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TAXATION LAW 1

General Principles of Taxation ........... 1DEFINITION AND CONCEPT OF TAXATION .. 1

NATURE OF THE POWER OF TAXATION ...... 1ESSENTIAL CHARACTERISTICS OF TAX ...... 3POWER OF TAXATION COMPARED WITH

OTHER POWERS ...................................... 4PURPOSE OF TAXATION ............................. 4PRINCIPLES OF SOUND TAX SYSTEM ......... 5THEORY AND BASIS OF TAXATION ............ 6DOCTRINES IN TAXATION .......................... 6SCOPE AND LIMITATION OF TAXATION .... 14KINDS STAGES OR PROCESS OF TAXATION

................................................................ 24REQUISITES OF A VALID TAX .................... 24TAX AS DISTINGUISHED FROM OTHER

FORMS OF EXACTIONS .......................... 24OF TAXES .................................................. 26

Income Taxation ............................... 28INCOME TAX SYSTEMS ............................. 29FEATURES OF THE PHILIPPINE INCOME TAX

LAW ........................................................ 29CRITERIA IN IMPOSING PHILIPPINE

INCOME TAX ........................................... 29TYPES OF PHILIPPINE INCOME TAX ......... 30TAXABLE PERIOD ...................................... 30KINDS OF TAXPAYERS .............................. 30INCOME TAXATION .................................... 33INCOME ...................................................... 33GROSS INCOME .......................................... 37SUBSTITUTED BASIS OF STOCK OR

SECURITIES RECEIVED BY TRANSFERORUPON THE EXCHANGE ........................... 49

SUBSTITUTED BASIS OF PROPERTYTRANSFERRED ...................................... 49

TAXATION OF RESIDENT CITIZENS,NON-RESIDENT CITIZENS ANDRESIDENT ALIENS ..................................... 80TAXATION OF NON-RESIDENT ALIENS

ENGAGED IN TRADE OR BUSINESS ........ 91NON-RESIDENT ALIENS NOT ENGAGED INTRADE OR BUSINESS ............................. 92

INDIVIDUAL TAXPAYERS EXEMPT FROMINCOME TAX ............................................93

TAXATION OF DOMESTIC CORPORATIONS.................................................................93

TAXATION OF RESIDENT FOREIGNCORPORATIONS ................................... 100

TAXATION OF NON-RESIDENT FOREIGNCORPORATIONS ................................... 103

IMPROPERLY ACCUMULATED EARNINGSOF CORPORATIONS .............................. 105

TAXATION OF PARTNERSHIPS ................ 107TAXATION OF GENERAL PROFESSIONAL

PARTNERSHIPS .................................... 108WITHHOLDING TAX .................................. 109

TAXATION LAW 2

Estate Tax ........................................ 119DEFINITION ............................................... 119NATURE .................................................... 119PURPOSE OR OBJECT ............................... 119TIME AND TRANSFER OF PROPERTIES ... 120CLASSIFICATION OF DECEDENT .............. 120GROSS ESTATE AND NET ESTATE ............ 121COMPOSITION OF THE GROSS ESTATE ... 123ITEMS TO BE INCLUDED IN GROSS ESTATE

............................................................... 123DEDUCTIONS FROM ESTATE ................... 127EXEMPTIONS AND EXCLUSIONS FROM THE

GROSS ESTATE ..................................... 133TAX CREDIT FOR ESTATE TAXES PAID IN A

FOREIGN COUNTRY .............................. 134FILING OF NOTICE OF DEATH .................. 135ESTATE TAX RETURN .............................. 135

Donors Tax ...................................... 137BASIC PRINCIPLES ................................... 137DEFINITION .............................................. 137NATURE ................................................... 137PURPOSE OR OBJECT .............................. 137REQUISITES OF VALID DONATION .......... 137TRANSFERS WHICH MAY BE CONSTITUTED

AS DONATION ....................................... 138TRANSFER FOR LESS THAN ADEQUATE

AND FULL CONSIDERATION ................. 138CLASSIFICATION OF DONORS ................. 138DETERMINATION OF GROSS GIFT ........... 139COMPOSITION OF GROSS GIFT................ 139VALUATION OF GIFTS MADE IN PROPERTY

............................................................... 139TAX CREDIT FOR DONORS TAXES PAID IN

A FOREIGN COUNTRY ........................... 139EXEMPTIONS OF GIFTS FROMDONORS TAX .......................................... 140


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PERSONS LIABLE ..................................... 140TAX BASIS ................................................. 141

VAT ...................................................143CONCEPT .................................................. 143CHARACTERISTICS/ELEMENTS OF A VAT-

TAXABLE TRANSACTION ...................... 143IMPACT OF TAX ........................................ 144INCIDENCE OF TAX .................................. 144TAX CREDIT METHOD .............................. 144DESTINATION PRINCIPLE ......................... 171PERSONS LIABLE ..................................... 145VAT ON SALE OF GOODS OR PROPERTIES

............................................................... 146ZERO-RATED SALES OF GOODS OR

PROPERTIES, AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR PROPERTIES............................................................... 148

TRANSACTIONS DEEMED SALE ............... 150CHANGE OR CESSATION OF STATUS ASVAT-REGISTERED PERSON .................. 150

VAT ON IMPORTATION OF GOODS ........... 151VAT ON SALE OF SERVICE AND USE OR

LEASE OF PROPERTIES ......................... 152ZERO-RATED SALE OF SERVICES ............ 154VAT EXEMPT TRANSACTIONS ................. 155INPUT TAX AND OUTPUT TAX, DEFINED 158SOURCES OF INPUT TAX .......................... 158PERSONS WHO CAN AVAIL OF INPUT TAX

CREDIT .................................................. 159

DETERMINATION OF OUTPUT/INPUT TAX;VAT PAYABLE; EXCESS INPUT TAXCREDITS ................................................ 160

SUBSTANTIATION OF INPUT TAX CREDITS............................................................... 162

REFUND OR TAX CREDIT OF EXCESS INPUTTAX ........................................................ 163

INVOICING REQUIREMENTS .................... 164FILING OF RETURN AND PAYMENT......... 166WITHHOLDING OF FINAL VAT ON SALES TO

GOVERNMENT ...................................... 167

Tax Remedies under the NIRC ...... 168TAXPAYERS REMEDIES........................... 168GOVERNMENT REMEDIES ....................... 184STATUTORY OFFENSES AND PENALTIES

............................................................... 190COMPROMISE AND ABATEMENT OF TAXES

................................................................ 191FLOWCHART: TAXPAYERS REMEDIES

FROM TAX ASSESSMENTNIRC .......... 193

FLOWCHART: PROCEDURES FORDISTRAINT AND LEVYNIRC ................ 194

Organization and Function of the BIR ......................................................... 194

RULE-MAKING AUTHORITY OF THESECRETARY OF FINANCE ...................... 194POWER OF THE COMMISSIONER TO

SUSPEND THE BUSINESS OPERATIONOF A TAXPAYER ...................................... 195LOCAL GOVERNMENT CODE OF 1991, AS

AMENDED ............................................. 196FLOWCHART: PROCEDURE FOR

ASSESSMENT OF LAND VALUE FOR REALPROPERTY TAX PURPOSESLGC ........ 218

FLOWCHART: TAXPAYERS REMEDIESINVOLVING COLLECTION OF REALPROPERTY TAXLGC ........................... 219

FLOWCHART: PROCEDURE FOR LEVY FORPURPOSES OF SATISFYING REALPROPERTY TAXESLGC ...................... 220

TARIFF AND CUSTOMS CODE OF 1978, ASAMENDED ............................................. 221

FLOWCHART: REMEDIES FROM SEIZUREAND FORFEITURE CASESTCC ........... 240

TABLE OF SPECIAL DUTIES: WHENIMPOSED ............................................... 241

TABLE OF SPECIAL DUTIES: IMPOSINGAUTHORITY AND AMOUNT .................. 242

JUDICIAL REMEDIES ................................243


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UP LAW BOC TAXATION LAW 1 TAXATION LAW

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General Principles ofTaxationDEFINITION AND CONCEPT OFTAXATIONTAXATION (4)(a) is a mode by which governments make

exactions for revenue in order to supporttheir existence and carry out their legitimateobjectives.

(b) a mode of raising revenue for publicpurpose; the exercise of sovereign power toraise revenue for the expense of thegovernment;

(c) the process or means by which the sovereign,

through its law-making body, raises incometo defray the necessary expenses ofgovernment; a method of apportioning thecost of government among those who insome measure are privileged to enjoy itsbenefits and must, therefore, bear itsburdens, ( see 51 Am. Jur. 341; 1 Cooley 72-93.)

(d) as a power, it refers to the inherent power ofthe state to demand enforced contributionsfor public purpose or purposes.

TAXES(a) are enforced proportional contributions from

persons and property levied by the law-making body of the State by virtue of itssovereignty for the support of thegovernment and all public needs.

(b) The enforced proportional and pecuniarycontributions from persons and propertylevied by the law-making body of the statehaving jurisdiction over the subject of theburden for the support of the governmentand public needs.

UNDERLYING THEORY AND BASIS OFTAXATIONThe power of taxation proceeds upon the theorythat the existence of government is a necessity;that it cannot continue without means to pay itsexpenses; and that for those means it has theright to compel all citizens and property withinits limits to contribute.

The basis of taxation is found in the reciprocalduties of protection and support between theState and its inhabitants. The State receivestaxes that it may be enabled to carry itsmandates into effect and perform the functionsof government and the citizen pays the portion

of taxes demanded in order that he may, bymeans thereof, be secured in the enjoyment ofthe benefits of an organized society, ( see 51 Am. Jur. 42-43. ) This is the so-called benefits-received principle.

NATURE OF THE POWER OF TAXATION(1) Inherent in sovereignty - The power to tax is an

attribute of sovereignty. It is a poweremanating from necessity. It is a necessaryburden to preserve the State's sovereigntyand a means to give the citizenry an army toresist an aggression, a navy to defend itsshores from invasion, a corps of civilservants to serve, public improvementdesigned for the enjoyment of the citizenryand those which come within the State'sterritory, and facilities and protection whicha government is supposed to provide ( Phil.Guaranty Co., Inc. v. Commissioner , G.R. No.L-22074 April 30, 1965). It isessential to the existence of everygovernment. It exists apart fromconstitutions and without being expresslyconferred by the people ( 71 Am.Jur.2d 397- 398 ). Constitutional provisions relating tothe power of taxation do not operate asgrants of the power to the government.They merely constitute limitations upon apower which would otherwise be practicallywithout limit. ( 1 Cooley 150). While thepower to tax is not expressly provided for inour Constitution, its existence is recognizedby the provisions relating to taxation (infra).

(2) Essentially a legislative function - The powerto tax is peculiarly and exclusivelylegislative and cannot be exercised by the

executive or judicial branch of thegovernment ( 1 Cooley 160-161). Hence, onlyCongress, our national legislative body, canimpose taxes. The levy of a tax, however,may also be made by a local legislativebody subject to such limitations as may beprovided by law.


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(3) Subject to constitutional and inherentlimitations - These limitations are thoseprovided in the fundamental law or impliedtherefrom, while the rest spring from thenature of the taxing power itself althoughthey may or may not be provided in the

Constitution.

SCOPE OF TAXATIONSubject to constitutional and inherentrestrictions, the power of taxation is regarded assupreme, unlimited and comprehensive. Theprincipal check on its abuse rests only on theresponsibility of the members of the legislatureto their constituents.

EXTENT OF THE LEGISLATIVE POWER TOTAXSubject to constitutional and inherentrestrictions, the legislature has discretion todetermine the incidence of the power to tax.

(1) The subjects or objects to be taxed refer tothe coverage and the kind or nature of the tax.They may be persons, whether natural or juridical; property, whether real or personal,tangible or intangible; businesses, transactions,rights, or privileges. A state is free to select thesubject of taxation and it has been repeatedlyheld that that inequalities which result from asingling out of one particular class for taxationor exemption infringe no constitutionallimitation so long as such exemption isreasonable and not arbitrary. [see Lutz vs. Araneta, 98 Phil. 148; Sison, Jr. vs. Ancheta, 130SCRA 654, 1984]

Thus, the power to tax carries with it the powerto grant exemption therefrom.

(2) The purpose or object of the tax so long as it isa public purpose The legislative bodysdetermination, however, on the question of

what is a public purpose is not conclusive. Thecourts can inquire into whether the purpose isreally public or private.

In the final analysis, therefore, the decision onthe question is not a legislative but a judicialfunction. But once it is settled that the purposeis public, the courts can make no other inquiryinto the objective of the legislature in imposinga tax (see Pascual vs. Sec. of Public Works, 110

Phil. 331 [1961]), or the wisdom, advisability, orexpediency of the tax. [ Blunt vs. U.S., 255 Fed. 322.]

Judicial action is limited only to a review whereit involves:

(a) The determination of the validity of thetax in relation to constitutional preceptsor provisions. Thus, a tax may bedeclared invalid because it violates theconstitutional requirement of uniformityand equity in taxation; or

(b) The determination in an appropriatecase of the application of a tax law.(see 1 Cooley 165.) Thus, a court maydecide that a tax has been illegallycollected where the taxpayer is entitledto tax exemption or his liability hasalready been extinguished by reason ofprescription.

(3) The amount or rate of the tax. - As a generalrule, the legislature may levy a tax of anyamount or rate it sees fit. If the taxes areoppressive or unjust, the only remedy is theballot box and the election of newrepresentatives. [see Cooley 178-181.]

According to Chief Justice John Marshall, "thepower to tax involves the power to destroy."[McCulloch vs. Maryland, 17 U.S. [4 Wheat.] 316-428, 4L. ed. 579. ] To say, however, that thepower to tax is the power to destroy is todescribe not the purposes for which the taxingpower may be used but the extent to which itmay be employed in order to raise revenues.[see: Cooley 178.] Thus, even if a tax should

destroy a business, such fact alone could notinvalidate the tax. [84 C.J.S. 46.]


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Incidentally, our Constitution mandates that"the rule of taxation shall be uniform andequitable." In a case, our Supreme Court said:"The power of taxation is sometimes called alsothe power to destroy. Therefore, it should beexercised with caution to minimize injury to the

proprietary rights of the taxpayer. It must beexercised fairly, equally and uniformly, lest thetax collector kills the 'hen that lays the goldeneggs.' And in order to maintain the generalpublic's trust and confidence in the government,this power must be used justly and nottreacherously." ( Roxas v. Court of Tax Appeals, 23 SCRA276, App120, 1968; Philex Mining Corp.vs. Comm. of Internal Revenue, 97 SCAD 777,294SCRA 687, Aug. 28, 1998. )

(4) The manner, means, and agencies of

collection of the tax . These refer to theadministration of the tax or the implementationof tax laws. The legislature possesses the solepower to prescribe the mode or method bywhich the tax shall be collected, and todesignate the officers through whom its willshall be enforced as well as the remedies whichthe State or the taxpayer may avail inconnection therewith.

ESSENTIAL CHARACTERISTICS OF TAX(1) It is an enforced contribution for its imposition

is in no way dependent upon the will orassent of the person taxed.

(2) It is generally payable in the form of money ,although the law may provide payment inkind (e.g. backpay certificates under Sec. 2,R.A. No. 304, as amended );

(3) It is proportionate in character or is laid bysome rule of apportionment which is usuallybased on ability to pay;

(4) It is levied on persons, property, rights, acts, privileges, or transactions.

(5) It is levied by the State which has jurisdictionor control over the subject to be taxed.

(6) It is levied by the law-making body of theState. The power to tax is a legislativepower but is also granted to localgovernments, subject to such guidelinesand limitations as law may provided [ Sec. 5, Art. X, Constitution ]; and;

(7) It is levied for public purpose . Revenuesderived from taxes cannot be used forpurely private purposes or for the exclusivebenefit of private persons. [ Gaston v.Republic Planters Bank, 158 SCRA 626,March 15, 1988 ]. The public purpose or

purposes of the imposition is implied in thelevy of tax. (see Mendoza v. Municipality, 94Phil. 1047[1954]), A tax levied for a privatepurpose constitutes a taking of propertywithout due process of law.

It is also an important characteristic of mosttaxes that they are commonly required to bepaid at regular periods or intervals ( see 1Cooley 64) every year.


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POWER OF TAXATION COMPARED WITH OTHER POWERS

Taxation Police Power Eminent Domain1. As to concept Power to enforce

contribution to raisegovernment funds

Power to make andimplement laws for thegeneral welfare

Power to take privateproperty for public use with just compensation

2. As to scope Plenary, comprehensive andsupreme

Broader in application.General power to make andimplement laws.

Merely a power to takeprivate property for publicuse

3. As to authority Exercised only bygovernment or its politicalsubdivisions

Exercised only bygovernment or its politicalsubdivisions

May be granted to publicservice or public utilitycompanies

4. As to purpose Money is taken to supportthe government

Property is taken ordestroyed to promotegeneral welfare

Private property is taken forpublic use

5. As to necessity ofdelegation

The power to make tax lawscannot be delegated

Can be expressly delegatedto the local governmentunits by the law makingbody

Can be expressly delegatedto the local governmentunits by the law makingbody

6. As to person

affected

Operates on a community or

a class of individual

Operates on a community or

a class of individual

Operates on the particular

private property of anindividual

7. As to benefits Continuous protection andorganized society

Healthy economic standardof society

Market value of the propertyexpropriated

8. As to amount ofimposition

Generally no limit Cost of regulation, licenseand other necessaryexpenses

No imposition

9. As to importance Inseparable for theexistence of a nation itsupports police power andeminent domain

Protection, safety andwelfare of society

Common necessities andinterest of the communitytranscend individual rightsin property

10. As torelationship to

Constitution

Subject to Constitutionaland Inherent limitations.

Inferior to non-impairmentclause.

Relatively free fromConstitutional limitations.

Superior to non-impairmentclause.

Superior to and mayoverride Constitutional

impairment provisionbecause the welfare of theState is superior to anyprivate contract

11. As to limitation Constraints byConstitutional and Inherentlimitations

Limited by the demand forpublic interest and dueprocess

Bounded by public purposeand just compensation

[Valencia and Roxas, Income Taxation 6 th Edition (2013-2014), Valencia Educational Supply, pp. 9-10]


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PURPOSE OF TAXATION

Revenue RaisingPrimary purpose of taxation is to provide fundsor property with which to promote the generalwelfare and protection it its citizens.

Fees may be properly regarded as taxes eventhough they also serve as an instrument ofregulation... If the purpose is primarily revenue,or if revenue is, at least, one of the real andsubstantial purposes, then the exaction isproperly called a tax. [ PAL v. Edu, G.R. No. L-41383 August 15, 1988]

Non-Revenue/Special or RegulatoryTaxation is often employed as a device forregulation by means of which certain effects or

conditions envisioned by governments may beachieved. These regulatory purposes are alsoknown as Sumptuary. Thus, taxation can:(1) Strengthen anemic enterprises or provide

incentive to greater production through grantof tax exemptions or the creation ofconditions conducive to their growth.

(2) Protect local industries against foreigncompetition by imposing additional taxeson imported goods, or encourage foreigntrade by providing tax incentives onimported goods.

(3) Be a bargaining tool by setting tariff ratesfirst at a relatively high level before tradenegotiations are entered into with anothercountry.

(4) Halt inflation in periods of prosperity to curbspending power; ward off depression inperiods of slump to expand business.

(5) Reduce inequalities in wealth and incomes , asfor instance, the estate, donor's and incometaxes, their payers being the recipients ofunearned wealth or mostly in the higherincome brackets.

(6) Taxes may be levied to promote science and

invention [see RA. No. 5448] or to financeeducational activities [see RA. No. 5447) orto improve the efficiency of local police forcesin the maintenance of peace and orderthrough grant of subsidy (see RA.No. 6141)].

(7) Be an implement of the police power topromote the general welfare.

In Lutz v. Araneta, 78 Phil 148 , it has beenheld that the Sugar Adjustment Act is anact enacted primarily under the policepower and designed to obtain areadjustment of the benefits derived bypeople interested in the sugar industry as

well as to rehabilitate and stabilize theindustry which constitutes one of the greatsources of the country's wealth and,therefore, affects a great portion of thepopulation of the country.

Taxes may be levied with a regulatorypurpose to provide means for rehabilitationand stabilization of a threatened industrywhich is imbued with public interest as to bewithin the police power of the State. [Caltexv. COA, G.R. No. 92585 May 8, 1992]

As long as a tax is for a public purpose, itsvalidity is not affected by collateralpurposes or motives of the legislature inimposing the levy, or by the fact that it has aregulatory effect [ 51 Am. Jur. 381-382. ] or itdiscourages or even definitely deters theactivities taxed. The principle applies eventhough the revenue obtained from the taxappears very negligible or the revenuepurpose is only secondary. [see UnitedStates vs. Sanchez, 340 U.S. 42; Tio vs.Videogram Regulatory Board, 151 SCRA 208,1987]

PRINCIPLES OF SOUND TAX SYSTEM

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

Administrative feasibility

Tax laws should be capable of convenient, justand effective administration. Each tax should becapable of uniform enforcement by governmentofficials, convenient as to the time, place, andmanner of payment, and not undulyburdensome upon, or discouraging to businessactivity.


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Theoretical justice or equality The tax burden should be in proportion to thetaxpayers ability to pay. This is the so -calledability to pay principle. Taxation should beuniform as well as equitable

Note: The non-observance of the aboveprinciples will not necessarily render the taximposed invalid except to the extent thosespecific constitutional limitations are violated.[De Leon]

THEORY AND BASIS OF TAXATION

Lifeblood theoryTaxes are the lifeblood of the government andtheir prompt and certain availability is animperious need. [ CIR v. Pineda ]

Taxes are the lifeblood of the government andso should be collected without unnecessaryhindrance... It is said that taxes are what we payfor civilized society. Without taxes, thegovernment would be paralyzed for lack of themotive power to activate and operate it [ CIR v. Algue, G.R. No. L-28896, February 17, 1988].

Necessity theoryThe power of taxation proceeds upon theorythat the existence of government is a necessity;that is cannot continue without means to pay itsexpenses; and that for those means it has theright to compel all citizens and property withinits limits to contribute.

The power to tax, an inherent prerogative, hasto be availed of to assure the performance ofvital state functions. It is the source of the bulkof public funds. [Sison v. Ancheta, G.R. No. L-59431, July 25, 1984]

The obligation to pay taxes rests upon t henecessity of money for the support of the state.

For this reason, no one is allowed to object to orresist the payment of taxes solely because nopersonal benefit to him can be pointed out[Lorenzo v. Posadas, G.R. No. L-43082, June 18,1937].

Benefits-protection theory (symbioticrelationship)This principle serves as the basis of taxation andis founded on the reciprocal duties of protectionand support between the State and itsinhabitants.

Despite the natural reluctance to surrender partof one's hard earned income to the taxingauthorities, every person who is able to mustcontribute his share in the running of thegovernment. The government for its part isexpected to respond in the form of tangible andintangible benefits intended to improve the livesof the people and enhance their moral andmaterial values. This symbiotic relationship isthe rationale of taxation and should dispel theerroneous notion that it is an arbitrary method

of exaction by those in the seat of power. [ CIR v. Algue]

Jurisdiction over subject and objectsThe limited powers of sovereignty are confinedto objects within the respective spheres ofgovernmental control. These objects are theproper subjects or objects of taxation and noneelse.

DOCTRINES IN TAXATION

Prospectivity of tax lawsGeneral rule: Tax laws are prospective inoperation.Rationale: Nature and amount of the tax couldnot be foreseen and understood by the taxpayerat the time the transaction.

Exception: Tax laws may be applied retroactivelyprovided it is expressly declared or clearly thelegislative intent. (e.g increase taxes on incomealready earned) when retroactive applicationwould be so harsh and oppressive [Republic v.Fernandez, G.R. No. L-9141. September 25,

1956].It is a cardinal rule that laws shall have noretroactive effect, unless the contrary isprovided (citing Art. 4 of the Civil Code).[HydroResources v.CA]


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The language of the statute must clearlydemand or press that it shall have a retroactiveeffect .[Lorenzo v.Posadas]

Exception to the exception:Collection of interest in tax cases is not penal in

nature; it is but a just compensation to theState. The constitutional prohibition against expost facto laws is not applicable to thecollection of interest on back taxes. [Central Azucarera v.CTA]

Non-retroactivity of rulings (sec. 246)General rule: Any revocation, modification orreversal of rules and regulations promulgated inaccordance with Sections 244 and 245 of theTax Code and rulings or circulars promulgatedby the CIR, that is prejudicial to the taxpayer,

shall NOT be given retroactive effect.Exceptions : (1) Where the taxpayer deliberately misstates or

omits material facts from his return or anydocument required of him by BIR;

(2) Where the facts subsequently gathered bythe BIR are materially different from thefacts on which the ruling is based; OR

(3) Where the taxpayer acted in bad faith. ( Sec. 246 , NIRC)

ImprescriptibilityUnless otherwise provided by the tax itself,taxes are imprescriptible. [CIR v. Ayala SecuritiesCorporation]

The law on prescription, being a remedialmeasure, should be liberally construed in orderto afford such protection. As a corollary, theexceptions to the law on prescription shouldperforce be strictly construed. [Commissioner v.C.A., G.R.No. 104171 (1999)]

Prescriptions found in statutes(1) National Internal Revenue Code - statute of

limitations [see Section 203 and 222 ] in theassessment and collection of taxes thereinimposed.

(2) Tariff and Customs Code - does not expressany general statute of limitation; it provides,however, that when articles have beenentered and passed free of duty or finaladjustments of duties made, withsubsequent delivery, such entry and

passage free of duty or settlements ofduties will, after the expiration of one (1) year ,from the date of the final payment of duties,in the absence of fraud or protest orcompliance audit pursuant to the provisionsof this Code, be final and conclusive uponall parties, unless the liquidation of theimport entry was merely tentative. [ Sec.1603]

(3) Local Government Code- prescribesprescriptive periods for the assessment (5years) and collection (5 years) of taxes. [see

Sections 194 and 270, Rep. Act No. 7160 ].DOUBLE TAXATONMeans taxing twice the same taxpayer for thesame tax period upon the same thing or activity,when it should be taxed but once, for the samepurpose and with the same kind of character oftax.

Strict sense (Direct Duplicate Taxation)(1) the same property must be taxed twice when

it should be taxed once;(2) both taxes must be imposed on the same

property or subject matter;(3) for the same purpose ;(4) by the same State, Government, or taxing

authority;(5) within the same territory, jurisdiction or taxing

district;(6) during the same taxing period ; and(7) of the same kind or character of tax .

Broad sense (Indirect Duplicate Taxation)There is double taxation in the broad sense orthere is indirect duplicate taxation if any of theelements for direct duplicate taxation is absent.

It extends to all cases in which there is a burdenof two or more pecuniary impositions. Forexample, a tax upon the same property imposedby two different states.


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Double taxation, standing alone and not beingforbidden by our fundamental law, is not a validdefense against the legality of a tax measure[Pepsi Cola v. Mun. of Tanauan, G.R. No. L-31156 February 27, 1976 ]. But from it might emanatesuch defenses against taxation as

oppressiveness and inequality of the tax.

Constitutionality of double taxationThere is no constitutional prohibition againstdouble taxation in the Philippines. It issomething not favored, but is permissible,provided some other constitutional requirementis not thereby violated.[ Villanueva v. City of Iloilo,G.R. No. L-26521, December 28, 1968 ]

If the tax law follows the constitutional rule onuniformity, there can be no valid objection to

taxing the same income, business or propertytwice.[China Banking Corp. v. CA, G.R. No.146749 (2003) ]

Double taxation in its narrow sense isundoubtedly unconstitutional but that in thebroader sense is not necessarily so. [ De Leon,citing 26 R.C.L 264-265 ].Where double taxation(in its narrow sense) occurs, the taxpayer mayseek relief under the uniformity rule or the equalprotection guarantee. [ De Leon, citing 84C.J.S.138].

Modes of eliminating double taxation(1) Allowing reciprocal exemption either by law

or by treaty;(2) Allowance of tax credit for foreign taxes paid(3) Allowance of deductions such as for foreign

taxes paid, and vanishing deductions inestate tax

(4) Reduction of Philippine tax rate.

ESCAPE FROM TAXATION

Shifting of tax burdenShifting - the transfer of the burden of a tax bythe original payer or the one on whom the taxwas assessed or imposed to someone else.What is transferred is not the payment of the taxbut the burden of the tax.

All indirect taxes may be shifted; direct taxescannot be shifted.

Ways of shifting the tax burden(1) Forward shifting - When the burden of the

tax is transferred from a factor of productionthrough the factors of distribution until itfinally settles on the ultimate purchaser orconsumer. Example: VAT, percentage tax

(2) Backward shifting - When the burden of thetax is transferred from the consumer orpurchaser through the factors ofdistribution to the factor of production.Example: Consumer or purchaser may shifttax imposed on him to retailer bypurchasing only after the price is reduced,and from the latter to the wholesaler, andfinally to the manufacturer or producer.

(3) Onward shifting - When the tax is shifted twoor more times either forward or backward.

Meaning of impact and incidence of taxation Impact of taxation is the point on which a tax isoriginally imposed. In so far as the law isconcerned, the taxpayer, the subject of tax, isthe person who must pay the tax to thegovernment.

Incidence of taxation is that point on which thetax burden finally rests or settles down. It takesplace when shifting has been effected from thestatutory taxpayer to another.

Relationship between Impact, Shifting, andIncidence of a TaxThe impact is the initial phenomenon, theshifting is the intermediate process, and theincidence is the result. Impact is the impositionof the tax; shifting is the transfer of the tax;while incidence is the setting or coming to restof the tax. (e.g impact in a sales tax is on theseller who shifts the burden to the customerwho finally bears the incidence of the tax)

Tax avoidance (Tax Minimization)The exploitation by the taxpayer of legallypermissible alternative tax rates or methods ofassessing taxable property or income in order toavoid or reduce tax liability. It is politely calledtax minimization and is not punishable by law.

Example: A person refrains from engaging insome activity or enjoying some privilege in orderto avoid the incidental taxation or to lower histax bracket for a taxable year.


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TransformationTRANSFORMATION method of escape intaxation whereby the manufacturer or producerupon whom the tax has been imposed pays thetax and endeavors to recoup himself byimproving his process of production thereby

turning out his units of products at a lower cost.The taxpayer escapes by a transformation of thetax into a gain through the medium ofproduction.

Tax evasion (Tax Dodging)Tax Evasion - is the use by the taxpayer of illegalor fraudulent means to defeat or lessen thepayment of a tax. It is also known as taxdodging. It is punishable by law.

Example: Deliberate failure to report a taxable

income or property; deliberate reduction ofincome that has been received.

Elements of Tax Evasion(a) The end to be achieved. Example: the

payment of less than that known by thetaxpayer to be legally due, or in paying notax when such is due.

(b) An accompanying state of mind described asbeing evil, in bad faith, willful ordeliberate and not accidental.

(c) A course of action (or failure of action) whichis unlawful.

Since fraud is a state of mind, it need not beproved by direct evidence but may be inferredfrom the circumstances of the case. Thus:(1) The failure of the taxpayer to declare for

taxation purposes his true and actualincome derived from his business for twoconsecutive years has been held as anindication of his fraudulent intent to cheatthe government of its due taxes. [ Republic v.Gonzales, 13 SCRA 633, 1965]

(2) The substantial underdeclaration of income

in the income tax returns of the taxpayer forfour (4) consecutive years coupled with hisintentional overstatement of deductions justifies the finding of fraud. [ Perez v. CTAand Collector, 103 Phil. 1167, 1958]

EXEMPTION FROM TAXATION

Meaning of exemption from taxationThe grant of immunity to particular persons orcorporations or to person or corporations of aparticular class from a tax which persons and

corporations generally within the same state ortaxing district are obliged to pay. It is animmunity or privilege; it is freedom from afinancial charge or burden to which others aresubjected. It is strictly construed against thetaxpayer.

Taxation is the rule; exemption is the exception.He who claims exemption must be able to justify his claim or right thereto, by a grantexpressed in terms too plain to be mistakenand too categorical to be misinterpreted. If not

expressly mentioned in the law, it must at leastbe within its purview by clear legislative intent.

Nature of tax exemption Mere personal privilege- cannot be assigned

or transferred without the consent of theLegislature. The legislative consent to thetransfer may be given either in the originalact granting the exemption or in asubsequent law

General rule: revocable by the government. Exception : if founded on a contract which is

protected from impairment. But thecontract must contain the essentialelements of other contracts. An exemptionprovided for in a franchise, however, may berepealed or amended pursuant to theConstitution [see Sec. 11, Art. XII]. Alegislative franchise is in the nature of acontract.

Implies a waiver on the part of thegovernment of its right to collect taxes dueto it, and, in this sense, is prejudicial thereto.Hence, it exists only by virtue of an expressgrant and must be strictly construed.

Not necessarily discriminatory, provided ithas reasonable foundation or rational basis.Where, however, no valid distinction exists,the exemption may be challenged asviolative of the equal protection guaranteeor the uniformity rule.


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Principles of Tax Exemption:(1) They are not presumed [Floro Cement v.

Gorospe](2) When granted, they are strictly construed

against the taxpayer [Luzon Stevedoring Co.v. CTA]

(3) They are higHly disfavoured and may almostbe said to be directly contrary to theintention of tax laws. [Manila ElectricCompany v. Vera], [Valencia and Roxas]

Kinds of tax exemption(1) Express or Affirmative - either entirely or in

part, may be made by provisions of theConstitution, statutes, treaties, ordinances,franchises, or contracts.

(2) Implied or Exemption by Omission - when atax is levied on certain classes without

mentioning the other classes. Every taxstatute, in a very real sense, makesexemptions since all those not mentionedare deemed exempted. The omission maybe either accidental or intentional.

Exemptions are not presumed, but whenpublic property is involved, exemption is therule, and taxation is the exception.

(3) Contractual - The legislature of a State may,in the absence of special restrictions in itsconstitution, make a valid contract with acorporation in respect to taxation, and thatsuch contract can be enforced against theState at the instance of the corporation[Casanovas Hord, G.R. No. 3473, March 22,1907]. In the real sense of the term andwhere the non-impairment clause of theConstitution can rightly be invoked, thisincludes those agreed to by the taxingauthority in contracts, such as thosecontained in government bonds ordebentures, lawfully entered into by themunder enabling laws in which thegovernment, acting in its private capacity,

sheds its cloak of authority and waives itsgovernmental immunity.

These contractual tax exemptions, however,are not to be confused with tax exemptionsgranted under franchises. A franchisepartakes the nature of a grant which isbeyond the purview of the non-impairmentclause of the Constitution. [ Manila Electric

Company v. Province of Laguna, G.R.No.131359, May 5, 1999]

RATIONALE/GROUNDS FOR EXEMPTION

Rationale of Tax ExemptionSuch exemption will benefit the body of thepeople and not particular individuals or privateinterest and that the public benefit is sufficientto offset the monetary loss entailed in the grantof the exemption.

Grounds for tax exemption(1) It may be based on contract. (2) It may be based on some ground of public

policy. (3) It may be created in a treaty on grounds of

reciprocity or to lessen the rigors ofinternational or multiple taxation.

But equity is NOT a ground for tax exemption.Exemption from tax is allowable only if there isa clear provision. While equity cannot be usedas a basis or justification for tax exemption, alaw may validly authorize the condonation oftaxes on equitable considerations.

REVOCATION OF TAX EXEMPTIONGeneral Rule: revocable by the government.Exception: Contractual tax exemptions may notbe unilaterally so revoked by the taxingauthority without thereby violating the non-impairment clause of the Constitution.

COMPENSATION AND SET-OFFGeneral rule: Internal revenue taxes cannot bethe subject of set-off or compensation [ Republicv. Mambulao Lumber, G.R. No. L-17725,February 28, 1962].


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Reasons:(1) This would adversely affect the government

revenue system ( Philex Mining v. CA G.R.No. 125704. August 28, 1998).

(2) Government and the taxpayer are notcreditors and debtors of each other. The

payment of taxes is not a contractualobligation but arises out of a duty to pay.[Republic v. Mambulao Lumber (1962) ]

Exception: If the claims against the governmenthave been recognized and an amount hasalready been appropriated for that purpose.Where both claims have already become dueand demandable as well as fully liquidated,compensation takes place by operation of lawunder Art. 1200 in relation to Articles 1279 and1290 of the NCC, and both debts are

extinguished to the concurrent amount.[Domingo v. Garlitos , G.R. No. L-18994, June 29,1963]

Doctrine of Equitable Recoupment - a claim forrefund barred by prescription may be allowed tooffset unsettled tax liabilities. The doctrine findsno application in this jurisdiction.

COMPROMISE A contract whereby the parties, by makingreciprocal concessions avoid litigation or putan end to one already commenced. (Art.2028, Civil Code). It involves a reduction ofthe taxpayers liability.

Requisites of a tax compromise:(a) The taxpayer must have a tax liability.(b) There must be an offer (by the taxpayer

or Commissioner) of an amount to bepaid by the taxpayer.

(c) There must be acceptance (by theCommissioner or the taxpayer, as thecase may be) of the offer in settlementof the original claim.

Generally, compromises are allowed andenforceable when the subject matter thereofis not prohibited from being compromisedand the person entering into it is dulyauthorized to do so.

(1) In the National Internal Revenue Code , theCommissioner of Internal Revenue isexpressly authorized to enter, under certainconditions, into a compromise of both thecivil and criminal liabilities of the taxpayer[Sec. 204, NIRC] .

(2) The power to compromise in respect ofcustoms duties is, at best, limited to caseswhere potestive authority is specificallygranted such as in the remission of dutiesby the Collector of Customs [ Sec. 709 , Tariffand Customs Code] and cases involvingimposition of fines, surcharges andforfeitures which may be compromised bythe Commissioner subject to the approval ofthe Secretary of Finance [ Sec. 2316 , Tariffand Customs Code]

(3) No provisions exist under the Local

Government Code , while the tax (notcriminal) liability is not prohibited frombeing compromised [see Arts. 2034 and 2035 , Civil Code]; there is no specificauthority, however, given to any publicofficial to execute the compromise so as torender it effective. [ Vitug, p. 48 ]

TAX AMNESTY A tax amnesty partakes of an absoluteforgiveness or waiver by the Government of itsright to collect what otherwise would be dueit, and in this sense, prejudicial thereto,particularly to give tax evaders, who wish torelent and are willing to reform a chance to doso and become a part of the new society witha clean slate .[Republic v. IAC (1991)]

A tax amnesty, much like a tax exemption, isnever favored nor presumed in law. If granted,the terms of the amnesty, like that of a taxexemption, must be construed strictly againstthe taxpayer and liberally in favor of thetaxing authority. For the right of taxation isinherent in government. The State cannotstrip itself of the most essential power oftaxation by doubtful words. He who claims anexemption (or an amnesty) from the commonburden must justify his claim by the clearestgrant of organic or state law. It cannot beallowed to exist upon a vague implication. If adoubt arises as to the intent of the legislature,that doubt must be resolved in favor of thestate. [ CIR v. Marubeni Corp.,372 SCRA 576, 2001]


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Distinguished from tax exemptionTax amnesty is immunity from all criminal andcivil obligations arising from non-payment oftaxes. It is a general pardon given to alltaxpayers. It applies to past tax periods, henceof retroactive application. [People v. Castaeda,

G.R. No. L-46881, September 15, 1988]

Tax exemption is an immunity from all civilliability only. It is an immunity or privilege, afreedom from a charge or burden of whichothers are subjected. [Greenfield v. Meer, 77 Phil. 394 [1946] ). It is generally prospective inapplication.(Dimaampao, 2005, p. 111)

CONSTRUCTION AND INTERPRETATION

Tax laws

General Rule: Tax laws are construed strictlyagainst the government and liberally in favor ofthe taxpayer. [Manila Railroad Co. v. Coll. ofCustoms, 52 Phil. 950, 1929]

No person or property is subject to taxationunless within the terms or plain import of ataxing statute. [ See 72 Am.Jur. 2d 44 ].

Taxes, being burdens, they are not to bepresumed beyond what the statute expresslyand clearly declares. [ Coll. v. La Tondena, 5SCRA 665, 1962] Thus, a tax payable byindividuals does not apply to corporations.

Tax statutes offering rewards are liberallyconstrued in favor of informers. [ Penid v. Virata,121 SCRA 166, 1983]

Exceptions:(1) The rule of strict construction as against the

government is not applicable where thelanguage of the statute is plain and there isno doubt as to the legislative intent. (see 51Am.Jur.368). In such case, the wordsemployed are to be given their ordinarymeaning. Ex. Word individual was changedby the law to person. This clearly indicatesthat the tax applies to both natural and juridical persons, unless otherwise expresslyprovided.

(2) The rule does not apply where the taxpayerclaims exemption from the tax.

Tax statutes are to receive a reasonableconstruction or interpretation with a view tocarrying out their purpose and intent . Theyshould not be construed as to permit thetaxpayer easily to evade the payment of tax.[Carbon Steel Co. v. Lewellyn, 251 U.S. 201 ]. Thus,

the good faith of the taxpayer is not a sufficient justification for exemption from the payment ofsurcharges imposed by the law for failing to paytax within the period required by law.

Tax exemption and exclusionTax exemptions must be shown to exist clearlyand categorically , and supported by clear legalprovisions. [ NPC v. Albay, G.R. No. 87479, June4, 1990 ]

General Rule : In the construction of tax statutes,

exemptions are not favored and are construedstrictissimi juris against the taxpayer. [ RepublicFlour Mills v. Comm. & CTA, 31 SCRA 520, 1970].

Tax exemptions must be shown to existclearly and categorically , and supported byclear legal provisions [ NPC v. Albay].

Claims for an exemption must be able topoint out some provision of law creating theright, and cannot be allowed to exist upon amere vague implication or inference [FloroCement v. Gorospe].

Refunds are in the nature of exemption, andmust be construed strictly against thegrantee/taxpayer [ CIR v. CA]

Taxation is the rule and exemption theexception, and therefore, he who claimsexemption must be able to justify his claimor right thereto, by a grant expressed interms too plain to be mistaken and toocategorical to be misinterpreted.[ Comm. V.Kiener Co. Ltd. (65 SCRA 142, 1975)]

Exceptions:(1) When the law itself expressly provides for a

liberal construction, that is, in case of doubt,it shall be resolved in favor of exemption;and

(2) When the exemption is in favor of thegovernment itself or its agencies, or ofreligious, charitable, and educationalinstitutions because the general rule is thatthey are exempt from tax.


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(3) When the exemption is granted underspecial circumstances to special classes ofpersons.

(4) If there is an express mention or if thetaxpayer falls within the purview of theexemption by clear legislative intent, the

rule on strict construction does not apply.[Comm. V. Arnoldus Carpentry Shop, Inc.,159 SCRA 19, 1988].

Tax rules and regulationsThe Secretary of Finance, uponrecommendation of the CIR, shall promulgateall needful rules and regulations for theeffective enforcement of the provisions of theNIRC. [Sec. 244 ].

Requisites for validity and effectivity of

regulations(a) Reasonable(b) Within the authority conferred(c) Not contrary to law and the Constitution ( Art.

7 , Civil Code)(d) Must be published

There are two kinds of administrative issuances:the legislative rules and the interpretative rules.A legislative rule is in the nature of subordinatelegislation, designed to implement a primarylegislation by providing the details thereof. Aninterpretative rule , on the other hand, is designedto provide guidelines to the law, which theadministrative agency is in charge of enforcing.An administrative rule should be published if itsubstantially adds to or increases the burden ofthose governed. When an administrative rule ismerely interpretative in nature, its applicabilityneeds nothing further than its bare issuance forit gives no real consequence more than whatthe law itself has already prescribed. When,upon the other hand, the administrative rulegoes beyond merely providing for the meansthat can facilitate or render least cumbersome

the implementation of the law but substantiallyadds to or increases the burden of thosegoverned, it behooves the agency to accord atleast to those directly affected a chance to beheard, and thereafter to be duly informed,before that new issuance is given the force andeffect of law. [ Commissioner v. Court of Appeals,G.R.No. 119761, 1996].

Tax regulations (issued by the CIR/DOFSecretary) whose purpose is to enforce orimplement existing law must (a) be published ina newspaper of general circulation (see Art. 2 ofthe Civil Code), AND (b) filed with UP LawCenter ONAR (per Chapter 2, Book VII of the

Admin Code of 1987 (EO 292) before they canbecome effective.

Such rules once established and found to be inconsonance with the general purposes andobjects of the law have the force and effect oflaw, and so they must be applied and enforced.[De Guzman v. Lontok, 68 Phil. 495, 1939]. Theyare, therefore, just as binding as if theregulations had been written in the law itself.[Rep. of the Philippines v. Pilipinas ShellPetroleum Corporation, G.R. No. 173918, April 8,

2008]NOTE: Administrative rules and regulationsmust always be in harmony with the provisionsof the law. In case of conflict with the law or theConstitution, the administrative rules andregulations are null and void. As a matter ofpolicy, however, courts will declare a regulationor provision thereof invalid only when theconflict with the law is clear and unequivocal.

Administrative interpretations and opinions The power to interpret the provisions of the TaxCode and other tax laws is under the exclusiveand original jurisdiction of the Commissioner ofInternal Revenue subject to review by theSecretary of Finance [Sec. 4, par.1, NIRC].

Revenue regulations are the formalinterpretation of the provisions of the NIRC andother laws by the Secretary of Finance upon therecommendation of the Commissioner ofInternal Revenue.

The Commissioner has the sole authority toissue rulings but he also has the power to

delegate said authority to his subordinates. Hecannot, however, delegate to any of hissubordinate officials the power to issue rulingsof first impression (i.e., question involved is newand important) or to reverse, revoke or modifyany existing ruling of the BIR [Sec. 7[B], NIRC].


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Decisions of the Supreme Court and Court ofTax AppealsDecisions of the Supreme Court applying orinterpreting existing tax laws are binding on allsubordinate courts and have the force andeffect of law. As provided for in Article 8 of the

Civil Code, they form part of the law of theland. They constitute evidence of what the lawmeans. [ People v. Licera, 65 SCRA 270, 1975] .

The same is also true with respect to decisionsof the Court of Tax Appeals. However, by thenature of its jurisdiction, the decisions of thiscourt are still appealable to the Supreme Courtby a petition for review on certiorari.

Penal provisions of tax lawsPenal provisions of tax laws must be strictly

construed. It is not legitimate to stretch thelanguage of a rule, however beneficent itsintention, beyond the fair and ordinary meaningof its language.

A penal statute should be construed strictlyagainst the State and in favor of the accused.The reason for this principle is the tenderness ofthe law for the rights of individuals and theobject is to establish a certain rule by conformityto which mankind would be safe, and thediscretion of the court limited. [ People v.Purisima, 86 SCRA 524,1978] .

Non-retroactive application of tax laws totaxpayersGeneral rule: Tax laws are prospective inoperation. The reason is that the nature andamount of the tax could not be foreseen andunderstood by the taxpayer at the time thetransaction which the law seeks to tax wascompleted.

Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the

legislative intent. [Lorenzo v. Posadas, 64 Phil. 353, 1937].

Exception to the exception: a tax law should notbe given retroactive application when it wouldbe so harsh and oppressive for in such case, theconstitutional limitation of due process wouldbe violated [ Republic v. Fernandez,1956] .

SCOPE AND LIMITATION OFTAXATIONINHERENT LIMITATIONS PUBLIC PURPOSE The proceeds of the tax must be used (a) forthe support of the State or (b) for somerecognized objects of government or directlyto promote the welfare of the community.

Test: whether the statute is designed topromote the public interest, as opposed to thefurtherance of the advantage of individuals,although each advantage to individuals mightincidentally serve the public. [ Pascual v.Secretary of Public Works (1960) ]

The protection and promotion of the sugarindustry is a matter of public concern; the

legislature may determine within reasonablebounds what is necessary for its protectionand expedient for its promotion. [ Lutz v Araneta (1955) ] The public purpose of a tax may legally existeven if the motive which impelled thelegislature to impose the tax was to favor oneindustry over another. [ Tio v. Videogram(1987)]

Tests in Determining Public Purpose:(1) Duty Test - Whether the thing to be furthered

by the appropriation of public revenue issomething which is the duty of the State asa government to provide.

(2) Promotion of General Welfare Test - Whetherthe proceeds of the tax will directly promotethe welfare of the community in equalmeasure.

(3) Character of the Direct Object of theExpenditure it is the essential character ofthe direct object of the expenditure whichmust determine its validity as justifying atax and not the magnitude of the intereststo be affected nor the degree to which the

general advantage of the community, andthus the public welfare, may be ultimatelybenefited by their promotion. Incidentaladvantage to the public or to the State,which results from the promotion of privateenterprises or business, does not justify theiraid with public money. [Pascual v. Sec. ofPublic Works, G.R. No. L-10405, December 29, 1960]


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INHERENTLY LEGISLATIVEStated in another way, taxation mayexceptionally be delegated, subject to suchwell-settled limitations as (1) The delegation shall not contravene any

constitutional provision or the inherent

limitations of taxation;(2) The delegation is effected either by the

Constitution or by validly enacted legislativemeasures or statute; and

(3) The delegated levy power, except when thedelegation is by an express provision of theConstitution itself, should only be in favor ofthe local legislative body of the local ormunicipal government concerned. [Vitug and Acosta]

General Rule: Delegata potestas non potest

delegari . The power to tax is exclusively vested inthe legislative body and it may not be re-delegated.

Judge Cooley enunciates the doctrine in thefollowing oft-quoted language: "One of thesettled maxims in constitutional law is that thepower conferred upon the legislature to makelaws cannot be delegated by that departmentto any other body or authority. Where thesovereign power of the state has located theauthority, there it must remain; and by theconstitutional agency alone the laws must bemade until the Constitution itself is charged.[People v. Vera, G.R. No. L-45685, November 16,1937]

Legislature has the power to determine the:(1) nature (kind),(2) object (purpose),(3) extent (rate),(4) coverage (subjects) and(5) situs (place) of taxation.

Exceptions

(1) Delegation to local governments - Thisexception is in line with the generalprinciple that the power to create municipalcorporations for purposes of local self-government carries with it, by necessaryimplication, the power to confer the powerto tax on such local governments. [ 1 Cooley190].

This is logical for after all, municipalcorporations are merely instrumentalities ofthe state for the better administration of thegovernment in respect to matters of localconcern. [ Pepsi-Cola Bottling Co. of the Phil.Inc. v. Mun. of Tanauan, 69 SCRA 460,

1976]. Under the new Constitution,however, LGUs are now expressly given thepower to create its own sources of revenueand to levy taxes, fees and charges, subjectto such guidelines and limitations as theCongress may provide which must beconsistent with the basic policy of localautonomy. [Art X, Sec 5, 1987 Constitution]

(2) Delegation to the President(a) to enter into Executive agreements, and(b) To ratify treaties which grant tax

exemption subject to Senate

concurrence.The Congress may, by law, authorize thePresident to fix within specified limits,and subject to such limitations andrestrictions as it may impose, tariffrates, import and export quotas,tonnage and wharfage dues, and otherduties or imposts within the frameworkof the national development program ofthe Government. [Art. 6, Sec. 28 (2),1987 Constitution]

(3) Delegation to administrative agencies -Limited to the administrativeimplementation that calls for some degreeof discretionary powers under sufficientstandards expressed by law or implied fromthe policy and purposes of the Act.(a) There are certain aspects of the taxing

process that are not legislative and theymay, therefore, be vested in anadministrative body. The powers whichare not legislative include: (1) the powerto value property for purposes oftaxation pursuant to fixed rules; (2) the

power to assess and collect the taxes;and (3) the power to perform any of theinnumerable details of computation,appraisement, and adjustment, and thedelegation of such details.

(b) The exercise of the above powers isreally not an exception to the rule as nodelegation of the strictly legislativepower to tax is involved.


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(c) The powers which cannot be delegatedinclude the determination of thesubjects to be taxed, the purpose of thetax, the amount or rate of the tax, themanner, means, and agencies ofcollection, and the prescribing of the

necessary rules with respect thereto.

TERRITORIALRule: A state may not tax property lying outsideits borders or lay an excise or privilege tax uponthe exercise or enjoyment of a right or privilegederived from the laws of another state andtherein exercise and enjoyed. ( 51 Am.Jur. 87-88 ).

Reasons:(1) Tax laws (and this is true of all laws) do not

operate beyond a countrys territorial limits.

(2) Property which is wholly and exclusivelywithin the jurisdiction of another statereceives none of the protection for which atax is supposed to be a compensation.

Note: Where privity of relationship exists. - Itdoes not mean, however, that a person outsideof state is no longer subject to its taxing powers.The fundamental basis of the right to tax is thecapacity of the government to provide benefitsand protection to the object of the tax. A personmay be taxed where there is between him andthe taxing state, a privity of the relationship justifying the levy. Thus, the citizens incomemay be taxed even if he resides abroad as the

personal (as distinguished from territorial) jurisdiction of his government over him remains.In this case, the basis of the power to tax is notdependent on the source of the income norupon the location of the property nor upon theresidence of the taxpayer but upon his relation

as a citizen to the state. As such citizen, he isentitled, wherever he may be, inside or outsideof his country, to the protection of hisgovernment.

SITUS OF TAXATIONSitus of taxation literally means the place oftaxation. The basic rule is that the state wherethe subject to be taxed has a situs may rightfullylevy and collect the tax; and the situs isnecessarily in the state which has jurisdiction orwhich exercises dominion over the subject in

question. Within the territorial jurisdiction, thetaxing authority may determine the situs.

Factors that Determine Situs:(1) Nature of the tax;(2) Subject matter of the tax (person, property,

act or activity);(3) Possible protection and benefit that may

accrue both to the government and thetaxpayer;

(4) Citizenship of the taxpayer;(5) Residence of the taxpayer;(6) Source of income .

INCOME TAX

Who is being taxed Source or Location

Citizenship Residency Within the PH Outside thePH

Partly Within andPartly Outside

Filipino Resident Taxable Taxable Taxable

Filipino Nonresident Taxable NotTaxable

Only income fromwithin is Taxable

Alien Resident Taxable NotTaxable

Only incomefrom within isTaxable

Alien Nonresident Not Taxable NotTaxable

Only incomefrom within isTaxable


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PROPERTY TAXKind of Property SitusReal property Where it is located ( lex

rei sitae )Tangible Personalproperty

Where property isphysically locatedalthough the ownerresides in another jurisdiction.

Intangible personalproperty (e.g., credits,bills receivables, bankdeposits, bonds,promissory notes,mortgage loans, judgments andcorporate stocks)

Gen Rule: Domicile ofthe owner. Mobiliasequuntur personam (movables follow theperson)

Exceptions:(1) When property has

acquired abusiness situs inanother jurisdiction; or

(2) When the lawprovides for thesitus of the subjectof tax (e.g., Sec 104,NIRC)

EXCISE TAX

Kind of Excise Tax Situs

Income Source of the income,nationality orresidence of taxpayer(Sec. 23 , NIRC)

Donors Tax Location of property;nationality orresidence of taxpayer

Estate Location of property;nationality orresidence of taxpayer

BUSINESS TAXKind of Business Tax SitusVAT Where transaction is

madeSale of Real Property Where the real

property is locatedSale of PersonalProperty

Where the personalproperty was sold

International ComityComity - respect accorded by nations to eachother because they are sovereign equals. Thus,the property or income of a foreign state orgovernment may not be the subject of taxationby another state.

Reasons:(1) In par in parem non habet imperium . As

between equals there is no sovereign(Doctrine of Sovereign Equality amongstates under international law). One statecannot exercise its sovereign powers overanother.)

(2) In international law, a foreign governmentmay not be sued without its consent useless to impose a tax which could not be

collected.(3) Usage among states that when a foreign

sovereign enters the territorial jurisdiction ofanother, there is an implied understandingthat the former does not intend to degradeits dignity by placing itself under the jurisdiction of the other.

(4) Rule in international law that a foreigngovernment may not be sued without itsconsent so that it is useless to assess thetax anyway since it cannot be collected.

Exemption of Government Entities, Agencies,and Instrumentalities

If the taxing authority is the NationalGovernment:General Rule: Agencies and instrumentalities ofthe government are exempt from tax.

Note: Unless otherwise provided by law, theexemption applies only to government entitiesthrough which the government immediatelyand directly exercises its sovereign powers. Withrespect to government-owned or controlledcorporations performing proprietary (notgovernmental) functions, they are generallysubject to tax in the absence of tax exemptionprovisions in their charters or the law creatingthem.


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Reasons for the exemption : (1) To levy a tax uponpublic property would render necessary newtaxes on other public property for the paymentof the tax so laid and thus, the governmentwould be taxing itself to raise money to pay overfor itself. (2) This immunity also rests upon

fundamental principles of government, beingnecessary in order that the functions ofgovernment shall not be unduly impeded. ( 1Cooley 263). (3) The practical effect of anexemption running to the benefit of thegovernment is merely to reduce the amount ofmoney that has to be handled by thegovernment in the course of its operations: Forthese reasons, provisions granting exemptionsto government agencies may be construedliberally in favor of non-tax liability of suchagencies. [ Maceda v. Macaraig, Jr., 197 SCRA 771,

1991].Exception: When it chooses to tax itself. Nothingcan prevent Congress from decreeing that eveninstrumentalities or agencies of the governmentperforming governmental functions may besubject to tax. [Mactan Cebu Airport v Marcos,G.R. No. 120082 September 11, 1996] There is noconstitutional prohibition against thegovernment taxing itself. [Coll. v. Bisaya LandTransportation, 105 Phil. 338, 1959].

If the taxing authority is the local governmentunit : RA 7160 expressly prohibits LGUs fromlevying tax on the National Government, itsagencies and instrumentalities and other LGUs.[Local Government Code, Sec. 133 (o)]

CONSTITUTIONAL LIMITATIONS

PROVISIONS DIRECTLY AFFECTINGTAXATION

Prohibition against imprisonment for non-payment of poll tax Art III, Sec 20, 1987 Constitution- No personshall be imprisoned for debt or non-payment ofa poll tax.

Uniformity and equality of taxation Art VI, Sec 28(1), 1987 Constitution- The rule

of taxation shall be uniform and equitable.Congress shall evolve a progressive systemof taxation.

Uniformity - All taxable articles or propertiesof the same class shall be taxed at the samerate. [ City of Baguio v. de Leon, 25 SCRA938 ]. (1)Uniformity of operation throughouttax unit - The rule requires the uniformapplication and operation, withoutdiscrimination, of the tax in every placewhere the subject of it is found. This means,for example, that a tax for a nationalpurpose must be uniform and equalthroughout the country and a tax for aprovince, city, municipality, or barangaymust be uniform and equal throughout theprovince, city, municipality or barangay. (2)Equality in burden Uniformity impliesequality in burden, not equality in amountor equality in its strict and literal meaning.The reason is simple enough. If legislation

imposes a single tax upon all persons,properties, or transactions, an inequalitywould obviously result considering that notall persons, properties, and transactions areidentical or similarly situated. Neither doesuniformity demand that taxes shall beproportional to the relative value or amountof the subject thereof. Taxes may beprogressive.

Equity 1) Uniformity in taxation is effectedthrough the apportionment of the taxburden among the taxpayers which underthe Constitution must be equitable.Equitable means fair, just, reasonable andproportionate to the taxpayers ability topay. Taxation may be uniform butinequitable where the amount of the taximposed is excessive or unreasonable. (2)The constitutional requirement of equity intaxation also implies an approach whichemployees a reasonable classification of theentities or individuals who are to be affectedby a tax. Where the tax differentiation isnot based on material or substantialdifferences, the guarantee of equalprotection of the laws and the uniformityrule will likewise be infringed.

Taxation does not require identity or equalityunder all circumstances, or negate theauthority to classify the objects of taxation. Classification to be valid, must, bereasonable and this requirement is notdeemed satisfied unless:


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(a) it is based upon substantial distinctionswhich make real differences;

(b) these are germane to the purpose of thelegislation or ordinance;

(c) the classification applies, not only topresent conditions, but, also, to future

conditions substantially identical tothose of the present; and

(d) the classification applies equally to allthose who belong to the same class.[Pepsi-Cola v. Butuan City, 24 SCRA 789 ]

The progressive system of taxation wouldplace stress on direct rather than indirecttaxes, on non-essentiality rather thanessentiality to the taxpayer of the object oftaxation, or on the taxpayers ability to pay.Example is that individual income taxsystem that imposes rates progressing

upwards as the tax base (taxpayers taxableincome) increases. A progressive tax,however, must not be confused with aprogressive system of taxation.

While equal protection refers more to liketreatment of persons in like circumstances,uniformity and equity refer to the proper relativetreatment for tax purposes of persons in unlikecircumstances.

Grant by Congress of authority to thePresident to impose tariff ratesDelegation of Tariff powers to the Presidentunder the flexible tariff clause [Art VI, Sec 28(2)],1987 Constitution], which authorizes thePresident to modify import duties. [Sec. 401,Tariff and Customs Code]

Prohibition against taxation of religious,charitable entities, and educational entities Art VI, Sec 28(3), 1987 Constitution:(a) Charitable institutions, churches and

personages or convents appurtenantthereto, mosques, non-profit cemeteries,and all lands, buildings, and improvements,

(b) actually, directly, and exclusively used forreligious, charitable, or educationalpurposes shall be exempt from taxation.

(c) The tax exemption under this constitutionalprovision covers property taxes only and notother taxes [ Lladoc v. Commissioner, 14SCRA 292, 1965] .

In general, special assessments are not coveredby the exemption because by nature they arenot classified as taxes. [ Apostolic Prefect v. CityTreasurer of Baguio ]

To be entitled to the exemption, the petitioner

must prove that:(1) it is a charitable institution(2) its real properties are actually , directly and

exclusively used for charitable purposes.

Revenue or income from trade, business orother activity, the conduct of which is notrelated to the exercise or performance ofreligious, educational and charitable purposesor functions shall be subject to internal revenuetaxes when the same is not actually, directly orexclusively used for the intended purposes. [BIR

Ruling 046-2000] Test ofExemption

Use of the property, and notthe ownership

Nature of UseActual, direct and exclusiveuse for religious, charitable oreducational purposes.

Scope ofExemption

Real property taxes on facilitieswhich are(1) actual,(2) incidental to, or(3) reasonably necessary for

the accomplishment of saidpurposes such as in thecase of hospitals, a schoolfor training nurses, anurses home, property toprovide housing facilities forinterns, resident doctorsand other members of thehospital staff, andrecreational facilities forstudent nurses, interns andresidents, such as athleticfields. [ Abra Valley College v.

Aquino ]

Test: whether an enterprise is charitable or not:whether it exists to carry out a purposerecognized in law as charitable or whether it ismaintained for gain, profit, or privateadvantage.


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A charitable institution does not lose itscharacter as such and its exemption from taxessimply because it derives income from payingpatients, whether out-patient, or confined in thehospital, or receives subsidies from thegovernment, so long as the money received is

devoted or used altogether to the charitableobject which it is intended to achieve; and nomoney inures to the private benefit of thepersons managing or operating the institution.

Exclusive - possessed and enjoyed to theexclusion of others; debarred from participationor enjoyment; "Exclusively" - "in a manner toexclude; as enjoying a privilege exclusively.

If real property is used for one or morecommercial purposes, it is not exclusively used

for the exempted purposes but is subject totaxation. The words "dominant use" or"principal use" cannot be substituted for thewords "used exclusively" without doing violenceto the Constitutions and the law. Solely issynonymous with exclusively. [ Lung Center ofthe Philippines v. Quezon City (2004) ]

Note: Lung Center did not necessarily overturnthe case of Abra Valley College v. Aquino (1988).Lung Center just provided a stricterinterpretation. In Abra Valley, the court held: Theprimary use of the school lot and building is thebasic and controlling guide, norm and standardto determine tax exemption, and not the mereincidental use thereof. Under the 1935Constitution, the trial court correctly held thatthe school building as well as the lot where it isbuilt, should be taxed, not because the secondfloor of the same is being used by the Directorand his family for residential purposes(incidental to its educational purpose), butbecause the first floor thereof is being used forcommercial purposes. However, since only aportion is used for purposes of commerce, it is

only fair that half of the assessed tax bereturned to the school involved.

Prohibition against taxation of non-stock,non-profit educational institutions

Art. XIV, Sec. 4, 1987 Constitutionxxx(3) All revenues and assets of non-stock, non-

profit educational institutions used actually,directly, and exclusively for educationalpurposes shall be exempt from taxes andduties .Proprietary educational institutions,including those cooperatively owned, maylikewise be entitled to such exemptionssubject to the limitations provided by law,including restrictions on dividends andprovisions for reinvestment.

(4) Subject to conditions prescribed by law, allgrants, endowments, donations, or

contributions used actually, directly, andexclusively for educational purposes shall beexempt from tax.

This provision covers only non-stock, non-profiteducational institutions

The exemption covers income, property, anddonors taxes, custom duties, and other taxesimposed by either or both the nationalgovernment or political subdivisions on allrevenues, assets, property or donations, usedactually, directly and exclusively for educationalpurposes. (In the case of religious andcharitable entities and non-profit cemeteries,the exemption is limited to property tax.)

The exemption does not cover revenues derivedfrom, or assets used in, unrelated activities orenterprise.

Similar tax exemptions may be extended toproprietary (for profit) educational institutionsby law subject to such limitations as it mayprovide, including restrictions on dividends andprovisions for reinvestment. The restrictions aredesigned to insure that the tax-exemptionbenefits are used for educational purposes.

Lands, buildings, and improvements actually,directly and exclusively used for educationalpurposes are exempt from property tax [Sec. 28[3], Art. VI, 1987 Constitution] , whether theeducational institution is proprietary or non-profit.


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Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3Charitable institutions,churches andparsonages or conventsappurtenant thereto,mosques, non-profitcemeteries, and alllands, buildings, andimprovements, actually,directly, and exclusively used for religious,charitable, oreducational purposes.

Non-stock, non-profiteducationalinstitutions.

Property taxes Income, property, anddonors taxes andcustom duties.

Majority vote of Congress for grant of tax

exemption Art. VI Sec.28, 1987 Constitution xxx(4) No law granting any tax exemption shall be

passed without the concurrence of a majorityof all the Members of the Congress.

Basis: The inherent power of the state to imposetaxes carries with it the power to grant taxexemptions.

Exemptions may be created by:

(1) the Constitution or(2) statute subject to constitutional limitations

Vote required for the grant of exemption : Absolute majority of the members of Congress(at least + 1 of ALL the members votingseparately)

Vote required for withdrawal of such grant ofexemption : Relative majority is sufficient(majority of the quorum).

The provision guaranteeing equal protection ofthe laws and that mandating the rule oftaxation shall be uniform and equitable likewiselimit, although not expressly, the legislativepower to grant tax exemption.

Grants in the nature of tax exemptions: (1) Tax amnesties(2) Tax condonations(3) Tax refunds

Note:(1) Local government units may, through

ordinances duly approved, grant taxexemptions, incentives or reliefs under suchterms and conditions as they may deemnecessary. [Sec. 192, LGC]

(2) The President of the Philippines may, whenpublic interest so requires, condone orreduce the real property tax and interest forany year in any province or city or amunicipality within the Metropolitan ManilaArea. [Sec. 277, LGC]

Prohibition on use of tax levied for specialpurposeAll money collected on any tax levied for aspecial purpose shall be treated as a specialfund and paid out for such purpose only.

If the purpose for which a special fund wascreated has been fulfilled or abandoned, thebalance, if any, shall be transferred to thegeneral funds of the Government [ see Gaston v.Republic Planters Bank, 158 SCRA 626 ].

Presidents veto power on appropriation,revenue, tariff bills Art VI, Sec 27(2), 1987 Constitution(2) The President shall have the power to veto

any particular item or items in anappropriation, revenue, or tariff bill, but theveto shall not affect the item or items towhich he does not object.

Non-impairment of jurisdiction of theSupreme Court Art VIII, Sec 2, 1987 Constitution - he Congressshall have the power to define, prescribe, andapportion the jurisdiction of the various courtsbut may not deprive the Supreme Court of its jurisdiction over cases enumerated in Section 5hereof.

Art VIII, Sec 5(2,b), 1987 Constitution - TheSupreme Court shall have the following powers:xxx (2) Review, revise, modify or affirm onappeal or certiorari, as the laws or the Rules ofCourt may provide, final judgments and ordersof lower courts in xxx (b) all cases involving thelegality of any tax, impost, assessment or toll orany penalty imposed in relation thereto.


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Even the legislative body cannot deprive the SCof its appellate jurisdiction over all casescoming from inferior courts where theconstitutionality or validity of an ordinance orthe legality of any tax, impost, assessment, ortoll is in question. [ San Miguel Corp v. Avelino

(G.R. No. L-39699 March 14, 1979]

Art VI, Sec 30, 1987 Constitution No law shallbe passed increasing the appellate jurisdictionof the Supreme Court without its advice andconcurrence.

Scope of Judicial Review in taxation: limited onlyto the interpretation and application of tax laws.Its power does not include inquiry into the policyof legislation. Neither can it legitimatelyquestion or refuse to sanction the provisions of

any law consistent with the Constitution. [ BisayaLand Transportation Co v. Collector, May 29,1959]

Grant of power to the local government unitsto create its own sources of revenueLGUs have power to create its own sources ofrevenue and to levy taxes, fees and charges,subject to such guidelines and limitations as theCongress may provide which must be consistentwith the basic policy of local autonomy. [ Art X,Sec 5, 1987 Constitution ]

Flexible tariff clauseDelegation of Tariff powers to the Presidentunder the flexible tariff clause [ Art VI, Sec 28(2),1987 Constitution ]

Flexible tariff clause: the authority given to thePresident, upon the recommendation of NEDA,to adjust the tariff rates under Sec. 401 of theCode in the interest of national economy,general welfare and/or national security.

Exemption from real property taxes Art VI, Sec 28(3), 1987 Constitution Charitableinstitutions, churches and personages orconvents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, andimprovements, actually, directly, and exclusivelyused for religious, charitable, or educationalpurposes shall be exempt from taxation.

No appropriation or use of public money forreligious purposes Art VI, Sec 29, 1987 Constitution(1) No money shall be paid out of the Treasury

except in pursuance of an appropriationmade by law.

(2) No public money or property shall beappropriated, applied, paid, or employed,directly or indirectly, for the use, benefit, orsupport of any sect, church, denomination,sectarian institution, or system of religion, orof any priest, preacher, minister, otherreligious teacher, or dignitary as such, exceptwhen such priest, preacher, minister, ordignitary is assigned to the armed forces, orto any penal institution, or governmentorphanage or leprosarium.

(3) All money collected on any tax levied for a

special purpose shall be treated as a specialfund and paid out for such purpose only. Ifthe purpose for which a special fund wascreated has been fulfilled or abandoned, thebalance, if any, shall be transferred to thegeneral funds of the Government.

Provisions Indirectly Affecting Taxation

Due process Art III, Sec 1, 1987 Constitution No person shallbe deprived of life, liberty, or property without due

process of law , nor shall any person be deniedthe equal protection of the laws.

(1) Substantive Due Process An act is doneunder the authority of a valid law or theConstitution itself.

(2) Procedural Due Process An act is done aftercompliance with fair and reasonablemethods or procedure prescribed by law.

Due Process in Taxation requirements :(1) public purpose(2) imposed within taxing authoritys territorial

jurisdiction(3) assessment or collection is not arbitrary or

oppressive


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The due process clause may be invoked where ataxing statute is so arbitrary that it finds nosupport in the Constitution, as where it can beshown to amount to the confiscation ofproperty. [ Sison v. Ancheta, 130 SCRA 654,1984]

Instances of violations of the due process clause:(1) If the tax amounts to confiscation of property;(2) If the subject of confiscation is outside the

jurisdiction of the taxing authority;(3) If the tax is imposed for a purpose other than

a public purpose;(4) If the law which is applied retroactively

imposes just and oppressive taxes.(5) If the law violates the inherent limitations on

taxation.

Equal protection

Art III, Sec 1, 1987 Constitution - No person shallbe deprived of life, liberty, or property withoutdue process of law, nor shall any person bedenied the equal protection of the laws .

All persons subject to legislation shall betreated alike under similar circumstances andconditions both in the privileges conferred andliabilities imposed. [ 1 Cooley 824-825; See Sisonv. Ancheta,1984]

The doctrine does not require that persons or

properties different in fact be treated in laws asthough they were the same. Indeed, to treatthem the same or alike may offend theConstitution. What the Constitution prohibits isclass legislation which discriminates againstsome and favors others. As long as there arerational or reasonable grounds for so doing,Congress may, therefore, group the persons orproperties to be taxed and it is sufficient if all ofthe same class are subject to the same rate andthe tax is administered impartially upon them.[1 Cooley 608].

The equal protection clause is subject toreasonable classification. Classification is validas long as:(1) classification rests on substantial distinctions

which make real differences,(2) classification is germane to achieve the

legislative purpose,(3) the law applies, all things being equal, to

both present and future con

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