TAXATION, IN GENERAL

A. Definition of taxation
*1. Taxation, definition or concept.
a. The inherent power of the sovereign
1) Exercised through the legislature to impose burdens
b. To impose burdens
1) Upon subjects and objects
2) Within its jurisdiction
c. For the purpose of raising revenues
d. To carry out the legitimate objects of government.
NOTES AND COMMENT:
a. Alternative definition. Taxation is the power vested in the legislature to impose
burdens or charge upon persons and property for the purpose of raising revenue
for public purposes. ( Malcom, p351-353)
B. Nature of taxation

***1. Two- fold nature of taxation or nature of the power of taxation or description of the
power of taxation:
a. Inherent power
b. Legislative power
***2. Power of taxation is an inherent power.
Taxation is an inherent power because it is an attribute of sovereignty
a. Basis: The basis of the power of taxation being an inherent power is the lifeblood
theory of taxation which posits that the very existence of the state is dependent
upon tax revenues collected. Without taxes the states would not be able to
perform the functions for which has been organized.
b. Manifestation:
1. Imposition even in the absence of constitutional grant empowering a state to
collect taxes.
2. States right to select objects and subjects of taxation.
3. No injuction rule. As a general rule courts should not issue injunctive writs to
enjoin collection of tax otherwise this would restrict the amount of taxes that
may be collect to finance the activities of government.
***3. Taxation is a high prerogative of sovereignty.
The power of taxation is essential and inherent attribute of sovereignty, belonging as a
matter of right to every independent government without being expressly granted by the people.
(Pepsi Cola Bottling Company of the Philippines, Inc v. Municipality of Tanauan, Leyte, 69
SCRA 460)

It is an attribute of sovereignty which emanates from necessity upon which the very existence of
the government is dependent. Without tax money, the government would not be able to
undertake the purpose for which it was organized, thus negating the need for its existence.
NOTES AND COMMENT:
a. Taxation as an attribute of sovereignty. A principal attribute of sovereignty, the exercise
of taxing power derives its source from the very existence of the state whose social contract
with its citizens obliges it to promote public interest and common good. ( National Power
Corporation v. City of Cabanatuan, G.R No 149110 April 9,2003 citing various cases)

***4. Taxation is a legislative power. Taxation being a legislative power is the exercise of the
high prerogative of sovereignty.
a. Basis: Involves promulgation of rules. Taxation is a set of rules, how much is the tax
to be paid, who pays the tax, to whom it should be paid, and when the tax should be
paid.
b. Manifestation: Prohibition on improper delegation of the legislative power to tax:
NOTES AND COMMENT: The power of taxation is inherent in every sovereign and
consequently exists with or without a constitutional provision to the effect. ( Cooley,
Constitutional Limitations, p 787)

C. Theory of Taxation

1. The theory of taxation is the lifeblood doctrine.

*2. Lifeblood theory, defined. Taxes are the lifeblood of the nation.
Without revenue raised from taxation, the government will not survive, resulting in
detriment to society. Without taxes, the government would be paralyzed for lack of mative
power to active and operate it. (Commisioner of Internal Revenue v. Algue, Inc, et al, 158
SCRA 8, 16-17).
NOTES AND COMMENT:
a. Alternative definition. Taxes are the lifeblood of government, for without taxes, the
government can neither exist nor endure. ( National Power Corporation v. City of
Cabanatuan, G.R No.149110, April 9,2003 citing various cases)
3.Basis of the lifeblood theory of taxation.
Acceptance that government existence is a necessity.
a. Performance of governmental functions redounds to the benefit of the populance
in general.

b. In view of the above, the government could levy proportionate forced

contributions among the populace to defray its expenditures. Stated otherwise,
revenues could be raised to defray expenditures for public purpose.
NOTES AND COMMENT:
a. Alternative statement of the basis of the theory of taxation.
The theory behind the exercise of the power to tax emanates from necessity,
without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.( Commissioner of Internal Revenue v.
Bank of the Phil Island G.R No.134062, April 17, 2007 citing National Power
Corporation v. City of Cabanatuan, G.R No. 149110, April 9,2003 citing
various cases).
Do not confuse the theory of taxation with the basis of rationale for taxation.
4. Principles that flow from the lifeblood theory.
a. Power to tax is an unlimited and plenary power.
b. The power to tax includes the power to destroy.
c. The presumption that tax laws are valid.
d. The right to collect taxes is imprescriptible.
e. Collection of taxes may not be enjoined by injunction.
f. Taxes could not be the subject of compensation and set-off.
NOTES AND COMMENTS: The above principles are apllied in general.
There may be exemptions.
5.

Power to tax is unlimited. The power to tax is so unlimited in force and so

searching in extent, that courts scarcely venture declare that it is subject to
any restriction whatever, except such as rest in the discretion of the authority
which exercise it. (Tio v. Videogram Regulatory Board et al., 151 SCRA 213)
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax in the constituency who are to pay it (FELS
Energy, Inc v. The province of Batangas et al., G. R No 168557, February 16,
2007 citing Mactan Cebu International Airport Authoirty v. Marcos, et al 261
SCRA 667)

6. The power to tax is sometimes called also the power to destroy. So

potent is the power to tax that it was once opined by Chief Justice Marshall in
McCulloch v. Maryland, 4 Wheat, 316 4 L ed. 579, 607, that the power to tax
involves the power to destroy. Verily taxation is a destructive power which
interferes with the personal and property rights of the people and takes from
them a portion of their property for the support of the government.

7.

The power to tax is sometimes called also the power to destroy.

It should be exercised with caution. This is so, in order to minimize injury
to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kills the hen that lay the golden egg. And in,
the order to maintain the general publics trust and confidence in the
Government, this power must be used justly and not treacherously.
(Commissioner of Internal Revenue v. Tokyo Shipping Co. Ltd et al., 244
SCRA 33; Roxas v. Court of Tax Appeals, No L-25043, April 26, 1968, 23
SCRA 276,282 cited in Pilipinas Shell Petroleum Corporation v. Commissioner
of Internal Revenue, G.R No 172598, December 21, 2007)

8. While the power to tax includes the power to destroy, administrative

taxing authorities must not act arbitrarily. The role of courts in taxation.
a. Required in all democratic regimes that taxing power
1.) Must be exercised reasonably, and
2.) In accordance with prescribed procedures
b. If exercised arbitarily
1.) the taxpayer has a right to complain, and
2.) The courts will come to his succor.
c. For all his awesome power, the tax collector
1.) May stop in his tracks
2.) If the taxpayer can demonstrate
a. That the law has not been observed.
(Commissioner of Internal Revenue v. Algue, 158 SCRA 8)

9. Contrary view: Power to tax not power to destroy. Justice Holmes

brushed aside Marshalls view by declaring in Panhandle Oil Co. v.
Mississippi, 227 US 218 that The power tax is not the power to destroy while
this court exists.
Justice Frankfurther in Graves v. New York 306 us 466 also remarked that
Justice Marshalls statement was a mere flourish of rhetoric and a product of
the intellectual fashion of times to indulge in the free use of absolutes
(Mactan Cebu International Airport Authority v. Marcos et al., 261 SCRA 667,
suggesting referral to Sinco, Phil Political Law, 1954, 577-578)
*10. Reconcilation of Marshalls view that, The power to tax involves the
power to destroy with the Holmes view that, The power to tax is not
the power to destroy.
a. The imposition of a valid tax could not be judicially restrained merely
because it would prejudice taxs payer property.
b. An illegal tax could be judicially declared invalid and should not work to
prejudice a taxs payer property.
c. Marshals view refers to a valid tax while the Holmes view refers to an
invalid tax.

11.The lifeblood theory supports the presumption that tax laws are valid.
While the courts may invalidate tax measures that run counter to the Constitution, it
bears emphasis that deeply ingrained in our jurisprudence is the time-honored principle that a
statute is presumed to be valid. ( Coconut Oil Refines Association, Inc., etc ., et al., v. Torres,
etc et al G.R No 132527, July 29, 2005 citing Basco v. Phil, Amusements and Gaming
Corporation, G.R No. 91649, May 14,1991, 197 SCRA 52)

12.
As a general rule, the right of the government to collect taxes is imprescriptible
because the very existence of the state depends upon the exercise of this power.
Where the government has not by express statutory provision, provided a limitation
upon its right to assess unpaid taxes, such right is imprescriptible. [ Kasamahan Realty
Development Corporation ( now know as Stag Trading Corporation) v. Commissioner of Internal
Revenue, CTA Case No. 6204, February 16, 2005)
Statutes may however provide for prescriptive periods for the collection of particular
kinds of taxes.
NOTES AND COMMENTS: For a detailed discussion of the non-injunction rule refer
to Vol. III, Tax Remedies and the Court of Tax Appeals.

13.
Generally, collection of taxes may not be restrained by an injunctive writ by a
court. It is said that taxes are the lifeblood of the government and any delay in its collection
would impair the rendition of government services. There should be not to impede the flow of
revenues needed to ensure that the state could attain the purpose for which it was organized.
As a general rule, No court shall have the authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge. ( NIRC, Sec 218)
However, the Court of Taxes Appeals is empowered to suspend the collection of taxes
through administrative remedies when collection could jeopardize the interest of the government
or taxpayer.( Sec.11 Rep. Act No.1125, as amended)
NOTES AND COMMENTS: For a detailed discussion of the : no-injunction rule refer to
Vol.III, Tax Remedies and the Court of Tax Appeals.
QUERY: How could the collection of taxes jeopardize the interest of the government.

***14. Grounds and procedure for suspension of collection of taxes. Where the collection
of the amount of the taxspayers liability, sought by means of a demand for payment, by levy,
distraint or sale of property of the paxpayer, or by whatever means, as provided under existing
laws, may jeopardize the interest of the government or the taxpayer, an interested party may file
a motion for the suspension of the collection of the tax liability (Sec.1, Rule 10, RRCTA effective
December 15,2005) with the Court of Tax Appeals.
The motion for suspension of the collection of the tax may be filed together with the
petition for review or with the answer, or in a separate motion filed by the interested party at any
stage of the proceedings. ( Sec. 3, Rule 10, RRCTA effective December 15 2005)
NOTES AND COMMENT: For a detailed discussion of the no- injunction rule refer to Vol III,
Tax Remedies and the Court of Tax Appeals.

D. Basis or rationale of taxation

*1. The basis or rationale for taxation.
a. Reciprocal relation of protection and support between the state and its citizens and
residents. Also called symbolic relation between the state and its inhabitants.
b. Jurisdiction by the state over persons and property within its territory.
NOTES AND COMMENTS
a. Basis or rationale for taxation different from the theory of taxation. Do not
confuse the basis of or rationale for taxation with the concept of the theory of
taxation with the concept of the theory of taxation which is the lifeblood doctrine.
The basis or rationale foe taxation explains the reason why a state may impose
taxes while the theory of taxation explains why there is a need to impose taxes.
b. The basis or rationale of taxation, specifically the symbiotic relation,
determines the situs of taxation; The basis of rationale of taxation may be
used as a tool for analysis in determining where the situs of taxation lies.
It is the country, state or sovereign that gives protection that has the right to
demand the payment of taxes with which to finance activities so it could continue
to give protection.
The basis or rationale of taxation is also used to explain why taxation is basically
territorial in character because it is only within the territorial boundaries of the tax
laws may be enforced. This is so, because it is only within the confines of its
territory that a country, state or sovereign may give protection.
**2.
The basis or rationale of taxation is the reason why the Philippine government
could impose taxes:
a. On the income of resident citizens derived from source outside the Philippines.
b. On aliens residing in the Philippines.
3. Symbolic relationship, explained. The reciprocal relation of protection and support
between the state and the taxpayers. The state gives protection and for it to continue
giving protection it must be supported by the taxpayers in the form of taxes.
a. Taxes are what we pay for a civilized society. Without taxes, the government would
be paralyzed for lack of motive power to activate and operate it.
b. Despite the natural reluctance to surrender part of ones hard-earned income to the
taxing authorities, every person who is able must contribute his share in running the
government.

c. The government, for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their
moral and material values.
This symbolic relationship is the rationale of taxation and should dispel the erroneous
notion that is an arbitrary method of exaction by those in the seat of power. (
Commisssioner of Internal Revenue v. Algue, Inc ., et., al, 158 SCRA 8, 16-17)
NOTES AND COMMENTS:
a. Alternative statement of the symbolic relationship. The opening quotation
in Abakada Guro party List ( formerly AASJAS). Etc.., v. Ermita et al., G.R No
168056, September 1 2005 and companion cases from Anne Robert Jacques
Turgot (1727-1781) a French statesman and economist provides a colorful
restatement of the symbolic relation in the following manner. The expenses
of government, having for their object the interest of all, should be borne by
everyone, and the more man enjoys the advantages of society, the more he
ought hold himself honored in contributing to those expenses.
Is the above quotation an interesting approach to the familiar statement, From
each according to his ability, and to each according to his need. Query to the
reader: who said the foregoing statement? The above statement may be used to
justify the compensatory purpose of taxation, specially the progressive system of
taxation

E. Purpose or objects of taxation

Purpose or objects of taxation, in general
*1. Purpose or objects of taxation. The purpose or objectives of taxation are the
following:
a. The basic purpose.
1) Revenue purpose
b. The secondary purposes
1) Sumptuary or regulatory purpose.
2) Compensation purpose.
3) To implement the power of eminent domain.

REVENUE PURPOSE OF TAXATION

1. Revenue purpose of taxation. The basic purpose of taxation is to raise revenues.

Taxes are imposed in order to raise funds used to meet the legitimate objects of
government.
This is sometimes referred to as the lifeblood theory of taxation.
2. Purpose of the NIRC of 1997. Revenue generation has undoubtedly been a major
consideration in the passage of the Tax Code. ( Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, G.R Nos 167274-75, July 21, 2008)
Sumptuary or regulatory purpose of taxation

1. Sumptuary or regulatory purpose of taxation. The sumptuary purpose of

taxation is to promote the general welfare and to protect the health, safety or
morals of the inhabitants. It is in the joint exercise of the power of taxation and
police power where regulatory taxes are collected.
The state increases taxes on harmful substance making them more expensive,
thus limiting their consumption.
Taxation may be made the implement of the states police power.
2. The concept of police power. Police power is not capable of an definition but
has been purposely veiled in general terms to underscore its comprehensive to
meet all exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest benefits.
(Carlos Superdrug Corp., etc, te al, G.R No 166494, June 29 2007 and
companion cases citing Sangalang v. IAC, G.R No 71169, August 25,1989 176
SCRA 719)
Accrodingly, it has been described as the most essential, insistent and the
least limitable of powers, extending as it does to all the great pblic needs [Ibid.,
citing Ermita- Malate and Motel Operators Association , inc v. City Mayor in
Manila, L-24693, July 31,1967, 20 SCRA849 citing Noble State Bank v. Haskell,
219 u.S 412 (1911)]
It is the power vested in the legislature by the constitution to make, ordain and
establish all manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not repugnant to the constitution, as
they shall judge to be for the good and welfare of the commonwealth and for the
subjects of the same. { ibid., citing U.S Toribio, 15 Phil., 85 (1910) in turn citing

Commonwealth v. Alger, 7 Cush.., 53 ( Mass. 1851); U.S ., v. Pompeya, 31

Phil.245, 253-254 (1951)]
3. In the exercise of police power the State can impair property rights in the process.
When the conditions so demand as determined by the legislature, property rights must bow to
the primacy of police power because property rights though sheltered by due process, must
yield to general welfare [ Carlos Superdrug Corp.., etc.., et al., G. R No. 166494, June 29,2007
citing Alalayan v. National Power Corporation, 24 Phil.172 (1968)]
The State, in the exercise of police power, can intervene in the operations of a business which
may result in an impairment of property rights in the process. ( Carlos Superdrug Corp., etc., et
al, supra)
Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the precept for the protection of property, various laws and jurisprudence, particularly
on agrarian reform and the regulation of contracts and public utilities, continuously serve as a
reminder that the right to property can be relinquished upon the command of the State for the
promotion of public good; [ Ibid. citing U.S v. toribio, 15 Phil. 85 at 98-99 (1910) in turn citing
Thorpe v. Rutland & Burlington R.R Co. ( 27 Vt., 140, 149] to the effect that by the general
police power of the State, persons and property are subjected to all kinds of restraints and
burdens, in order to secure the general comfront, health and prosperity of the State, of the
perfect right in the legislature to do which , no question ever was, or, upon acknowledge and
general principles ever can made, so far as natural persons are concerned.
*4. Taxation distuguished from police power:
a. Purpose: Taxation is for revenue while police power is a general welfare:
b. Amount: In taxation, the amount of tax collected is practically unlimited while under
police power, the license fee should not exceed cost of regulation.
c. Compensation : In taxation, the enjoyment of public services while in police power,
the feeling of having done something good for society in general.
d. Property taken: In taxation , generally money while under police power, any property,
other than money collected is spent for building infrastructure or providing public
services while police power is destructive. The property taken is usually destroyed.
e. What is done with the property taken : Taxation is constructive because the money
collected is spent for building infrastructured or providing public services while police
power is destructive. The property taken is usually destroyed.
f. Relation to the non-impairment clause: Taxation is inferior to the non-impairment
clause and could, not override the same while police power is superior to the nonimpairment clause.
g. Scope: Taxation interferes with property rights only while police power regulates both
liberty and property.
h. Surrender: Taxation may be bargained away through a contract such that if the
government issues a tax- exempt bond, it could not withdraw the exemption because it
would violate the non- impaired clause while police power cannot be bargained away.
i. Means to implement public goods goals: Taxation is distinguishable from police
power as to the means employed to implement public good goal. Those doctrines that
are unique to taxation arose from peculiar considerations such as those especially
punitive effects of taxation, and the belief that taxes are the lifeblood of the state. These
consideration necessitated the evolution of taxation as a distinct legal concept from

police power. Yet at the same time, it has been recognized that taxation may be made to
implement of the states police power. [Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Phil,et al.., G> R> No.158540, August 3 2005 citing
Lutz v. Araneta 98 Phil 148, 152 ( 1995) in turn citing great Atl., & Pac. Tea co.v
Grosjean, 301 U.S 412 U.S Butler297 U.S 1 McCulloch v. Maryland, 4 Wheaton 316]
5. Similarities between the power of taxation and police power.
a. Both are inherent in the state and may be exercised even if there is no specific
authority granted by the Constitutiuon.
b. Without these powers, the state could not attain the purpose for which it is
established. Otherwise stated, the very existence of the State is dependent upon
the exercise of these powers.
c. The powers are to be exercised by the legislative department.
d. both interfere with ownership and use of private property.
6.Regulatory taxes, defined. Regulatory taxes are those imposed in the joint exercise
of the power of taxation and police power of taxation and police power. They raise taxes
and at the same time promote general welfare or protect the health, safety or morals of
the general populace.
7.Taxes may be levied with a regulatory purpose.
a. Taxation is no longer envisioned as a measure merely to raise revenue to
support the existence of the government. Taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and stablilization of
a threatened industry which is affected with public interest as to be within the
police power of the state. ( Caltext Phil, inc.,v Commission on audit, 208
SCRA 726; Osmena v. Orbos, 220 SCRA 703)
Thus, the power of taxation may be exercised to implement police power. (
Lutz v. Araneta , 98 Phil. 148 ; Tiu v. Videogram Regulatory Board,151 SCRA
208; Gaston v. Republic Planters Bank, 158 SCRA 626)
The motivation behind many taxation measures is the implementation of
police power goals. [southern Cross Cement Corporation v. Cement
Manufacturers Association of the Phil, et al., G.R No. 158540, August 3, 2005
citing Lutz v. Araneta, 98 Phil. 148,152(1995); in turn citing [ Great Atl.,& Pac.
Tea Co. v. Grosjean, 302 U.S 412., U.S. v Biutler, 297 U.S. 1 McCulloch v.
Maryland, 4 Wheaton 316]. The reader should note that the August 3, 2005
Southern Cross case is the decision on the motion for reconsideration of the
July 8, 2004 Southern Cross decision.
The so- called sin taxes on alcohol and tobacco manufacturers help
dissuade the consumers from excessive intake of these potentially harmful
products. ( Southern
Cement corporation v. Cement manufacturers
Association of the Phil, te al., G. R No. 158540, august 3, 2005)

b. A law, imposing burdens may be both a tax measure and an exercise of

police power, in which case the license fee may exceed the necessary
expenses of police surveillance and regulation.
*8. Examples of impositions under the police power and not under the power of taxation.
a. Regulation of non- useful occupations. ( Cu- Unjieng v. Patstone, 42 Phil. 881)
b. The Sugar Adjustment Act which increased existing taxes on sugar was enacted
to stabilize the sugar industry to prepare it for the loss of its quota in the U.S.
market and was levied for a regulatory purpose to protect and promote the sugar
industry which is also for a public purpose. ( Lutz v. Araneta ., 98 Phil. 148)
c. The Philsugin fund, an imposition on sugar, to raise funds to conduct research for
the improvement of the sugar industry, is for the purpose of stabilizing the sugar
industry which affects the welfare of the State. The levy is not so much an
exercise of the power of taxation, nor the imposition of a special levy,. But the
exercise of police power which is for the general welfare of the entire country,
therefore for a public purpose. (Republic v. Bacolod-Murcia Co.,. et al., G.R No.
L-19824, July 9, 1966)
d. Margins fees paid on the branch profit remittances. They were exactions
designed to curb the excessive demands upon the countrys international reserve
and were imposed not in the exercise of the power of taxation. ( Esso Standard
Eastern Inc.,v Commissioner of Internal Revenue, 175 SCRA 149).
e. Establishment of the Oil Price Stablization Fund ( OPSF). It is within that
pervasive and non- waivable power and responsibility of the government to
secure the physical and economic survival and well- being of the community, that
comprehensive authority designated as police power.
The establishment and subsidy of domestic prices of petroleum products and fuel
oil is important considering the continued high level of dependence of the country
on imported crude oil are appropriately regarded as public purpose. ( Citizens
Alliance for Consumer Protection v. Energy Regulatory Board., et al.,, 162 SCRA
521)

f.

The imposition under Section 40 (g) of the Public Service Act of x x x fees as
reimbursement of its expenses in the authorization, supervision and /or
regulation of the public service; ( x x x 0 for each permit, authorizing the increase
in equipment, the installation of new units or authorizing the increase in
equipment, the installation of new units or general extensions in the services,
twenty centavos for each one hundred pesos or fraction of the additional capital
necessary to carry out the permit ( paraphrasing supplied) is not a tax measure
but a simple regulatory provision for the collection of fees imposed pursuant to
the exercise of the States police power.

g. A tax is imposed under the taxing power of government principally for the
purpose of raising revenues. The law in question, however, merely authorizes
and requires the collection of fees for the reimbursement of the Commissions
expenses in the authorization, supervision and/or regulation of public service.
(Republic, etc.., International Communications Corporation ( Icc)., G.R No.
141667, July 17, 2006)
9.Examples of taxes levied with a regulatory purpose, or combined exercise of police
power and the power of taxation.
a. Motor vehicle registration fees are now considered revenue or tax measures.
Consequently, entities enjoying tax exemptions are also exempt from paying motor
vehicle registration fees. ( PAL v. Edu., G.R No. L-41383, August 15, 1998)

This case reversed the doctrine previously held in Republic v. Phil Rabbit Bus Lines.,
Inc., 32 SCRA 221, to the effect that the motor vehicle registration fees are
regulatory exactions and not revenue measures.

b.

The tax impost on videogram establishments is not only regulatory but a revenue
measure because the earnings of such establishments have not been subject to tax
depriving the government of an additional source of income. There is no over
regulation as a result of the imposition of the tax because of the need for regulating a
new industry. ( Tio v. Videogram Regulatory Board, 151 SCRA 208)

c. The coconut levy funds under the Coconut Investment fund created under R.A
6260; The Coconut Consumer stabilization Fund created under Pd 276, The
Coconut Industry Development Fund created under PD 582, and the Coconut
Industry Stabilization fund created under PD 1841, were all raised under the states
taxing and police powers.
It can be denied that the coconut industry is one of the major industries supporting
the national economy. It is, therefore, the states concern to make it a strong and
secure source not only of the livelihood of the significant segment of the population,
but also export earnings, the sustained growth. [ Phil Coconut Procedures
federation, Inc ( Cocofed v. Presidential Commission on Good Government, 178
CSRA 236, 252]

d. The OPSF designed to reimburse gasoline companies for increase in the price of
crude oil resulting from world price movements and exchange fluctuations are taxes
collected in the exercise of the police power in order to stabilize prices of gasoline
and other petroleum products. ( Osmena v. Orbos, G.R No.99886, March 31,1993)

e. The Sugar adjustment Act which increase existing taxes on sugar was enacted to
stabilize the sugar industry to prepare it for the loss of its quota in the U.S market

was levied for a regulatory purpose to protect and promote the sugar industry which
is also for a public purpose. ( Lutz v. Araneta, 98 Phil, 148)
f.
The Philsugin fund, an imposition on sugar, to raise funds to conduct research for
the improvement of the sugar industry , is for the purpose of stabilizing the sugar
industry which is one of the pillars of the Phil economy which affects the welfare of the
state. The levy is not much an exercise of the power of taxation, nor the imposition of a
special levy, but the exercise of police power which is for the general welfare of the
entire country therefore for a public purpose. ( Republic v. Bacolod- Murcia Co.., et al..,
G.R No L-19824, July 9, 1966)
POWER TO TAX
As to purpose

POLICE POWER

To raise revenue
(regulation
is
incidental)

As to amount of Contemplates
exaction
limits

no

POWER
OF
EMINENT DOMAIN
To promote public To
take
private
welfare
through property for public
regulation (revenue use
is incidental)
Exaction limited to
cost of regulation,
issuance of the
license,
or
surveillance.
Similarly, no direct Just compensation
benefits
are is given the owner of
received
yet
a the
expropriated
healthy economic property
(A
standard of society particular person is
is maintain.
affected)

As to benefits No special or direct

received
by benefit other than
taxpayer
the fact that the
government secures
to the citizen that
general
benefit
resulting from the
protection of his
person
and the
welfare of all.
As to superiority Recognizes
the Does not apply
of Contracts
obligations imposed
by contracts.
As to transfer of Taxes paid form Allows merely the
property rights
part of public funds. restraint on the
exercise of property
rights
As to persons Applies
to
all
Only a particular
affected
persons,
property
property
is
and excises that
comprehended.
may be subject
thereto.

The compensation purpose of taxation

*1. The compensatory purpose of taxation. The power of taxation may be exercised in order
to:
a. Maintain high level of employment. Tax revenues may be utilized to pump prime
the economy through the creation of high levels of employment. This is done through the
creation of high levels of employment. This is done through the acceleration of the infrastructure
projects, farm support activities (financial support for purchase of fertilizer and other farm
inputs).,etc.
b. Control inflation. The government may mop up excess liquidity by imposing higher
taxes, thus limiting the amount of money in circulation.
c. Achieve social justice through redistribution of income using the progressive system of
taxation.

2.How the compensatory purpose of taxation implements the social justice provisions of
the constitution. The compensatory purpose of taxation is to implement the social justice
provisions of the constitution through the progressive system of taxation, which would result
to equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Phil, et al., G.R
No.158540, August 3, 2005)
In recent years, the increasing social challenges of the times expanded the scope of the
state activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as
public welfare and similar objectives, ( Batangas Power Corporation v. Batangas City, et al..,
G.R No.152675, and companion case, April 28,2004 citing National Power Corporation v.
City of Cabanatuan, G.R No. 149110, April 9, 2003)
Tax measure are but enforced contributions exacted on pain of penal sanctions and
clearly imposed for public purpose. In most recent years, the power to tax has indeed
become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth. ( Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R No 159647, April 16, 2005).
3. Purpose of shit from ad valorem system to specific tax system in taxation
of cigarettes. The shift from the ad valorem system to the specific tax system is
likewise meant to promote fair competition among the players in the industries
concerned, to ensure an equitable distribution of the tax rates. ( Commissioner of
Internal Revenue v. Fortune Tobacco Corporation, G.R Nos. 167274-75, July 21,
2008 citing Record of the Senate , pp 224-225)

F. Basic principles or characteristic of a sound tax system: ( Also known as canons

of taxation)
The canons of a sound tax system, also known as the characteristic or, principles
of a sound tax system, are used as a criteria in order to determine whether a tax
system is able to meet the purpose or objectives of taxation. They are:
a. Fiscal adequacy
b. Administrative feasibility
c. Theoretical justice
NOTES AND COMMENT:
a. Origin of the canons. The above concept of canons of a sound system
originated from the canons of taxation which were first identified by Adam
Smith in his book. Wealth of Nations. These canons of taxation are the
criteria when evaluating a particular tax base. Adam Smiths canon of
taxation are as follows:
1. Equality. This is equivalent of theoretical justice as shown above which is
premised on ability to pay. Thus, a tax to be fair or equitable must be in
proportion to the taxs payers income. This is exemplified through the
adoption of a progressive system of taxation, where the burden of
taxation falls more upon those with higher income.
2. Convenience. This refers to the convenience of the taxs payer in paying
the tax. The refers to the convience of the taxpayers. This is the
counterpart of the concept of administrative feasibility mentioned above.
3. Certainly. This is present where the taxpayer can readily predict, when,
where and how the tax will be levied.
4. Economy. This entails nominal collection costs by the government and
minimal compliance costs on the taxspayer part. [Wealth of Nations, Book
V., Chapter II, Part II ( New York : Dutton, 1910]
Adam Smith also posited that, every tax ought to be so constructed as
both to take out and to keep out of the pockets of the people as little as
possible over and above what it brings into the public treasury of the
state. [ Wealth of Nations, Book V., Chapter Ii., cited in Abakada Guro
Party List ( Formerly AASJS), etc., v., Ermita., et al., G.R No. 168056,
September 1,2005]
2.Illustration of the characteristic of a sound tax system. To continue collecting real
property taxes based on valuations arrived at a 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 requires that the sources of revenues must be
adequate to meet government expenditures. ( Chavez v. Ongpin ., et al., 186 SCRA 331)

3.Fiscal adequacy as a characteristic of a sound tax system, explained. This means

that the tax system must be able to provide sufficient revenues in order to meet the
legitimate objects of government.
Stated otherwise the taxes collected must be able to finance government expenditures and
their variations. [ Abakada Guro Party List ( Formerly AASJS), etc v., Ermita, et al., G.R No.
168056, September 1, 2005 citing Chavez v. Ongpin., G.R No. 76778., June 6, 1990, 1990
, 186 SCRA 331, 338]
4.Administrative feasibility as a character of a sound tax system, explained. The tax
measure should easily be implemented in order to assure the smooth flow into the treasury
of the fiscally adequate amounts.
5.Theoretical justice, as a characteristic of a sound tax system, explained. This means
that taxes should be collected premised on the ability of pay.

CONCEPT AND NATURE OF TAXES

A. Concept and nature of taxes
Taxes In general
*1. Tax, defined. Taxes are enforced contributions, generally payable in money,
proportionate in character, levied on persons, property or exercise of a right or privilege
by the state having jurisdiction, through its legislature, for public purpose and paid at
regular periods or intervals. ( paraphrasing Cooley)
NOTES AND COMMENTS: The essential elements of a tax or its characteristic are
derived from the definition.
*2. Essential elements of a tax (also called the characteristic of a tax).
a. Enforced contribution.
b. Generally payable in money.
c. Proportionate in character.
d. Levied on persons, property or exercise of a right or privilege.
e. Levied by the state having jurisdiction.
f. Levied by the legislature
g. Levied for a public purpose.
h. Paid at regular periods or internals.
*3. Requisite of a valid tax.
a. A valid tax should be within the jurisdiction of the taxing authority.
b. That the assessment and collection of certain kinds (The same as the inherent
limitations of the power of taxation) should be for a public purpose.

c. That either the person or property of taxes guarantees against injustice to

individuals, especially by way of notice and opportunity for hearing be provided.
e. The tax must not impinge on the inherent and Constitutional limitations on the
power of taxation.

Classification of taxes according to subject or object.

*1. Taxes according to subject matter or object.
a. Personal, poil or capitalization- Imposed on all residents, whether citizen or not,
Example-Community Tax.
b. Property- Imposed on property. Example- Real property tax.
c. Exercise- Imposed upon the performance of an act, the enjoyment of a privilege or
the engaging in an occupation.
Example- income tax, estate tax.

Classification of taxes as to determine of amount

1. Taxes as to determine of amount:
a. Specific- imposed based on some standard of weight or measure and which
requires no assessment beyond a listing and classification of the object to be
taxed.
Example- taxes on distilled spirits and wines.
b. Ad valorem- imposed based on a specific proportion of the value fixed by law
or as appraised.
c. Mixed or compound- impose both specific and ad valorem.

Taxes classified as to purpose

*1. Taxes classified as to purpose:

a. General, fiscal or revenue- imposed for the purpose of raising public funds
for the service of the government.
b. Special or regulatory- imposed primarily for the regulation of useful or nonuseful occupation or enterprises and secondarily only for the raising of public funds.

Taxes classified according to the imposing authority

1. Classification as to the authority imposing the tax:

a. National
b. Municipal or local

Taxes classified according to graduation or rate

1. Taxes as to gradation or rate:
a. Proportional- which increases or decreases in relation to bracket.
b. Progressive or graduated- increase as the income of taxpayer goes higher.
c. Regressive- decrease as the income of taxpayer goes higher.

General Rule: Taxes cannot be the subject of compensation or set-off

REASONS:
a. Lifeblood theory
b. Taxes are not contractual obligations but arise out of a duty to, and are the positive
acts of government, to the making and enforcing of which the personal consent of
the individual taxpayer is not reqired. ( Republic v. Mambulao Lumber co.., 4 SCRA
622)
c. The government and the taxpayer are not mutually creditors and debtors of each
other and a claim for taxes is no such a debt, demand, contract or judgement as is
allowed to be set0off. ( Caltex Phil. Inc v. Commisssion on Audit, 208 SCRA 726756)

The contributions to the OPSF of an oil company cannot be offset against its
outstanding claims from the said fund. Since the source of the OPSF is taxation, it is
settled that a taxpayer may not offset taxes due from the claims that he may have
against government.
REASON: First, taxes cannot be the subject of compensation because because the
government and the tax payer are not mutually ceridtors and debtors of each other.
Secondly, there is no proof that the oil companys claim is already due and liquidated. (
Caltex Phil., Inc . v Comm on Audit, 208 SCRA 726)
Exceptions : When set-off or compensation allowed for local taxes:
a. Where both claims already become overdue and demandable as well as fully
liquidated. Compensation takes place by operation of law under Art.,1200 in
relation to Arts., 1279 and 1290 all of the civil code

b. Compensation takes place by operation of law, where the government and

the tax payer are in their own right reciprocally debtors and creditors of each
other, and that the debts are both due and demandable. This is consequence
of Art.1278 and 1279 of the civil code
c. The Supreme Court upheld the validity of a set-off between the tax payer and
the government. In both cases, the claims were certain of the taxpayer
therein were certain and liquidated. The claims were certain since there were
no doubts or dispute as to their refundability, In fact , the government
admitted the fact of the over-payment
d. In case of a tax overpayment, the BIRs obligation to refund or off set arises
from the moment the tax was paid.
e. While judgement should be renderd in favor of Republic for unpaid taxes,
judgement ought at the same time to issue for Sampaguita Pictures
commanding payment to the latter by the Republic of the value of the
backpay certificates which the Republic received.
When legal compensation takes place.
a. Compensation shall take place when two persons in their own right,
are creditors and the debtors of each other., ( CCP, Art., 1278)
b. In order that compensation may be proper, it is necessary.
(1.) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2.) That the both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated:
(3.) That the two debts be due.
(4.) That they be liquidated and demandable.
(5.) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.,
c. When all the requisites mentioned in article 1279 are present, compensation takes effect by
operation of law , and extinguished both debts to the concurrent amount, even though the
creditors are not aware of the compensation
NO off- setting of taxes against taxpayers claims against government.. A person cannot
refuse to pay a tax on the ground that the government owes him an amount equal to or greater
that the tax being collected. The collection of the tax cannot await the results of a lawsuit
against the government.
Reconcillation between Francia and Domingo cases. In Domingo v. Garlitos, 8 SCRA 443,
both of the claims became overdue, demandable and fully liquidated while in francia v. IAC, 162

SCRA 758 the claim against the government is not overdue and demandable as it was already
settled.
Doctrine or equitable recoupment. Where the refund of a tax illegally or erroneously collected
or overpaid by a tax payer is barred by prescription, a tax presently being assessed against a
taxpayer may be recouped or set-off against the tax whose refund is now barred by prescription
Doctrine of equitable recoupment not followed in the Phil. REASON: Lifeblood theory.
Taxpayers would become lazy in paying taxes because they could off-set the alleged illegally or
erroneous collected or overpaid taxes. The same could also be said of tax collectors relative to
their duty to collect taxes because they know that the tax payers would not pay anyway because
of the offset with previous illegally or erroneously collected or overpaid taxes.
Tax avoidance, and tax evasion
***1. Tax avoidance, defined. The exploitation by the tax payer of legally permissible rates or
methods of assessing taxable property or income in order to reduce or entirely avoid tax liability.
Example. Availing of all deductions allowed by law of refraining from engaging in activities
subject to tax.

2.Taxpayers right to tax avoidance. Taxpayer has legal right by means permitted by law to
d. Decrease the amount of what could be his taxes,or
e. Altogether avoid them.

***3. Tax evasion, defined. A scheme used outside of those lawful means and when availed
of, it usually subjects the taxpayer to further or additional civil or criminal liabilities

4.Factors integrated in tax evasion.

f. The end to be achieved i.e payment of less than that know by the tax payer to be
legally due or the non- payment of tax when it is shown that tax is due.
g. An accompanying state of mind which is described as being evil in bad faith
willfull, or deliberate and not accidental and;
h. A course of action or failure of action which is unlawful.

5.Illustration of tax evasion.

On 30 August 1989, Toda in representation of Cibeles Insurance Corporation, which he
owns up to the extent of 99.991% of its capital stock, sold the Cibeles Building and the two
parcels of land on which the building stands for P100 million to Altonaga who, in turn, sold the
same property on the same day to Royal match, Inc for P200 million. These two transactions
were evidence by Deeds of Absolute sale notarized on the same day by the same notary public.

The above scheme is not a legitimate tax planning but one tainted with fraud. It is
obvious that the sale Altonaga was to reduce the amount of tax to be paid specially that the
transfer from him to Royal Match would then subject the income to only 5% (now 6%)( individual
capital gains tax, and not the 35% ( now 32%) corporate income tax., The sale to Altonaga was
merely a tax ploy, a sham and without business purpose and economic substance. The fact that
Altonaga through his counsel asked the opinion of the BIR on the tax consequence of the two
sale transactions does not erase the taint of fraud.

The intermediary transactions i.e the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purpose constitutes one of tax evasion
***6. Tax avoidance distinguished from tax evasion.
a. Validity: Tax avoidance is legal and not subject to criminal penalty while tax evasion
is illegal and subject to criminal penalty.
b. Effect: tax avoidance is minimization of taxes while tax evasion almost always results
in absence of tax payments.
c. Means and methods: Tax avoidance uses legal and valid means while tax
avoidances uses illegal methods.
7. Money entrusted to taxpayer not subject to tax. Money entrusted to a local
travel agency, earmarked and paid for hotel room charges of tourist, travelers
and / or foreign travel agencies do not form part of its gross receipts subject to
the 3% independent contractors tax under the NIRC.
REASON: Gross receipts subject to tax under the Tax code do not include monies or receipts
entrusted to taxpayer who do not belong to it and does not redound to the taxpayers benefit and
it is not necessary that there must be law of regulation which would exempt such monies and
receipts within the meaning of gross receipts.

LIMITATIONS ON THE POWER OF TAXATION

A. Limitations on the power of taxation, in general
**1. Limitations on the power of taxation.
a. Inherent limitations. These are part and parcel of the power of taxation and originate
from the very nature of taxation.
b. Constitutional Limitations. These are the restrictions imposed by the constitution.
2.Rationale for limitations.
unlimited power of taxation.

To prevent abuse on the exercise of the otherwise

2. Limitations on power to tax, not assumed. It is well established jurisprudence that

limitations upon the right of the government to assess and collect taxes will not be

presumed in the absence of clear legislation to the contrary and that where the
government has not by express statutory provision, provided a limitations upon its right
to assess unpaid taxes, such right is known as Stag Trading Corp.

3. Importance of knowing the limitations. The limitations serve as a standard for

determining whether a tax law or an act of the authorities in the implementation of tax
laws is valid or not.
A violation of the limitations could be a ground for the nullification of a tax law or an act
of the taxing authorities.
Thus , any questions asking whether a tax law is valid or not, or whether an act of the
taxing authorities is valid or not always requires referral to the limitations that are the
standards in order to determine the validity of the law or act.
4.

To validly nullify a tax measure courts must follow certain criteria.

Subject to the determination of the courts as to what is a proper exercise of police power
using the due process clause and the equal protection clause as yardstick , the State
may interfere wherever the public interest demand it, and in this particular a large
discretion is necessary for the protection of such interests.
Tax revenues should be utilized for a public purpose.

1. When a tax is for a public purpose:

a. If for the welfare of the nation or greater portion of the population.
b. It affects the area as a community rather than as individuals.
c. Is designed to support the services of government for some of the recognized
objects of the country. Stated otherwise the revenues collected from taxation
should be devoted to achieve the purpose of government.
2. The need for a public purpose.. The tax must be for a public purpose, otherwise,it
is robbery.
Citizens Saving & Loan Association of Cleveland, Ohio v. City of Topeka, 20 Wall
(U.S) 655, 22 L. E.d 455, held that, to lay with one hand the power of the government
on the property of the citizen and with the other to bestow it on the property of the
citizen and with the other to bestow it on favored individuals, is nonetheless a
robbery though it was done under the forms of law and is called taxation.
It may be said generally that the expenditures shall be for some object which
concerns the public welfare. The expenditure is for a private, not a public purpose, if
it is intended to promote the interest of individuals, in respect of either property or
business, although incidentally it may result in that of private interest, the expenditure
is essentially public. It is the essential character of the direct object of the
expenditure which must determine its validity, as justifying a tax and not the
magnitude of the interest to be affected, nor the degree to which the general
advantage of the community, and thus the public welfare, may be ultimately
benefited by their promotion.

***3. As a general rule that expenditures are for a public when made for a
proper governmental function. What constitute a governmental function depends
upon the changing political theories adopted, The following have been considered
governmental functions, and consequently taxes levied therefore are valid because
they are for public purpose:
(1.) The regulation of conduct for the promotion of the general safety, health morals
and welfare.
(2.) The discharge of the moral obligations of a state, like the support and
maintenance of the indigent and those unable to take care of themselves, and
the payment of pensions to soldier and pensions and gratuities to government
employees.
(3.) The conduct of service enterprises, like the construction and maintenance of
roads, parks, playgrounds, schools, and universities.
(4.) The promotion of the natural resources of the country; and
(5.) The operation by the government of enterprises when redounding to the welfare
of the people.
***4. Principles to consider in the determination of whether tax revenues are
devoted for a public purpose.
a. The tax revenues are for a public purpose if utilized for the benefit of the
community in general. An alternative meaning is the tax proceeds should
be utilized only to attain the objects of government.

b. Inequalities resulting from the signing out of one particular class for
taxation or exemption infringe no constitutional limitation
REASONS: It is inherent in the power to tax that the legislature is free to
select the subjects of taxation.
BASIS: The lifeblood theory

c. An individual taxpayer need not derive direct benefits from the tax.
REASON: The paramount consideration is the welfare of the greater
portion of the population.
d. A tax may be imposed, not so much for revenue purpose, but under
police power for the general welfare of the community. This would still be
for a public purpose.
e. Public purpose continually expanding. Areas formerly left to private
initiative now lose their boundaries and may be undertaken by the
government if it is to meet the increasing social challenges of the times.
f.

Tax revenue must not be used for purely private purposes or for the
exclusive benefit private persons.

g. Private persons may be benefited but such benefit should be merely

incidental as its main object is the benefit of the community in general.
h. Determined at the time of enactment of tax law and not at the time of
implementation.
i.

There is a presumption of public purpose even if the tax law does not
specially provide for its purpose.

j.

Public use is no longer confined to the traditional notion of use by the

public but held synonymous with public interest, public benefit, public
welfare, and public convenience

**5. Illustrations of concept to remember.

a. A person levied a P100.00 tax for the support of the public educational system could
not assail the tax on the ground that he has not sent, does not and will not send any
of his children to public schools. REASON: An individual need not derive direct
benefits from the tax because the paramount consideration is the welfare of the
greater portion of the population. The legislature has the right to select the subjects
of taxation because of the lifeblood doctrine, so long as there is valid classification.
b. A tax measure intended to regulate the video industry while protecting the movie
industry is valid. It is not only regulatory but a revenue measure because the
earnings of such establishment have not been subject to tax, depriving the
government of an additional source of income. There is no over regulation as a result
of the imposition of the tax because of the need for regulating a new industry.
c. The stabilization fees collected from the sugar industry is a valid tax. REASON: The
levy was for a regulatory purpose, to protect and promote the sugar industry which is
also for a public purpose.
It was for the purpose of stabilizing the sugar industry which is one of the pillars of
the Phil economy which affects the welfare of the State. The levy is not so much an
exercise of the power of taxation, nor the imposition of a special levy, but the
exercise of police power which is for the general welfare of the entire country,
therefore for a public purpose.
Concept of Locus standi in order to impugn the valid of a tax or an act of the
taxing authorities

**1. Requisites for challenging constitutionality of law. The party bringing suit
must show not only that the law or act is invalid, but also that he has sustained or is

in immediate, or imminent danger of sustaining some direct injury as a result of its

enforcement and not merely that he suffers thereby in some indefinite way.
**2. Requisites before a case may be instituted involving constitutional issues
are necessary in order for a party to have locus standi:
a. There must be an actual case or controversy;
b. The question of constitutionality must be raised by the proper party, otherwise
stated the party who has locus standi;
c. The constitutional question must be raised at the earliest possible
opportunity.
d. The decision on the constitutional question must be raised at the earliest
possible opportunity.

3. Nature of actual case or controversy. An actual case or controversy involves a

conflict of legal rights, an assertion of opposite legal claims susceptible of judicial
adjudication.
4. Criteria of being ripe for judicial determination, A closely related requirement is
ripeness, that is the question must be ripe for adjudication. And a constitutional
question is ripe for adjudication when the government act being challenged has a
direct adverse effect on the individual challenging it
5. Personal injury must be shown for judicial controversy to be ripe for judicial
determination. In this case aside from the general claim that the dispute has
ripened into a judicial controversy by the mere enactment of the law even without
any further over act.,
Thus, were petitioners fail either to assert any specific and concrete legal claim or to
demonstrate any direct adverse effect of the law on them or are unable to show a
personal stake in the outcome of this case or an injury to themselves their petition is
procedurally infirm..
No improper delegation of legislative authority to tax

*1. No improper delegation of legislative authority to tax. The power to tax is

inherent in the state,such power being inherently legislative, based on the principle that taxes
are s grant of the people who are taxed, and the grant must be made by the immediate
representative of the people; and where the people have laid the power, there it must remain
and be exercised.
2.Delegata potestas non potest delegari. A delegated power cannot be further
delegated.
Since the power of taxation is a power that is exercised by Congress as
delagates of the people, then as ageneral rule Congress could not re- delegate this
delegated power.

3.Principle of separation of powers is the basis for the non-delegation of the

legislative authority to tax. The principle of separation of powers ordains that each of
the three great branches of government has exclusive cognizance of and is supreme in
matters falling within its own constitutionally allocated sphere.
A logical corollary to the doctrine of separation of powers is the principle of nondelegation of powers, as expressed in the Latin maxim: potestas delegate non delegari
potest which means what has been delegated, cannot be delegated.

4.Basis of the principle of separation of powers, the principle of separation of powers

is based on the ethical principle that such a delegated power constitutes not only a right but a
duty to be performed by the delegate through the intervening mind of another.
5.The inherent limitations prohibit only improper delegation so not all instances of
delegation are considered tainted.

6.Instances of proper delegation: When taxing power could be delegated:

Exceptions to the rule on non-delegation:
a. Delegation of tariff powers by Congress to the President under the flexible tariff,
section 28 (2) , Article VI of the Constitution.
b.Delegation of emergency powers to the President under Section 23 (2) of Article VI of
the constitution.
c.The delegation to the President of the Phil to enter into executive agreements, and to
ratify treaties which may contain tax exemption provision subject to the concurrence by the
Senate in the ratification made by the President.
d.Delegation to the people at large.
e.Delegation to administrative bodies, In this instance, there is a requirement that the
law is complete in all aspects so what is delegated is merely the implementation of the law or
there exist sufficient determinate standards to guide the delegate and prevent a total
transference of the taxing power.
7. Paradigm shift from exclusive Congressional power to direct grant of taxing power
to local legislative bodies. The power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant
to Article X, section 5 of the 1987 Constitution
Local government legislation is not regarded as a transfer of general legislative power, but
rather as the grant of authority to prescribe local regulations, according to immemorial practice
subject of course to the interposition of the superior in cases of necessity.
8.Taxing power of the local government is limited. The taxing power of local government is
limited in the sense that Congress can enact legislation granting tax exemptions.
While the system of local government units to tax is still limited.
While the power to tax by local governments may be exercised by local legislative bodies, no
longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred

by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains
essentially the same
9.Further amplification by Bernas of the local governments power to tax. What is the
effect of Section 5 on the fiscal position of municipal corporations?. Section 5 does not change
the doctrine that municipal corporations do not possess inherent powers of taxations. What it
does is to confer municipal corporations a general power to levy taxes and otherwise create
sources of revenue. They no longer have to wait for a statutory grant of these powers. The
power of the legislative authority relative to the fiscal powers of local governments has been
reduced to the authority to impose limitations on municipal powers. Moreover, these limitations
must be consistent with the basic policy of local autonomy. The important legal effect of
Section 5 is thus to reverse the principle that doubts are resolved against municipal fiscal
powers, doubts will be resolved in favor of municipal corporations. It is understood, however,
that taxes imposed by local government must be for a public purpose, uniform within a locality,
must not be confiscatory and must be with the jurisdiction of the local unit to pass.
10. Reconcillation of the local governments authority to tax and the Congressional
general taxing power. Congress has the inherent power to tax, which includes the power to
grant tax exemptions. On the other hand, the power of local governments, such as provinces
and cities for example Quezon City, to tax is prescribed by Section 151 in relation to Section
137 of the LGC which expressly provides that notwithstanding any exemption granted by any
law or other special law, the City or a province may impose a franchise tax. It must be noted that
Section 137 of the LGC does not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of Congress to grant tax
exemptions over and above the power of the local governments delegated power to
tax.(Quezon city, e.t al.., v, ABS-CBN Broadcasting Corporation, G. R No. 166408, October
6,2008 citing City Government of Quezon City, et al. v. Bayan Telecomunications, Inc.., G.R No
162015, March 6, 2006, 484 SCRA 16)
Indeed, the grant of taxing power to local government units under the Constitution and the LGC
does not affect the power of Congress to grant exemptions to certain persons, pursuant to a
declared national policy. The legal effect of the constitutional grant to local governments simply
means that in interpreting statutory provisions on municipal taxing powers doubts must be
resolved in favor of municipal corporations. [Ibid.., referring tp Phil Long Distance Telephone
Company., Inc (PLDT) vs. City of Davao]
11.Requisites for delegation to administrative bodies also known as the power of
subordinate legislation. The delegation must comply with
a. The completeness test and
b. The existence of sufficiency determinate standards test. (Pelaez v. Auditor General.,
15 SCRA569 ).
12.Completeness test. In order for the delegation to be valid the law must be complete in itself,
setting forth therein the policy to be executed, carried out, or implemented by the delegate.[
Abakada Guro Party List ( Formerly AASJS)., etc.., v Ermita., et al., G.R No 168056,
September 1 2005 citing Pelaez., v., Auditor General, No L23825, December 24., 1965, 122
Phil. 965,974., 15 SCRA 569,577 in turn citing various cases] The only thing left for the
delegate to do is implement the law. (U.S v. Ang Tang Ho., 43 Phil .,1)

13.Sufficiently determinate standards test. The law fixes a standard- the limit of which are
sufficiently determinate and determinable- to which the delegate must conform in the
performance of his functions
.[ Abakada Guro Party List ( Formerly AASJS)., etc.., v Ermita., et al., G.R No 168056,
September 1 2005 citing Pelaez., v., Auditor General, No L23825, December 24., 1965, 122
Phil. 965,974., 15 SCRA 569,577 in turn citing various cases] The only thing left for the
delegate to do is implement the law. (U.S v. Ang Tang Ho., 43 Phil .,1) A sufficient
standards is one which defines legislative policy, marks its limits maps out its boundaries and
specifies the public agency to apply it. It indicates the circumstances under which the legislative
command is to be affected. .[ Abakada Guro Party List ( Formerly AASJS)., etc.., v Ermita.,
et al., G.R No 168056, September 1 2005 citing Eastern Shipping Lines, Inc., v., phil
Overseas Employment administration., No L-76633 , October 18., 1988,. 166 SCRA 533,
543-544)
The sufficient standards limits the boundaries of the delegates authority by defining
legislative policy and the circumstances under which it is to be pursued and implemented. The
standards would prevent a total transference of the legislative authority to enact laws. ( Ynot ., v
Intermediate Appellate Court, et al.., de Llana v. Alba, 112 SCRA 294; Demetria v., Alba 148
SCRA 208; Lozano v. Martinez, 146 SCRA 323)

14.Rationale for the completeness and sufficiently determinate standard tests. Both tests
are intended to prevent a total transference of legislative authority to the delegate who is not
allowed to step in to the shoes of the legislature and exercise a power essentially legislative
authority to enact laws.
15. Illustrations where there was no delegation of legislative authority to tax:
a. The petitioner impugn the validity of the establishment of tax and duty-free shops
within the Subic Special Economic Zone ( SSEZ) and the removal of consumer
goods and items from the zones without payment of corresponding duties and taxes
for the reason that this constitute executive legislation in violation of the rule on
separation of powers that only raw material, capital and equipment should be
allowed the privilege.
HELD: The objections should not be given credence. It is legal to set up duly
authorized duty-free shops in the SSEZ to sell tax and duty free consumer items in
the Secured Area. This is in line with the policy enunciated in the law that the SSEZ
shall be developed into a self-sustaining industrial, commercial, financial and
investment center to generate employment opportunities in and around the zone and
to attract and promote productive foreign investments.
While it is true that Section 12 (b) of Rep. Act No 7227 mentions only raw materials
capital and equipment, this does not necessarily mean that the tax and duty free
buying privilege is limited to these types of articles to the exclusion of consumer
goods.
It must be remembered that in construing statues, the proper course is to start out
and follow the true intent of the Legislature and to adopt that sense which

harmonizes best with the context and promotes to the fullest manner the policy and
objects of the legislature.
The concept of conclusion unius est exclusion alterius does not find application
because the phrase tax and duty free importations of raw materials, capital and
equipment was merely cited as an example of incentives that the SSEZ is
authorized to grant, in line with its being a free port zone., Thus, the legislative intent
is that consumer goods entering the SSEZ which satisfy the needs of the zone and
are consumed there are not subject to duties and taxes in accordance with Philippine
Law.

The ruling would not be the same if the Presidential Proclamation allowed for the
limited withdrawal from the Clark Special Economic Zone or the John Hay Economic
Zone of consumer goods tax and free duty.
This time, The Presidential Proclamation would be invalid as the statutory tax exempt
privilege was granted only to the Subic Special Economic Zone and not to John Hay
or Clark. This is so because the Constitution mandates that no law granting tax
exemption shall be passed without the concurrence of a majority of all the members
of Congress.
Furthermore, the law is very clear that the exportation or removal of goods from the
territory of the Subic Special Economic zone to other parts of the Phil territory shall
be subject to customs duties and taxes under the Customs and Tariff Code and other
relevant tax laws of the Phil., (ibid).
b. The VAT law provides that, the president, upon the recommendation of the Secretary
of Finance, shall, effective January 1, 2006 raise the rate of value added tax to
twelve percent ( 12%) after any of the following conditions have been satisfied (i)
value added tax collection as a percentage of Gross Domestic Product ( GDP) of the
previous year exceeds two and four- fifth percent ( 2 4/5%) or ( ii) national
government deficit as a percentage og GDP of the previous year exceeds one and
one-half percent ( 1 %)

HELD: There is no undue delegation of legislative power but only of the discretion as to
execution of the law. This is constitutionally permissible.
Congress does not abdicate its function or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority, In the
above case, the Secretary Finance becomes merely the agent of the legislative
department, to determine and declare the event upon which its express will takes place.
The president cannot set aside the findings of the Secretary of Finance, who is not under
the conditions acting as the execute alter ego or subordinate,[ Abakada Guro Party List
9 etc v. ermita., etc.., et al.., G.R No. 168056, September 1, 2005 and companion cases
citing various cases]
Recognition of government exemption as a limitation on the power of taxation.

1. Generally , the state may not be subject to taxation.., one of the inherent limitations
on the power of taxation is recognition of tax exemptions of the government . This is
premised on the concept that with respect to the government, exemption is the rule and
taxation is the exception. REASON: Government is usually exempt from taxation in order
to reduce the amount of money that the government is handling.
*2. The state may tax itself. While this may be so, sovereignty being absolute and taxation
being an act of high sovereignty , the state, if it is so minded, could tax itself, including its
political subdivisions.
3. Government importations subject to duties and taxes. All importations by the
government for its own use or that of its subordinate branches or instrumentalities, or
owned or controlled by the government, shall be subject to the duties, taxes fees and
other charges provided for in the Tariff and Customs Code. ( TCC, sec 1205).
Importations of the Philippine National Police (PNP) are released from customs custody
only if there is a certification from the Department of Budget and Management that there
are funds available for the payment of customs duties and other taxes.
4.Government corporations exemptions from local government taxes already withdrawn.
The primary reason for the withdrawal of tax exemption privilege granted to government
owned and controlled corporations and all other units of government was that such
privilege resulted to serious tax base erosion and distortion in the tax treatment of
similarly situated enterprise, hence resulting in the need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the taxes and other charges
due them.( Phil ports Authority v. City of Iloilo, G.R no 109791, July 14, 2003)
5.In taxing itself the State ultimately suffers no loss. To all intents and purposes, real
property taxes are funds taken by the State with one hand and given to the other. In no
measure can the government be said to have lost anything. .( Phil ports Authority v. City
of Iloilo, G.R no 109791, July 14, 2003 citing National Power Corporation v. Presiding
Judge, RTC, Br. XXV, 190 SCRA 477)

Comity as a limitation on the power of taxation

1. Comity, defined. Comity is the respect accorded by nations to each other because
they are sovereign equals.

2. Comity as a limitation on the power of taxation. The property or income of a

foreign state or government may not be the subject of taxation by another. This is
based on:

a.

The Latin maxim, In par parem non habet imperium. As between equals
there is no sovereign. Taxation is ahigh prerogative of sovereignty, hence
may not be imposed upon foreign sovereigns.

b.

The rule of international law that a foreign government may not be sued
without its consent so that it is useless to impose a tax which could not be
collected.

c.

The concept that when a foreign sovereign enters the territorial jurisdiction of
another, it does not subject itself to the jurisdiction of the other.

Constitutional Restrictions on the Power of Taxation

A. Constitutional restrictions, In General
1. The nature of constitutional restrictions. The constitutional restriction area in the
nature of limitations upon various powers of government, such as the power of
taxation, in order to protect the lowly individual from abuse by the all mighty state in
the exercise of its powers.
2. Two kinds of constitutional limitations.
a. General or indirect constitutional restrictions and; and
b. Specific or direct constitutional restriction.
3. General or indirect constitutional limitations on the power of taxation. These
are the
Constitutional provisions that serve to limit the exercise by the state of the plenary
and unlimited power of taxation. They are reffered to as general or indirect limitations
because they find application not only to taxation but to all powers exercised by the
state such as police power and the power of eminent domain. Another reason why
they are reffered to as general or indirect limitations is the fact that these provisions
do not include the words tax or taxation. Among such provisions are the following:
a. Due process clause ( Sec. 1 art , III 1987 Constitution)
b. Equal protection clause ( Ibid)
c. Freedom of the press ( Sec 4 Ibid)
d. Religious freedom ( Sec 5, ibid)
e. No taking of private property without just compensation, ( Sec 9 Ibid)
f. Non- Impairment clause ( Sec.10 Ibid.) Law making process

1) Bill should embrace only one subject expressed in the tittle thereof ( Sec. 26 (i) Art VI ,
ibid.)
2) Three readings on three separate days. ( Sec. 26 (2) Ibid.)
3) Printed copies in final form distributed three days before passage. ( Ibid)

g. Presidential power to grant reprieves, commutations and pardons and remit

fines and forfeitures after conviction by final judgement. ( Sec. 19 Art VII, Ibid)
**4. Specific or direct constitutional limitations on the power of taxation.
a. No imprisonment for non- of poll tax. ( Sec., 20 Art III, 1987 Constitution).
b. Taxation shall be uniform and equitable. ( Sec 28 Art VI, Ibid)
c. Congress shall evolve a progressive system of taxation. ( Ibid)
d. All appropriation, revenue or tariff bills shall originate exclusively in the house of
Representative, but the Senate may propose or concur with amendments. ( sec.24,
ibid)
e. The President shall have the power to veto any particular item or items in an
appropriation, revenue or tariff bill, but the veto shall not affect the item or items to
which he does not object. ( Sec. 27 (2) , Ibid).
f. Delegate authority of President to impose tariff rates, import and export quotas,
tonnage and wharfage dues
1) Delegation by Congress
2) Through a law
3) Subject to congressional limits and restriction
4) Within the framework of national development program. (par,2, Sec,28,
Art VI, Ibid)
g.Tax exemption of charitable institution, churches ,parsonages, convents, all lands,
buildings and improvements actually, directly and exclusively used
1) For religious, charitable or educational purposes ( par.3, Ibid)
h. No tax exemption without concurrence of Congress majority, ( par. 4 , Ibid)
i. No use of public money or property for religious purposes EXCEPT if priest is
assigned to armed forces, penal institutions government orphanage or leprosarium. ( par
2, Sec. 29, Ibid.)
j. Money collected on tax levied for special purpose to be used only for such purpose ,
balance if any , to general funds. ( par.3 , Sec 29 Ibid)
k. Supreme Courts power to review judgments or orders of lower courts in all cases
involving:
1) Legality of any tax, impose assessment or toll
2) Legality of any penalty imposed in relation to the above. ( Sec. 5 Art VIII, Ibid.)
l. Delegate authority to local governments units
1.) To create their own sources of revenue
2) levy taxes, fees and charges

Subject to:
a) Guidelines and limitations imposed by Congress consistent with the basic
policy of local autonomy.
b) Such fees, taxes and other charges accrue exclusively to the local
governments.( Sec.5 Art X, Ibid.)
c) Automatic release of LGUs just share in national taxes: ( Sec.6, Ibid.)

m. Tax exemption of all revenues and assets of

1) Non- profit, non-stock educational institutions
2) Proprietary or cooperative educational
provided by law including

institutions subject to limitations

a) restriction or dividends
b) provisions for reinvestments. ( Sec 4, Art, XIV, 1987 Constitution)
n. Tax exemption of grants, endowments, donations or contributions
1. Used actually, directly and exclusively for educational purposes.
2. Subject to conditions prescribed by law. (Ibid).

Constitutional due process as a limitation on the power of

taxation

1. Due process clause in the Constitution. No person shall be deprived of life, liberty or
property without due process of law, xxx ( Sec 1 Art III, 1987 Phil Cons)
2. Due process, general definitions.
a. A law which hears before it condemns, which proceeds upon inquiry and renders
judgement only after trial. :
b. Responsiveness to the supremacy of reason, obedience to the dictates of justice.:
3. Meaning of deprivation to fall within the ambit of the due process protection. A
deprivation of liberty or property, as a result of the exercise of the power of taxation,
which requires compliance with due process, requires something more than mere
negligent conduct by government officials, even though such conduct causes injury. It
may occur as a result of a legislative act enacting a tax statue or that of admninistrative
authorities implementing a tax statute.

4. Liberty, defined.
a. The right to exist and the right to be free from arbitrary personal restraint or
servitude.
b. The right of the citizen to be free to use faculties in all lawful ways.
c. The right to be free of physical restraints imposed by government in the noncriminal
context as well as by the criminal context.
d. It also include the right to contract and to engage in gainful employment.
5. Property, defined,
a. Tangible or tangible objects which could be legally appropriated by man, subject of a
contract, including the right to own, use and dispose.
b. It denotes more than ownership of realty, chattels or money. It also includes interest
already acquired in specific benefits which requires a legitimate claim to the benefit
under applicable law.
6. The VAT law does not violate the due process and equal protection clauses when
it reduced the input credits to only 70% of output VAT because input VAT is not
property right within the constitutional purview of the due process clause being merely a
statutory privilege. Persons have no vested rights in statutory privileges.
The state may change or take away rights, which were created by law of the state,
although it may not take away property, which was vested by virtue of such rights.
7. Due process issue not passed upon in anti- VAT petition. There is no justification for
passing upon the claims that R.A No 7716; the Expanded VAT Law violates due
process:
Reason:
a.
The absence of threat of immediate harm makes the need for judicial intervention
less evident and underscore the essential nature of the attack on the law on the
ground of denial of due process as a mere academic discussion of the merit of the
law.
b. There were no notice of assessments issued to the petitioners and no determinations
at the administrative levels of their claims so as to illuminate the actual operation of
the law and enable of the Court to reach sound judgment regarding the fundamental
questions of denial of due process.
8. Kinds of due process.
a. Substantive due process, which limits the govern-ments law and rulemaking powers ,
and
b. Procedural due process, which limits the actions of judicial and quasi-judicial bodies.
9.

Concept to remember: Due process in taxation.

a. Due process in taxation REQUIRES:
1) Tax must be for public purpose
2) Imposed within territorial jurisdiction
3) No arbitrariness or oppression in
a. Assessment and
b. Collection

b.Due process in taxation DOES NOT REQUIRE:

1) Determination through judicial inquiry of
a) property subject to tax
b)amount of tax to be imposed
2)notice and hearing as to:
1) amount of the tax
2)manner of apportionment.
c.Publication of presidential decrees, executive orders administrative rules and
regulations, except interpretative legislation is an indispensable part of due process.
d.As a general rule, appeal is not part of due process except when the Constitution or a
statue provides for an appeal in which cases its denial is aviolation of due process.
e. No due process where a statute is so arbitrary that it finds no support in the
Constitution.
f.

No violation of due process although tax will result in an injury rather than benefit to a
particular taxpayer.
REASON: taxing authority could select objects of taxation.
BASIS:
Lifeblood theory.
10. Procedural due process in taxation. In the observance of procedural due process, the
Supreme Court is always mindful that taxpayer being made liable with his property
should be given an opportunity to be heard which is one of its essential elements.
11. An adversarial, trial type of hearing, whether before or after deprivation of a
protected liberty or property interest, is not always required.
12. The following criteria may be used in determining the needs for hearing and the
extent of the procedural requirements:
a. The importance of the individual interest involved;
b. The value of specific procedural safeguards to that interest; and
c. The government interest in fiscal and administrative efficiency.
13. Doctrines on due process in taxation:
a. A tax assessments supported by unsubstantial evidence amounts to deprivation of
property without due process of law.(Ang Tibay et al,. v. CIR, et al., 69 Phil695)
b. Compliance with strict procedural requirements must be followed effectively to avoid
a collision course between the states power to tax and the individual recognized
rights.
c. Balancing on the scale the power of the state to tax and its inherent right to
prosecute perceived transgressors of the law on one side, and the constitutional
rights of a citizen to due process of law and equal protection of the laws or the other
cannot be avoided.

Obviously scales must tilt in favor of the individual, for a citizens right to comply is
protected by the Bill of Rights of the Constitution. Thus, while taxes are the lifeblood
of the Government , the power to tax has also its limits inspite of all plenitude.

14. Generally notice and hearing necessary for assessment and collection of taxes.
Due process of law requires that in the assessment and collection of taxes certain
guarantees against injustice of individuals, especially in the case of ad valorem as
distinguished from specific taxes, by way of notice and opportunity for hearing, should be
provided. However, no notice or opportunity for a hearing need be given the taxpayer
where it would not be of any possible advantage to him or where nothing could be
changed by hearing him.
15. Application of due process in assessment of deficiency taxes. The constitutional
requirement for due process also finds application in the field of taxation, especially in
the matter of issuance of a deficiency tax assessments. The two requirements of due
process for the validity of aletter of demand and an assessment notice are:
a. The issuance of a notice for informal conference. This is an administrative
requirement which is provided for by Revenue Regulations. ( Sec 3.1.1,
Revs. Regs. 12-99)
b. A pre-assessments noticed must be furnished the taxpayer advising him thar
proper taxes should be assessed. When the commissioner or his duly
authorized representative finds that proper taxes should be assessed, he
shall first notify the taxpayer a preliminary Assessment Notice ( PAN) for the
proposed assessment, showing in detail, the facts and the law rules and
regulations or jurisprudence on which the proposed assessment is based.
16. Instance where notice for informal conference may be dispense with before
issuance of a preliminary assessment notice and where a pre- assessment notice
is not required before issuing an assessment notice.
a. When the finding for any deficiency tax is the result of mathematical error in
the computation of the tax as appearing on the face of the return filed by the
tax payer.
b. When a tax payer who has opted to claim a refund or tax credit of excess
credible withholding tax for a taxable period was determined to have carried
over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or
c. When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent or;
d. When the exercise tax due on execisable articles has not been paid or;

e. When an article locally purchased or imported by an exempted person such

as but not limited to vehicles capital equipment, machineries and spare parts,
has been sold traded or, transferred to non- exempt person.
17. Instance where the due process clause may be invoked. The due process clause
may correctly be invoked only when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax power.
The Legislative is given the discretion to determine the
a.
b.
c.
d.
e.

Nature ( kind)
Object( purpose),
Extent ( rate)
Coverage ( subjects) , and
Where the situs ( place) of taxation primarily lies. The Supreme Court cannot freely
delve into those matters which by constitutional fiat, rightly rests on legislative
judgment.
Of course, where a tax measure becomes so unconscionable and unjust as to
amount to confiscation of property, courts will not hesitate to strike it down, for
despite all its plentitude, the power to tax cannot, override constitutional
proscriptions.

18. Requisites of administrative due process.

a. The right to notice , be it actual or constructive , of the filing of the proceedings that may
affect persons legal rights.
b. The rights to a hearing which includes the right to present ones case and submit
evidence in support thereof. This is the right of a person to a reasonable opportunity to
defend himself, introduce witnesses and relevant evidence;
c. A tribunal so constituted as to give the person reasonable assurance of honesty and
impartiality, and which must be of competent jurisdiction.

Constitution concepts of equal protection and uniformity as limitations on the power of

taxation.
1. Provision on equal protection and uniformity in the Constitution. xxxx nor shall
any person be denied the equal protection of the laws. ( Section 1, article III , 1987
Philippine Constitution, paraphrasing supplied)
The rule of taxation shall be uniform and equitable. [!st sentence, Sec 28 9!0 Article VI,
Ibid.)

**2. Concepts to remember: Equal protection and uniformity rule.

a. The criteria of equal protection and uniformity, are used interchangeably, In general,
they mean the same.
b. The criteria is MET
1) When the laws operate uniformly
a. On all persons
b. Under similar circumstances
2) All person are treated in the same manner
a.) The conditions not being different
b.) Both in privileges conferred and liabilities imposed
c.) Favoritism and preference not allowed.

c. The criteria MEANS that all taxable articles or kinds of property of the same class
shall be taxed at the same rate. The Constitution does not require things which are
different in fact to be treated in law as though they were the same. Hence, the
constant reiteration of the view that CLASSIFICATION, if rational in character, IS
ALLOWABLE.
d. The taxing authority has the power to make reasonable and natural classifications
foe purpose of taxation.
e. The legislature has the inherent power to select the subjects of taxation, hence it has
the power to select whom to exempt.
f.

Tax exemptions are not violative of the equal protection clause, so long as there is
valid classification. It has been repeatedly held that, inequalities which result from a
singing out of one particular class of taxation, or exemption, infringe no constitutional
limitations.

Situs of Income taxation or general principles of income taxation.

1. Situs of income tax, defined. The place where income taxes are to be paid, or the
state that has the right to demand payment of income taxes.
***2. Basis of taxability of incomes.
a. As regards individuals, the taxability of incomedependes upon
1)
2)
3)
b.
1)
2)

Citizenship or
Residence of the recipient or,
The place where such income is delivered.
With respect to corporations ., the taxability of income depends upon.
Whether the corporation is a domestic or a foreign corporation.
Whether the foreign corporation is a resident or nonresident.

3.Basis of taxability of income, explained. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the tax payer ( that renders resident
citizens subject to income tax liability on their income from all sources) and of the generally
accepted and internationally recognized income taxable base (that can subject non-resident
aliens and foreign corporations to income tax on their income tax from Phil sources.0
4.Where the sources of the income is the Phil the income is taxable under the NIRC of
1997. There shall be levied collected and paid for each taxable year upon the entire income
received from all sources within the phil by every non resident aliens individual not engaged in
trade or business within the Phil as interest, cash and / or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or
determinable annual or periodic casual gains, profits and income and capital gains[ Sec.25 ( B)
NIRC of 1997]

***5. General principles of income taxation in the Phil or the sources rule of income
taxation as provided in the NIRC of 1997.
a. A citizen of the Phil residing therein is taxable on all income derived from sources within
and without the Phil.
b. A nonresident citizen is taxable only on income derived from sources within the
Philippines:
c. An individual citizen of the Phil who is working and deriving income abroad as an
overseas contract worker is taxable only on income from sources within the Phil,
provided that a seaman who is a citizen of the Phil and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract worker;
d. An alien individual, whether a resident or not of the Phil is taxable only on income
derived from sources within the Phil;
e. A domestic corporation is taxable on all income derived from sources within and
without the Phil; and
f.

A foreign corporation, whether engagedor not in trade or business in the Phil, is

taxable only on income derived from sources within the Phil
6. Illustration of the sources or activity rule
a. Juliane, a non-resident alien appointed as a commission agent by a domestic
corporation with a sales commission of 10% all sales actually concluded and
collected through her efforts. The local company withheld the amount of
P107,000 from her sales commission and remitted the same to the BIR.
She field a claim for refund alleging that her sales commission is not taxable
because the same was a compensation for her services rendered in Germany
and therefore considered as income from sources outside the Phil.

HELD; The important factor which determines the sources of income of personal
services is not the residence of the payor, or the place where the contract for
service is entered into, or the place of payment, but the place where the contract
for services were actually performed
Since the activity of securing the sales were in Germany, then the income did not
originate from sources from within the Phil.

Gross income from sources within the Philippines

2. Gross income from the sources within the Philippines. The following items of gross
income shall be treated as gross income from sources within the Philippines;
a.
b.
c.
d.
e.
f.

Interests
Dividends
Services
Rentals and royalties
Sale of real property
Gains, profits, and income from the sale of personal property.

3. Situs of tax on interest income. The place of payment which is in the residence of the
borrower who pays the interest IRRESPECTIVE of the place where the obligation was
contracted.
REASON:
a). If the borrower is a resident of the Philippines, the interest payment paid by the
bond, note or other interest bearing obligations, but by the borrower.
Payment is the activity that produced the income, and the act of payment took place in
the Philippines which is the residence of the debtor.
4. Interest treated as gross income from sources within the Philippines. Interest
derived from sources within the Philippines , and interest on bonds, notes, or other
interest- bearing obligations of residents, corporate or otherwise.
5. Dividends considered as gross income from sources within the Philippines. The
amount received as dividends;
a. From a domestic corporation;
b. From a foreign corporation [unless]
1) Less than fifty percent (50%) of the gross income of such foreign corporation
2) For Three-year period ending with the close of its taxable year preceding the
declaration of such dividends or for such part of such period as the
corporation has been in existence
3) Was derived from sources within the Philippines as determined under these
provisions

4) But only in an amount which bears the same ratio to such dividends as the
gross income of the corporation for such period derived from sources within
the Philippines
5) Bears to its gross income from all sources.
6. Income from services treated as gross income sources within the Philippines.
Compensation for labor or personal services performed in the Philippines. [ Sec.42 (A0
(3), NIRC of 1997]
7. Rentals and royalties treated as gross income from sources within the
Philippines. Rentals and royalties from property located in the Philippines or from any
interest in such property, including rentals or royalties for:
a. The use of or the right or privilege to use in the Philippines or from any copyright,
patent, design or modern plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
b. The use of, or the right to use in the Philippines of any industrial, commercial
knowledge or information;
c. The supply of scientific, technical, industrial or commercial knowledge or information;
d. The supply of any assistance that is ancillary and subsidiary to, and is furnished as
ameans of enabling the application or enjoyment of, any such property, or rights as is
mentioned in paragraph (a) or any such knowledge or information as is mentioned in
paragraph (b); or
e. The supply of services by a nonresident person or his employee in connection with
the use of property or rights belonging to, or the installation or operation of any
brand, machinery or other apparatus purchased from such non-resident person
belonging to, or the installation or operation of any brand, machinery or other
apparatus purchased from such no-resident person;
f. Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking
venture, project or scheme;
g. The use or the right to use
(i)
Motion picture films
(ii)
Films or video tapes for the use in connection with television;
(iii)
Tapes for use in connection with radio broadcasting.
8. Sale of real property treated as gross income from sources within the Philippines.
Gains, profits, and income from the sale of real property located in the Philippines. [ Sec.
42 (5), NIRC of 1997]
9. Sale of personal property when treated as gross income from sources within or
without the Philippines.
Gains , profits and income derived:
a. From the purchase of personal property within and its sale without the
Philippines, or
b. From the purchase of personal property without and its sale within the
Philippines, shall be treated as derived entirely from sources within the country in
which sold; Provided, however, That gains from the sales of shares of stock in a
domestic corporation shall be treated as derived entirely from sources within the
Philippines regardless of where the said shares are sold.

10. Conditions for entry in books of transfer by a nonresident alien or foreign

corporation of shares in domestic corporation. The transfer by a nonresident alien
or a foreign corporation to anyone of any share of stock issued by a domestic
corporation shall not be effected or made in its books unless:
a. The transfer nonresident alien or foreign corporation has filed with the
Commissioner of Internal Revenue a bond conditioned upon the future payment
by him of any income tax that may be due on the gains derived from such
transfer, or
b. The Commissioner of Internal Revenue has certified that the taxes, if any
imposed under tittle II, tax on income , of the NIRC, and due from such sale or
transfer have been paid. It shall be the duty of the transferor nonresident alien or
foreign corporation and the domestic corporation the shares of which are sold or
transferred to advise the transferee of this requirement.
11. Taxable income from sources within the Philippines. Certain allowable deductions
are made from gross income from sources within the Philippines and the remainder is
treated in full as taxable income from sources within the Philippines.
12. Deductions allowed to gross income from sources within the Philippines to arrive
at the taxable income from sources within the Philippines.
a. Expenses, losses and other deductions properly allocated to gross income from
sources within the Philippines; and
b. A ratable part of expenses, interest, losses and other deductions effectively
connected with the business or trade conducted exclusively within the Philippines
which cannot definitely be allocated to some items or class of gross income:
13. When interest not deductible from items considered as gross income from
sources within the Philippines. No deductions for interest paid or incurred abroad
shall be allowed from gross income from sources from within the Philippines unless
indebtedness was actually incurred ro provide funds for use in connection with the
conduct or operation of trade or business in the Philippines.

Gross income tax sources without the Philippines

1. Gross income from sources without the Philippines. The following items of gross
income shall be treated as income from sources without the Philippines.
a. Interest
b. Dividends
c. Compensation
d. Renatals or royalties; and
e. Gains, profits and income from the sale of real property
2. Interest treated gross income from sources without the Philippines. Interest other
than that derived from sources within the Philippines.
3. Dividends treated as gross income from sources without the Philippines.
Dividends other than those derived from sources within the Philippines

4. Compensation treated as gross income from sources without the Philippines.

Compensation for labor or personal service performed without the Philippines.
5. Rentals and royalties treated as gross income from sources without the
Philippines. Rentals or royalties from properly located without the Philippines or from
any interest in such property including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents copyrights, secret processes and
formulas, goodwill, trademarks, trade brands, franchise and other like properties.
6. Proceeds of real property as gross income from sources without the Philippines.
Gains, profits and income from the sale of real property located without the Philippines.
7. How to compute taxable income from sources without the Philippines. Certain
allowable deductions are made from gross income from sources from without the
Philippines and the remainder, if any, shall be treated in full as taxable income from
sources without the Philippines.
8. Allowable deductions from gross income from sources without the Philippines to
arrive at taxable income from sources without the Philippines.
a. Expenses, losses and other deductions properly apportioned or allocated to gross
income from sources without the Philippines; and
b. A ratable part of any expenses, loss or other deduction which cannot definetly be
allocated to some items or class of gross income

Gross income from sources partly within and partly without the
Philippines.
1. Determine of allocation where the income is from sources partly within and
without the Philippines.
a. Items of gross income, losses and deductions other than those considered as gross
income from sources from within the Philippines or gross income from sources
without the Philippines, shall be allocated or apportioned to sources within or without
the Philippines, under the rules and regulations prescribed by the Secretary of
Finance upon recommendation of the Commissioner of Internal Revenue.
b. Where items of gross income are separately allocated to sources within the
Philippines there shall be deducted( for the purpose of computing the taxable income
therefrom)the expenses, losses and other deductions which cannot definitely be
allocated to some items or classes of gross income. The remainder, if any, shall be
included in full as taxable income from sources within the Philippines.

c. In the case of gross income derived from sources partly within and partly without the
Philippines, the taxable income may first be computed by deducting the expenses,
losses or other deductions apportioned or allocated thereto and a ratable part of any
expenses, loss or other deduction which cannot definitely be allocated to some items
or classes of gross income, and the portion of such taxable income attributable to
sources within the Philippines may be determined by processes or formulas of
general apportionment prescribed by the Secretary of Finance.

d. Gains, profits and income from the sale of personal property produced( in whole or in
part) by the tax payer within and sold without the Philippines, or produced ( in whole
or in part) by the tax payer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the Philippines.

The issue of off-line air carriers

***1. Revenues derived by an off-line international carrier, without any flight originating
from the Philippines, from ticket sales through its local agent are subject to Philippine
income tax. REASON: such airline is considered a resident foreign corporation engaged in
trade or business in the Philippines. The test of taxability is the source of income; and the
source of an income is that activity which produced the income.(Air Canada v. Commissioner of
internal Revenue, CTA case no.6572, December 22,2004 citing Howden & Co Ltd V.
Commissioner of Internal Revenue 13 Scra 601) The sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands here and payment for fare
were also made here in the Philippine currency. The suits of the source of payments is the
Philippines.(ibid.., citing Commissioner of Internal Revenue v. British Overseas Airways
Corporation, 149 SCRA 601)
The flow of wealth proceed from, and occurred within the Philippine territory enjoying
the protection accorded by the Philippine government. In consideration of such protection, the
flow of wealth should share the burden of supporting the government.
The absence of flight operations within the Philippine territory cannot alter the fact that
revenues were derived from ticket sales within the jurisdiction. ( Commissioner of Internal
Revenue v. Japan Air Lines, 202 SCRA 450, reiterating British Overseas Airways Corp., Air
India, and American Airlines ., Inc)

**2. Off-line international carrier liable for income taxes as a non-resident foreign
corporation doing business in the Philippines even if it does not maintain a permanent
establishment locally. The term non-resident foreign corporation applies to a foreign
corporation engaged in trade or business within the Philippines hence it is subject to income
taxes, even if the flights do not originate from the Philippine. ( Air Canada v. Commissioner of
Internal Revenue., CTA Case No. 6572., December 22, 2004)
3.The term doing or engaged in business, has no fixed or specific criterion. There is
no specific criterion as to what constitutes doing or engaging in or transacting business.
Each case must be judged in the light of its peculiar environmental circumstances. The term

implies continuity of commercial dealings and arrangement, and contemplates, to that extent,
the performance of acts or works or the exercise of some of the functions normally incident to
and in progressive prosecution of commercial gain or for the purpose and object the business
organization.
4.Off-line international carriers are engaged in business in the Philippines because they
have appointed and maintained a local sales agent. A foreign airline company selling tickets
in the Philippines through its local agent, whether liaison offices, agencies or branches, shall be
considered as a resident foreign corporation engaged in trade or business in the Philippines for
such activities show continuity of commercial dealings or arrangements and performance of acts
or works or the exercise of some functions normally incident to and in progressive prosecution
of commercial gain or for the purpose and object of the business organization.

In fact it can be said that the regular sale of ticket is an airlines main activity and is the very
lifeblood of the airline business, the generation of ticket sales being its principal objective.
5.Off-line international carriers are subject to income taxes only if they are non-resident
foreign corporations not engaged in trade or business in the Philippines. An off-line
international carrier, as authorized to operate by the Civil Aeronautics Board and having no
flights originating from the Philippines in a continuous and uninterrupted flight, cannot be taxed
on its gross Philippine billings.

This is so because of a change in the definition of gross Philippine billings. The NIRC of 1977
defines gross Philippine billings as gross revenue realized from uplifts of passengers
anywhere in the world and excess baggage, cargo and mail originating from the Philippines,
covered by passage documents sold in the Philippines. [ Sec.24 (b), NIRC of 1997, as
amended, underlining supplied.]
On the other hand, the NIRc of 1997 has redefined gross Philippine billings as the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted flight irrespective of the place of sale or
issue and place of payment or ticket or passage document.,
It is evident that to be subject to tax the flight should be one, originating from the Philippines in
a continuous and uninterrupted flight.
To originate would mean to cause the beginning of ; to start ( a person or thing) on a course
or journey ; to begin, start ( Websters Third New International Dictionary). To be taxable, the
gross Philippine billings must be derived from flights carrying passengers that originated or
started.

Situs of exercise tax

*1. Situs of exercise tax is where transaction performed. The power to levy an exercise
upon the performance of an act or the engaging in an occupation does not depend upon the
domicile of the person subject to the exercise , nor upon the physical location of the property
and in connection with the act or occupation taxed, but depends upon the place in which the act
is performed or occupation engaged in.
Thus the gauge for taxability does not depend on the location of the office, but attaches upon
the place where the respective transaction (s) is perfected and consummated.
2. Situs of taxation of Zero- rated VAT services such as facilitating the collection of
receivables from credit card members situated in the Philippines and payment to
service establishments in the Philippines. The place where the service is rendered
determines the jurisdiction state may tax anything not within its jurisdiction without
violating the due process clause of the [C]onstitution. Manila Gas Corp. V. collector of
Internal Revenue, 62 Phil. 895, 900, January 17, 1963, per Malcom., J. ) {
Commisioner, supra citing Deoferio,. Jr. and Mamalateo, The Value added Tax in the
Philippines ( 2000), p.93].

Performed in the Philippines, the service is necessarily subject to its jurisdiction [ Commissioner
, supra citibg Garner (e.d in chief), Blacks Law Dictionary ( 8 th ed.., 1998), 3 ] the place of
payment is immaterial [ Commissioner, supra, citing Deoferio jr, and Mamalateo. The Value
Added Tax in the Philippines (2000), p .93 ], much less is the place where the output of the
service will be further or ultimately used.
This is so, because the law neither makes a qualification nor adds a condition in determining the
tax situs of a zero-rated service.
Situs of sale of personal property. The place where the sale is consummated and perfected.
Illustration: Sales of encyclopedia were considered as perfected and consummated in the U.S
because of showing that when the Philippine distributors placed and / sent their specific orders
to P.F Collier, U.S they already knew the price of the books., Such orders were shipped by the
vendor in the U.S direct to the different buyers in the Philippines. [P.F, Collier., Inc (Phil Branch)
v. Commissioner of Internal Revenue., CTA Case No. 4355, November 9,1995]

Who Are Required To File Income Tax Returns

Individuals

Resident citizens receiving income from sources within or outside the Philippines
o employees deriving purely compensation income from 2 or more employers,
concurrently or successively at anytime during the taxable year
o employees deriving purely compensation income regardless of the amount,
whether from a single or several employers during the calendar year, the income
tax of which has not been withheld correctly (i.e. tax due is not equal to the tax
withheld) resulting to collectible or refundable return

self-employed individuals receiving income from the conduct of trade or business

and/or practice of profession
o individuals deriving mixed income, i.e., compensation income and income from
the conduct of trade or business and/or practice of profession
o individuals deriving other non-business, non-professional related income in
addition to compensation income not otherwise subject to a final tax
o individuals receiving purely compensation income from a single employer,
although the income of which has been correctly withheld, but whose spouse is
not entitled to substituted filing
o marginal income earners
Non-resident citizens receiving income from sources within the Philippines
Aliens, whether resident or not, receiving income from sources within the
Philippines
Corporation shall include partnerships, no matter how created or organized.
Domestic corporations receiving income from sources within and outside the
Philippines
Foreign corporations receiving income from sources within the Philippines
Estates and trusts engaged in trade or business

Annual Income Tax For Individuals Earning Purely Compensation

Income (Including Non-Business/Non-Profession Related Income) and
For Marginal Income Earners
Tax Form
BIR Form 1700 - Annual Income Tax Return (For Individual Earning Purely
Compensation Income Including Non-Business/Non-Profession Related Income)
Documentary Requirements
1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316)
2. Waiver of the Husbands right to claim additional exemption, if applicable
3. Duly approved Tax Debit Memo, if applicable
4. Proof of Foreign Tax Credits, if applicable
5. Income Tax Return previously filed and proof of payment, if filing an amended
return for the same taxable year
Procedures
1. Fill-up BIR Form 1700 in triplicate.
2. If there is payment:

Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District
Office where you are registered and present the duly accomplished BIR Form
1700, together with the required attachments and your payment.

In places where there are no AABs, proceed to the Revenue Collection Officer or
duly Authorized City or Municipal Treasurer located within the Revenue District
Office where you are registered and present the duly accomplished BIR Form
1700, together with the required attachments and your payment.

Receive your copy of the duly stamped and validated form from the teller of the
AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer.

3. For "No Payment" Returns including refundable returns, and for tax returns qualified
for second installment:
o

Proceed to the Revenue District Office where you are registered or to any Tax
Filing Center established by the BIR and present the duly accomplished BIR
Form 1700, together with the required attachments.

Receive your copy of the duly stamped and validated form from the RDO/Tax
Filing Center representative.

Deadline
On or before the 15th day of April of each year covering taxable income for the preceding
taxable year

Annual Income Tax For Self-Employed Individuals, Estates And

Trusts (Including Those With Mixed Income,i.e., Compensation
Income and Income from Business and/or Practice of Profession )
Tax Form
BIR Form 1701 - Annual Income Tax Return (For Self-Employed Individuals, Estates
and Trusts Including Those With Both Business and Compensation Income)
Documentary Requirements
1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316), if applicable
2. Certificate of Income Payments not Subjected to Withholding Tax (BIR Form
2304) if applicable
3. Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if
applicable

4. Waiver of the Husbands right to claim additional exemption, if applicable

5. Duly approved Tax Debit Memo, if applicable
6. Proof of Foreign Tax Credits, if applicable
7. Income Tax Return previously filed and proof of payment, if filing an amended
return for the same year
8. Account Information Form (AIF) or the Certificate of the independent
CPA with Audited Financial Statements if the gross quarterly sales, earnings,
receipts or output exceed P 150,000.00
9. Proof of prior years excess tax credits, if applicable
Procedures
1. Fill-up BIR Form 1701 in triplicate copies.
2. If there is payment:
o

Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District
Office where you are registered and present the duly accomplished BIR Form
1701, together with the required attachments and your payment.

In places where there are no AABs, proceed to the Revenue Collection Officer or
duly Authorized City or Municipal Treasurer located within the Revenue District
Office where you are registered and present the duly accomplished BIR Form
1701, together with the required attachments and your payment.

Receive your copy of the duly stamped and validated form from the teller of the
AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer

3. For "No Payment" including refundable/ creditable returns, returns with excess tax
credit carry over, and returns qualified for second installment:
o

Proceed to the Revenue District Office where you are registered or to any
established Tax Filing Centers established by the BIR and present the duly
accomplished BIR Form 1701, together with the required attachments.

Receive your copy of the duly stamped and validated form from the RDO/Tax
Filing Center representative.

Deadline
Final Adjustment Return or Annual Income Tax Return - On or before the 15th day of April of
each year covering income for the preceding year

Account Information Form For Self-Employed Individuals, Estates

And Trusts (Including Those With Mixed Income , I.E., Compensation

Income and Income from Business and/or Practice of Profession)
Tax Form
BIR Form 1701 AIF - Account Information Form For Self-Employed Individuals, Estates
and Trusts (Including those with Mixed Income, i.e., Compensation Income and Income
from Business and/or Practice of Profession) and Estates and Trusts (Engaged in Trade
or Business)
NOTE: Pursuant to Revenue Memorandum Circular No. 6 2001, corporations,
companies or persons whose gross quarterly sales, earnings, receipts or output
exceed P 150,000.00 may not accomplish this form. In lieu thereof, they may file
their annual income tax returns accompanied by balance sheets, profit and loss
statement, schedules listing income-producing properties and the corresponding
income therefrom, and other relevant statements duly certified by an independent
CPA.
Documentary Requirements
None
Procedures
1. Accomplish BIR Form 1701 AIF in triplicate.
2. Attach the same to BIR Form 1701.
Deadline
Same deadline as BIR Form 1701 - On or before the 15th day of April of each year
covering taxable income for the preceding year

Quarterly Income Tax For Self-Employed Individuals, Estates

And Trusts (Including Those With Mixed Income, I.E.,
Compensation Income and Income from Business and/or
Practice of Profession)
Tax Form
BIR Form 1701Q - Quarterly Income Tax Return For Self-Employed Individuals,
Estates and Trusts (Including those with both Business and Compensation
Income)

Documentary Requirements
1. Certificate of Income Tax Withheld at Source (BIR Form 2307), if applicable
2. Certificate of Income Payments not Subjected to Withholding Tax (BIR Form
2304) if applicable
3. Duly approved Tax Debit Memo, if applicable
4. Previously filed return, if an amended return is filed for the same quarter
Procedures
1. Fill-up BIR Form 1701Q in triplicate.
2. If there is payment:
o

Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District
Office where you registered and present the duly accomplished BIR Form 1701
Q, together with the required attachments and your payment.

In places where there are no AABs, proceed to the Revenue Collection Officer or
duly Authorized City or Municipal Treasurer located within the Revenue District
Office where you are registered and present the duly accomplished BIR Form
1701Q, together with the required attachments and your payment.

Receive your copy of the duly stamped and validated form from the teller of the
AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer.

3. For "No Payment" Returns including refundable/ creditable returns with excess tax
credit carry over and returns qualified for second installment:
o

Proceed to the Revenue District Office where you are registered or to any Tax
Filing Center established by the BIR and present the duly accomplished BIR
Form 1701Q, together with the required attachments.

Receive your copy of the duly stamped and validated form from the RDO/Tax
Filing Center representative.

Deadlines

April 15 for the first quarter

August 15 for the second quarter
November 15 for the third quarter

Tax Rate

For Individuals Earning Purely Compensation Income and Individuals

Engaged in Business and Practice of Profession
Amount of Net Taxable Income
Over
But Not Over
P10,000
P10,000
P30,000
P30,000
P70,000
P70,000
P140,000
P140,000
P250,000
P250,000
P500,000
P500,000

Rate
5%
P500 + 10% of the Excess over P10,000
P2,500 + 15% of the Excess over P30,000
P8,500 + 20% of the Excess over P70,000
P22,500 + 25% of the Excess over P140,000
P50,000 + 30% of the Excess over P250,000
P125,000 + 32% of the Excess over P500,000 in 2000
and onward

Note: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in two equal
installments, the first installment to be paid at the time the
return is filed and the second installment 15 of the same year at on or before July the
Authorized Agent Bank (AAB) within the jurisdiction of the
Revenue District Office (RDO) where the taxpayer is registered.
Passive Income
1. Interest from currency deposits, trust funds and deposit
substitutes
2. Royalties (on books as well as literary & musical composition)
- In general
3. Prizes (P10,000 or less )
- In excess of P10,000
4. Winnings (except from PCSO and lotto)
5. Interest Income of Foreign Currency Deposit
6. Cash and Property Dividends
- To individuals from Domestic Corporations
- To Domestic Corporations from Another Domestic Corporations
7. On capital gains presumed to have been realized from sale,
exchange or other disposition of real property (capital asset)
8. On capital gains for shares of stock not traded in the stock
exchange
- Not over P100,000
- Any amount in excess of P100,000

20%
10%
20%
5%
20%
20%
7.5%
10 %
0%
6%

5%
10%

9. Interest Income from long-term deposit or investment in the form

Exempt
of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments
evidenced by certificates

Upon pretermination before the fifth year , there should be

imposed on the entire income from the proceeds of the long-term
deposit based on the remaining maturity thereof:
Holding Period
Four (4) years to less than five (5) years
5%
Three (3) years to less than four (4) years
12%
Less than three (3) years
20%
B. For Non-Resident Aliens Engaged in Trade or Business
1. Interest from currency deposits, trust funds and deposit
20%
substitutes
2. Interest Income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
Exempt
substitutes, investment management accounts and other
investments evidenced by certificates
Upon pretermination before the fifth year, there should be imposed
on the entire income from the proceeds of the long-term deposit
based on the remaining maturity thereof:
Holding Period:
-Four (4) years to less than five (5) years
-Three (3) years to less than four (4) years
-Less than three (3) years
3. On capital gains presumed to have been realized from the sale,
exchange or other disposition of real property
4. On capital gains for shares of stock not traded in the Stock
Exchange
- Not over P100,000
- Any amount in excess of P100,000
C) For Non-Resident Aliens Not Engaged in
Business

5%
12%
20%
6%

5%
10%

Trade or

1. On the gross amount of income derived from all sources within

the Philippines
2. On capital gains presumed to have been realized from the
exchange or other disposition of real property located in the Phils.
3. On capital gains for shares of stock not traded in the Stock
Exchange
Not Over P100,000
Any amount in excess of P100,000
D) On the gross income in the Philippines of Aliens Employed
by Regional Headquarters (RHQ) or Area Headquarters and

25%
6%

5%
10%
15%

Regional Operating Headquarters (ROH), Offshore Banking

Units
(OBUs),
Petroleum
Service
Contractor
and
Subcontractor
E) General Professional Partnerships
0%
F) Domestic Corporations
1) a. In General on net taxable income
b. Minimum Corporate Income Tax on gross income
c. Improperly Accumulated Earnings on improperly
accumulated taxable income
2) Proprietary Educational Institution and Non-profit Hospitals
- In general (on net taxable income)
- If the gross income from unrelated trade, business or other
activity exceeds 50% of the total gross income from all sources
4) GOCC, Agencies & Instrumentalities
a. In General - on net taxable income
b. Minimum Corporate Income Tax on gross income
c. Improperly Accumulated Earnings on improperly
accumulated taxable income
5) Taxable Partnerships
a. In General on net taxable income
b. Minimum Corporate Income Tax on gross income
c. Improperly Accumulated Earnings on improperly
accumulated taxable income
6) Exempt Corporation
a. On Exempt Activities
b. On Taxable Activities
8) Corporation covered by Special Laws

30%
2%
10%
10%
10%
30%

30%
2%
10%

30%
2%
10%

0%
30%
Rate specified
under
the
respective
special laws

G) Resident Foreign Corporation

1)a. In General on net taxable income
b. Minimum Corporate Income Tax on gross income

30%
2%

c. Improperly Accumulated Earnings on improperly accumulated

10%
taxable income
2) International Carriers on gross Philippine billings
2.50%
3) Regional Operating Headquarters on gross income
10%
Rate
specified
4) Corporation Covered by Special Laws
under
the

5) Offshore Banking Units (OBUs) on gross income

6) Foreign Currency Deposit Units (FCDU) on gross income

respective
special laws
10%
10%

Related Revenue Issuances

RR No. 4-95, RR No. 4-96, RR No. 5-97, RR No. 1-98, RA 9337, RR 14-2002, RR 12-2007
Codal Reference
Sections 23-59, 67-73 and 74-77 of the National Internal Revenue Code

CHANGE OR UPDATE OF STATUS

Requirements for Change / Update of Status

BIR Form 2305 Certificate of Update of Exemption and of Employer's and Employee's
Information Description. A Certificate to be accomplished and issued in case of increase or
decreases in exemption, change of status, change in the person of employer, change in
the type of employment, acquiring employment after having registered as engaged in
business or exercise of profession, change in the working status of the spouse,
execution of the "waiver to claim the Additional Exemption" by the husband, or
revocation of the previously executed "waiver to claim the Additional Exemption" by the
husband. Filing Date. File this form with the RDO where the taxpayer is registered,
within ten (10) days after such change or event. (This form is given to the main
employer, copy furnished the secondary employer).

BIR Form 1905 Application for Registration Information Update (you only need to fill this
out if you're changing RDO codes --- that means if you have recently changed your
employer)
Description. This form is to be accomplished by all taxpayers who intend to
update/change any data or information, e.g. transfer of business within the same RDO,
change in registered activities, cancellation of business registration due to closure of
business or transfer to other district, or replacement of lost TIN Card/ Certificate of
Registration.To be accomplished with the RDO having jurisdiction over the taxpayer,
whether Head Office or branch.
Filing Date.Filed each time taxpayer needs to register the change in registration such as
but not limited to change in registered activities, change in tax type details etc. except
those changes to be filed under Form 2305; replacement of lost TIN Card / lost
Certificate of Registration or cancellation or registration and/or TIN.

Frequently Asked Questions

1) What is income?
Income means all wealth, which flows into the taxpayer other than as a mere return of capital.
2) What is Taxable Income?
Taxable income means the pertinent items of gross income specified in the Tax Code as
amended, less the deductions and/or personal and additional exemptions, if any, authorized for
such types of income, by the Tax Code or other special laws.
3) What is Gross Income?
Gross income means all income derived from whatever source.
4) What comprises gross income?
Gross income includes, but is not limited to the following:

Compensation for services, in whatever form paid, including but not limited to fees,
salaries, wages, commissions and similar item
Gross income derived from the conduct of trade or business or the exercise of
profession
Gains derived from dealings in property
Interest
Rents
Royalties
Dividends
Annuities
Prizes and winnings
Pensions
Partner's distributive share from the net income of the general professional partnerships

5) What are some of the exclusions from gross income?

Life insurance
Amount received by insured as return of premium
Gifts, bequests and devises
Compensation for injuries or sickness
Income exempt under treaty
Retirement benefits, pensions, gratuities, etc.
Miscellaneous items
income derived by foreign government
income derived by the government or its political subdivision
prizes and awards in sport competition
prizes and awards which met the conditions set in the Tax Code
13th month pay and other benefits

GSIS, SSS, Medicare and other contributions

gain from the sale of bonds, debentures or other certificate of indebtedness
gain from redemption of shares in mutual fund

6) What are the allowable deductions from gross income?

Except for taxpayers earning compensation income arising from personal services rendered
under an employer-employee relationships where the only deduction provided that the gross
family income does not exceed P250,000 per family is the premium payment on health and/or
hospitalization insurance, a taxpayer may opt to avail any of the following allowable deductions
from gross income:
a)Optional Standard Deduction - an amount not exceeding 40% of the net sales for individuals
and gross income for corporations; or
b) Itemized Deductions which include the following:
o
o
o
o
o
o
o
o
o
o

Expenses
Interest
Taxes
Losses
Bad Debts
Depreciation
Depletion of Oil and Gas Wells and Mines
Charitable Contributions and Other Contributions
Research and Development
Pension Trusts

In addition, individuals who are either earning compensation income, engaged in business or
deriving income from the practice of profession are entitled to personal and additional
exemptions as follows:
Personal Exemptions:
For single individual or married individual judicially decreed as legally separated with no
qualified dependentsP 50,000.00
For head of familyP 50,000.00
For each married individual *P 50,000.00
Note: In case of married individuals where only one of the spouses is deriving gross income,
only such spouse will be allowed to claim the personal exemption.
Additional Exemptions:

For each qualified dependent, an P25,000 additional exemption can be claimed but only
up to 4 qualified dependents

The additional exemption can be claimed by the following:

The husband who is deemed the head of the family unless he explicitly waives his right
in favor of his wife

The spouse who has custody of the child or children in case of legally separated
spouses. Provided, that the total amount of additional exemptions that may be claimed
by both shall not exceed the maximum additional exemptions allowed by the Tax Code.
The individuals considered as Head of the Family supporting a qualified dependent

The maximum amount of P 2,400 premium payments on health and/or hospitalization insurance
can be claimed if:

Family gross income yearly should not be more than P 250,000

For married individuals, the spouse claiming the additional exemptions for the qualified
dependents shall be entitled to this deduction

7) Who are required to file the Income Tax returns?

Individuals

Resident citizens receiving income from sources within or outside the

Philippines
o employees deriving purely compensation income from 2 or more
employers, concurrently or successively at anytime during the taxable
year
o employees deriving purely compensation income regardless of the
amount, whether from a single or several employers during the calendar
year, the income tax of which has not been withheld correctly (i.e. tax due
is not equal to the tax withheld) resulting to collectible or refundable return
o self-employed individuals receiving income from the conduct of trade or
business and/or practice of profession
o individuals deriving mixed income, i.e., compensation income and income
from the conduct of trade or business and/or practice of profession
o individuals deriving other non-business, non-professional related income
in addition to compensation income not otherwise subject to a final tax
o individuals receiving purely compensation income from a single employer,
although the income of which has been correctly withheld, but whose
spouse is not entitled to substituted filing
o marginal income earners

Non-resident citizens receiving income from sources within the Philippines

Aliens, whether resident or not, receiving income from sources within the
Philippines

Corporations no matter how created or organized including partnerships

o domestic corporations receiving income from sources within and outside the
Philippines
o foreign corporations receiving income from sources within the Philippines
o taxable partnerships

Estates and trusts engaged in trade or business

8) Who are not required to file Income Tax returns?

a. An individual who is a minimum wage earner

b. An individual whose gross income does not exceed his total personal and additional
exemptions
c. An individual whose compensation income derived from one employer does not exceed P
60,000 and the income tax on which has been correctly withheld
d. An individual whose income has been subjected to final withholding tax (alien employee as
well as Filipino employee occupying the same position as that of the alien employee of regional
headquarters and regional operating headquarters of multinational companies, petroleum
service contractors and sub-contractors and offshore-banking units, non-resident aliens not
engaged in trade or business)
e. Those who are qualified under substituted filing. However, substituted filing applies only if all
of the following requirements are present :
o
o
o
o
o
o

the employee received purely compensation income (regardless of

amount) during the taxable year
the employee received the income from only one employer in the
Philippines during the taxable year
the amount of tax due from the employee at the end of the year equals
the amount of tax withheld by the employer
the employees spouse also complies with all 3 conditions stated above
the employer files the annual information return (BIR Form No. 1604-CF)
the employer issues BIR Form No. 2316 (Oct 2002 ENCS version ) to
each employee.

9) Who are exempt from Income Tax?

Non-resident citizen who is:

a) A citizen of the Philippines who establishes to the satisfaction of the Commissioner
the fact of his physical presence abroad with a definite intention to reside therein
b) A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis
c) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year
d) A citizen who has been previously considered as a non-resident citizen and who
arrives in the Philippines at any time during the year to reside permanently in the
Philippines will likewise be treated as a non-resident citizen during the taxable year in
which he arrives in the Philippines, with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.

Overseas Filipino Worker, including overseas seaman

An individual citizen of the Philippines who is working and deriving income from abroad
as an overseas Filipino worker is taxable only on income from sources within the
Philippines; provided, that a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade will be treated as an overseas Filipino worker.
NOTE: A Filipino employed as Philippine Embassy/Consulate service personnel of the
Philippine Embassy/consulate is not treated as a non-resident citizen, hence his income is
taxable.
10) What are the procedures in filing Income Tax returns (ITRs)?

For with payment ITRs (BIR Form Nos. 1700 / 1701 / 1701Q / 1702 / 1702Q / 1704)
File the return in triplicate (two copies for the BIR and one copy for the taxpayer) with the
Authorized Agent Bank (AAB) of the place where taxpayer is registered or required to be
registered. In places where there are no AABs, the return will be filed directly with the
Revenue Collection Officer or duly Authorized Treasurer of the city or municipality in
which such person has his legal residence or principal place of business in the
Philippines, or if there is none, filing of the return will be at the Office of the
Commissioner.

For no payment ITRs -- refundable, break-even, exempt and no operation/transaction,

including returns to be paid on 2nd installment and returns paid through a Tax Debit
Memo(TDM)
File the return with the concerned Revenue District Office (RDO) where the taxpayer is
registered. However, "no payment" returns filed late shall be accepted by the RDO but
instead shall be filed with an Authorized Agent Bank (AAB) or Collection
Officer/Deputized Municipal Treasurer (in places where there are no AABs), for payment
of necessary penalties.

11) How is Income Tax payable of individuals (resident citizens and non-resident
citizens)computed?
Gross Income
Less: Allowable Deductions (Itemized or Optional)
Net Income
Less: Personal & Additional Exemptions
Net Taxable Income
Multiply by Tax Rate (5 to 32%)

P ___________
___________
P ___________
___________
P ___________
____________

Income Tax Due: Tax withheld (per BIR From 2316/2304)

P ___________

Income tax payable

P____________

12) How is Income Tax paid?

Through withholding
o
o
o

Generally 10% or 15% if the gross annual business or professional income

exceeds P720,000 per year
20% - Fees paid to directors who are not employees and 20% of professional
fees paid to non-individuals
Other withholding tax rates

Pay the balance as you file the tax return, computed as follows:
Income Tax Due
Less: Withholding Tax
Net Income Tax Due

P ___________
___________
P ___________

PENALTY
the withholding of tax is a prerequisite to the deductibility of expense or asset acquisition.
Therefore, the tax that was not withheld or remitted has to be paid. In addition to the payment
of the tax that was not withheld or remitted to the Bureau of Internal Revenue (BIR), there is an
interest of 20 percent per year and, in certain cases, a surcharge ranging from 25 percent to 50
percent of the basic tax due. There is also a compromise penalty ranging from P200 to P25,000
if unpaid tax exceeds P1 million, graduated based on the amount not withheld or remitted.
Actually, payment of the compromise penalty is not mandatory the taxpayer does not always
need to pay it. However, this is paid as a compromise so that the BIR will not file a criminal
charge in court for the taxpayers violation. While the BIR will not file a criminal case for all
offenses, it is generally advisable to pay the compromise penalty to be on the safe side.
1.

Under the Tax Code, the civil penalties that may be imposed for failure to file and pay your ITR
on time are:
a.)
25% or 50% surcharge,
b.)
Interest of 20% per annum, and
c.)
Compromise Penalty.
These Penalties will be added to your Income Tax Payable.
For illustration purposes, let us assume that your Income Tax Payable is P 20,000.00.
2.

A surcharge of 25% is imposed for failure to file and pay the tax due on time. This surcharge is
also imposed when you file a return other than those with whom the return is required to be filed
(i.e. You are registered with Revenue District Office-La Union, but you filed you return at the
Revenue District Office of Baguio City).
Computation:
Surcharge = Income Tax Payable x 25%
Surcharge = (P 20,000.00) x 25%
Surcharge = P5,000.00

The following cases will warrant a surcharge of 50%:

a. In case of willful neglect to file the return on time; or
b. In case of false or fraudulent return that is willfully made.
3.

An interest of 20% per annum (or a higher rate as may be prescribed by rules and regulations)
is likewise imposed on any unpaid amount of tax until the amount is fully paid.
Computation:
Assuming that the Income Tax Return with Income Tax Payable in the amount of P20,000.00 is
filed five (5) days after the deadline:
Interest = Income Tax Payable x 20% x( number of days / *360 Days)
Interest = P20,000.00 x 20% x (5 days/360 days)
Interest = P55.56
*360 days = one year

4.

Revenue Memorandum Order No. 19-2007 issued on August 10, 2007 prescribes the
Consolidated Revised Schedule of Compromise Penalties for violations of the Philippine Tax
Code.
Compromise penalty on the above-mentioned Income Tax Payable of P20,000.00 is P6,000.00.

5.

Total Income Tax Payable inclusive of penalties is:

Income Tax Payable
Add: Penalties:
Surcharge
Interest
Compromise Penalty
Total Penalties
Total Amount Payable

20,000.00

5,000.00
55.56
_6,000.00
11,055.56
31,055,56

If you think that you dont need to file your Income Tax Return because your computation led to
an exempt or even return, you are wrong. Although there is no surcharge and interest to be
computed, you will still be liable for not filing your Income Tax return. You still have to pay a
compromise penalty pursuant to RMO 19-2007, based on your gross annual sales or receipts: