposes or for the exclusive benefit of private
persons. The reason for this is simple. The power to tax
exists for the general welfare; hence, implicit in its
power is the limitation that it should be used only for a
public purpose. It would be a robbery for the State to
tax its citizens and use the funds generated for a private
purpose. As an old United States case bluntly put it:
"To lay with one hand, the power of the government
on the property of the citizen, and with the other to
bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is
nonetheless a robbery because it is done under the
forms of law and is called taxation." (Planters Products vs.

Fertiphil Corporation, G.R. No. 166006, March 14, 2008)

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• The term "public purpose" is not defined. It is an elastic

concept that can be hammered to fit modern standards.
Jurisprudence states that "public purpose" should be
given a broad interpretation. It does not only pertain to
those purposes which are traditionally viewed as
essentially government functions, such as building
roads and delivery of basic services, but also includes
those purposes designed to promote social justice.
Thus, public money may now be used for the
relocation of illegal settlers, low-cost housing and
urban or agrarian reform. (Planters Products vs. Fertiphil

Corporation, G.R. No. 166006, March 14, 2008)

• While the categories of what may constitute a public

purpose are continually expanding in light of the
expansion of government functions, the inherent
requirement that taxes can only be exacted for a public
purpose still stands. Public purpose is the heart of a tax
law. When a tax law is only a mask to exact funds from
the public when its true intent is to give undue benefit
and advantage to a private enterprise, that law will not
satisfy the requirement of "public purpose." (Planters

Products vs. Fertiphil Corporation, G.R. No. 166006, March 14, 2008)

• The protection of a large industry constituting one of

the great sources of the state's wealth and therefore
directly or indirectly affecting the welfare of so great a
portion of the population of the State is affected to such
an extent by public interests as to be within the police
power of the sovereign. (Lutz vs. Araneta, G.R. No. L-7859,

December 22, 1955)

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• The protection and promotion of the sugar industry is

a matter of public concern. (Lutz vs. Araneta, G.R. No. L-7859,

December 22, 1955)

• There can be no doubt that the oil industry is greatly

imbued with public interest as it vitally affects the
general welfare. (Caltex vs. COA, G.R. No. 92585 May 8, 1992)

• The eradication of a dreaded disease is a public

purpose, but if by public purpose the petitioner means
benefit to a taxpayer as a return for what he pays, then
it is sufficient answer to say that the only benefit to
which the taxpayer is constitutionally entitled is that
derived from his enjoyment of the privileges of living
in an organized society, established and safeguarded
by the devotion of taxes to public purposes. Any other
view would preclude the levying of taxes except as
they are used to compensate for the burden on those
who pay them and would involve the abandonment of
the most fundamental principle of government — that
it exists primarily to provide for the common good.
(Gomez vs. Palomar, G.R. No. L-23645, October 29, 1968)

• The entrusting of the collection of the fees does not

destroy the public purpose of the ordinance. So long as
the purpose is public, it does not matter whether the
agency through which the money is dispensed is public
or private. The right to tax depends upon the ultimate
use, purpose and object for which the fund is raised. It
is not dependent on the nature or character of the
person or corporation whose intermediate agency is to
be used in applying it. The people may be taxed for a
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public purpose, although it be under the direction of an

individual or private corporation. (Bagatsing vs. Ramirez, G.R.
No. L-41631 December 17, 1976) (Note: That the delegation of
the collection of local taxes to private persons is no
longer allowed under the Local Government Code.
This discussion is strictly for purposes of determining
“public purpose”)

b. INTERNATIONAL COMITY

• International Law is founded largely upon mutuality,

reciprocity, and the principle of comity of nations.
Comity, in this connection, is neither a matter of
absolute obligation on the one hand, nor of mere
courtesy and good will on the other; it is the
recognition which one nation allows within its territory
to the acts of foreign governments and tribunals,
having due regard both to the international duty and
convenience and the rights of its own citizens or of
other persons who are under the protection of its laws.
(30 Am. Jur., 178; Hilton vs. Guyot, 159 U. S., 113, 40 Law. ed., 95; 16 S.
Ct., 139.)

• States, being considered as sovereign equals, cannot

exercise power over one another following the
principle of “par in parem non habet imperium.”

• As an application to this limitation, the power of

taxation may be limited by treaties or by the State’s
reluctance to tax the governmental acts of another
State. In fact, most States would provide a way to
lessen the impact of international double taxation
 Page 20 of 87

either through tax credits or tax deductions for foreign

taxes paid.

c. NON-DELEGATION OF THE LEGISLATIVE POWER

TO TAX

• The power of taxation is a power that is purely

legislative and which the central legislative body
cannot delegate either to the executive or judicial
department of the government without infringing upon
the theory of separation of powers. (PEPSI-COLA BOTTLING
vs. Tanauan, GR No. L-31156, Feb. 1976)

• Exceptions to the non-delegability of the

power to tax:

• Article VI, Section 28 (2) of the

Constitution providing for the
President’s power to impose tariff
rates, import and export quotas, etc.
(customs duties), subject to the
limitations and guidelines as the
Congress may impose, consistent
with the national development
program of the government.

• Article X, Section 5 of the

Constitution providing that each
local government unit shall have the
power to create its own sources of
revenue, fees, charges, subject to
such guidelines and limitations as
the Congress may provide consistent
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with the basic policy of local

autonomy. Such taxes, fees, and
other charges shall accrue
exclusively to the local government.

• The exception, however,

lies in the case of municipal
corporations, to which, said
theory does not apply.
Legislative powers may be
delegated to local
governments in respect of
matters of local concern.
This is sanctioned by
immemorial practice. By
necessary implication, the
legislative power to create
political corporations for
purposes of local self-
government carries with it
the power to confer on such
local governmental
agencies the power to tax.
(PEPSI-COLA BOTTLING vs.
Tanauan, GR No. L-31156, Feb. 1976)

d. EXEMPTION OF THE GOVERNMENT FROM

TAXATION

• In most cases, properties of the national government as

well as those of the local government units are not
subject to tax, otherwise it will result in the absurd
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situation of the government “taking money from one

pocket and putting it in another.”

• Moreover, taxes are financial burdens imposed for the

purpose of raising revenues with which to defray the
cost of the operation of the Government, and a tax on
property of the Government, whether national or local,
would merely have the effect of taking money from
one pocket to put it in another pocket (Cooley on
Taxation, Sec. 621, 4th Edition.) Hence, it would not
serve, in the final analysis, the main purpose of
taxation. What is more, it would tend to defeat it, on
account of the paper work, time and consequently,
expenses it would entail. (Board of Assessment Appeals, Province
of Laguna vs. Court of Tax Appeals, G.R. No. L-18125, May 31, 1963)

• Take note, however, that the Government MAY still

choose to tax itself (in fact, this is very common
especially with the Government’s proprietary activities
or with activities conducted for profit) –

• Besides, nothing can prevent Congress from

decreeing that even instrumentalities or
agencies of the government performing
governmental functions may be subject to tax.
Where it is done precisely to fulfill a
constitutional mandate and national policy,
no one can doubt its wisdom. (MCIAA vs. Marcos,
G.R. No. 120082, September 11, 1996)

e. TERRITORIAL JURISDICTION

• The taxing power of a State is limited to subjects

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within its jurisdiction/territory.

• Tax Situs – literally means the “place of taxation”

2. Constitutional Limitations (1987 Constitution)

a. Due Process of Law

• ART. 3, SEC. 1. - No person shall be deprived of life,

liberty, or property without due process of law, x x
x.

• In the conduct of its preliminary hearing, the CTA

must balance the scale between the inherent power of
the State to tax and its right to prosecute perceived
transgressors of the law, on one side; and the
constitutional rights of petitioners to due process of
law and the equal protection of the laws, on the other.
In case of doubt, the tax court must remember that as
in all tax cases, such scale should favor the taxpayer,
for a citizen's right to due process and equal protection
of the law is amply protected by the Bill of Rights
under the Constitution. (Spouses Emmanuel and Jinkee Pacquiao

vs. Court of Tax Appeals, G.R. No. 213394, April 06, 2016)

• CIR vs. Yumex Philippines, G.R. No. 222476. May

5, 2021 (on the failure to follow the due process
requirement in assessments):

• Indeed, Section 228 of the Tax Code clearly

requires that the taxpayer must first be
informed that he is liable for deficiency taxes
through the sending of a PAN. He must be
informed of the facts and the law upon which
 Page 24 of 87

the assessment is made. The law imposes a

substantive, not merely a formal,
requirement. To proceed heedlessly with tax
collection without first establishing a valid
assessment is evidently violative of the
cardinal principle in administrative
investigations -that taxpayers should be able
to present their case and adduce supporting
evidence.

• From the provision quoted above, it is clear

that the sending of a PAN to taxpayer to
inform him of the assessment made is but part
of the "due process requirement in the
issuance of a deficiency tax assessment," the
absence of which renders nugatory any
assessment made by the tax authorities. The
use of the word "shall" in subsection 3 .1.2
describes the mandatory nature of the service
of a PAN. The persuasiveness of the right to
due process reaches both substantial and
procedural rights and the failure of the CIR to
strictly comply with the requirements laid
down by law and its own rules is a denial of
Metro Star's right to due process. Thus, for its
failure to send the PAN stating the facts and
the law on which the assessment was made as
required by Section 228 of R.A. No. 8424, the
assessment made by the CIR is void.
 Page 25 of 87

• In balancing the scales between the power of

the State to tax and its inherent right to
prosecute perceived transgressors of the law
on one side, and the constitutional rights of a
citizen to due process of law and the equal
protection of the laws on the other, the scales
must tilt in favor of the individual, for a
citizen's right is amply protected by the Bill
of Rights under the Constitution.

• Due process is usually violated where the tax imposed

is for a private as distinguished from a public purpose;
a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive
methods are used in assessing and collecting taxes.
But, a tax does not violate the due process clause, as
applied to a particular taxpayer, although the purpose
of the tax will result in an injury rather than a benefit
to such taxpayer. Due process does not require that the
property subject to the tax or the amount of tax to be
raised should be determined by judicial inquiry, and a
notice and hearing as to the amount of the tax and the
manner in which it shall be apportioned are generally
not necessary to due process of law. (PEPSI-COLA

BOTTLING vs. Tanauan, GR No. L-31156, Feb. 1976)

• Lack of publication of administrative rules may be

a violation of the due process clause (CIR vs. Hypermix

Feeds Corporation, G.R. No. 179579, February 1, 2012):

• When an administrative rule is merely

 Page 26 of 87

interpretative in nature, its applicability needs

nothing further than its bare issuance, for it
gives no real consequence more than what the
law itself has already prescribed. When, on
the other hand, the administrative rule goes
beyond merely providing for the means that
can facilitate or render least cumbersome the
implementation of the law but substantially
increases the burden of those governed, it
behooves the agency to accord at least to
those directly affected a chance to be heard,
and thereafter to be duly informed, before that
new issuance is given the force and effect of
law.

• The clear object of the above-quoted

provision is to give the general public
adequate notice of the various laws which are
to regulate their actions and conduct as
citizens. Without such notice and publication,
there would be no basis for the application of
the maxim "ignorantia legis non excusat." It
would be the height of injustice to punish or
otherwise burden a citizen for the
transgression of a law of which he had no
notice whatsoever, not even a constructive
one.

• Because petitioners (Commissioner of

Customs) failed to follow the requirements
 Page 27 of 87

enumerated by the Revised Administrative

Code, the assailed regulation must be struck
down.

• x x x In summary, petitioners violated

respondent’s right to due process in the
issuance of CMO 27-2003 when they failed to
observe the requirements under the Revised
Administrative Code.

• It is undoubted that the due process clause may be

invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious
example is where it can be shown to amount to the
confiscation of property. That would be a clear abuse
of power. It then becomes the duty of this Court to say
that such an arbitrary act amounted to the exercise of
an authority not conferred. That properly calls for the
application of the Holmes dictum. It has also been held
that where the assailed tax measure is beyond the
jurisdiction of the state, or is not for a public purpose,
or, in case of a retroactive statute is so harsh and
unreasonable, it is subject to attack on due process
grounds. (Sison vs. Ancheta, G.R. No. L-59431 July 25, 1984)

• The due process clause may correctly be invoked only

when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax
power. (Tan vs. Del Rosario, G.R. No. 109289, October 3, 1994)

b. Equal Protection Clause / Uniformity of Taxation (used

interchangeably in some decisions of the Supreme Court)
 Page 28 of 87

• ART. 3, SECTION 1. x x x x , nor shall

any person be denied the equal protection of the laws.

• ART. 6, SECTION 28. (1) The rule of taxation shall be

uniform and equitable.

• “Equal protection” does not require equal rates of

taxation on different classes of property, nor prohibit
unequal taxation so long as the inequality is not based
upon arbitrary classification. Legislation which, in
carrying out a public purpose, is limited in its
application, does not violate the provisions if, within
the sphere of its operation, it affects alike all persons
similarly situated. It does not prohibit special
legislation or legislation which is limited either in the
objects to which it is directed, or by the territory within
which it is to operate. It merely requires that all persons
subjected to such legislation shall be treated alike,
under like circumstances and conditions, both in the
privileges conferred and in the liabilities imposed.
(Dimaampao citing 1 Cooley Taxation)

• The equal protection clause means that no person or

class of persons shall be deprived of the same
protection of laws enjoyed by other persons or other
classes in the same place in like circumstances. Thus,
the guarantee of the equal protection of laws is not
violated if there is a reasonable classification. For a
classification to be reasonable, it must be shown that
(1) it rests on substantial distinctions; (2) it is germane
to the purpose of the law; (3) it is not limited to existing
 Page 29 of 87

conditions only; and (4) it applies equally to all

members of the same class. (CIR vs. Hypermix Feeds

Corporation, G.R. No. 179579, February 1, 2012)

• The equal protection clause does not require the

universal application of the laws on all persons or
things without distinction. This might in fact
sometimes result in unequal protection. What the
clause requires is equality among equals as determined
according to a valid classification. By classification is
meant the grouping of persons or things similar to each
other in certain particulars and different from all others
in these same particulars. (ABAKADA vs. Ermita, G.R. No.

168056 September 1, 2005)

• The power of the State to make reasonable and natural

classifications for the purposes of taxation has long
been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or
the amounts to be raised, the methods of assessment,
valuation and collection, the State’s power is entitled
to presumption of validity. As a rule, the judiciary will
not interfere with such power absent a clear showing
of unreasonableness, discrimination, or arbitrariness.
(ABAKADA vs. Ermita, G.R. No. 168056 September 1, 2005)

• Requisites for a valid classification:

• For a classification to be reasonable, it must

be shown that:

• (1) it rests on substantial

distinctions;
 Page 30 of 87

• (2) it is germane to the purpose of the

law;

• (3) it is not limited to existing

conditions only; and

• (4) it applies equally to all members

of the same class. (CIR vs. Hypermix Feeds
Corporation, G.R. No. 179579, February 1, 2012)

• A tax is considered uniform when it operates with the

same force and effect in every place where the subject
may be found. (Philippine Trust Company vs. Yatco, G.R. Nos. L-

46255)

• Equality and uniformity in taxation means that all

taxable articles or kinds of property of the same class
shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural
classifications for purposes of taxation. (Eastern Theatrical

Co. vs. Alfonso, G.R. No. L-1104, May 31, 1949)

• A levy of tax is not unconstitutional because it is not

intrinsically equal and uniform in its operation. The
uniformity rule does not prohibit classification for
purposes of taxation. (British American Tobacco vs. Jose Isidro

Camacho, GR No. 163583, Aug. 20, 2008)

• Rational Basis Test –

• It has been held that "in the areas of social and

economic policy, a statutory classification
that neither proceeds along suspect lines nor
infringes constitutional rights must be upheld
against equal protection challenge if there is
 Page 31 of 87

any reasonably conceivable state of facts that

could provide a rational basis for the
classification.

• Under the rational basis test, it is sufficient

that the legislative classification is rationally
related to achieving some legitimate State
interest. As the Court ruled in the assailed
Decision, viz:

• A legislative classification that is reasonable

does not offend the constitutional guaranty of
the equal protection of the laws. The
classification is considered valid and
reasonable provided that: (1) it rests on
substantial distinctions; (2) it is germane to
the purpose of the law; (3) it applies, all things
being equal, to both present and future
conditions; and (4) it applies equally to all
those belonging to the same class.

• WY: In other words, the rational basis test is

just the application of the “requisites for a
valid classification.”

c. NON-IMPAIRMENT CLAUSE

• ART. 3, SECTION 10. No law impairing the

obligation of contracts shall be passed.

• Only slightly less abstract but nonetheless hypothetical

is the contention of CREBA that the imposition of the
VAT on the sales and leases of real estate by virtue of
 Page 32 of 87

contracts entered into prior to the effectivity of the law

would violate the constitutional provision that "No law
impairing the obligation of contracts shall be passed."
It is enough to say that the parties to a contract cannot,
through the exercise of prophetic discernment, fetter
the exercise of the taxing power of the State. For not
only are existing laws read into contracts in order to fix
obligations as between parties, but the reservation of
essential attributes of sovereign power is also read into
contracts as a basic postulate of the legal order. The
policy of protecting contracts against impairment
presupposes the maintenance of a government which
retains adequate authority to secure the peace and good
order of society.

In truth, the Contract Clause has never been thought as

a limitation on the exercise of the State's power of
taxation save only where a tax exemption has been
granted for a valid consideration. (Tolentino vs. Secretary of

Finance, G.R. No. 115455 August 25, 1994)

• Can tax exemptions be withdrawn at any time?

• Yes, since taxation is the rule and exemption

therefrom the exception, the exemption may
thus be withdrawn at the pleasure of the
taxing authority. The only exception to this
rule is where the exemption was granted to
private parties based on material
consideration of a mutual nature, which then
becomes contractual and is thus covered by
 Page 33 of 87

the non-impairment clause of the

Constitution. (MACTAN CEBU INTERNATIONAL

AIRPORT AUTHORITY vs. Marcos, G.R. No. 120082

September 11, 1996)

d. Freedom of Religion

• ART. 3, SECTION 5. No law shall be made respecting

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

• American Bible Society Case (American Bible Society vs.

City of Manila, G.R. No. L-9637 April 30, 1957):

• The City of Manila informed the American

Bible Society that they have unpaid dues to
the City for operating without a Mayor’s
Permit (under Ordinance 3000) and a
Municipal License (under Ordinance 2529)
for the sale of bibles. The American Bible
Society contended that the ordinances
requiring them to secure a Mayor’s Permit
and to pay the License Fee (municipal
license) on its sale of bibles is
unconstitutional insofar as it is concerned
because it restrains the free exercise of
religion and it constitutes religious
censorship.
 Page 34 of 87

• SC Ruling: It may be true that in the case at

bar the price asked for the bibles and other
religious pamphlets was in some instances a
little bit higher than the actual cost of the
same but this cannot mean that the American
Bible Society was engaged in the business or
occupation of selling said "merchandise" for
profit. For this reason We believe that the
provisions of City of Manila Ordinance No.
2529 (License fee / Municipal license), as
amended, cannot be applied to appellant, for
in doing so it would impair its free exercise
and enjoyment of its religious profession and
worship as well as its rights of dissemination
of religious beliefs.

• With respect to Ordinance No. 3000 (Mayor’s

permit), as amended, which requires the
obtention of the Mayor's permit before any
person can engage in any of the businesses,
trades or occupations enumerated therein, We
do not find that it imposes any charge/tax
upon the enjoyment of a right granted by the
Constitution, nor tax the exercise of religious
practices.

• It seems clear, therefore, that Ordinance No.

3000 (mayor’s permit) cannot be considered
unconstitutional, even if applied to plaintiff
American Bible Society. But as Ordinance
 Page 35 of 87

No. 2529 (license fee) of the City of Manila

is not applicable to American Bible Society
and defendant-appellee is powerless to
license or tax the business of the American
Bible Society involved here because, as stated
before, it would impair their right to the free
exercise and enjoyment of its religious
profession and worship, as well as its rights of
dissemination of religious beliefs, We find
that Ordinance No. 3000, as amended, is also
inapplicable to said business, trade or
occupation of the plaintiff. (American Bible Society
vs. City of Manila, G.R. No. L-9637 April 30, 1957)

e. Freedom of the Press

• ART. 3, SECTION 4. No law shall be passed abridging

the freedom of speech, of expression, or of the press,
x x x.

• The Supreme Court has held that, as a general

proposition, the press is not exempt from the taxing
power of the State and that what the constitutional
guarantee of free press prohibits are laws which single
out the press or target a group belonging to the press
for special treatment or which in any way discriminate
against the press on the basis of the content of the
publication. (Tolentino vs. Secretary of Finance, G.R. No. 115455

October 30, 1995)

• Examples of the taxing power violating the freedom of

the press, cited in Tolentino vs. Secretary of Finance,
 Page 36 of 87

(G.R. No. 115455 October 30, 1995):

• The license tax in Grosjean v. American

Press Co., 297 U.S. 233, 80 L. Ed. 660
(1936) was found to be discriminatory
because it was laid on the gross advertising
receipts only of newspapers whose weekly
circulation was over 20,000, with the result
that the tax applied only to 13 out of 124
publishers in Louisiana. These large papers
were critical of Senator Huey Long who
controlled the state legislature which enacted
the license tax. The censorial motivation for
the law was thus evident.

• In Minneapolis Star & Tribune Co. v.

Minnesota Comm'r of Revenue, 460 U.S.
575, 75 L. Ed. 2d 295 (1983), the tax was
found to be discriminatory because although
it could have been made liable for the sales
tax or, in lieu thereof, for the use tax on the
privilege of using, storing or consuming
tangible goods, the press was not. Instead, the
press was exempted from both taxes. It was,
however, later made to pay a special use tax
on the cost of paper and ink which made these
items "the only items subject to the use tax
that were component of goods to be sold at
retail." The U.S. Supreme Court held that the
differential treatment of the press "suggests
 Page 37 of 87

that the goal of regulation is not related to

suppression of expression, and such goal is
presumptively unconstitutional." It would
therefore appear that even a law that favors
the press is constitutionally suspect.

f. Tax exemption of properties for religious, charitable, and

educational purposes:

• ART. 3, SEC. 28 (3). Charitable institutions, churches

and parsonages 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.

• Lung Center of the Philippines vs. Quezon City,

G.R. No. 144104, June 29, 2004:

• The tax exemption under this

constitutional provision covers property
taxes only. As Chief Justice Hilario G.
Davide, Jr., then a member of the 1986
Constitutional Commission, explained: ". . .
what is exempted is not the institution itself .
. .; those exempted from real estate taxes are
lands, buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational purposes."

• Under the 1973 and 1987 Constitutions and

Rep. Act No. 7160 in order to be entitled to
 Page 38 of 87

the exemption, the petitioner is burdened to

prove, by clear and unequivocal proof, that (a)
it is a charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY
and EXCLUSIVELY used for charitable
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. The words "dominant use" or
"principal use" cannot be substituted for the
words "used exclusively" without doing
violence to the Constitutions and the law.
Solely is synonymous with exclusively.

• What is meant by actual, direct and exclusive

use of the property for charitable purposes is
the direct and immediate and actual
application of the property itself to the
purposes for which the charitable institution
is organized. It is not the use of the income
from the real property that is determinative of
whether the property is used for tax-exempt
purposes.

• WY: Please take note, you may get the wrong

 Page 39 of 87

impression that once properties are being used for

purposes other than religious, charitable, or
educational, then the entire property would be
subject to tax. No, that is not correct. The effect of the
Court’s ruling in this case is that only those
“portions” of the property which are actually,
directly, and exclusively used for religious,
charitable, or educational purposes will be exempt
from taxation. The “portions” used for other
purposes will be subject to tax. You can see this in the
Court’s ruling that is reproduced after this note.

• Accordingly, we hold that the portions of the

land leased to private entities as well as those
parts of the hospital leased to private
individuals are not exempt from such taxes.
On the other hand, the portions of the land
occupied by the hospital and portions of the
hospital used for its patients, whether paying
or non-paying, are exempt from real property
taxes.

• The test of exemption from taxation is the use of the

property for purposes mentioned in the Constitution
(Apostolic Prefect v. City Treasurer of Baguio, 71 Phil,
547 [1941]).

• It must be stressed however, that while this Court

allows a more liberal and non-restrictive interpretation
of the phrase "exclusively used for educational
purposes" as provided for in Article VI, Section 22,
paragraph 3 of the 1935 Philippine Constitution,
reasonable emphasis has always been made that
 Page 40 of 87

exemption extends to facilities which are incidental to

and reasonably necessary for the accomplishment of
the main purposes. Otherwise stated, the use of the
school building or lot for commercial purposes is
neither contemplated by law, nor by jurisprudence.
Thus, while the use of the second floor of the main
building in the case at bar for residential purposes of
the Director and his family, may find justification
under the concept of incidental use, which is
complimentary to the main or primary purpose—
educational, the lease of the first floor thereof to the
Northern Marketing Corporation cannot by any stretch
of the imagination be considered incidental to the
purpose of education.

x x x

The trial court correctly arrived at the conclusion that

the school building as well as the lot where it is built,
should be taxed, not because the second floor of the
same is being used by the Director and his family for
residential purposes, but because the first floor thereof
is being used for commercial purposes. However, since
only a portion is used for purposes of commerce, it is
only fair that half of the assessed tax be returned to the
school involved. (Abra Valley College vs. Aquino, G.R. No. L-39086
June 15, 1988)

• Commissioner vs. St. Luke’s, G.R. No. 195909,

September 26, 2012:

• "Non-profit" does not necessarily mean

 Page 41 of 87

"charitable." In Collector of Internal Revenue

v. Club Filipino Inc. de Cebu, this Court
considered as non-profit a sports club
organized for recreation and entertainment of
its stockholders and members. The club was
primarily funded by membership fees and
dues. If it had profits, they were used for
overhead expenses and improving its golf
course. The club was non-profit because of its
purpose and there was no evidence that it was
engaged in a profit-making enterprise.

• The sports club in Club Filipino Inc. de Cebu

may be non-profit, but it was not charitable.
The Court defined "charity" in Lung Center
of the Philippines v. Quezon City as "a gift, to
be applied consistently with existing laws, for
the benefit of an indefinite number of persons,
either by bringing their minds and hearts
under the influence of education or religion,
by assisting them to establish themselves in
life or [by] otherwise lessening the burden of
government." A non-profit club for the
benefit of its members fails this test. An
organization may be considered as non-profit
if it does not distribute any part of its income
to stockholders or members. However,
despite its being a tax exempt institution, any
income such institution earns from activities
 Page 42 of 87

conducted for profit is taxable, as expressly

provided in the last paragraph of Section 30.

• To be a charitable institution, however, an

organization must meet the substantive test of
charity in Lung Center. The issue in Lung
Center concerns exemption from real
property tax and not income tax. However, it
provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens
the burden of government. In other words,
charitable institutions provide for free goods
and services to the public which would
otherwise fall on the shoulders of
government. Thus, as a matter of efficiency,
the government forgoes taxes which should
have been spent to address public needs,
because certain private entities already
assume a part of the burden. This is the
rationale for the tax exemption of charitable
institutions. The loss of taxes by the
government is compensated by its relief from
doing public works which would have been
funded by appropriations from the Treasury.

• As a general principle, a charitable institution

does not lose its character as such and its
exemption from taxes simply because it
derives income from paying patients, whether
 Page 43 of 87

out-patient, or confined in the hospital, or

receives subsidies from the government, so
long as the money received is devoted or used
altogether to the charitable object which it is
intended to achieve; and no money inures to
the private benefit of the persons managing or
operating the institution.

• For real property taxes, the incidental

generation of income is permissible because
the test of exemption is the use of the
property. The Constitution provides that
"[c]haritable 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 test of exemption
is not strictly a requirement on the intrinsic
nature or character of the institution. The test
requires that the institution use the property in
a certain way, i.e. for a charitable purpose.
Thus, the Court held that the Lung Center of
the Philippines did not lose its charitable
character when it used a portion of its lot for
commercial purposes. The effect of failing to
meet the use requirement is simply to remove
from the tax exemption that portion of the
 Page 44 of 87

property not devoted to charity.

• The Constitution exempts charitable

institutions only from real property taxes.
Section 28(3), Article VI of the Constitution
does not define a charitable institution, but
requires that the institution "actually, directly
and exclusively" use the property for a
charitable purpose.

• Moreover, the exemption in favor of property used

exclusively for charitable or educational purposes is
"not limited to property actually indispensable"
therefor (Cooley on Taxation, Vol. 2, p. 1430), 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 nurses, a nurses' home, property use to provide
housing facilities for interns, resident doctors,
superintendents, and other members of the hospital
staff, and recreational facilities for student nurses,
interns and residents" (84 C.J.S., 621), such as "athletic
fields," including "a farm used for the inmates of the
institution" (Cooley on Taxation, Vol. 2, p. 1430).
(Herrera vs. Quezon City Board of Assessment Appeals, G.R. No. L-15270,
September 30, 1961)

g. Bills originating from the House of Representatives

• ART. 6, SECTION 24. All appropriation, revenue or

tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall
 Page 45 of 87

originate exclusively in the House of Representatives,

but the Senate may propose or concur with
amendments.

• To begin with, it is not the law — but the revenue bill

— which is required by the Constitution to "originate
exclusively" in the House of Representatives. It is
important to emphasize this, because a bill originating
in the House may undergo such extensive changes in
the Senate that the result may be a rewriting of the
whole. x x x x. At this point, what is important
to note is that, as a result of the Senate action, a distinct
bill may be produced. To insist that a revenue statute
— and not only the bill which initiated the legislative
process culminating in the enactment of the law —
must substantially be the same as the House bill would
be to deny the Senate's power not only to "concur with
amendments" but also to "propose amendments." It
would be to violate the coequality of legislative power
of the two houses of Congress and in fact make the
House superior to the Senate. (Tolentino vs. Secretary of

Finance, G.R. No. 115455 August 25, 1994 – note, 1994 decision!!)

• Indeed, what the Constitution simply means is that the

initiative for filing revenue, tariff, or tax bills, bills
authorizing an increase of the public debt, private bills
and bills of local application must come from the
House of Representatives on the theory that, elected as
they are from the districts, the members of the House
can be expected to be more sensitive to the local needs
and problems. On the other hand, the senators, who are
 Page 46 of 87

elected at large, are expected to approach the same

problems from the national perspective. Both views are
thereby made to bear on the enactment of such laws.
(Tolentino vs. Secretary of Finance, G.R. No. 115455 August 25, 1994 –
note, 1994 decision!!)

• Nor does the Constitution prohibit the filing in the

Senate of a substitute bill in anticipation of its receipt
of the bill from the House, so long as action by the
Senate as a body is withheld pending receipt of the
House bill. (Tolentino vs. Secretary of Finance, G.R. No. 115455

August 25, 1994 – note, 1994 decision!!)

h. Tax Exemption of Non-stock Non-Profit Educational

Institutions (NS-NP-EIs)

• ART. 14, SEC. 4 (3) and (4). (3) All revenues and
assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively
for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of
the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law.

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.

(4) Subject to conditions prescribed by law, all grants,

endowments, donations, or contributions used
actually, directly, and exclusively for educational
 Page 47 of 87

purposes shall be exempt from tax.

• Note: proprietary educational institution refers to

privately owned educational institutions which are not
non-stock, non-profit educational institutions.

• The tax exemption granted by the Constitution to

non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive
use of their assets, revenues and income for
educational purposes. (Commissioner vs. De La Salle University,
G.R. No. 196596, November 9, 2016):

• We find that unlike Article VI, Section 28 (3)

of the Constitution (pertaining to charitable
institutions, churches, parsonages or
convents, mosques, and non-profit
cemeteries), which exempts from tax only the
assets, i.e., "all lands, buildings, and
improvements, actually, directly, and
exclusively used for religious, charitable, or
educational purposes ... ," Article XIV,
Section 4 (3) categorically states that "[a]ll
revenues and assets ... used actually, directly,
and exclusively for educational purposes
shall be exempt from taxes and duties."

• The addition and express use of the word

revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.

• We find that the text demonstrates the policy

 Page 48 of 87

of the 1987 Constitution, discernible from the

records of the 1986 Constitutional
Commission to provide broader tax privilege
to non-stock, non-profit educational
institutions as recognition of their role in
assisting the State provide a public good. The
tax exemption was seen as beneficial to
students who may otherwise be charged
unreasonable tuition fees if not for the tax
exemption extended to all revenues and assets
of non-stock, non-profit educational
institutions.

• Further, a plain reading of the Constitution

would show that Article XIV, Section 4 (3)
does not require that the revenues and income
must have also been sourced from educational
activities or activities related to the purposes
of an educational institution. The phrase all
revenues is unqualified by any reference to
the source of revenues. Thus, so long as the
revenues and income are used actually,
directly and exclusively for educational
purposes, then said revenues and income shall
be exempt from taxes and duties.

• We find it helpful to discuss at this point the

taxation of revenues versus the taxation of
assets:

Revenues consist of the amounts earned by a

 Page 49 of 87

person or entity from the conduct of business

operations. It may refer to the sale of goods,
rendition of services, or the return of an
investment. Revenue is a component of the
tax base in income tax, VAT, and local
business tax (LBT).

• Assets, on the other hand, are the tangible and

intangible properties owned by a person or
entity. It may refer to real estate, cash deposit
in a bank, investment in the stocks of a
corporation, inventory of goods, or any
property from which the person or entity may
derive income or use to generate the same. In
Philippine taxation, the fair market value of
real property is a component of the tax base
in real property tax (RPT). Also, the landed
cost of imported goods is a component of the
tax base in VAT on importation and tariff
duties.

• Thus, when a non-stock, non-profit

educational institution proves that it uses its
revenues actually, directly, and exclusively
for educational purposes, the REVENUES
shall be exempted from income tax, VAT, and
LBT. On the other hand, when it also shows
that it uses its assets in the form of real
property for educational purposes, it shall be
exempted from RPT.
 Page 50 of 87

• To be clear, proving the actual use of the

taxable item will result in an exemption, but
the specific tax from which the entity shall be
exempted from shall depend on whether the
item is an item of revenue or asset.

• To illustrate, if a university leases a portion of

its school building to a bookstore or cafeteria,
the leased portion is not actually, directly and
exclusively used for educational purposes,
even if the bookstore or canteen caters only to
university students, faculty and staff.

• The leased portion of the building may be

subject to real property tax, as held in Abra
Valley College, Inc. v. Aquino. We ruled in
that case that the test of exemption from
taxation is the use of the property for purposes
mentioned in the Constitution. We also held
that the exemption extends to facilities which
are incidental to and reasonably necessary for
the accomplishment of the main purposes.

• In concrete terms, the lease of a portion of a

school building for commercial purposes,
removes such asset from the property tax
exemption granted under the Constitution.
There is no exemption because the asset is not
used actually, directly and exclusively for
educational purposes. The commercial use of
the property is also not incidental to and
 Page 51 of 87

reasonably necessary for the accomplishment

of the main purpose of a university, which is
to educate its students.

• However, if the university actually, directly

and exclusively uses for educational purposes
the revenues earned from the lease of its
school building, such revenues shall be
exempt from taxes and duties. The tax
exemption no longer hinges on the use of the
asset from which the revenues were earned,
but on the actual, direct and exclusive use of
the revenues for educational purposes.

• Parenthetically, income and revenues of non-

stock, non-profit educational institution not
used actually, directly and exclusively for
educational purposes are not exempt from
duties and taxes. To avail of the exemption,
the taxpayer must factually prove that it used
actually, directly and exclusively for
educational purposes the revenues or income
sought to be exempted.

• The crucial point of inquiry then is on the use

of the assets or on the use of the revenues.
These are two things that must be viewed and
treated separately. But so long as the assets or
revenues are used actually, directly and
exclusively for educational purposes, they are
exempt from duties and taxes.
 Page 52 of 87

• The tax exemption granted by the Constitution to

non-stock, non-profit educational institutions,
unlike the exemption that may be availed of by
proprietary educational institutions, is not subject
to limitations imposed by law (Commissioner vs. De La Salle
University, G.R. No. 196596, November 9, 2016):

• That the Constitution treats non-stock, non-

profit educational institutions differently
from proprietary educational institutions
cannot be doubted. As discussed, the
privilege granted to the former is conditioned
only on the actual, direct and exclusive use of
their revenues and assets for educational
purposes. In clear contrast, the tax privilege
granted to the latter may be subject to
limitations imposed by law.

• We spell out below the difference in treatment

if only to highlight the privileged status of
non-stock, non-profit educational institutions
compared with their proprietary counterparts.

• While a non-stock, non-profit educational

institution is classified as a tax-exempt entity
under Section 30 (Exemptions from Tax on
Corporations) of the Tax Code, a proprietary
educational institution is covered by Section
27 (Rates of Income Tax on Domestic
Corporations).

• To be specific, Section 30 provides that

 Page 53 of 87

exempt organizations like non-stock, non-

profit educational institutions shall not be
taxed on income received by them as such.

• Section 27 (B), on the other hand, states that

proprietary educational institutions shall
enjoy a lower tax rate.

• By the Tax Code's clear terms, a proprietary

educational institution is entitled only to a
reduced rate of the corporate income tax.

• Consistent with Article XIV, Section 4 (3) of

the Constitution, these limitations do not
apply to non-stock, non-profit educational
institutions.

• Thus, we declare the last paragraph of Section

30 of the Tax Code without force and effect
for being contrary to the Constitution insofar
as it subjects to tax the income and revenues
of non-stock, non-profit educational
institutions used actually, directly and
exclusively for educational purpose.

• Finally, we stress that our holding here

pertains only to non-stock, non-profit
educational institutions and does not cover
the other exempt organizations under Section
30 of the Tax Code.

i. No law granting any tax exemption shall be passed without

the concurrence of a majority of all the Members of the
 Page 54 of 87

Congress. (ART. 6, SEC. 28(4))

• In granting tax exemptions, an absolute majority vote

of the Members of Congress is required, while in cases
of withdrawal of such tax exemption, a relative
majority vote is sufficient. (Dimaampao)

• Tax amnesties, tax condonations, and tax refunds are

in the nature of tax exemptions. Such being the case, a
law granting tax amnesties, tax condonations, and tax
refunds requires the vote of an absolute majority of the
Members of Congress. (Dimaampao)

j. Congress shall evolve a progressive system of taxation

• ART. 6, SECTION 28. (1) x x x . The

Congress shall evolve a progressive system of taxation.

• 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. Otherwise, sales taxes, which perhaps are the
oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, §17(1)
 Page 55 of 87

of the 1973 Constitution from which the present Art.

VI, §28(1) was taken. Sales taxes are also regressive.
(Tolentino vs. Secretary of Finance, G.R. No. 115455 October 30, 1995)

• 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.

Secretary of Finance, G.R. No. 115455 October 30, 1995)

• Will a tax law be invalidated for being regressive?

• Regressivity is not a negative standard for

courts to enforce. What Congress is required
by the Constitution to do is to "evolve a
progressive system of taxation." This is a
directive to Congress, just like the directive to
it to give priority to the enactment of laws for
the enhancement of human dignity and the
reduction of social, economic and political
inequalities (Art. XIII, § 1), or for the
promotion of the right to "quality education"
(Art. XIV, § 1). These provisions are put in
the Constitution as moral incentives to
legislation, not as judicially enforceable
rights. (Tolentino vs. Secretary of Finance, G.R. No. 115455
August 25, 1994 – note, 1994 decision!!)

k. NON-IMPRISONMENT FOR NON-PAYMENT OF POLL

TAX

• ART. 3, SECTION 20. No person shall be imprisoned

for debt or non-payment of a poll tax.
 Page 56 of 87

• This limitation only applies to poll tax. A taxpayer may

be imprisoned for non-payment of other taxes where
the law so expressly provides.

l. VETO POWER OF THE PRESIDENT

• ART. 6, SEC. 27 (2). The President shall have the

power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall
not affect the item or items to which he does not object.

• Examples:

• President Rodrigo Duterte has vetoed a

provision in Republic Act (RA) No. 11213, or
the Tax Amnesty Act of 2019, granting
amnesty to people who failed to pay correct
taxes in 2017 and before.

• President Rodrigo Duterte has vetoed nine

items in the new Corporate Recovery and Tax
Incentives for Enterprises (CREATE) Act to
ensure it would serve its purpose as a fiscal
relief and recovery measure for Filipino
businesses affected by the pandemic.

m. PRESIDENT’S POWER TO TAX

• ART. 6, SEC. 28 (2). 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
 Page 57 of 87

development program of the Government.

n. LOCAL TAXATION

• ART. 10, SECTION 5. Each local government unit

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

• Can Congress abolish the LGU’s power to tax?

• No, Congress cannot abolish the LGU’s

taxing power because such power is expressly
granted by the Constitution. Congress,
however, can provide for guidelines and
limitations.

• Note: the provisions in the Local Government

Code relating to the LGU’s power to tax are
guidelines and limitations provided for by
Congress.

• Doctrine of Preemption in Local Taxation

• It is correct to say that preemption in the

matter of taxation simply refers to an instance
where the national government elects to tax a
particular area, impliedly withholding from
the local government the delegated power to
tax the same field. This doctrine primarily
rests upon the intention of Congress.
 Page 58 of 87

Conversely, should Congress allow

municipal corporations to cover fields of
taxation it already occupies, then the doctrine
of preemption will not apply.

G. STAGES OR ASPECTS OF TAXATION

1. (Mamalateo) Well-known authors describe that the exercise of taxation

has three aspects, namely:

a. Levy

b. Assessment and Collection

c. Payment

2. Levy

a. This refers to the enactment of a law by Congress, imposing a

tax. (Mamalateo)

b. In the legislature primarily lies the discretion to determine the

nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation. It has the authority to
prescribe a certain tax at a specific rate for a particular public
purpose on persons or things within its jurisdiction. In other
words, the legislature wields the power to define what tax shall
be imposed, why it should be imposed, how much tax shall be
imposed, against whom (or what) it shall be imposed and where
it shall be imposed. (CREBA vs. Romulo, G.R. No. 160756, March 2010)

3. Assessment and Collection

a. This is the act of administration and implementation of the tax

law by the executive department through administrative
agencies. (Mamalateo)
 Page 59 of 87

b. Tax assessments by tax examiners are presumed correct and

made in good faith, and all presumptions are in favor of the
correctness of a tax assessment unless proven otherwise.
(Commissioner vs. Hon. Raul Gonzales, G.R. No. 177279, October 13, 2010)

c. However, the prima facie correctness of a tax assessment does

not apply upon proof that an assessment is utterly without
foundation, meaning it is arbitrary and capricious. Where the
BIR has come out with a "naked assessment," i.e., without any
foundation character, the determination of the tax due is without
rational basis. (Commissioner vs. Hantex, G.R. No. 136975, March 31, 2005)

4. Filing/Payment

a. This is the act of compliance by the taxpayer, including such

options, schemes, or remedies as may be legally available to
him. (Mamalateo)

H. REQUISITES OF A VALID TAX

1. Must be for a public purpose;

2. Should be uniform and equitable

3. Either the person or the property being taxed is within the

jurisdiction of the taxing authority;

4. Complies with the requirements of due process; and

5. Does not infringe any constitutional limitations. (Gruba)

I. KINDS OF TAXES

1. As to object
a. Personal, capitation, or poll tax – imposed on persons,
whether citizens or not, residing within a specified territory.
(e.g. community tax)
 Page 60 of 87

b. Property tax – imposed on property, real or personal. (e.g. real

estate tax)
c. Privilege or excise tax – a tax on the exercise of a right or
privilege or performance of an act. (e.g. income tax, estate tax,
donor’s tax, and value-added tax).
2. As to burden or incidence
a. Direct – a tax for which a taxpayer is directly liable on the
transaction or business it engages in. (e.g. Income Tax)
• Direct taxes are those that are exacted from the very
person who, it is intended or desired, should pay them.
b. Indirect – a tax primarily paid by persons who can shift the
burden upon someone else. (e.g. VAT)
3. As to method of computation
a. Specific – based on weight, volume, or other physical unit of
measure.
b. Ad Valorem – based on specific proportion of the value
(monetary value) fixed by law.
c. Mixed – mix of specific and ad valorem.
4. As to purpose
a. General – imposed solely to raise revenue for the government,
such as: income tax, donor’s tax, estate tax, and value-added
tax.
b. Special – imposed and collected to achieve a particular
legitimate object of government. (e.g. oil price stabilization
fund)
5. As to taxing authority
a. National – imposed by the national government (e.g. revenue
taxes under the NIRC and custom duties)
 Page 61 of 87

b. Local – levied and collected by the local government (e.g.

business tax)
6. As to graduation or rate
a. Progressive / graduated – one whereby the rate increases as
the tax base (amount) increases.
b. Regressive – one where the tax rate decreases as the tax base
increases.
c. Proportionate – one where the tax rate is based on a fixed
percentage of the tax base.

J. GENERAL CONCEPTS IN TAXATION

1. Nature of tax laws

a. Tax laws are civil in nature. (Commissioner vs. Reyes, G.R. No. 159694,

January 27, 2006)

b. Tax laws, in general, are not penal in nature. Indeed, a

legislation merely imposing taxes, without strictly penal
sanctions for violations thereof, may have a retrospective
operation, without being an ex post facto law. (Commissioner of

Customs vs. Caltex, G.R. No. L-24192, May 22, 1968)

2. Prospectivity of tax laws

a. Tax laws are prospective in operation, unless the language of

the statute clearly provides otherwise. (CIR vs. Acosta, 529 SCRA 177)

b. Indeed, a legislation merely imposing taxes, without strictly

penal sanctions for violations thereof, may have a retrospective
operation, without being an ex post facto law. (Commissioner of

Customs vs. Caltex, G.R. No. L-24192, May 22, 1968)

3. Imprescriptibility

a. As a general rule, taxes are imprescriptible unless otherwise

 Page 62 of 87

provided for by law.

b. It is well settled that limitations upon the right of the

government to assess and collect taxes will not be presumed in
the absence of clear legislation to the contrary. The existence of
a time limit beyond which the government may recover unpaid
taxes is purely dependent upon some express statutory
provision, (51 Am. Jur. 867; 10 Mertens Law of Federal Income
Taxation, par. 57. 02.). It follows that in the absence of express
statutory provision, the right of the government to assess unpaid
taxes is imprescriptible. (CTA ruling upheld by the Court, cited in

Commissioner vs. Ayala Securities, G.R. No. L-29485 November 21, 1980)

c. The Court is persuaded by the fundamental principle that

limitations upon the right of the government to assess and
collect taxes will not be presumed in the absence of clear
legislation to the contrary and that where the government has
not by express statutory provision provided a limitation upon its
right to assess unpaid taxes, such right is imprescriptible.
(Commissioner vs. Ayala Securities, G.R. No. L-29485 November 21, 1980)

4. Situs of taxation

a. The approved doctrine is that no state may tax anything not

within its jurisdiction without violating the due process clause
of the constitution. The taxing power of a state does not extend
beyond its territorial limits, but within such it may tax persons,
property, income, or business. If an interest in property is taxed,
the situs of either the property or interest must be found within
the state. If an income is taxed, the recipient thereof must have
a domicile within the state or the property or business out of
which the income issues must be situated within the state so that
 Page 63 of 87

the income may be said to have a situs therein. Personal

property may be separated from its owner, and he may be taxed
on its account at the place where the property is although it is
not the place of his own domicile and even though he is not a
citizen or resident of the state which imposes the tax. (Manila Gas

vs. Collector of Internal Revenue, G.R. No. L-42780, January 17, 1936)

b. Some examples of rules observed in fixing tax situs:

• It should be stressed that what the City of Iriga seeks

to collect from CASURECO III is a franchise tax,
which as defined, is a tax on the exercise of a privilege.
As Section 137 of the Local Government Code
provides, franchise tax shall be based on gross receipts
precisely because it is a tax on business, rather than on
persons or property. Since it partakes of the nature of
an excise tax, the situs of taxation is the place where
the privilege is exercised, in this case in the City of
Iriga, where CASURECO III has its principal office
and from where it operates, regardless of the place
where its services or products are delivered. (City of Iriga

vs. CASURECO, G.R. No. 192945, September 5, 2012)

• The situs of tangible personal property, for purposes of

taxation may be where the owner is domiciled but is
not necessarily so. Unlike intangible personal
property, it may acquire a taxation situs in a state other
than the one where the owner is domiciled, merely
because it is located there. Its taxable situs is where it
is more or less permanently located, regardless of the
domicile of the owner. It is well settled that the state
where it is more or less permanently located has the
 Page 64 of 87

power to tax it although the owner resides out of the

state, regardless of whether it has been taxed for the
same period at the domicile of the owner, provided
there is statutory authority for taxing such property. It
is equally well settled that the state where the owner is
domiciled has no power to tax it where the property has
acquired an actual situs in another state by reason of its
more or less permanent location in that state. (Law of

Taxation – Cooley, cited in BPI vs. Juan Posadas Jr., G.R. No. L-34583,
October 22, 1931)

• The source of an income is the property, activity or

service that produced the income. For the source of
income to be considered as coming from the
Philippines, it is sufficient that the income is derived
from activity within the Philippines. (Commissioner vs.

British Overseas Airways Corporation, G.R. No. L-65773-74 April 30, 1987)

• Real property is subject to taxation in the state or

country where it is located, regardless of whether the
owner is a resident or a non-resident. (First National Bank vs.
Maine, 284 U.s. 312. 77 ALR 401) (Cited by Dimaampao)

5. Double taxation

a. Double taxation may be direct double taxation or indirect

double taxation.

b. Strict sense / Direct Double Taxation / Obnoxious

Sense

• "In order to constitute double taxation in the

objectionable or prohibited sense the same
property must be taxed twice when it should be
 Page 65 of 87

taxed but once; both taxes must be imposed on the

same property or subject-matter, for the same
purpose, by the same State, Government, or
taxing authority, within the same jurisdiction or
taxing district, during the same taxing period, and
they must be the same kind or character of tax."
(Villanueva vs. City of Iloilo, G.R. No. L-26521, December 28, 1968)

• 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." It is obnoxious when the taxpayer is taxed
twice, when it should be but once. Otherwise described
as "direct duplicate taxation," the two taxes must be
imposed on the same subject matter, for the same
purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and the
taxes must be of the same kind or character. (Nursery Care
Corporation vs. Acevedo, G.R. No. 180651, July 30, 2014)

c. Broad sense / Indirect Double Taxation / General

Sense

• In indirect double taxation, not all elements of direct

double taxation are present. The same is not prohibited
by law. (Gruba)

• Illustration of indirect double taxation – different

taxing authority; different objects being taxed
(Villanueva vs. City of Iloilo, G.R. No. L-26521, December 28, 1968)

:
 Page 66 of 87

• While it is true that the plaintiffs-appellees are

taxable under the aforesaid provisions of the
National Internal Revenue Code as real estate
dealers, and still taxable under the ordinance
in question, the argument against double
taxation may not be invoked. The same tax
may be imposed by the national government
as well as by the local government. There is
nothing inherently obnoxious in the exaction
of license fees or taxes with respect to the
same occupation, calling or activity by both
the State and a political subdivision thereof.

• The contention that the plaintiffs-appellees

are doubly taxed because they are paying the
real estate taxes and the tenement tax imposed
by the ordinance in question, is also devoid of
merit. It is a well-settled rule that a license tax
may be levied upon a business or occupation
although the land or property used in
connection therewith is subject to property
tax. The State may collect an ad valorem tax
on property used in a calling, and at the same
time impose a license tax on that calling, the
imposition of the latter kind of tax being in no
sense a double tax.

• Indirect Double Taxation (Double Taxation in the

General Sense) is not prohibited in our
constitution:
 Page 67 of 87

• At all events, there is no constitutional

prohibition against double taxation (in the
general sense) in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional
requirement is not thereby violated, such as
the requirement that taxes must be uniform."
(Villanueva vs. City of Iloilo, G.R. No. L-26521,
December 28, 1968 – footnote #22 of Villanueva refers to
Double Taxation in the GENERAL sense)

d. Tax treaties as relief from double taxation

• (Dimaampao) In order to eliminate double

taxation, a tax treaty resorts to two methods of
relief, to wit:

• 1.) Exemption Method – the income or

capital which is taxable in the state of
source or situs is exempted in the state of
residence, although in some instances it
may be taken into account in determining
the rate of tax applicable to the taxpayer’s
remaining income or capital.

• 2.) Credit Method – the tax paid in the

state of source is credited against the tax
levied in the state of residence.

The basic difference between the two

methods is that in the exemption method,
the focus is on the income or capital itself,
whereas the credit method focuses upon
 Page 68 of 87

the tax. (Baker, Double Taxation

Conventions and International Tax Law
[1994], pp.70-72)

The intention behind the adoption of the

provision on “relief from double
taxation” in two tax treaties should be
considered in light of the purpose behind
the most favored nation clause.
The purpose of a most favored nation
clause is to grant to the contracting party
treatment not less favorable than that
which has been or may be granted to the
"most favored" among other countries.
The most favored nation clause is
intended to establish the principle of
equality of international treatment by
providing that the citizens or subjects of
the contracting nations may enjoy the
privileges accorded by either party to
those of the most favored nation. The
essence of the principle is to allow the
taxpayer in one state to avail of more
liberal provisions granted in another tax
treaty to which the country of residence
of such taxpayer is also a party provided
that the subject matter of taxation, in this
case royalty income, is the same as that in
the tax treaty under which the taxpayer is
 Page 69 of 87

liable. (Commissioner vs. S.C. Johnson, G.R. No.

127105 June 25, 1999)

e. Modes of eliminating Double Taxation:

• Allowance of tax credit for foreign taxes (as can be

seen in the allowance of tax credits in our NIRC for
foreign income taxes, foreign estate taxes, or foreign
donor’s taxes paid.)

• Providing tax exemptions

• Application of the principle of reciprocity (as can also

be seen in the grant of tax exemption on transfer taxes
of intangible personal property provided that the home
state of the taxpayer also grants a similar tax
exemption)

6. Escape from taxation

a. Shifting of tax burden

• (Gruba) The burden of paying tax can actually be

shifted from the statutory taxpayer to another
without necessarily violating the law. There are
three (3) ways of shifting the tax burden, namely:

• 1.) Forward Shifting – the transfer of

burden from the producer to the
distributor until it finally reaches the
ultimate purchaser or consumer.

• 2.) Backward Shifting – the reverse of

forward shifting, which means the
manufacturer has agreed to buy the
suppliers product only if the price is
 Page 70 of 87

reduced by the amount of tax.

• 3.) Onward Shifting – the tax burden is

shifted twice, either forward or backward.

• The following may be subject to shifting

of tax burden:

• Percentage Tax

• Excise Tax

• Value-added Tax

• Ad Valorem Tax

• Indirect Tax - indirect taxes are those that are

demanded in the first instance from one person in
the expectation and intention that he can shift the
burden to someone else.

• Impact of Taxation – refers to the

taxpayer upon whom the tax has first
been imposed.

• Incidence of Tax – refers where the tax

burden ultimately rests. (where the tax
burden stops and cannot be shifted to
another person).

b. Distinguish: tax avoidance and tax evasion

• Tax Evasion – also called tax dodging

• Tax Avoidance – also called tax minimization

• Commissioner vs. The Estate of Benigno Toda Jr.,

G.R. No. 147188, September 14, 2004:
 Page 71 of 87

• Tax avoidance and tax evasion are the two

most common ways used by taxpayers in
escaping from taxation. Tax avoidance is the
tax saving device within the means
sanctioned by law. This method should be
used by the taxpayer in good faith and at arms
length. 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.

• Elements of Tax Evasion:

• Tax evasion connotes the integration

of three factors:

• (1) 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;

• (2) an accompanying state of mind

which is described as being "evil," in
"bad faith," "willfull," or "deliberate
and not accidental"; and

• (3) a course of action or failure of

action which is unlawful.
 Page 72 of 87

• The intention to minimize taxes, when used in the

context of fraud, must be proved to exist by clear and
convincing evidence amounting to more than mere
preponderance, and cannot be justified by a mere
speculation. This is because fraud is never lightly to be
presumed.

"Tax evasion" is a term that connotes fraud thru the use

of pretenses and forbidden devices to lessen or defeat
taxes. (Yutivo Sons Hardware Company vs. Court of Tax Appeals, G.R.

No. L-13203, January 28, 1961)

• No fraud when the taxpayer voluntarily informed the

BIR (through a notation in his income tax return) that
there was an underdeclaration due to error:

• The Supreme Court was persuaded

considerably by Javier's contention that there
is no fraud in the filing of the return and agree
fully with the Court of Tax Appeals'
interpretation of Javier's notation on his
income tax return filed on March 15, 1978
thus: "Taxpayer was the recipient of some
money from abroad which he presumed to be
a gift but turned out to be an error and is now
subject of litigation that it was an "error or
mistake of fact or law" not constituting fraud,
that such notation was practically an
invitation for investigation and that Javier had
literally "laid his cards on the table."
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(Commissioner vs. Javier Jr., G.R. No.

78953, July 31, 1991)

• The Willful Blindness Doctrine (Court of Tax

Appeals Case):

• People vs. Gloria Kintanar, CTA E.B.

CRIM-006, December 3, 2010:

• Willful in the tax crimes statutes

means voluntary, intentional
violation of a known legal duty, and
bad faith or bad purpose need not be
shown. (Mertens' Law of Federal
Income Taxation)

• An act or omission is "willfully"

done if done voluntarily and
intentionally and with specific intent
to do something the law forbids, or
with specific intent to fail to do
something the law requires to be
done; that is, with bad purpose to
either disobey or disregard the law.
A willful act may be described as
one done intentionally, knowingly
and purposely, without justifiable
excuse. (Black’s Law Dictionary)

• Gloria Kintanar claims that she did

not actively participate in the filing
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of her joint ITRs with her husband in

the years 2000 and 2001 and
entrusted the fulfillment of such duty
to her husband; that her husband
hired a certain Marina Mendoza, an
accountant, who was tasked by her
husband to handle the filing and
payment of their tax obligations;
thus, there was no voluntary,
intentional, deliberate, or malicious
failure to file a return on her part.

• The Court of Tax Appeals did not

sustain Gloria Kintanar’s
contention. First, Kintanar's sole
reliance on her husband to file their
ITRs is not a valid reason to justify
her non-filing, considering that she
knew from the start that she and her
husband are mandated by law to file
their ITRS.

• Second, Kintanar, being an

experienced businesswoman, should
know how much are her tax dues, the
details stated on the ITRs, where the
same are filed, and other important
facts related to the filing of her ITRs;
after all, these matters concern her
finances. She cannot just leave
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entirely to her husband the filing of

her ITRs.

• Furthermore, the Court finds no

affirmative acts on the part of the
Kintanar to make sure that her
obligation to file her ITRs had been
fully complied with. Kintanar
testified that she does not even know
how much was her tax obligation,
nor did she bother to inquire or
determine the facts surrounding the
filing of her ITRs. Such neglect or
omission, as aptly found by the
Former Second Division, is
tantamount to "deliberate ignorance"
or "conscious avoidance".

7. Exemption from taxation

a. The Supreme Court has since ruled that the power to tax
includes the power to grant tax exemptions. Thus, the
imposition of taxes, as well as the grant and withdrawal of
tax exemptions, shall only be valid pursuant to a legislative
enactment. (Secretary of Finance vs. Lazatin, G.R. No. 210588, November 29,

2016)

b. "Exception is an immunity or privilege; it is freedom from a

charge or burden to which others are subjected." (Greenfield vs. Meer,
G.R. No. 156, September 27, 1946)
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c. Exemption vs Exclusion

• Both in their nature and in their effect there is no

difference between tax exemption and tax exclusion.
Exemption is an immunity or privilege; it is freedom
from a charge or burden to which others are subjected.
Exclusion, on the other hand, is the removal of
otherwise taxable items from the reach of taxation,
e.g., exclusions from gross income and allowable
deductions. Exclusion is thus also an immunity or
privilege which frees a taxpayer from a charge to
which others are subjected. Consequently, the rule that
tax exemption should be applied in strictissimi juris
against the taxpayer and liberally in favor of the
government applies equally to tax exclusions. (PLDT vs.

City of Davao, G.R. No. 143867, March 25, 2003)

• WY: Strictly speaking, they are not the same but they
are only the same with respect to their nature and
effect.

d. RULE ON CONSTRUCTION OF EXEMPTIONS (Strict

Construction Rule on Tax Exemptions)

• Because taxes are the lifeblood of the nation, statutes

that allow exemptions are construed strictly against the
taxpayer and liberally in favor of the government.
Otherwise stated, any exemption from the payment of
a tax must be clearly stated in the language of the law;
it cannot be merely implied therefrom. (Davao Gulf vs.

Commissioner, G.R. No. 117359 July 23, 1998)

 Page 77 of 87

• Tax exemptions are strictly construed against the

taxpayer because taxes are considered the lifeblood of
the nation. (Capitol Wireless vs. Batangas, G.R. No. 180110, May 30,

2016)

• Exceptions to the Strict Construction Rule:

• 1.) If there is an express mention or if the

taxpayer falls within the purview of the
exemption by clear legislative intent, then the
rule on strict construction will not apply.
(Commissioner vs. Arnoldus Carpentry, G.R. No. 71122 March
25, 1988)

• 2.) It is a recognized principle that the rule on

strict interpretation does not apply in the case
of exemptions in favor of a government
political subdivision or instrumentality.
(Maceda vs. Macaraig, G.R. No. 88291, May 31, 1991)

• The reason for the rule does not

apply in the case of exemptions
running to the benefit of the
government itself or its agencies. In
such case the practical effect of an
exemption is merely to reduce the
amount of money that has to be
handled by government in the course
of its operations. For these reasons,
provisions granting exemptions to
government agencies may be
 Page 78 of 87

construed liberally, in favor of non

tax liability of such agencies. (Maceda

vs. Macaraig, G.R. No. 88291, May 31, 1991)

• 3.) The rule of strict construction does not

apply where the statute granting the
exemption expressly provides for a liberal
interpretation. (Dimaampao)

• 4.) The rule of strict construction does not

apply to special taxes relating to special cases
and affecting only special classes of persons;
(Dimaampao)

• 5.) In case of property owned by the State or

the City or other public corporation, an
express exemption should not be construed
with the same degree of strictness that applies
to exemptions contrary to the policy of the
state, since as to such property “exemption is
the rule and taxation the exemption”; (2
Cooley Taxation, 1414-1415) (Dimaampao)

• 6) Exemptions to traditional exemptees, such

as those in favor of religious and charitable
institutions; (2 Cooley Taxation, 1414-1415)
(Dimaampao)

8. Doctrine of Equitable Recoupment

a. This doctrine means that when the refund of a tax illegally or

 Page 79 of 87

erroneously collected or overpaid by a taxpayer is barred by the

statute of limitations and a tax is being presently assessed
against the taxpayer, the said present tax may be recouped or set
off against the tax erroneously paid, the refund of which has
been barred. Commissioner of Internal Revenue vs. UST (104
Phil. 1062) stated that this doctrine is not applicable in the
Philippines.

9. Prohibition on compensation and set-off

a. It is settled that a taxpayer may not offset taxes due from the
claims that he may have against the government. Taxes cannot
be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other
and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off. (Caltex vs. COA, G.R. No. 92585

May 8, 1992)

b. However, in an exceptional case, “both the claim of the

Government for . . . taxes and the claim of the intestate
(taxpayer) for services rendered have already become overdue
and demandable is well as fully liquidated. Compensation,
therefore, takes place by operation of law.” (Domingo vs. Garlitos, G.R.
No. L-18994, June 29, 1963)

10. Compromise

a. "A compromise is an agreement between two or more persons,

who, for preventing for putting an end to a lawsuit, adjust their
difficulties by mutual consent in manner which they agree on,
and which every one of them prefers to the hope of gaining,
 Page 80 of 87

balanced by the danger of losing." (Black’s Law Dictionary)

b. In other words, compromise is resorted to, to avoid a litigation

or to end a suit already instituted. It contemplates mutual
concessions and mutual gains to avoid expenses and trouble of
litigation or, when litigation has already been begun, to end it
because of the uncertainty of the result thereof. (Rovero vs. Amparo,

G.R. No. L-5482, May 5, 1952)

c. As this Court has had occasions to explain, a compromise

implies agreement. One party cannot impose it upon the other.
If an offer of compromise is rejected by the taxpayer, as in this
case, the Commissioner of Internal Revenue should file a
criminal action if he believes that the taxpayer is criminally
liable for violation of the tax law as the only way to enforce a
penalty. (Commissioner vs. Abad, G.R. No. L-19627, June 27, 1968)

d. Sec. 204 of the NIRC provides that the Commissioner may

compromise the payment of any internal revenue tax, when:

• (1) A reasonable doubt as to the validity of the claim

against the taxpayer exists; or

• (2) The financial position of the taxpayer demonstrates

a clear inability to pay the assessed tax.

11. Tax amnesty

a. Tax amnesty is an immunity from all criminal and civil

obligations arising from non-payment of taxes. It is a
general pardon given to all taxpayers. It partakes of an
absolute waiver by the government of its right to collect
 Page 81 of 87

what is due it and to give tax evaders who wish to relent a

chance to start with a clean slate. (Dimaampao)

b. A tax amnesty, much like a tax exemption, is never favored nor

presumed in law and if granted by statute, 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. (People vs. Castaneda, G.R. No. L-46881 September 15, 1988)

12. Liabilities involved

a. Taxes are the personal liability of the taxpayer.

b. A Tax creates a CIVIL Liability:

• The situation under the income tax law is the

exact opposite (from that of a Civil Liability
arising from a criminal act under our Penal Laws).
Civil liability to pay taxes arises from the fact, for
instance, that one has engaged himself in
business, and not because of any criminal act
committed by him. The criminal liability arises
upon failure of the debtor to satisfy his civil
obligation. (Republic of the Philippines vs. Patanao, G.R. No. L-
22356, July 21, 1967)

13. The power to tax is the power to destroy

a. The power of taxation is sometimes called also the power to

destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector
 Page 82 of 87

kill the "hen that lays the golden egg". And, in order to maintain
the general public's trust and confidence in the Government this
power must be used justly and not treacherously. It does not
conform with Our sense of justice in the instant case for the
Government to persuade the taxpayer to lend it a helping hand
and later on to penalize him for duly answering the urgent call.
(Roxas vs. Court of Tax Appeals, G.R. No. L-25043, April 26, 1968)

b. As a general rule, the power to tax is an incident of sovereignty

and is unlimited in its range, acknowledging in its very nature
no limits, so that security against its abuse is to be found only in
the responsibility of the legislature which imposes the tax on the
constituency who is to pay it. So potent indeed is the power that
it was once opined that "the power to tax involves the power to
destroy." (Philippine Health Care Providers vs. Commissioner, G.R. No. 167330,

September 18, 2009)

c. Legitimate enterprises enjoy the constitutional protection not to

be taxed out of existence. Incurring losses because of a tax
imposition may be an acceptable consequence but killing the
business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of
the nation’s thrust towards a better economy which will
ultimately benefit the majority of our people. (Philippine Health Care

Providers vs. Commissioner, G.R. No. 167330, September 18, 2009)

d. The power to tax is not the power to destroy:

• The power to tax moreover, to borrow from Justice

Malcolm, "is an attribute of sovereignty. It is the
strongest of all the powers of government." It is, of
 Page 83 of 87

course, to be admitted that for all its plenitude, the

power to tax is not unconfined. There are restrictions.
The Constitution sets forth such limits. Adversely
affecting, as it does, properly rights, both the due
process and equal protection clauses may properly be
invoked to invalidate, in appropriate cases, a revenue
measure. (Sison vs. Ancheta, G.R. No. L-59431 July 25, 1984)

e. Marshall Dictum (because of former US Chief Justice

Marshall):

• The power to tax involves the power to destroy.

f. Holmes Dictum:

• The web or unreality spun from Marshall's famous

dictum was brushed away by one stroke of Mr. Justice
Holmes pen, thus: "The power to tax is not the power
to destroy while this Court sits.” So it is in the
Philippines. (Reyes vs. Almanzor, G.R. Nos. L-49839-46, April 26,

1991)

14. Tax pyramiding

a. A tax should not be imposed upon another tax. This is tax

pyramiding, which has no basis either in fact or in law. (People vs.
Sandiganbayan, G.R. No. 152532. August 16, 2005)

b. A taxpayer cannot be "compelled to pay a tax on the tax itself."

(People vs. Sandiganbayan, G.R. No. 152532. August 16, 2005)

K. CONSTRUCTION AND INTERPRETATION OF TAX LAWS,

RULES AND REGULATIONS
 Page 84 of 87

1. Construction / Interpretation of Tax Laws or Tax Statutes

a. It is a general rule in the interpretation of statutes levying taxes

or duties, that in case of doubt, such statutes are to be construed
most strongly against the government and in favor of the
subjects or citizens, because burdens are not to be imposed, nor
presumed to be imposed beyond what statutes expressly and
clearly import. (Commissioner vs. Fireman’s Fund Insurance Co., G.R. No. L-

30644 March 9, 1987)

b. Construction / Interpretation by the Secretary of Finance is

not binding on the successors

• It cannot be denied, however, that the Secretary of

Finance is vested with authority to revoke, repeal or
abrogate the acts or previous rulings of his predecessor
in office because the construction of a statute by those
administering it is not binding on their successors if
thereafter the latter become satisfied that a different
construction should be given. (EMILIO Y. HILADO vs.

Commissioner of Internal Revenue, G.R. No. L-9408, October 31, 1956 –

from chanrobles)

c. Commissioner of Internal Revenue is not bound by rulings

of predecessors

• The Commissioner of Internal Revenue is not bound

by the ruling of his predecessors. To the contrary, the
overruling of decisions is inherent in the interpretation
of laws. (BDO vs. Commissioner, G.R. No. 198756, January 13, 2015)

2. Principle of legislative approval by re-enactment

a. Under the aforementioned legal concept, "where a statute is

susceptible of the meaning placed upon it by a ruling of the
 Page 85 of 87

government agency charged with its enforcement and the

Legislature thereafter re-enacts the provisions without
substantial change, such action is to some extent confirmatory
that the ruling carries out the legislative purpose." Thus, there is
tacit approval of a prior executive construction of a statute
which was re-enacted with no substantial changes. (Gulf Air

Company vs. Commissioner, G.R. No. 182045, September 19, 2012)

3. Taxpayer’s Suit

a. The prevailing doctrine in taxpayer’s suits is to allow taxpayers

to question contracts entered into by the national government or
government- owned or controlled corporations allegedly in
contravention of law. A taxpayer is allowed to sue where there
is a claim that public funds are illegally disbursed, or that public
money is being deflected to any improper purpose, or that there
is a wastage of public funds through the enforcement of an
invalid or unconstitutional law. Significantly, a taxpayer need
not be a party to the contract to challenge its validity. (Abaya vs.

Ebdane Jr., G.R. No. 167919, February 14, 2007)

4. NON-INJUNCTION RULE

a. NIRC, SEC. 218. Injunction not Available to Restrain

Collection of Tax. – No court shall have authority to grant an
injunction to restrain the collection of any national internal
revenue tax, fee, or charge imposed by this Code.

b. Exception to the non-injunction rule:

• Section 11 of R.A. No. 1125, as amended by R.A. No.

9282, embodies the rule that an appeal to the CTA
from the decision of the CIR will not suspend the
 Page 86 of 87

payment, levy, distraint, and/or sale of any property of

the taxpayer for the satisfaction of his tax liability as
provided by existing law. HOWEVER, when, in the
view of the CTA, the collection may jeopardize the
interest of the Government and/or the taxpayer, it may
suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety
bond. (Spouses Emmanuel and Jinkee Pacquiao vs. Court of Tax Appeals,
G.R. No. 213394, April 06, 2016)

• Note: collection may be suspended IF the collection

may jeopardize the interest of the Government and/or
the taxpayer and the taxpayer may be required to
deposit the amount claimed or file a bound – Question:
In what instance may a deposit/bond NOT be required
from the taxpayer?

• From all the foregoing, it is clear that the

authority of the courts to issue injunctive
writs to restrain the collection of tax and to
dispense with the deposit of the amount
claimed or the filing of the required bond is
not simply confined to cases where
prescription has set in. As explained by the
Court in those cases, whenever it is
determined by the courts that the method
employed by the Collector of Internal
Revenue in the collection of tax is not
sanctioned by law, the bond requirement
under Section 11 of R.A. No. 1125 should be
dispensed with. The purpose of the rule is not
 Page 87 of 87

only to prevent jeopardizing the interest of the

taxpayer, but more importantly, to prevent the
absurd situation wherein the court would
declare "that the collection by the summary
methods of distraint and levy was violative of
law, and then, in the same breath require the
petitioner to deposit or file a bond as a
prerequisite for the issuance of a writ of
injunction." (Spouses Emmanuel and Jinkee Pacquiao vs.

Court of Tax Appeals, G.R. No. 213394, April 06, 2016)

5. No Estoppel Against the State

a. It has long been a settled rule that the government is not bound
by the errors committed by its agents. Estoppel does not also lie
against the government or any of its agencies arising from
unauthorized or illegal acts of public officers. This is
particularly true in the collection of legitimate taxes due where
the collection has to be made whether or not there is error,
complicity, or plain neglect on the part of the collecting agents.
In CIR v. CTA, we pointedly said: “It is axiomatic that the
government cannot and must not be estopped particularly in
matters involving taxes. Taxes are the lifeblood of the nation
through which the government agencies continue to operate and
with which the State effects its functions for the welfare of its
constituents. Thus, it should be collected without unnecessary
hindrance or delay.” (Secretary of Finance vs. ORO Maura Shipping Lines, G.R.
No. 156946, July 15, 2009)

END OF GENERAL PRINCIPLES SUPPLEMENT