Bepitel, Breylle L.

Taxation Law Review Notes

(February 17, 2024)

SITUS OF TAXATION

Situs is the place of taxation; power to tax is limited to the territorial jurisdiction of the taxing state. It is
the place or authority that has the right to impose and collect taxes.

Exception: where privity of relationship exists, the State can exercise its taxing powers over its citizen
outside its territory.

The basis of the power to tax is not dependent on the source of the income nor upon the location of the
property nor upon the residence of the taxpayer but upon his relation as a citizen to the state. As such
a citizen, he is entitled, wherever he may be, inside or outside of his country, to the protection of his
government.

OTHER FORMS OF EXACTIONS DISTINGUISHED FROM TAXATION.

1. Customs Duty/Tariff

TAX CUSTOMS DUTY

Coverage More comprehensive than Importation or export of goods
customs duty

Object Persons, prop, etc. Goods imported or exported

2. Toll

TAX TOLL
Kind of demand Demand of sovereignty Demand of ownership

Purpose Support of government Collection for the use of property

Amount No limit – depends on need of Fair return of the cost of the

the government property or improvement

NOTE: Taxes may be imposed only by the government under its sovereign authority; toll fees may be
demanded by either the government or private individuals or entities, as an attribute of ownership.
3. License Fee

TAX LICENSE FEE

Source of Authority Exercise of Taxing power Emanate from the police power of
the State

Purpose Raise revenue Regulation

Object Persons, property and privilege Right to exercise a privilege

Amount No limit Only necessary to carry out

regulation

The primary purpose of license fees is for regulation and the excess of the amount collected, from the
cost to carry out the regulation, should be minimal and incidental.

4. Special Assessment

TAX SPECIAL ASSESSMENT

Source Law; legal obligation Based on contract

Nature Personal Assignable

Right to set-off Generally, not subject to May be the subject of

compensation/ set-off compensation/ set-off

Effect Imprisonment is sanction for No imprisonment for non-payment

non-payment

The primary purpose of license fees is for regulation and the excess of the amount collected, from the
cost to carry out the regulation, should be minimal and incidental.

In Caltex v. COA, 208 SCRA 726, the Court ruled that it is settled that a taxpayer may not offset taxes
due from the claims that he may have against the government. Taxes cannot be 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.

In Progressive Development Corp. v. Quezon City, G.R. No. L-36081, a LICENSE FEE is imposed in
the exercise of the police power primarily for purposes of regulation, while TAX is imposed under the
taxing power primarily for purposes of raising revenues.

If the generating 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 incidentally, revenue is also obtained does not
make the imposition a tax.

To be considered a license fee, the imposition must relate to an occupation or activity that so engages the
public interest in health, morals, safety, and development as to require regulation for the protection and
promotion of such public interest; the imposition must also bear a reasonable relation to the probable
expenses of regulation, taking into account not only the costs of direct regulation but also its incidental
consequences.
KINDS OF TAXES

AS TO OBJECT

1. Personal /poll or capitation tax – A fixed amount imposed upon all persons, or upon all persons of a
certain class or residents within a specified territory, without regard to their property or occupation. (e.g.,
community tax)

2. Property tax – Tax imposed on property, whether real or personal, in proportion either to its value, or
in accordance with some other reasonable method of apportionment. (e.g., real property tax)

3. Privilege/excise tax – A charge upon the performance of an act, the enjoyment of a privilege, or the
engaging in an occupation. An excise tax is a tax that does not fall as property tax. (e.g., income tax,
estate tax, donor’s tax, VAT)

NOTE: This is different from the excise tax under the NIRC which is a business tax imposed on items
such as cigars, cigarettes, wines, liquors, frameworks, mineral products, etc.

AS TO BURDEN OR INCIDENCE

1. Direct taxes - are demanded from the very person who, as intended, should pay the tax which he
cannot shift to another.

2. Indirect taxes - are demanded in the first instance from one person with the expectation that he can
shift the burden to someone else, not as a tax but as a part of the purchase price. Income tax, estate tax,
and donor's tax are considered as direct taxes. On the other hand, value-added tax, excise tax, other
percentage taxes, and documentary stamp tax are indirect taxes.

It is direct taxes when the impact or liability for the payment of tax as well as incidence or burden of tax of
the tax falls on the same person. On the other hand, it is indirect taxes when the impact or liability for the
payment of tax falls on one person but the incidence or burden thereof can be shifted or passed to
another.

NOTE: The liability for payment of the indirect taxes lies only with the seller of the goods or services, not
in the buyer thereof. Thus, one cannot invoke one’s exemption privilege to avoid the passing on or the
shifting of the VAT to him by the manufacturers or suppliers of the goods. Hence, it is important to
determine if the tax exemption granted specifically includes the indirect tax, otherwise, it is presumed that
the tax exemption embraces only those taxes for which the buyer is directly liable. (CIR v. PLDT, 478
SCRA 61)

Indirect taxes, like VAT and excise tax, are different from withholding taxes (direct taxes). To distinguish,
in indirect taxes, the incidence of taxation falls on one person, but the burden thereof can be shifted or
passed on to another person, such as when the tax is imposed upon goods before reaching the consumer
who ultimately pays for it.

On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same
entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely
collects, by withholding, the tax due from income payments to entities arising from certain transactions
and remits the same to the government. Due to this difference, the deficiency VAT and excise tax cannot
be “deemed” as withholding taxes merely because they constitute indirect taxes.
AS TO PURPOSE

1. General or Fiscal Tax – levied for the general or ordinary purposes of the Government, i.e., to raise
revenue for governmental needs (e.g., income tax, VAT, and almost all taxes).

2. Special/Regulatory/Sumptuary Tax – levied for special purposes, i.e., to achieve some social or
economic ends irrespective of whether revenue is actually raised or not (e.g., protective tariffs or customs
duties on imported goods to enable similar products manufactured locally to compete with such
imports in the domestic market). Tariff duties intended mainly as a source of revenue are relatively low so
as not to discourage imports.

AS TO SCOPE (OR AUTHORITY IMPOSING THE TAX)

1. National – taxes imposed by the national government, through Congress and administered by the
Bureau of Internal Revenue (BIR) or the Bureau of Customs (BOC) (e.g., national internal revenue
taxes, customs duties, and national taxes imposed by laws).

2. Municipal or Local – taxes imposed by local governments, through their respective Sanggunians, and
administered by the local executive through the local treasurer (e.g., business taxes that may be imposed
under the Local Government Code, professional tax).

AS TO GRADUATION
1. Progressive – The rate of tax increases as the tax base or bracket increases, e.g., income tax on
individuals

2. Regressive – The rate of tax decreases as the tax base or bracket increases. There is no regressive
tax in the Philippines.

3. Proportionate – The rate of tax is based on a fixed percentage of the amount of the property, receipts
or other basis to be taxed, e.g., real estate tax, VAT, and other percentage taxes.

4. Digressive – A fixed rate is imposed on a certain amount and diminishes gradually on sums below it.
The tax rate in this case is arbitrary because the increase in tax rate is not proportionate to the increase of
tax base.

DOCTRINES IN TAXATION

CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES, AND REGULATIONS

a. Public purpose is always presumed

b. If the law is clear, apply the law in accordance to its plain and simple tenor
c. A statute will not be construed as imposing a tax unless it does so clearly, expressly and
unambiguously. In case of doubt, it is construed most strongly against the Government and
liberally in favor of the taxpayer since it is an imposition of a burden (Lifeblood Theory).
d. Tax laws may not be extended by implication beyond the clear import of their language, nor their
operation enlarged so as to embrace matters not specifically provided
 e. Tax laws operate prospectively unless the purpose of the legislature to give retroactive effect is
expressly declared or may be implied from the language used
f. Tax laws are special laws and prevail over a general law

In Philippine Health Care Providers, Inc. v. CIR, G.R. No. 167330, the Court ruled that we should be
guided by the principle that tax statutes are strictly construed against the taxing authority. This is because
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. Hence, tax laws may not be
extended by implication beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided

In City of Iloilo v. Smart, G.R. No. 167260, the Court enunciated that the One who claims an exemption
from his share of the common burden of taxation must justify his claim by showing that the Legislature
intended to exempt him by words too plain to be beyond doubt or mistake. Right of taxation is inherent in
the State. It is a prerogative essential to the perpetuity of the government. A well-founded doubt is fatal to
the claim; it is only when the terms of the concession are too explicit to admit fairly of any other
construction that the proposition can be supported.

Tax exemptions must be clear and unequivocal; A taxpayer claiming a tax exemption must point to a
specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common
burden.

In Kepco Philippines Corp. v. CIR, G.R. No. 179356, the Court highlighted that Tax refunds are in the
nature of tax exemptions, and laws granting exemptions are construed strictly against the taxpayer and
liberally in favor of the taxing authority. The Court of Tax Appeals (CTA) is dedicated exclusively to the
resolution of tax problems and has developed expertise on the subject. Unless there is a showing of
abuse or reckless exercise of authority, the Court sees no ground to disturb the decision of the CTA.

PROSPECTIVITY OF TAX LAWS

General rule:
Tax laws are prospective in operation. Nature and amount of the tax under tax laws enacted after the
transaction could not have been foreseen and understood by the taxpayer at the time of the transaction.

Exception:
Tax laws may be applied retroactively provided it is expressly declared or it is clearly the legislative intent
(e.g., increase taxes on income already earned) except when retroactive application would be so harsh
and oppressive.

Statutes are prospective and not retroactive in their operation, laws being the formulation of rules for the
future, not the past. The language of the statute must clearly demand or press that it shall have a
retroactive effect.

Exception to the exception:

Collection of interest in tax cases is not penal in nature; it is but a just compensation to the State. Thus,
the constitutional prohibition against ex post facto laws is not applicable to the collection of interest on
back taxes.
In Central Azucarera v. CTA, G.R. No. L-23236, it is thus evident that petitioner's contention that
"interest on such deficiency accrued only when the taxpayer failed to pay the tax within the period
prescribed therefor by respondent (Commissioner of Internal Revenue)" is not correct; said interest was
imposable in case of non-payment on time, not only on the basic income tax, but also on the deficiency
tax, since the deficiency was part and parcel of petitioner's income tax liability.

IMPRESCRIPTIBILITY OF TAXES

Although the NIRC provides for the limitation in the assessment and collection of taxes imposed, such will
only be applicable to those taxes where a tax return is required. The prescriptive period shall start from
the time the taxpayer files the tax return and declares his liability.

Unless otherwise provided by the tax law itself, taxes in general are imprescriptible. The law on
prescription being a remedial measure should be interpreted liberally in favor of the taxpayer in order to
protect the taxpayer.

Commissioner v. Standard Chartered Bank, G.R. No. 192173 (2015)

DOUBLE TAXATION

1. Direct Double Taxation (Strict sense)

The same property is taxed twice when it should be taxed only once.
Both taxes must be imposed:
i. On the same property or subject matter;
ii. For the same purpose;
iii. By the same taxing authority;
iv. Within the same jurisdiction or taxing district and during the same period; and
v. They must be of the same kind or character of tax.

2. Indirect Double taxation (Broad sense)

It means indirect duplicate taxation. It extends to all cases in which there are two or more pecuniary
impositions. The Constitution does not prohibit the imposition of double taxation in the broad sense.

Constitutionality of Double Taxation

The SC held that there is no constitutional prohibition against double taxation in the Philippines.Therefore,
it may not be a valid defense against the validity of a tax measure. What is prohibited is direct double
taxation.

There is no double taxation in the following cases:

● By taxing corporate income and stockholders’ dividends from the same corporation;
● Tax imposed by the State and the local government upon the same occupation, calling or activity;
● Real estate tax and income tax collected on the same real estate property leased for earning purposes
● Taxes are imposed on taxpayer’s final product and the storage of raw materials used in the production
of the final product
In Villanueva v. City of Iloilo, G.R. No. L-26521, imposing license tax on the operation of a business
conducted on a property, at the same time subjecting said property to property tax does not result in
double taxation.

The contention that the 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 inconnection
therewith is subject to property tax. The State may collect an ad valorem tax on property, and at the same
time impose a license tax, the imposition of the latter kind of tax being in no sense a double tax.

In order to constitute double taxation in the objectionable or prohibited sense the same property must be
taxed twice when it should be taxed but once; both taxes must be imposed (1) on the same property or
subject-matter, (2) for the same purpose, (3) by the same State, Government, or taxing authority,
(4)within the same jurisdiction or taxing district, (5) during the same taxing period, and (6) they must be
the same kind or character of tax." It has been shown that a real estate tax and the tenement tax imposed
by the ordinance, although imposed by the same taxing authority, are not of the same kind or character.

ESCAPE FROM TAXATION

SHIFTING OF TAX BURDEN

The imposition of tax is transferred from the statutory taxpayer to another without violating the law.

1. Forward shifting: The transfer of burden from the producer to distributor until it finally reaches the
ultimate purchaser or consumer

2. Backward shifting: The reverse of forward shifting, e.g. the manufacturer has agreed to buy the
supplier’s product only if the price is reduced by the amount of tax

3. Onward shifting: The tax burden is shifted twice or more either forward or backward

Taxes that can be shifted

1. VAT
2. Percentage tax
3. Excise tax on excisable articles
4. Ad valorem taxes that oil companies pay to BIR upon removal of petroleum products from its refinery

Meaning of impact and incidence of taxation

 Impact of Taxation – point on which the tax is originally imposed or the one on whom the tax is
formally assessed.

 Incidence of Taxation – point on which the tax burden finally rests or settles down.

Example: VAT is originally assessed against the seller who is required to pay the said tax, but the burden
is actually shifted or passed on to the buyer. It is important to know where the impact of taxation lies (i.e.
who the statutory taxpayer is) because it will generally determine:
1. The proper party to claim a refund of erroneously imposed indirect taxes; and
2. Whether the indirect taxes can be passed on to an exempt buyer.
In CIR v. PLDT, G.R. No. 140230, based on the possibility of shifting the incidence of taxation, or as to
who shall bear the burden of taxation, taxes may be classified into either direct tax or indirect tax.In
context, direct taxes are those that are exacted from the very person who, it is intended or desired, should
pay them; they are impositions for which a taxpayer is directly liable on the transaction or business he is
engaged in.

On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by,
one person in the expectation and intention that he can shift the burden to someone else. Stated
elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but
the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon
goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his
buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of
goods sold or services rendered

TAX AVOIDANCE VS TAX EVASION

1. Tax avoidance – also called tax minimization, is a tax saving device that is legally permissible
The Court held that tax avoidance is the use of a tax saving device within the means sanctioned by law.
Any tax avoidance scheme should be used by the taxpayer in good faith and at arm’s length

When a merger or reincorporation is undertaken for a bona fide purpose and not solely for the purpose of
escaping the burden of taxation, it is not evasion. The questioned merger involved a pooling of resources
aimed at the continuation and expansion of business and so came under the intendment of the NIRC
exempting from the capital gains tax exchanges of property effected under lawful corporate combinations.

2. Tax evasion – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat
taxes; must be willful and intentional

It connotes the integration of three factors:

 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;
 Accompanying state of mind which is described as being "evil," in "bad faith," "willful," or
"deliberate and not accidental"; and
 Course of action or failure of action, which is unlawful

In CIR v. The Estate of Benigno P. Toda, G.R. 147188, tax evasion is a scheme not sanctioned by law
and when it is availed of, it subjects the taxpayer to further or additional civil or criminal liabilities. Tax
evasion connotes the integration of three factors:
(a) 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;
(b) an accompanying state of mind which is described as being “evil,” in “bad faith,”
“willfull,” or “deliberate and not accidental”; and
(c) a course of action or failure of action which is unlawful.
EXEMPTION FROM TAXATION

Tax Exemption is the grant of immunity to particular persons or corporations or to persons or

corporations of a particular class from a tax which persons and corporations generally within the same
state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial
charge or burden to which others are subjected. (Greenfield v. Meer, G.R. No. 156, 1946)

Nature of Tax Exemption

Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is
directly liable. In any case, it cannot be transferred or assigned by the person to whom it is given without
the consent of the State.

Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored
and may almost be said to be odious to the law.

Exemptions are not presumed, but when public property is involved, exemption is the rule, and taxation,
the exception.

General Rule: Exemptions are not presumed.

Exception: When public property is involved (i.e., exemption is the rule, and taxation, the exception)
There can be no simultaneous exemptions under two laws, one partial and the other total.

In Maceda v. Macaraig, G.R. 88291, a chronological review of the NPC laws will show that it has been
the lawmaker's intention that the NPC was to be completely tax exempt from all forms of taxes — direct
and indirect. P.D. No. 938 did not amend the same and so the tax exemption provision in Section 8 (b),
R.A. No. 6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular
Section 8 (b) had to do only with loans and machinery imported, paid for from the proceeds of these
foreign loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax
exemption stood as is — with the express mention of "direct and indirect" tax exemptions. And this "direct
and indirect" tax exemption privilege extended to "taxes, fees, imposts, other charges . . . to be imposed"
in the future — surely, an indication that the lawmakers wanted the NPC to be exempt from ALL FORMS
of taxes — direct and indirect.

It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and
indirect taxes under P.D. No. 938.

In Philippine Fisheries Development Authority v. CA, G.R. 169836, the Court ruled that the Authority
is not a GOCC but an instrumentality of the national government which is generally exempt from payment
of real property tax. However, said exemption does not apply to the portions of the IFPC which the
Authority leased to private entities. With respect to these properties, the Authority is liable to pay real
property tax. Nonetheless, the IFPC, being a property of public dominion cannot be sold at public auction
to satisfy the tax delinquency.

Unlike GOCCs, instrumentalities of the national government, like MIAA, are exempt from local taxes
pursuant to Section 133(o) of the Local Government Code. This exemption, however, admits of an
exception with respect to real property taxes. Applying Section 234(a) of the Local Government Code, the
Court ruled that when an instrumentality of the national government grants to a taxable person the
beneficial use of a real property owned by the Republic, said instrumentality becomes liable to pay real
property tax.

Thus, while MIAA was held to be an instrumentality of the national government which is generally exempt
from local taxes, it was at the same time declared liable to pay real property taxes on the airport lands
and buildings which it leased to private persons. It was held that the real property tax assessments and
notices of delinquencies issued by the City of Pasay to MIAA are void except those pertaining to portions
of the airport which are leased to private parties. Pertinent portions of the decision

EQUITABLE RECOUPMENT

When a taxpayer is entitled to a claim for refund but he was not able to file a written claim within the
prescribed time, the taxpayer is allowed to credit the amount for refund against his existing liability. This is
not allowed in the Philippines and is applied in common law countries.

PROHIBITION ON COMPENSATION AND SET-OFF

Taxes are not subject to set-off or legal compensation because the government and the taxpayer are not
mutual creditor and debtor of each other.

Taxes are not subject to set-off or compensation for the following reasons:
 Taxes are of distinct kind, essence and nature, and these impositions cannot be classed in
merely the same category as ordinary obligations;
 The applicable laws and principles governing each are peculiar, not necessarily common, to each
other; and
 Public policy is better subserved if the integrity and independence of taxes are maintained.

A person cannot refuse to pay tax on the basis 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.

In several cases, as an exception to offsetting, the Court have allowed the determination of the taxpayer’s
liability in a refund case, thereby allowing the offsetting taxes. In these cases, offsetting was allowed
because the determination of the taxpayer’s liability is intertwined with the resolution for the claim of
refund.

COMPROMISE AND TAX AMNESTY

Compromise is generally allowed and enforceable when the subject matter thereof is not prohibited from
being compromised and the person entering such compromise is duly authorized to do so

The law allows the following persons to do compromise on behalf of the government:
 BIR Commissioner as expressly authorized by the NIRC subject to certain conditions;
 Collector of Customs with respect to customs duties limited to cases where the legitimate
authority is specifically granted such as in the remission of duties (Sec. 709, Tariffs and Customs
Code); and
 Customs Commissioner, subject to the approval of the Secretary of Finance, in cases involving
the imposition of fines, surcharges, and

Tax Amnesty is the general or intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute
forgiveness or waiver of the Government of its right to collect. It is a way to give tax evaders who wish to
relent and are willing to reform a chance to do so.

It refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and power to
impose penalties on persons or entities guilty of violating a tax law. Tax amnesty aims to grant a general
reprieve to tax evaders who wish to come clean by giving them an opportunity to straighten out their
records. Amnesty taxpayers may immediately enjoy the privileges and immunities under a Tax Amnesty
Law, provided they fulfill the suspensive conditions imposed therein.

A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax
amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor
of the taxing authority.

In CIR v. Marubeni, G.R. 137377, the tax amnesty is a general pardon or intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue
or tax law. It is an absolute forgiveness or waiver by the government of its right to collect what is due it
and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a
tax exemption, is never favored nor presumed in law. If granted, its terms must be construed strictly
against the taxpayer and liberally in favor of the State. For the right of taxation is inherent in government.