General Principles of Taxation 2018

General Principles of
Taxation
AUGUST 2018
Definition & Characteristics
 Taxes:
• Enforced contribution
• Generally payable in money and proportionate in character
• Levied ---
• on persons, properties, or transactions
• by the state having jurisdiction
• by the law-making body
• for public purpose
Definition & Characteristics
 Taxation:
• Process by which the sovereign through its law-making
body
• Raises income
• To defray the necessary expenses of government
Aspects of taxation
• Levy – This involves the determination by Congress of the objects

and subjects of taxation and the requisite details
• Assessment & Collection
• Assessment is the determination or process to arrive at the amount of tax due
• Collection is the actual means and method of implementing the tax rules to
satisfy the tax obligation
• Levy is a legislative function while assessment & collection are
functions delegated to the executive
Non-revenue (sumptuary) objectives
• Taxation can strengthen anemic enterprises or provide incentive to greater

production through the grant of tax exemptions or the creation of conditions
conducive to their growth
• Taxes may be increased in periods of prosperity to curb spending power and halt
inflation or lowered in periods of slump to expand business
• Taxes on imports may be increased to protect local industries against foreign
competition or decreased to encourage foreign trade
• Taxes can discourage certain businesses such as in the case of the high taxes
imposed on alcohol and tobacco products
• Taxes can also minimize inequity by redistributing wealth
Concepts – Lifeblood theory
(Extent)
The BIR was denied its day in court by reason of the mistakes and/or negligence of its
officials and the case was submitted without evidence being offered.
Although the Government may generally be estopped, their neglect or omission as

exemplified in this case will not and should not produce that effect. Nowhere is the
aforestated rule more true than in the field of taxation. 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. The errors of certain
administrative officers should never be allowed to jeopardize the Government's financial
position, especially in the case at bar where the amount involves millions of pesos the
collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy.
(CIR vs. CTA)
(Extent)
The cigarette manufacturers contend that for a long time prior to the transactions involved
in the case, the CIR had never subjected their purchases and importations of stemmed leaf
tobacco to excise taxes.
An erroneous interpretation by a BIR officer based on a misapprehension of law will not

put the government in estoppel. Prolonged practice of the BIR in not collecting specific
tax on stemmed leaf tobacco cannot validate what is an otherwise erroneous application
and enforcement of the law. The government is never estopped from collecting legitimate
taxes because of the error committed by its agents. The BIR is not precluded from
making a new interpretation of the law, especially when the old interpretation was flawed.
(La Suerte Cigar & Cigarette Factory vs. CIR)

(Limitation)
Petitioners questioned the revision of market values which increased tax rates. The City
used the “comparable sales approach” but the taxpayers wanted to use the “income
approach” because it is only by using this approach will the possibility of realty taxes
exceeding the rental income be prevented.
Since the approach (comparable sales) already amounts to confiscation of property, it was
deemed that the same amounted to the exercise of the power to tax be equivalent to the
power to destroy. While taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance, such collection should be made in accordance
with law as any arbitrariness will negate the very reason for government itself.
(Reyes vs. Almanzor)

(Limitation)
Petitioner was assessed for various taxes amounting to P4.6 billion. The assessment was appealed
to the CTA which also granted the Motion to Suspend Collection of Tax but on the condition that
Petitioner deposits an acceptable surety bond of 150% of the assessment or around P6.7 billion.
The CTA erred in requiring Petitioner to file a surety bond despite the supposedly patent illegality
of the assessment that was beyond petitioner’s net worth. It behooved the CTA to consider other
factors in imposing an absurd amount of surety bond requirement such as whether the assessment
would jeopardize the interest of the taxpayer or whether the means adopted by the CIR were legal
and valid. The Court said that “the power of taxation is sometimes called the power to destroy.
Thus 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”.
(Tridharma Marketing Corporation vs. CTA)

Concepts – Benefits-received (symbiotic)
principle
The issue is whether the business of reinsurance gives rise to Philippine-sourced income subject to
tax in the hands of foreign entities.
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a

necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvements 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.
Considering that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and reinsurers should share the burden of maintaining
the state.
(Philippine Guaranty Co., Inc. vs. CIR)

Concepts – Benefits-received (symbiotic)
principle
A person, therefore, cannot object to or resist the payment of taxes solely because no
personal benefit to him can be pointed out as arising from the tax or he is benefitted less
than others who pay the same or smaller amount of tax.
(Lorenzo vs. Posadas)

Concepts – Plenary power of Congress
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)
Congress’ power is “wide range and flexible”. The only benefit to which the taxpayer is
entitled is that derived from his enjoyment of the privileges of living in an organized
society.
(Gomez vs. Palomar)

Concepts – Plenary power of Congress
The legislative branch is given the discretion to determine the object, nature, rates,
coverage, and exemptions.
(Tan vs. Del Rosario)
 Extent of the legislative power to tax

• Subject or objects to be taxed (includes the power to grant exemption therefrom)
• Purpose of the tax which must be a public purpose
• The amount or rate of the tax
• Manner, means, and agencies tasked to collect taxes
Taxation, Police Power & Eminent
Domain
TAXATION POLICE POWER EMINENT DOMAIN
Purpose Support government’s Use of property or exercise For public use of the
needs of right is regulated property
Persons affected Class or group of persons Class or group of persons Owner of the property
Effect Money becomes public No transfer of ownership, Transfer of property
fund merely regulatory taken
Benefits received Protection and benefits No direct benefit except Receives the market
maintenance of orderly value of the property
society
Amount Generally no limit Sufficient only to cover the Market value of the
cost of the license property
Principles of a sound tax system
 Fiscal adequacy – The sources of revenue should be sufficient to meet the demands
of public expenditure in order to avoid fiscal deficit. It also means that the revenues
should be capable of expanding or contracting annually in response to variations in
public expenditures. An example is raising taxes to avoid the current fiscal crisis.
 Equality or theoretical justice - This is also called the ability-to-pay principle. The
tax burden should be in proportion to the taxpayer’s ability to pay. An example is
the schedular system of taxation applied in the Philippines.
 Administrative Feasibility - Tax laws should be capable of convenient, just and
effective administration. An example would be avoiding taxing the government to
reduce collection costs and the non-imposition of taxes on very small amounts of
benefits (i.e. de minimis) given to employees since to monitor these small amounts
would be very difficult administratively.
Principles of a sound tax system – fiscal
adequacy
Petitioner argues that the general revision of assessments of real property resulted to an excessive
increase in real property taxes by 100% to 400% on improvements, and up to 100% on land; that
any increase in the value of real property brought about by the revision of real property values and
assessments would necessarily lead to a proportionate increase in real property taxes which would
amount to a confiscation of property repugnant to the constitutional guarantee of due process.
Without Executive Order No. 73, the basis for collection of real property taxes will still be the 1978
revision of property values. 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. 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)

Principles of a sound tax system –
administrative feasibility
Are toll fees collected by tollway operators subject to VAT?
Petitioners assert that the substantiation requirements for claiming input VAT
make the VAT on tollway operations impractical and incapable of implementation.
They cite the fact that, in order to claim input VAT, the name, address and tax
identification number of the tollway user must be indicated in the VAT receipt or
invoice. The manner by which the BIR intends to implement the VAT — by
rounding off the toll rate and putting any excess collection in an escrow account
— is also illegal, while the alternative of giving "change" to thousands of
motorists in order to meet the exact toll rate would be a logistical nightmare. Thus,
according to them, the VAT on tollway operations is not administratively feasible.
Principles of a sound tax system –
administrative feasibility
The assertion that the VAT imposed is not administratively feasible given the
manner by which the BIR intends to implement the VAT (i.e., rounding off the
toll rates and putting any excess collection in an escrow account) is not
enough to invalidate the law. Non-observance of the canon of administrative
feasibility will not render a tax imposition invalid “except to the extent that
specific constitutional or statutory limitations are impaired”.
(Diaz vs. Secretary of Finance)

Taxes in comparison
TAXES FEES
Enforced contribution assessed to Legal compensation for specific
defray public expenses services
Levied for revenue Imposed for regulation
Exercise of taxing power Exercise of police power
Imposed on persons, property, Imposed on the right to exercise a
exercise of right or privilege privilege only
Generally no limit on the amount of Amount should be limited to the
tax that may be imposed necessary expenses of inspection and
regulation
Failure to pay does not necessarily Failure to pay makes the act of
make an act or business illegal business illegal
Taxes vs. Fees cases
Is margin fee (that imposed to curb excessive demands upon international reserve) a
tax or a fee?
A margin levy on foreign exchange is a form of exchange control or restriction

designed to discourage imports and encourage exports, and ultimately, `curtail any
excessive demand upon the international reserve' in order to stabilize the currency. It
is not a tax but is in fact a fee.
(Esso Standard Eastern, Inc. vs. CIR)

Petitioner insists that the "supervision fee" collected from rentals, being a return from
capital invested in the construction of the Farmers Market, practically operates as a tax on
income, which is one of those expressly excepted from respondent's taxing authority, and
thus beyond the latter's competence.
The fee is a license fee. Petitioner has not shown that the rate of the gross receipts tax is so
unreasonably large and excessive and so grossly disproportionate to the costs of the
regulatory service being performed by the respondent as to compel the Court to
characterize the imposition as a revenue measure exclusively. If the purpose is primarily to
regulate, then it is deemed a regulation and an exercise of the police power of the State and
the fact that incidental revenue is also obtained does not make the imposition a tax.
(Progressive Development Corporation vs. Quezon City)

Are anchorage fee taxes or fees?
They are taxes because they have no relation to the cost of the permit. To support the
claim that the fees imposed are merely regulatory, it was claimed that the City of
Basilan is an island with mountainous coasts and fringed by numerous coves and
inland bays and islets and may thus become a veritable haven for smugglers if the
city has no funds or means to suppress their illegal activities. The fees required were
primarily intended for revenue purposes.

(American Mail Lines vs. City of Basilan)

The issue was whether the imposition on the liquor company of both sales tax and license
fee was valid.
There was no double taxation because only one of the imposition was a tax. Ordinance No.
3358 is clearly one that prescribes municipal license fees for the privilege to engage in the
business of selling liquor or alcoholic beverages, having been enacted by the Municipal
Board of Manila pursuant to its charter power to fix license fees on, and regulate, the sale
of intoxicating liquors. On the other hand, it is clear that Ordinances Nos. 3634, 3301, and
3816 impose taxes on the sales of general merchandise, wholesale or retail, and are revenue
measures enacted by the Municipal Board of Manila by virtue of its power to tax dealers for
the sale of such merchandise.
(Compania General de Tabacos de Filipinas vs. City of Manila)

Is the motor vehicle registration fee a tax or a fee and is PAL liable to pay the same?
Following the Calalang case, the fee was considered a tax and thus PAL, which had
an “in lieu of all taxes” exemption, was not liable for the same. They are taxes even if
the same are denominated as fees. The same was deemed taxes given 1) the
legislative intent and 2) only 5% of the amount collected was set aside for the
operating expenses of the agency collecting the same.
(PAL vs. Edu)

A capital recovery component (CRC) was imposed on the domestic sales of all fertilizer
grades. The same issuance provided that the CRC “shall be collected until adequate
capital is raised to make Petitioner PPI (a private company) viable”.
The LOI is an exercise of the power of taxation. While it is true that the power of taxation
can be used as an implement of police power, the primary purpose of the CRC is revenue
generation given that the amounts collected were too excessive to serve a mere
regulatory purpose given that it was collectible “until adequate capital is raised to make
PPI viable”. Given its nature as a tax imposition, the fact that the ultimate beneficiary is
PPI, a private company, makes the levy invalid for not serving a public purpose.
(Planters Products, Inc. vs. Fertiphil Corporation)

Taxes vs. Fees cases (police power or
eminent domain)
The subject regulation may be said to be similar to, but with substantial distinctions
from, price control or rate of return on investment control laws which are
traditionally regarded as police power measures. These laws generally regulate
public utilities or industries/enterprises imbued with public interest in order to
protect consumers from exorbitant or unreasonable pricing as well as temper
corporate greed by controlling the rate of return on investment of these corporations
considering that they have a monopoly over the goods or services that they provide to
the general public. To the degree material to the resolution of this case, the 20%
discount may be properly viewed as belonging to the category of price regulatory
measures which affect the profitability of establishments subjected thereto. On its
face, therefore, the subject regulation is a police power measure.
(Manila Memorial Park, Inc. vs. Secretary of DSWD)

Taxes vs. Fees cases (police power or
eminent domain)
The law has also not been shown to be unreasonable, oppressive or confiscatory and
does not necessarily affect companies’ rates of return since (1) not all customers are
senior citizens; (2) the level of profit margin of the goods and services offered to the
public varies; and (3) the entities’ ability to recoup the discounts through higher
mark-ups or from other products not subject to discounts.
(Manila Memorial Park, Inc. vs. Secretary of DSWD)

Taxes in comparison
TAXES TOLL
A demand of sovereignty A demand of proprietorship
Paid for the support of the Paid for the use of another’s property
government
Generally no limit on the amount of Amount of toll depends upon the cost
tax that may be imposed of construction or maintenance of the
public improvement used
May be imposed only by the May be imposed by the government
government or private individuals or entities
Non payment will merit penalties and Non payment may prohibit a person
possible closure from using the facility
Taxes vs. Toll
The toll fee is not a user’s tax and thus it is permissible to impose a VAT on the said
fee. The MIAA case does not apply and the Court emphasized that toll fees are not
taxes since they are not assessed by the BIR and do not go the general coffers of the
government. Toll fees are collected by private operators as reimbursement for their
costs and expenses with a view to a profit while taxes are imposed by the government
as an attribute of its sovereignty. Even if the toll fees were treated as user’s tax, the
VAT can not be deemed as a ‘tax on tax’ since the VAT is imposed on the tollway
operator and the fact that it might pass-on the same to the tollway user will not make
the latter directly liable for VAT since the shifted VAT simply becomes part of the cost
to use the tollways.
(Diaz vs. Secretary of Finance)

Taxes in comparison
TAXES SPECIAL ASSESSMENT

Levied on persons, property, Levied only on land
privileges, acts, etc
Personal liability Not a personal liability of the person
involved, his liability is limited only to
the land involved
Based on necessity and benefits Based wholly on benefits
Has general application Exceptional both as to the time and
place
Taxes in comparison
TAXES TARIFF
Levied by both the national and local Levied only by the national
government government
Imposed on both domestic and Generally imposed on imported
imported products products
Broadly covers impositions on Understood to be a charge on goods
persons, property, and transactions that are traded beyond borders
Collected by the BIR and local Collected by the BOC
governments
Taxes in comparison
TAXES DEBTS
Based on law Based on contract

Payable in money Can be paid in various forms
Failure to pay may result to No imprisonment for failure to pay
imprisonment
Only incurs interest when delinquent Incurs interest if delayed or stipulated
Imposed by the government May be imposed by private parties
Not subject to set-off May be subject to set-off

Prescriptive period provided by Tax Prescriptive period provided by Civil
Code Code
Classification of taxes
 As to subject matter
• Personal – imposed on persons without regard to their property or the occupation or
business in which they are engaged
• Property – Tax imposed on property, whether real or personal, in proportion either to its
value, or in accordance with some other reasonable methods of apportionment
• Excise – Any tax which does not fall within the classification of a personal or a
property tax. It is a charge imposed upon the performance of an act, the enjoyment of a
privilege, or the engaging in an occupation, profession or business.
 As to who bears the burden
• Direct – Demanded from the person who also shoulders the burden of the tax; the
taxpayer is directly or primarily liable, and he cannot shift the burden to another.
Incidence and burden of tax are on the same person. (Example: income tax)
• Indirect – Demanded from one person in the expectation and intention that he shall indemnify
himself at the expense of another, falling finally upon the ultimate purchaser or consumer.
Incidence is on one person but the burden is shifted to another. (Example: VAT)
 As to scope
• National – Tax imposed by the national government
• Local – Tax imposed by municipal corporations or local government units

 As to rate
• Progressive – The rate increases as the tax base of bracket increases
• Regressive – The rate decreases as the tax base or bracket increases
• Flat – The rate does not adjust to any factor
 As to determination of amount due

• Specific – based on a unit of measurement
• Ad valorem – based on the amount or value
 As to purpose
• Revenue or fiscal – to raise funds for public purpose
• Regulatory or sumptuary – to regulate an act

Direct vs. indirect taxes
Is PLDT, given the tax component of its franchise, exempt from paying VAT, compensating taxes,
advance sales taxes and internal revenue taxes on its importations?
PLDT’s exemption based on the "in lieu of all taxes" clause in its franchise covers direct taxes only
since for indirect taxes to be included in the exemption, the intention to include must be specific and
unmistakable. “Direct taxes” are defined as “those that are extracted from the very person who, it is
intended or desired, should pay them.” Thus, the incidence and burden are on one and the same
person. “Indirect taxes” are those that are “demanded, in the first instance, from, or are paid by,
one person in expectation and intention that he can shift the burden to someone else.” Thus, the
incidence of tax is initially on one person but the burden is shifted to another.
(CIR VS. PLDT)

Limitations
 Inherent
 Public purpose
 International comity
 Non-delegability
 Exemption of government
 Territoriality
 Constitutional
Limitations – inherent (public purpose)
Inasmuch as the land on which the projected feeder roads were to be constructed
belonged then to respondent Zulueta, the result is that said appropriation sought a
private purpose, and, hence, was null and void. The test is whether the main
beneficiary is the public. Incidental advantage to the public or to the state, which
results from the promotion of private interests and the prosperity of private
enterprises or business, does not justify their aid by the use of public money.
(Pascual vs. Secretary of Public Works)

Limitations – inherent (non-delegability)
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. It is a power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of 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 respect of matters of local concern.
This is sanctioned by immemorial. By necessary implication, the legislative power to
create political corporations for purpose of local self-government carries with it the
power to confer on such local government agencies the power to tax. The constitutional
basis to empower LGUs to tax is Sec. 5 Art. X (“to create its own sources of revenue”)
(Pepsi-Cola Bottling Company vs. Municipality of Tanauan)

 Article VI, Section 28 (2) of the Constitution provides the flexible tariff clause
which states that “Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it may impose,
tariff rates, import and export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national development program of
the Government”.
 The increase of existing rates of import duty shall not be higher than 100%
 The imposition of additional duty on all imports must not exceed 10% ad valorem.
There is no undue delegation of legislative power on the provision allowing increase

the VAT rate from 10% to 12% since what is delegated is simply “the ascertainment
of facts upon which the administration and enforcement of the increase rate under
the law is contingent” (i.e., VAT collection and fiscal deficit in relation to GDP). No
discretion is exercised by the President since the term used is “shall”
(Abakada Guro Party List vs. Ermita)

Limitations – inherent (exemption of
government)
There is no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of
public funds from one government pocket to another However,
portions leased to private entities (such as hangars leased to private
companies) are taxable because the beneficial use thereof are granted
to taxable person. The power to tax which was characterized by Justice
Marshall as the "power to destroy" cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent
power to wield it.
(Manila International Airport Authority vs. City of Paranaque)

Limitations – inherent (international
comity)
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to
Eximbank, assuming the truth thereof, is too tenuous and conjectural to support the
proposition that Mitsubishi is a mere conduit. The refund of the withholding tax was
denied. Otherwise, the mere expedient of having a Philippine corporation enter into a
contract for loans or other domestic securities with private foreign entities, which in
turn will negotiate independently with their governments, could be availed of to take
advantage of the tax exemption law under discussion.
(CIR vs. Mitsubishi Metal Corporation)

comity)
Section 32 (B) (7) (a) of the Tax Code excludes from gross income the following
income derived by foreign government:
“Income derived from investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on their deposits in banks in the Philippines by
(i) foreign governments, (ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (iii) international or regional financing
institutions established by foreign governments.”
comity)
 Foreign governments, embassies, diplomatic missions, and international
organizations as employers are immune from being withholding agents on the
salaries of their employees.
 Exempted from Philippine taxes are diplomats (including family, staff, servants if
not locals/Filipinos) and employees of various international organizations such as
JICA, AUSAID, Ford Foundation, Rockefeller Foundation, UN, UNESCO,
WHO, etc. On the other hand only non-Filipino employees of some other entities
(ADB, IMF, UNICEF, etc.) are exempt from Philippine taxes.
Limitations – inherent (territoriality)
 Situs rule is influenced by ---
• domicile
• nationality
• source
The Philippines adheres to a combination of the above factors depending on the type of
income.
Summary: Only resident citizens and domestic corporations are taxed on worldwide income.
 Multiplicity of situs can result to double taxation which is resolved by tax exemptions or
entry into treaties
 Philippine law recognizes foreign tax credits for income tax (Section 34), estate tax
(Section 86), and donor’s tax (Section 101)
Situs rules under Income Tax
• Interest – it follows the residence of the borrower/obligor (but only

interest income and not “income assimilated to money lent”
• Dividends – from a domestic corporation or a foreign corporation
which derives substantial income (more than 50%) from the Philippines
• Services – where the services are performed
• Rentals & Royalties – where the property is located or where the
service of the object underlying the royalty is found
• Real property – where located
• Personal property – where the sale is consummated and perfected
(except Philippine shares of stock)
Situs rules under other taxes
• Estate and donor’s tax

• The law provides for certain properties which have acquired situs in the
Philippines
• Franchise exercised in the Philippines
• Shares of stock, etc. issued by a foreign corporation where 85% of its
business is located in the Philippines
• Only nonresident aliens are taxed only on estate and gifts within the
Philippines
• Excise tax is imposed on goods manufacture in and imported into the
Philippines (local consumption)
• VAT adheres to the destination principle
NDC opened for public bidding a project to construct and install a modern,
reliable, efficient and integrated wharf/port complex at the Leyte Industrial
Development Estate under a turn-key contract.
While the construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment and supplies
were completely designed and engineered in Japan. The two sets of ship
unloader and loader, the boats and mobile equipment for the NDC project
and the ammonia storage tanks and refrigeration units were made and
completed in Japan.
They were already finished products when shipped to the Philippines. The
other construction supplies listed under the Offshore Portion such as the
steel sheets, pipes and structures, electrical and instrumental apparatus,
these were not finished products when shipped to the Philippines. They,
however, were likewise fabricated and manufactured by the sub-
contractors in Japan. All services for the design, fabrication, engineering
and manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were
rendered outside the taxing jurisdiction of the Philippines and are
therefore not subject to contractor's tax.
(CIR vs. Marubeni Corporation)

Limitations – Constitutional
 Uniformity and equality
 Due process clause
 Prohibition against imprisonment for non payment of tax
 Prohibition against taxation of religious, charitable institution, non-stock, non-profit institutions, and
educational entities
 Limitation on use of tax levied for public purposes
 Exemption from real property taxes
 Mandate to evolve a progressive system of taxation
 Tax exemption of certain grants, donations, and contributions
 Authority of the President to impose tariff rates
 Grant of Congress of tax exemptions
 Grant of power to LGUs to create their own sources of revenue
 Origination of revenue or tariff bills
Limitations – Constitutional (uniformity)
 BCDA cases
Equal protection of law provision is not violated by granting incentives to businesses and
residents within the secured area. The purpose of the law is to accelerate conversion of
military bases to productive uses and make Subic self-sustaining industrial, commercial ,
financial and investment center.
(Tiu vs. Court of Appeals)
Power to grant tax exemption is only within the powers of Congress. Thus, an administrative
order making a cross-reference to RA 7227 will not suffice to grant exemption.
(John Hay Peoples Alternative Coalition vs. BCDA)
(Coconut Oil Refiners Association Inc. vs. BCDA)

 VAT cases
Customs brokers are subject to VAT because they are not subject to LBT. Thus valid
classification. VAT is equitable because it applies only if sales exceed P200,000 and will thus
not apply to sari-sari stores.

(Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan )

Those exempted are agricultural products or other items that will benefit end-users and is thus
a valid classification. The transactions involving basic and essential goods and services are
exempted from the VAT. On the other hand, the transactions which are subject to the VAT are
those which involve goods and services which are used or availed of mainly by higher income
groups.
These include real properties held primarily for sale to customers or for lease in the
ordinary course of trade or business, the right or privilege to use patent, copyright,
and other similar property or right, the right or privilege to use industrial,
commercial or scientific equipment, motion picture films.
The contention of CREBA that there was an erroneous classification of “poor” and
“less poor” because socialized housing is exempt, was not upheld.
Even if VAT is regressive because it is an indirect tax, it is not prohibited, since the
Constitution only says that direct taxes are preferred.
The bottom line is that state is free to choose what it will tax and exempt.
(Tolentino vs. Secretary of Finance)

Reiterated that indirect taxes are not prohibited and even recognized that “VAT is the antithesis of
progressive taxation”.
(1) There is no undue delegation of legislative power on the provision allowing increase to 12%
since what is delegated is simply “the ascertainment of facts upon which the administration and
enforcement of the increase rate under the law is contingent” (i.e., VAT collection and fiscal deficit
in relation to GDP). No discretion is exercised by the president since the term used is “shall”.
(2) Petitioners contention that the 12% VAT rate is an “unfair and unnecessary additional tax
burden” is beyond the scope of review of the Supreme Court as it is a “question of wisdom of
legislation”.
(4) The law is equitable as it imposes safeguards/limits on VAT-taxability of sales below
P1,500,000.

(Abakada Guro Party List vs. Ermita)
Cigarette cases
BAT introduced in June 2001 its Lucky Strike cigarettes line in the market. At this point,
“new” brands (introduced after October 1, 1996) were being taxed based on their current
net retail price while old brands (sold before October 1, 1996 or the Annex “D” brands)
were taxed based on their net retail price as of October 1, 1996. BAT questioned the
implementation of Section 145 and the regulations on the ground that they discriminate
against new brands of cigarettes in violation of the equal protection and uniformity
provisions of the Constitution. While the Petition was pending, RA No. 9334 which
increased excise tax rates took effect on January 1, 2005 and retained the Annex “D”
brands. The same law also provided that those brands introduced between the January 2,
1997 and December 31, 2003, including Lucky Strike, shall remain in their current
classification until revised by Congress – or what was labeled the “classification freeze”
provision also previously applied to Annex “D” brands.
BAT contended that the continued use of Annex “D” which include brands such as
Marlboro and Philip Morris gives undue protection to said brands which are still
taxed based on their price as of October 1996 even if they are now sold at the same or
even at a higher price than new brands like Lucky Strike. The intervenors (other
cigarette companies) commented that BAT (i) can not object considering that they
now enjoy the same status quo provision as the Annex “D” brands and (ii) is
estopped from questioning the law because it entered into the industry knowing fully
well the existing laws and regulations.

The law is Constitutional since it passes ‘rational basis’ test and addresses (i) concerns on the
delegation of too much power to the DOF and BIR; (ii) simplification of tax administration of
sin products; (iii) elimination of potential areas for abuse and corruption in tax collection; (iv)
buoyant and stable revenue generation; and (v) ease of projection of revenues. It was added
that the price is not only consideration of consumers. Even if creates undue advantage to
Marlboro and PM, not enough to declare unconstitutional since does not show that Congress
had this in mind but hat earnest desire to improve tax administration. The law also does not
violate the GATT since it uniformly applies to all newly introduced brands and does not
purport to single out imported cigarettes in order to unduly favor locally produced ones.

(British American Tobacco vs. Camacho)

R.A. 8240 took effect on January 1, 1997 and a shift from ad valorem to specific taxes on cigarettes was
implemented. The amending law separately provided that (i) the specific tax due from any brand of
cigarette within the next 3 years (i.e., the transition period) shall not be lower than the tax due before the
new law and (2) the rates of specific tax shall be increased by 12% on January 1, 2000. The BIR then
issued RR 17-99 to implement the law increasing the rate and substantially echoed R.A. 8240 except that it
additionally stipulated that the specific tax to be paid shall not be lower than the tax actually paid before
January 1, 2000. The CIR, in defending the RR, opined that “the adoption of the “higher tax rule” during
the transition period shows the intent of Congress not to lessen the excise tax collection”.
Is RR 17-99 valid to the extent that it carries the “higher tax rule” for the January 1, 2000 increase?

NO. The “higher tax rule” clearly only applies to the transition period. As such, the RR was
deemed an invalid act of administrative legislation. The CIR can not state that the sole
purpose for the shift to specific tax was to increase revenue since there were other reasons for
the same such as to curb corruption, simplify tax administration, etc. Likewise, the rule of
uniformity was deemed violated since brands belonging to the same category would be
imposed with different tax rates if the “higher tax rule” were to be implemented. Finally, the
Court pointed out that the rule of strictly interpreting tax exemption laws will not apply to the
instant tax refund since the refund of the Petitioner is not premised on legislative grace but on
the principle of solutio indebiti given that the government is put in a position to unjustly enrich
itself due to a mistake in law.
(CIR vs. Fortune Tobacco Corporation)

 Other cases on uniformity
BOCEA questions R.A. 9335 (Attrition Act of 2005) and states that the law violates their rights
to (1) due process; (2) equal protection of the laws; and (3) security of tenure. They likewise
claim that the same is an undue delegation of legislative power and is a bill of attainder.

Is the law unconstitutional?
No. Given the clear parameters on revenue targets, rewards, removal levels, etc., R.A. 9335 is

complete in all its essential terms and conditions and contains sufficient standards that negate
a claim of undue delegation.
BOC and BIR are both revenue-generating agencies that are both under the DOF. Such
substantial distinction Is germane and related to the purpose of the law.
The law does not deny the BOC employees their right to be heard and they still can not be
arbitrarily removed.
It is not a bill of attainder as the same does not seek to punish without a judicial trial as all it
does is lays down the grounds for possible termination.
(BOCEA vs. Teves)

The application of the gross system of taxation to compensation income earners while the net system
applied to professionals is a valid classification because compensation earners have almost no
overhead while businessmen have varying deductions.
(Sison vs. Ancheta)
Imposed taxes on theatres, vaudevilles, boxing. The same was still valid and complied with
uniformity requirement even if it did not specify other amusement places such as race tracks,
cabarets, cockpits, etc.
Eastern Theatrical Co., Inc. vs. City of Manila

There is valid classification between boarding stables for racehorses and boarding stables for horses
not for racing and hence no violation of the uniformity clause if one is taxed and the other is not.
(Manila Race Horses Owners Association vs. de la Fuente)

The contention that the ordinance is discriminatory and hostile because there is no other person in the
locality who exercises such "designation" or occupation is also without merit, because the fact that there is
no other person in the locality who exercises such a "designation" or calling does not make the ordinance
discriminatory and hostile, inasmuch as it is and will be applicable to any person or firm who exercises
such calling or occupation named or designated as "installation manager.“
(Shell Co. of P.I. Ltd. v. Vaño)

It is inherent in the power to tax that the 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 of taxation, or
exemption infringe no constitutional limitation.
(CIR vs. Santos)

Cases which showed violation of the uniformity clause
An ordinance imposing a tax on centrifugal sugar produced only by a specific sugar company
and not on other companies producing the same type of product was declared void.
(Ormoc Sugar Co. vs. Treasurer of Ormoc)
A tax on all motor vehicles registered and operating in the City of Manila violates the rule on
uniformity because it does not impose the same type of tax for vehicles that are not registered
with the city but are similarly operating within the boundaries of the city.
(Association of Customs Brokers, Inc. vs. Municipal Board)

It is violative of the uniformity clause because only agents or consignees of

dealers outside Butuan City are subject to the tax while local dealers are
exempt even if they exceed the threshold sales. Indeed, if its purpose were
merely to levy a burden upon the sale of soft drinks or carbonated beverages,
there is no reason why sales thereof by dealers other than agents or
consignees of producers or merchants established outside the City of Butuan
should be exempt from the tax.
(Pepsi-Cola Bottling Company of the Philippines, Inc. vs. City of Butuan)

Commissioner of Customs issued CMO 27-2003. Under the Memorandum, for tariff
purposes, wheat was classified according to the following: (1) importer or consignee;
(2) country of origin; and (3) port of discharge. The regulation provided an exclusive
list of corporations, ports of discharge, commodity descriptions and countries of
origin. Depending on these factors, wheat would be classified either as food grade or
feed grade. The corresponding tariff for food grade wheat was 3%, for feed grade,
7%.
Unfortunately, CMO 27-2003 does not meet the requirements to comply with the
uniformity clause. We do not see how the quality of wheat is affected by who imports
it, where it is discharged, or which country it came from. Thus, on the one hand, even
if other millers excluded from CMO 27-2003 have imported food grade wheat, the
product would still be declared as feed grade wheat, a classification subjecting them
to 7% tariff. On the other hand, even if the importers listed under CMO 27-2003 have
imported feed grade wheat, they would only be made to pay 3% tariff, thus depriving
the state of the taxes due. The regulation, therefore, does not become
disadvantageous to respondent only, but even to the state.
(Commissioner of Customs v. Hypermix Feeds Corp.)

Limitations – Constitutional (due process)
Due process in taxation requires that (i) taxation must be for public purposes; (ii) imposed within the
territorial jurisdiction; and (iii) no arbitrariness is shown in the assessment and collection of taxes.
Due process is usually violated where the tax imposed is for a private purpose as distinguished from a
public purpose; a tax is imposed on property outside the State, i.e., extra-territorial application; and
arbitrary or oppressive methods are used in assessing collecting taxes.
(Pepsi-Cola of the Philippines vs. Municipality of Tanauan)
The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution,
as where it can be shown to amount to a confiscation of property.
(Reyes vs. Almanzor)

CREBA claims that the MCIT under Section 27 (E) of RA 8424 is unconstitutional
because it is highly oppressive, arbitrary and confiscatory which amounts to
deprivation of property without due process of law. It explains that gross income as
defined under said provision only considers the cost of goods sold and other direct
expenses while other major expenditures, such as administrative and interest
expenses which are equally necessary to produce gross income, were not taken into
account. Thus, pegging the tax base of the MCIT to a corporation's gross income is
tantamount to a confiscation of capital because gross income, unlike net income, is
not "realized gain."
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are
found in many jurisdictions. Tax thereon is generally held to be within the power of a state to
impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT
is arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply
because of its yokes. Taxation is necessarily burdensome because, by its nature, it adversely
affects property rights. The party alleging the law's unconstitutionality has the burden to
demonstrate the supposed violations in understandable terms.
(Chamber of Real Estate and Builders' Ass'n, Inc. v. Romulo)

 Due process requirements for tax assessment

 Requirement of pre-assessment notices
 Taxpayer must be informed of the facts and the laws on which the assessment was
based
 Following rules on taxpayer’s remedies in terms of process and timing (30-60-180-30)
 Prescriptive periods
 Waiver of the Statute of Limitations
 Collections of taxes (judicial, administrative)
The input tax is not a property or a property right within the constitutional purview of
the due process clause. A VAT-registered person's entitlement to the creditable input
tax is a mere statutory privilege. The distinction between statutory privileges and
vested rights must be borne in mind for persons have no vested rights in statutory
privileges. The state may change or take away rights, which were created by the law
of the state, although it may not take away property, which was vested by virtue of
such rights.
(Abakada Guro Party List v. Ermita)

Limitations – Constitutional (non-
impairment)
 Impairment takes place when the law that is passed substantially alters the legal
relationship between the parties by invalidating, releasing, or extinguishing the
obligations of a contract.
 Contracts cover those entered into by the State either in its sovereign or
proprietary capacity and those between private parties.
 Tax exemptions in franchises are always subject to alteration, amendment or
repeal.
 “In lieu of all taxes” provisions in a franchise grant are not assumed to cover both
national and local taxes when granted.
 Withdrawal or modification of tax exemptions that are granted for a clear
consideration may give rise to impairment.
impairment)
Locators within Subic Economic Zone were granted tax- and duty-free incentives
under R.A. 7227. Subsequently, R.A. 9334 was passed in 2005 which stated that
notwithstanding any special contrary, “importation of cigarettes, spirits, liquors into
the Philippines even if destined for tax and duty free shops, shall be subject to all
applicable taxes” and specific reference was made to goods destined for the Subic
Economic Zone.

There is no violation of the non-impairment clause.
impairment)
There is no vested right in tax exemption and may thus be modified or withdrawn at
will by the granting authority. Tax exemptions are strictly construed. While tax
exemption may have been part of the inducement to carry on business within the
zone, this exemption is not contractual and, as such, the non-impairment clause of
the Constitution can not be rightly invoked. Whatever rights were granted in the
certificates/licenses issued to the locators, the same must yield to exercise of police
power given that it has been repeatedly said that taxation may be made the
implement of the State’s police power.
(Republic of the Philippines vs. Caguioa)

Limitations – Constitutional (exempt
entities)
 SCHOOLS
• Non-stock, non-profit schools are exempt on revenues and assets actually, directly and
exclusively used for educational purposes
• The rationale is to avoid having schools pass-on added cost of taxes to students
• The exemption extends to ---
• taxes and duties on importations
• grants, endowments, donations for educational purposes, subject to conditions prescribed by
law
• The source of revenue is immaterial as long as used for educational purposes (or the
utilization rule)
entities)
• All lands, buildings, and improvements actually , directly, and exclusively used for
educational purposes are exempt from real property tax
• Interest income from deposits are exempt as well as long as utilization is supported
• Non-stock proprietary schools are subject to the preferential rate of 10% except if more
than 50% of their income is unrelated to their educational purposes
• Proprietary --- private

• Non-profit --- no net income inures to the benefit of member or specific person
entities)
 SECTION 3O ENTITIES
• Non-stock, non-profit association organized and operated exclusively for
charitable purposes
• Non-profit --- no net income inures to the benefit of member or specific person
• Charitable --- provides for free goods and services to the public which would otherwise
fall on the shoulders of the government
• Organized --- its corporate form is one which no part of its income is distributable as
dividends to its members
entities)
 REAL PROPERTY EXEMPTION
• Charitable institutions, churches and parsonages, convents appurtenant thereto, mosques,
non-profit cemeteries
• All lands, buildings, and improvements
• Actually, directly, and exclusively used for religious, charitable, or educational purposes
• The type of entity (whether for profit or non-profit) is immaterial as the requirement is on the use
• Ownership is likewise not considered as the exemption is based on use
• The exemption extends not only to those that are indispensable to the purposes but covers those
that are incidental to and reasonably necessary for the aforesaid purposes
• “For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property.”
entities)
 HOSPITALS
St. Luke’s is a non-stock, non-profit hospital which provided substantial (65%) free
services to its patients. The BIR claimed that Section 27 (B) should apply to St.
Luke’s as it is more specific and should prevail over Section 30 which is general.

Section 27 (B) does not remove income tax exemption of non-profit hospitals and
schools as all it does is to cover the income under the last paragraph of Section 30 by
taxing it at 10% instead of 30%.
(Commissioner of Internal Revenue vs. St. Luke’s Medical Center, Inc. )

entities)
Others (ex.
Pay patients Charity patients (70%) Concessionaires,
(30%) etc.)
Income Tax 10% Exempt 10%

(St. Luke’s)
Real Exempt Exempt Subject

Property Tax (Lung Center)
entities)
Is the income derived from rentals of real property owned by YMCA — established
as "a welfare, educational and charitable non-profit corporation" — subject to income
tax under the Tax Code and the Constitution?
The last paragraph of Section 27, the YMCA argues, should be "subject to the
qualification that the income from the properties must arise from activities 'conducted
for profit' before it may be considered taxable." This argument is erroneous. As
previously stated, a reading of said paragraph ineludibly shows that the income from
any property of exempt organizations, as well as that arising from any activity it
conducts for profit, is taxable. The phrase "any of their activities conducted for
profit" does not qualify the word "properties." This makes income from the property
of the organization taxable, regardless of how that income is used — whether for
profit or for lofty non-profit purposes.
entities)
As previously discussed, laws allowing tax exemption are construed strictissimi juris.
Hence, for the YMCA to be granted the exemption it claims under the aforecited
provision, it must prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly, and exclusively for
educational purposes. However, the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it met the said requisites.
(CIR vs. YMCA)

Double taxation
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 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." 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.
(Villanueva vs. City of Iloilo)

Double taxation
The payment of 1/10 of 1% for incurring reserve deficiencies (under the Central Bank
Act) is a penalty as the primary purpose involved is regulation while the payment of
1% for the same violation (under the Tax Code) is a tax for the generation of revenue
which is the primary purpose in this instance. Petitioner's case is covered by two
special laws — one a banking law and the other, a tax law.
(Republic Bank vs. CTA)
The province may no longer tax stone quarried from private lands because this is
already subject to tax under Tax Code as the law imposes tax on all quarry resources.
The Local Government Code only empowers LGUs to tax only those from public lands.
(Province of Bulacan vs. Court of Appeals)

Double taxation
The City of Manila sought to enforce both Sections 14 and 21 of the Manila Revenue
Code claiming that the former is a tax on manufacturers, etc. while the latter applies
to business subject to excise, VAT or percentage tax.
There is in fact double taxation since both sections are being imposed on the same
subject matter (privilege of doing business within the city), for the same purpose, by
the same taxing authority, within the same taxing jurisdiction, for the same taxing
period, and of the same kind or character (a local business tax imposed on gross
sales or receipts). The Court further said that the LGC provision applicable (Section
143) clearly states that Section 143 (h) may be imposed only on businesses that are
subject to excise tax, VAT, and percentage tax “and that are not otherwise specified
in the preceding paragraphs”.
(Swedish Match Philippines, Inc. vs. Treasurer of the City of Manila)

Escape from taxation
 Shifting the tax to another party

 Tax avoidance (also called tax planning or tax minimization) is the exploitation by
the taxpayer of legally permissible alternative rates or methods of assessing
taxable property or income in order to reduce or entirely avoid tax liability. It is
the tax saving device within the means sanctioned by law. The method should be
used by the taxpayer in good faith and at arms’ length.
 Tax evasion (or tax dodging) is the use by the taxpayer of illegal or fraudulent
means to defeat or lessen the payment of taxes.
 Tax exemption
Escape from taxation – shifting the tax
 Only indirect taxes may be shifted and any agreement to “shift” the tax to another
party does not bind the State and is merely contractual
 Taxes that may be shifted (for being indirect taxes):
• VAT
• Percentage tax
• Excise tax
• DST
 The liability for the tax is also known as the impact of the tax while the burden of
the tax is knowns as the incidence of the tax. When indirect tax is passed-on what
is being shifted is not the liability but the burden.
Escape from taxation – tax evasion & tax
avoidance
Pacheco leased land to Hydro Pipes who had right of first refusal. Subsequently, the
Pachecos exchanged the same land under a tax-deferred exchange to Delpher Trades.
Hydro Pipes questioned the exchange and said that there was effectively a sale to
Delpher Trades and as such its right of first refusal was violated.

There was no sale since only the nature of the ownership was changed from
unincorporated to incorporated given the advantage of the same off having perpetual
succession. It was expressly stated that “estate planning” is allowed.
(Delpher Trades Corp. vs. IAC)

avoidance
CIC sold Cibeles building to Altonaga for P100,000,000. Altonaga sold the building
to Royal Match Inc. for P200,000,000 on the same day. The assessment was based on
the taxable gain covered up by scheme.
The three factors in tax evasion are all present in this case --- (1) end to be achieved
(payment of less tax) (2) evil or deliberate state of mind (not accidental) (3) a course
of action which is unlawful. The two transfers were tainted with fraud since the
intermediary transfer (from CIC to Altonaga) was prompted only by the desire to
mitigate tax liabilities and not by a business purpose.
(CIR vs. Toda)

avoidance
An arm’s length transaction is one where all parties have dealt with each other in good
faith and for their respective individual benefits, and not for the benefit of the transaction
group. In order to pay a lesser amount of tax, taxpayers may be influenced primarily (if
not solely) by factors which are purely tax motivated and thus take away the transaction
from the purview of one being at “arm’s length”.
Section 50 of the Tax Code provides that “In the case of two or more organizations,
traces or businesses (whether or not incorporated and whether or not organized in the
Philippines) owned or controlled directly or indirectly by the same interest, the
Commissioner is authorized to distribute, apportion or allocate gross income or
deductions between or among such organization, trade or business, if he determines that
such distribution, apportionment or allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any such organization, trade or business.”
Escape from taxation – tax exemption
 Taxexemption is the grant of immunity from a tax

imposition.
 Kinds of tax exemption

• Coverage – local, national, or both
• Extent – Total or partial
• Intent – intentional or by omission
• Source – Constitution, Law, Treaty, Contractual
 Exemptions under the Constitution

• Real property exemptions
• Exemptions of educational institutions
 Exemptions under the Tax Code
• Section 30 entities
• Exclusions from gross income
• GPPs, JVs
• Certain transfers from donor’s and estate tax
• VAT exempt transactions
 Exemptions under special laws

• Special Economic zone entities
• Barangay Micro Business Enterprise
• Rural banks, SPVs, subcontractors of petroleum companies
• Exemptions from donor’s tax (donations to UP, National Book
Development Trust, IRRI, Ramon Magsaysay Foundation,
foster care institutions, campaign contributions, etc.)
• Tax amnesty laws
Petitioner was granted a legislative franchise and on that basis filed a case stating that it was not liable for
the local franchise tax of s since its franchise states that it is only subject to franchise tax (now, the
VAT)under the Tax Code.
Petitioner is still liable for the local franchise tax since the law does not expressly provide what taxes
Petitioner is exempt from and whether its exemption covers national or local taxes, or both. The
uncertainty of the “in lieu of all taxes” clause must be construed strictly against Petitioner as it is in the
form of a tax exemption. In which case, Smart’s exemption is interpreted to refer only to national and not
local taxes. The Court noted that the “in lieu of all taxes” provisions has become functus officio with the
abolition of franchise tax on telecommunication companies and its replacement with the VAT. It also
discarded Smart’s argument that what it enjoys is tax exclusion (as it pays other taxes) and not tax
exemption and stated that either situation requires a strict interpretation against the taxpayer claiming
the same.
(Smart Communications, Inc. vs. City of Davao)

However, the principle that tax exemptions are strictly construed will only apply after
it is clearly shown that the entity is indeed subject to tax. Petitioner Commissioner of
Internal Revenue erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in the imposition of taxes. It
is obviously both illogical and impractical to determine who are exempted without
first determining who are covered by the aforesaid provision.
(CIR vs. Ateneo de Manila University )

NDC had Japanese shipbuilders build ships. NDC paid interest on unpaid portion
without withholding taxes.

Even if all related activities (signing, construction, payment) were done in Japan,
since the source of income is the Philippines, the same (interest payment) is taxable
in the Philippines. The fact that the Secretary of Finance guaranteed the loan is not
tantamount to a waiver of collection of taxes as the same must be made expressly.
Also, the entity being taxed in this case is the Japanese shipbuilder and not the
Philippine government.
(National Development Company vs. CIR)

Petitioner withheld a 15% tax on its remittances to its head office in Germany using
as basis the Tax Code provision on BPRT. Believing that it overpaid the BPRT since
the RP-Germany provides for a lower rate of 10% on branch remittances, the
Petitioner filed a refund with the BIR and subsequently with the CTA. Both the BIR
and the CTA denied stating that the branch office should have filed a tax treaty relief
application prior to availing of the preferential treaty rate in view of the existing
doctrine in the Mirant case.
The principle of pacta sunt servanda requires the performance in good faith of treaty
obligations. Thus, to require that taxpayers must first comply with an administrative
requirement (under RMO 1-2000) is not in consonance with the performance in good
faith. The obligation to comply with a tax treaty must take precedence over the
objectives of the said RMO. In addition, it was pointed out that the prior application
becomes illogical if the premise of the claim was an erroneous payment since the
taxpayer could not have known it would be entitled to the refund since precisely it
was using a different basis when it paid the taxes due.
(Deutsche Bank AG Manila Branch vs. CIR)

Escape from taxation – direct & indirect
tax exemptions
The sales to NPC and VOA were being claimed exemption from taxes since the
buyers were tax exempt and “passing-on” tax would impair that exemption.
The tax imposed by the Tax Code is a tax on the manufacturer or producer and not a
tax on the purchaser except probably in a very remote and inconsequential sense.
Accordingly its levy on the sales made to tax-exempt entities like the NPC is
permissible.
(Philippine Acetylene Co., Inc. vs. CIR)

tax exemptions
Shell filed a claim for refund for excise taxes it paid on sales of gas and fuel oils to various
international carriers. The Court initially denied the claims but a Motion for
Reconsideration was filed.
Refund is proper. Section 135 is concerned with the exemption of the article itself and not
the ostensible exemption of the international carrier-buyer. In addition, the failure to grant
exemption will cause adverse impact on the domestic oil industry (similar to the practice of
“tankering”) as well as result to violations of international agreements on aviation. Thus,
Respondent, as the statutory taxpayer who is directly liable to pay the excise tax, is entitled
to a refund or credit for taxes paid on products sold to international carriers.
(CIR vs. Pilipinas Shell Petroleum Corporation)

tax exemptions
Caltex sold fuel to PAL and included excise tax in the total price. PAL filed for a
refund of the excise tax passed-on to it by Caltex based on its franchise and which
confers upon PAL the tax exemption of purchase of fuel including taxes passed on to
it. The CTA denied using the Silkair decision as basis.

The Court initially cited Silkair and said it was the seller (Petron) who had personality
to file. However, the Court said that the above rule does not apply to cases 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 it should be allowed to claim
refund even if it’s not the statutory taxpayer.
(Philippine Airlines, Inc. vs. CIR)

Other modes of satisfying tax liability
 Compromise is where the State and the taxpayer agree to a reciprocal concession in order
to avoid litigation or to put one already commenced. Section 204 of the Tax Code allows
compromise based on doubtful validity or financial incapacity.
 Tax amnesty is a general pardon to taxpayers of the intentional overlooking by the State of
its authority to impose penalties on persons otherwise guilty of evasion or violation of a tax
law. Tax amnesty is interpreted strictly against the claimant. The same may only be passed
by Congress as a tax exemption measure. Tax amnesty is distinguished from tax exemption
in that it covers both criminal and civil aspects (while exemptions only excludes the civil
obligation) and has a retroactive application (while tax exemptions are generally
prospective).
Nature of tax laws
Tax laws are strictly interpreted against the State and liberally in favor of the taxpayer.
This is the rule considering that taxes, as burdens which must be endured by the
taxpayer should not be unduly exacted or presumed to go beyond what the law
expressly and clearly declares.
(CIR vs. Fortune Tobacco Corporation)
Tax exemptions must be clear and unequivocal based on the lifeblood theory. However,
as to the property of the State, exemption is the rule and taxation is the exception.
(Maceda vs. Macaraig)

Nature of tax laws
For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or
assessment, our tax law provides a statute of limitations in the collection of taxes. Laws on prescription,
being a remedial measure, should be liberally construed in order to afford such protection.
(CIR vs. BF Goodrich, Phils., Inc.)
In criminal cases, statutes of limitations are acts of grace, a surrendering by the sovereign of its right
to prosecute. They receive a strict construction in favor of the Government.
(Lim vs. CA)
An RMC which extended the period to file a claim for refund from 2 to 10 years is a “legislated guideline”
which only Congress can pass. Thus, a BIR issuance cannot vest taxpayers with any right if based on a
wrong interpretation of the law.
(Philippine Bank of Communications vs. CIR)

Nature of tax laws
For purposes of determining the retroactivity of BIR rulings, the taxpayer was
deemed not to be in bad faith considering its reliance on an existing BIR ruling
(which stated that ad valorem tax is computed based on selling price excluding VAT)
(CIR vs. Alhambra Industries)
Tax laws are not political in nature and thus remained in existence during
occupation.
(Hilado vs. CIR)

Nature of tax laws
Tax laws are generally prospective but a statute may nevertheless operate retroactively
provided it is expressly declared or is clearly the legislative intent. (Lorenzo vs.
Posadas) But a tax law should not be given retroactive application when it would be
harsh and oppressive for in such case the Constitutional limitation of due process
would be violated. (Republic vs. Fernandez)
Any revocation, modification, or reversal of any of the rules and regulations cannot be
given retroactive application if such will be prejudicial to the taxpayer except where ---
(i) the taxpayer deliberately misstates or omits material facts
(ii) the facts subsequently gathered by the BIR are materially different from the facts
on which the ruling is based
(iii) the taxpayer acted in bad faith
Nature of tax laws
CODE-NGO may not invoke the principle of non-retroactivity since Section 246 of the Tax Code
allows retroactive application of rulings in instances “where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different from the facts on which the ruling is based.” The
reference was made by the BIR to the involvement of the secondary market which fact was only
subsequently gathered. It also stated that there are no vested rights which are based on the wrong
interpretation of the law. Thus, the ruling was reversed to state that the BTr shall withhold the final tax
due on interest income derived from the PEACe Bonds prior to its payment on the date of maturity.
Further, there is ample legal authority to conclude that the non-retroactivity principle does not apply
when the ruling involved is null and void for being contrary to law, such as the 2001 Rulings. Well-
entrenched are the principles that the Government is never estopped from collecting taxes because of
mistakes and errors of its agents and there are no vested rights in a wrong interpretation of the law.
PEACe Bonds ruling

Set-off of taxes
Taxes cannot be the subject of set-off because the government’s claim for taxes is not a debt nor does
it arise from contract. The taxpayer and the BIR are not creditors and debtors of each other since
debts are due to the government in its corporate capacity while taxes are due it in its sovereign
capacity.
(Philex Mining Corporation vs. CIR)
However, where (1) there is already an existing deficiency tax assessment against the claimant or (2)
the assessment is an incidental issue that must be resolved in order to determine whether there should
also be a refund or (3) if the issues are intertwined, then offsetting of taxes may be allowed. In this
case, however, offsetting was not allowed because to use a claim for refund under the Tax Code as a
means to assesses a taxpayer for any deficiency VAT if the period to assess had already prescribed
would be very unfair.
CIR vs. Toledo Power Company)

Taxpayer’s suit
The Municipality of Agoo in La Union province passed a resolution authorizing its mayor to obtain a
loan from the Petitioner and mortgaging as collateral a portion of the Agoo plaza. As additional security,
the municipality assigned a portion of its internal revenue allotment (IRA) in favor of the Petitioner. The
loan proceeds were used to construct a commercial center on the plaza which was objected to by the
local residents including the Respondent.
The two requisites for a taxpayer’s suit have been complied with. First, even if the construction of the
commercial center would be sourced from the loan proceeds from the Petitioner, the said funds were
already converted into public funds upon receipt by the municipality and the assignment of the IRA
likewise characterized the funds as public. Second, since the plaza is for public use, the Respondent, like
all other Agoo residents, is directly affected. Besides it has been held that as long as taxes are involved,
people have a right to question government contracts even if they are not party to the contract/s.
(Land Bank of the Philippines vs. Cacayuran)

Good luck!
+ AMDG

General Principles of Taxation 2018

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

General Principles of Taxation 2018

Uploaded by

Copyright:

Available Formats

General Principles of

• Levy – This involves the determination by Congress of the objects

• Taxation can strengthen anemic enterprises or provide incentive to greater

Although the Government may generally be estopped, their neglect or omission as

An erroneous interpretation by a BIR officer based on a misapprehension of law will not

(La Suerte Cigar & Cigarette Factory vs. CIR)

(Reyes vs. Almanzor)

(Tridharma Marketing Corporation vs. CTA)

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a

(Philippine Guaranty Co., Inc. vs. CIR)

(Lorenzo vs. Posadas)

(Lutz vs. Araneta)

(Gomez vs. Palomar)

(Tan vs. Del Rosario)

 Extent of the legislative power to tax

(Chavez vs. Ongpin)

(Diaz vs. Secretary of Finance)

A margin levy on foreign exchange is a form of exchange control or restriction

(Esso Standard Eastern, Inc. vs. CIR)

(Progressive Development Corporation vs. Quezon City)

Are anchorage fee taxes or fees?

(Compania General de Tabacos de Filipinas vs. City of Manila)

(PAL vs. Edu)

(Planters Products, Inc. vs. Fertiphil Corporation)

(Manila Memorial Park, Inc. vs. Secretary of DSWD)

(Manila Memorial Park, Inc. vs. Secretary of DSWD)

(Diaz vs. Secretary of Finance)

TAXES SPECIAL ASSESSMENT

Based on law Based on contract

Not subject to set-off May be subject to set-off

 As to determination of amount due

(CIR VS. PLDT)

(Pascual vs. Secretary of Public Works)

The power of taxation is an essential and inherent attribute of sovereignty, belonging as

(Pepsi-Cola Bottling Company vs. Municipality of Tanauan)

There is no undue delegation of legislative power on the provision allowing increase

(Abakada Guro Party List vs. Ermita)

(Manila International Airport Authority vs. City of Paranaque)

(CIR vs. Mitsubishi Metal Corporation)

• Interest – it follows the residence of the borrower/obligor (but only

• Estate and donor’s tax

(CIR vs. Marubeni Corporation)

(Coconut Oil Refiners Association Inc. vs. BCDA)

(Tolentino vs. Secretary of Finance)

(British American Tobacco vs. Camacho)

(CIR vs. Fortune Tobacco Corporation)

 Other cases on uniformity

(BOCEA vs. Teves)

Eastern Theatrical Co., Inc. vs. City of Manila

(Manila Race Horses Owners Association vs. de la Fuente)

(Association of Customs Brokers, Inc. vs. Municipal Board)

It is violative of the uniformity clause because only agents or consignees of

(Pepsi-Cola Bottling Company of the Philippines, Inc. vs. City of Butuan)

(Commissioner of Customs v. Hypermix Feeds Corp.)

(Pepsi-Cola of the Philippines vs. Municipality of Tanauan)

(Reyes vs. Almanzor)

(Chamber of Real Estate and Builders' Ass'n, Inc. v. Romulo)

 Due process requirements for tax assessment

(Abakada Guro Party List v. Ermita)

(Republic of the Philippines vs. Caguioa)

• Proprietary --- private

(Commissioner of Internal Revenue vs. St. Luke’s Medical Center, Inc. )

Income Tax 10% Exempt 10%