TAXATION LAW

GRUBA NOTES
(based from exams of Dean Lily K. Gruba)

I
Give at least five (5) constitutional provisions/limitations that directly affect the
power to tax of the State.

1. Due process
“(n)o person shall be deprived of life, liberty or property without due
process of law, nor shall any person be denied the equal protection of the
law." (Section 1, Article III, 1987 Philippine Constitution)
2. Equal protection
"...... nor shall any person be denied the equal protection of the laws"
(Section 1, Article III, Constitution)
3. Rule of uniformity and equity in taxation
"The rule of taxation shall be uniform and equitable and that Congress
shall evolve a progressive system of taxation" (Section 28(1), Article VI,
Constitution)
4. No imprisonment for non-payment of poll tax
"No person shall be imprisoned for debt or non-payment of a poll tax."
(Section 20, Article III, Constitution)
5. Non-impairment of obligations and contracts
"No law impairing the obligation of contracts shall be passed." (Section 10,
Article III, Constitution)
6. Non-infringement of religious freedom
" 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." (Section 5, Article III, Constitution)
7. No appropriation for religious purposes
"No public money or property shall be appropriated, applied, paid, or
employed, directly or indirectly, for the use, benefit, or support of any sect,
church, denomination, sectarian institution, or system of religion, or of
any priest, preacher, minister, or other religious teacher, or dignitary as
such, except when such priest, preacher, minister, or dignitary is assigned
to the armed forces, or to any penal institution, or government orphanage
or leprosarium." (Section 29(2), Article VI, Constitution)
8. Exemption of all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educ. purposes from
income, property and donor’s taxes and custom duties

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 TAXATION LAW
GRUBA NOTES
(based from exams of Dean Lily K. Gruba)

"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." (Section 4(3), Article XIV, Constitution)

9. Concurrence by a majority of all members of Congress in the passage of a

law granting tax exemptions
"No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress." (Section
28(4), Article VI, Constitution)

II
Explain the various inherent limitation of the power to tax of the State.

A. Non Delegation of the power to Tax

The power to tax is purely legislative and it cannot be delegated by the legislature to
the executive or judicial department of the government. Only the legislature can
exercise the power of taxes unless the same is delegated to some other governmental
body by the constitution or through a law which does not violate any provision of the
constitution.

B. Exemption from taxation of government entities

Government agencies performing essential government functions are exempt from
tax unless expressly taxed while those performing proprietary functions are subject
to tax unless expressly exempted. Government cannot tax itself.

C. Public Purpose
The proceeds of the tax must be used for the support of the State or for some
recognized objects of government or directly to promote the welfare of the
community. The test is whether the statute is designed to promote the public interest,
as opposed to the furtherance of the advantage of individuals, although each
advantage to individuals might incidentally serve the public.

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 TAXATION LAW
GRUBA NOTES
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D. Territorial Jurisdiction
The tax laws of the state are enforceable only within its territorial limits. Tax laws
do not operate beyond the country's territorial limits. A state may not tax property
lying outside its borders or lay an excise or privilege tax upon the exercise or
enjoyment of a right or privilege derived from the laws of another state and therein
exercise and enjoyed.

E. International comity
The property of a foreign State or government may not be taxed by another.
Courteous and friendly agreement and interaction between nations.

III
Construction and Interpretation of Tax Laws. Explain the following:
A. General rules in the interpretation of tax laws
B. Interpretation of laws on tax exemptions and exclusions
C. Rules on non-retroactive application of tax laws
D. Doctrine of prospectivity of tax laws

A. General rules in the interpretation of tax laws

Tax laws are liberally construed in favor of the taxpayer and strictly against the
government. The reason is that burdens are not to be imposed nor presumed beyond
what the statutes expressly and clearly import.

B. Interpretation of laws on tax exemptions and exclusions

Tax exemption should be construed in strictissimi juris against the taxpayer. One
who claims to be exempted from payment of a particular tax must show exemption
under clear and unmistakable terms found in the exempting statute. (Philippine
Acetylene Co., v. CIR, 20 SCRA 1056) The power of taxation is a high prerogative of
sovereignty. The relinquishment is never presumed. Any reduction or diminution
thereof must be strictly construed, and the same must be couched in clear and
unmistakable terms. Exemption cannot be allowed to exist upon a mere vague
implication or inference. (Floro Cement Corporation v. Judge Gorospe and the
Municipality of Lugait, 200 SCRA 480)

The exceptions to strictissimi juris interpretation of tax exemptions are:

a. When the statute granting exemption provides for liberal construction
thereof.

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GRUBA NOTES
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b. In case of special taxes relating to special cases and affecting only special
classes of persons.
c. If exemptions refer to public property.
d. In case of exemptions granted to charitable and educational institutions
or their property. (Cooley)
e. In cases of exemptions in favor of a government, political subdivision or
instrumentality. (Maceda v. Macaraig, Jr., 197 SCRA 771)

C. Rules on non-retroactive application of tax laws

As a general rule, like other statutes, tax laws operate prospectively. The exception
is when unless the purpose of the legislature to give retrospective effect is expressly
declared or may be implied from the language used RRs Section 246,NIRC: any
revocation, modification or reversal of any of the rules and regulations shall not be
given retroactive application, if prejudicial to the taxpayers.

D. Doctrine of prospectivity of tax laws (same as III.C)

IV
How did the Supreme Court explain the "The power to tax is sometimes called the
power to destroy" in the case of Roxas vs. Court of Tax Appeals (GR No. L-25043,
Aprile 26, 1968)

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers
who tilled them for generations was not only in consonance with, but more in
obedience to the request and pursuant to the policy of our Government to allocate
lands to the landless. It was the bounden duty of the Government to pay the agreed
compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to
subsequently subdivide them among the farmers at very reasonable terms and prices.
However, the Government could not comply with its duty for lack of funds. Obligingly,
Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands
directly to the farmers in the same way and under the same terms as would have
been the case had the Government done it itself. For this magnanimous act, the
municipal council of Nasugbu passed a resolution expressing the people's gratitude.

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 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

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GRUBA NOTES
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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.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question.
Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are
capital assets, and the gain derived from the sale thereof is capital gain, taxable only
to the extent of 50%.

V
Why is compensation or off setting not allowed or is not feasible in taxation?

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

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

VI
The interest income of a bank is subject to a final tax of 20%, in addition such amount
is subject to a Gross Receipt Tax of 5%. Is this a direct double taxation or an indirect
double taxation? Explain the difference. Is this constitutional? Why?

In indirect double taxation, first, the taxes herein are imposed on two different
subject matters. The subject matter of the FWT [Final Withholding Tax] is the
passive income generated in the form of interest on deposits and yield on deposit
substitutes, while the subject matter of the GRT [Gross Receipts Tax] is the privilege
of engaging in the business of banking. A tax based on receipts is a tax on business
rather than on the property; hence, it is an excise rather than a property tax. It is not
an income tax, unlike the FWT. In fact, we have already held that one can be taxed
for engaging in business and further taxed differently for the income derived
therefrom. Akin to our ruling in Velilla v. Posadas, these two taxes are entirely
distinct and are assessed under different provisions.

Second, although both taxes are national in scope because they are imposed by the
same taxing authority—the national government under the Tax Code—and operate

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GRUBA NOTES
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within the same Philippine jurisdiction for the same purpose of raising revenues, the
taxing periods they affect are different. The FWT is deducted and withheld as soon
as the income is earned, and is paid after every calendar quarter in which it is earned.
On the other hand, the GRT is neither deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax
subject to withholding, while the GRT is a percentage tax not subject to withholding.
In direct double 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 they must be of the same kind or character. In
indirect double taxation, at least one element of direct double taxation is missing.

While generally frowned upon, double taxation is not unconstitutional, unless a

constitutional limitation is violated (e.g., due process).

VII
Explain the difference between the Silkair case and the PAL case in the matter of
who is a statutory taxpayer, meaning of indirect and direct taxes and who has the
legal standing to claim for refund.

In the Silkair case, a statutory taxpayer is defined as the person on whom the tax is
imposed by law (and who paid the same even if he shifts the burden thereof to
another). In the PAL case, the same definition for statutory taxpayer is used.

In the Silkair case, a direct tax is a tax for which a taxpayer is directly liable on the
transaction or business it is engaged in. Examples are custom duties and ad valorem
taxes paid by the oil companies to the Bureau of Customs for their importation of
crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal
Revenue after converting the crude oil into petroleum products. In the PAL case,
direct tax was not defined.

In the Silkair case, indirect tax was defined as a tax primarily paid by persons who
can shift the burden upon someone else. For example, the excise tax and ad valorem
taxes that the oil companies pay to the Bureau of Internal Revenue upon removal of
petroleum products from its refinery can be shifted to its buyer, like the NPC, by
adding them to the "cash" and/or "selling price." In the PAL case, indirect tax was
defined those which are demanded in the first instance from one person with the

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expectation and intention that he can shift the economic burden to someone else Who
has legal standing to claim refund

In the Silkair case, it is the statutory taxpayer, the person on whom the tax is imposed
by law and who paid the same even if he shifts the burden thereof to another, who
has the legal standing to claim for refund. In the PAL case, the rule in Silkair should
not apply to instances where the law clearly grants the party to which the economic
burden of the tax is shifted an exemption from BOTH direct and indirect taxes. In
which case, the latter must be allowed to claim a tax refund even if it is not considered
as the statutory taxpayer under the law. On the other hand, if the exemption
conferred ONLY applies to direct taxes, then the statutory taxpayer is regarded as
the proper party to file the refund claim.

Given BOTH the direct and indirect tax exemptions UNDER ITS (LEGISLATIVE)
FRANCHISE, PAL is endowed with the legal standing to file the subject tax refund
claim, notwithstanding the fact that it is not the statutory taxpayer.

VIII
Identify the differences between tax avoidance (tax minimization) and tax evasion
(tax dodging) in terms of the means in achieving it, the purpose why it is done and
the penalty if found guilty of the same.

As to the means in achieving it, tax avoidance uses lawful means, or “means
sanctioned by law" and “used by the taxpayer in good faith and at arms length”. Tax
Evasion, on the other hand, uses illegal means or “a scheme outside of those lawful
means;”

As to purpose, tax avoidance is for a legitimate business purpose. While tax evasion
is merely a tax ploy, a sham, and without business purpose and economic substance.

As to penalty if found guilty of the same, there is no penalty imposed in tax avoidnace.
While in tax evasion, the taxpayer is usually subjected to further or additional civil
or criminal liabilities.

IX
Distinguish between tax amnesty and tax exemption, in terms of the scope of
immunity, to whom granted, when applied, and as to implication to revenue loss.

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 TAXATION LAW
GRUBA NOTES
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As to scope of immunity, in tax amnesty the scope is the immunity from any civil,
criminal or administrative penalties. In tax exemption, the scope of immunity is the
civil liability only.

As to whom granted, in tax amnesty is a general pardon to ALL taxpayers. While in

tax evasion, the same is not granted to all (others are subject to the charge or burden).

As to when applied, tax evasion is applied to past tax periods. While tax evasion is
generally prospective.

As to implication to revenue loss, in tax avoidance, the State partially recovers the
loss through the collection of an amnesty tax. While in tax evasion, the tax is not
recovered.

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