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TAXATION REVIEW NOTES

PART I
GENERAL PRINCIPLES OF TAXATION
Chapter 1
CONCEPTS, CLASSIFICATIONS,
AND DISTINCTIONS
A. TAXATION AND TAXES
1. Define taxation.
Taxation is the act of levying a tax, i.e., the process or means by which the sovereign,
through its law-making body, raises income to defray the necessary expenses of
government. As a power, it refers to the inherent power of the State to demand enforced
contributions for public purpose or purposes.
2. Discuss comprehensively but briefly the basic purposes of taxation.
1. The primary purpose of taxation on the part of the government is to provide funds or
property with which to promote the general welfare and protection of its citizens (51
Am. Jur. 3435.) and to enable it to finance its multifarious activities. Almost all
revenues of the government are derived from taxes raised through taxation.
2. Taxation may also be employed for purposes of regulation or control. Typical
examples of this extra-revenue objective of taxation are the imposition of protective
tariffs on imported goods to protect local industries, the adoption of progressively
higher tax rates to reduce inequalities in wealth and income, and the increase or
decrease of taxes to prevent inflation or ward off depression.
3. Define taxes.
Taxes are the enforced proportional contributions from persons and property levied by the
law-making body of the State by virtue of its sovereignty for the support of the
government and all public needs. (1 Cooley [3rd ed.], p. 1.)
4. Enumerate the essential elements of a tax.
They are the following:
(1) It is an enforced contribution;
(2) It is generally payable in money;
(3) It is proportionate in character;
(4) It is levied on persons, property, or the exercise of a right or privilege;
(5) It is levied by the State which has jurisdiction over the subject or object of taxation;

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(6) It is levied by the law-making body of the State; and

(7) It is levied for public purpose or purposes.
It is also an important characteristic of a tax that it is commonly required to be paid at
regular periods or intervals. (see 1 Cooley 64.)
5. Give the theory and basis of taxation.
(1) The power of taxation proceeds upon the theory that the existence of government is a
necessity; that it cannot continue without means to pay its expenses; and that for this
means it has a right to compel all its citizens and property within its limits to
contribute. (51 Am. Jur. 42.)
(2) The basis of taxation is found in the reciprocal duties of protection and support
between the State and its inhabitants. In return for his contribution, the taxpayer
receives benefits and protection from the government. This is the so-called "benefits
received principle." The one is compensation for the other: protection for support and
support for protection. This does not mean, however, that only those who are able to
and do pay taxes can enjoy the privileges and protection given to a citizen by the government. (Ibid.) Protection in the enjoyment of his rights is a duty owed by the state
to every citizen.
6. May a person legally refuse to pay a tax on the ground that he will derive no personal
benefit from the tax?
No. In return for the tax, the government promises or renders no definite specific
commodity or benefit to any particular property or person. The only benefit to which
the taxpayer is entitled is that derived from his enjoyment of the privileges of living in
an organized society established and safeguarded by the devotion of taxes to public
purposes. (Carmichael vs. Southern Coal, 301 U.S. 495.)
7. State the nature or characteristics of the State's power to tax.
(1) It is inherent in sovereignty; hence, it may be exercised although not expressly
granted by the Constitution;
(2) It is legislative in. character; hence, only the legislature can impose taxes (although
the power may be delegated); and
(3) It is subject to constitutional and inherent limitations; hence, it is not an absolute
power that can be exercised by the legislature anyway it pleases.
NOTE: The President exercised legislative powers during the period of martial law
through the issuance of "presidential decrees." By virtue of Amendment No.6 to the 1973
Constitution, the President was given concurrent legislative authority which he exercised
under certain conditions. Under the 1986 Provisional Government, the President exercised legislative powers through the issuance of executive orders. With the effectivity
of the new Constitution, only Congress can impose taxes, beginning with the convening
of the first Congress.
8. Give the processes that are included or embodied in the term "taxation."
They are the following:
1) Levying or imposition of the tax which is a legislative act;

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2) Collection of the tax levied which is essentially administrative in character.

The first is taxation, strictly speaking, while the second may referred to as tax
administration.
The two processes together constitute the taxation system.
9. In the exercise of the power to tax, what matters are within the competence of the
legislature to determine?
The following:
1) The subject or object to be taxed;
2) The purpose of the tax so long as it is a public purpose;
3) The amount or rate of the tax; and
4) The manner, means, and agencies of collection of the tax.
NOTE: As a general rule, the legislature may levy a tax of any amount it sees fit. As long
as the exercise of the taxing power does not violate any constitutional limitation (see
Chap. 2.), a lawful tax cannot be defeated merely because the power which is manifested
by its imposition involve the power to destroy. (51 Am. Jur. 80-81.)
10. Do taxpayers have sufficient interest to question or prevent illegal expenditure of public
funds?
Yes. Not only persons individually affected but even taxpayers whose money paid as
taxes to the government is being appropriated by the legislature may question or prevent
illegal expenditures of public money. (Pascual vs. Sec. of Public Works and
Communications, 110 Phil. 331.)
11. What are considered the three basic principles of a sound tax system? Explain each
briefly.
They are the following:
1. Fiscal adequacy. - It means that the sources of revenue Id be sufficient to meet the
demands of public expenditures;
2. Equality or theoretical justice. - It means that the tax burden should be proportionate
to the taxpayer's ability to pay. This is the so-called "ability to pay principle"; and
3. Administrative feasibility. - It means that tax laws should be capable of convenient,
just and effective administration. (see Report of 1st Tax Commission, Vol. 1, pp. 2331.)
12. Classify tax as to subject matter or object.
They are:
1. Personal, poll or capitation. - Tax of a fixed amount imposed on individuals, whether
citizens or not, residing within a specified territory without regard to their property or
the occupation in which they may be engaged. (see 51 Am. Jur. 66.) Example:
Community tax (formerly Residence tax);
2. Property. - Tax imposed on property, whether real or personal, in proportion either to
its value, or in accordance with some other reasonable method of apportionment.
Example: Real estate tax; and
3. Excise. - Any tax which does not fall within the classification of a poll tax or a

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property tax. Thus, it is said that an excise tax is a charge imposed upon the
performance of an act, the enjoyment of a privilege, or the engaging in an occupation.
The term privilege tax is often used. Examples: Income tax, value-added tax, estate
tax, donor's tax.
NOTE: Excise tax, as used above, is not to be confused with excise taxes imposed on
certain specific articles manufactured or produced in or imported into the Philippines
for the domestic sale or consumption or for other disposition. The latter are taxes on
property. (see question No. 14.)
13. Classify tax as to who bears the burden.
They are:
1. Direct. - Tax which is demanded from the person who also shoulders the burden of
the tax; or tax which the taxpayer cannot shift to another. Examples: Corporate and
individual income taxes; estate tax; donor's tax; and
2. Indirect. - Tax which is demanded from one person in the expectation and intention
that he shall indemnify himself at the expense of another. (J.S. Mills, Principles of
Political Economy, p. 823.); or tax which the taxpayer can shift to another. Examples:
Excise taxes on certain specific goods; professional tax; value-added tax; other
percentage taxes such as amusement taxes; custom duties.
14. Classify tax as to determination of amount.
They are:
1. Specific. - Tax of a fixed amount imposed by the head or number, or by some standard
of weight or measurement; it requires no assessment other than a listing or
classification of the subjects to be taxed. (51 Am. Jur. 53.) Examples: Excise taxes
on ;tilled spirits, wines, fermented liquors, cigars, cigarettes, petroleum products and
others; and
2. Ad valorem. - Tax of a fixed proportion of the value of the property with respect to
which the tax is assessed; it requires e intervention of assessors or appraisers to
estimate the value such property before the amount due from each taxpayer can be
determined. Examples: Real estate; tax customs duties (except . cinematographic
films); excise taxes on automobiles, non-essential goods, and others.
Excise taxes imposed under the National Internal Revenue code on certain specified
articles are either specific or ad valorem.
15. Classify tax as to purpose.
They are:
1. General, fiscal or revenue. - Tax imposed solely for the general purposes of the
government, i.e., to raise revenue for government expenditures. Examples: income
tax; value-added tax; excise taxes; and
2. Special or regulatory. - Tax imposed for a special purpose, i.e., to achieve some social
or economic ends irrespective of whether revenue is actually raised or not. (supra.)
Examples: Protective tariffs or customs duties on imports to protect local industries

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against foreign competition; low tariffs on imports to encourage foreign trade.

16. Classify tax as to the authority imposing the same.
They are:
(1) National. - Tax imposed by the national government.
Examples: National internal revenue taxes; customs duties; and national taxes under
special laws; and
(2) Municipal or local. - Tax imposed by municipal corporations or local government
units. Examples: Real property tax; professional tax.
17. Classify tax as to graduation or rate.
They are:
1. Proportional. - Tax based on a fixed percentage of the amount of the property,
receipts, or other basis to be taxed.
Examples: Value-added tax; real property taxes.
2. Progressive or graduated. - Tax, the rate of which increases as the tax base or bracket
increases.
Example: Income tax; and
3. Regressive. - Tax, the rate of which decreases as the tax base or bracket increases. We
have no regressive taxes.
NOTE: A regressive tax, however, must not be confused with a regressive system of
taxation which exists when there are more indirect taxes imposed than direct taxes.
18. According to Chief Justice John Marshall, "the power to tax involves the power to
destroy." But according to Justice Oliver Wendell Holmes, "the power to tax is not the
power to destroy while this court sits." Reconcile the two aforementioned statements.
The power to tax involves the power to destroy because being an enforced contribution
the subject is not at liberty to free himself of this burden. However, this power is not
absolute since it is subject to certain inherent and constitutional limitations. If the
exercise of the taxing power exceeds these limitations, then the court has the duty to declare the same as invalid or unconstitutional, thereby preventing the destructive nature of
the power.
19. What is the doctrine of equitable recoupment?
The doctrine of equitable recoupment means that when the refund of a tax supposedly
due to the taxpayer has already been barred by prescription, and the said taxpayer is assessed with a tax at present, the two taxes may be set-off with each other. This doctrine is
not applicable in our jurisdiction (UST vs. Collector; G.R. No. L-11274).
20. Are taxes subject to set-off or legal compensation?
As a general rule, taxes are not subject to set-off or legal compensation. However, where
the taxes and the claim of the taxpayer are fully liquidated, due and demandable, set-off
or legal compensation as provided under Article 1279 of the Civil Code may take place
by operation of law and as a matter of practical convenience.

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21. Briefly explain the concept of taxation at source.

Taxation at source refers to the withholding system of collecting taxes. Under this
method, the payor of the income acts as the withholding agent of the government by
deducting the tax in advance from the income to be paid to the recipient taxpayer, and
remitting the same to the BIR within the period mandated by law. A good example is the
income tax withheld and deducted by the employer from the periodic payroll of the
employees.
B. TAX AND OTHER TERMS OR IMPOSTS
1. Distinguish tax from toll.
Toll has been defined as a sum of money for the use of something, generally applied to
the consideration which is paid for the use of a road, bridge or the like, of a public nature.
(1 Cooley 77.)
1. A toll is a demand of proprietorship, while a tax is a demand of sovereignty;
2. A toll is paid for the use of another's property, while tax is paid for the support of the
government;
3. The amount of toll is based on the cost of construction of maintenance of the public
improvement used, while the amount of tax is based on the necessities of the State;
and
4. A toll may be imposed by the government private individuals or entities, while a tax
may be imposed only by the State.
2. Distinguish tax from penalty.
Penalty is any sanction imposed as a punishment for violation of law or acts deemed
injurious. Thus, the violation of tax nay give rise to imposition of penalty.
a. A penalty is designed to regulate conduct, while a tax is primarily aimed at raising
revenue; and
b. A penalty may be imposed by the government or private individuals or entities, while
a tax may be imposed only by the government.
3. Distinguished tax from special assessment.
Special assessment is an enforced proportional contribution from owners of lands for
special benefits resulting from public improvements. Under the Local Government Code
(R.A. No. I, a province, city, or municipality, or the National Government may impose a
special levy on lands especially benefited by works or improvements financed by it. (see
Sec. 240 thereof; see APPENDIX 2-F.)
A tax can be distinguished from a special assessment by considering the characteristics of
the latter, namely:
(1) A special assessment is levied only on land;
(2) It is not a personal liability of the person assessed;
(3) It is based wholly on benefits (not necessity); and
(4) It is exceptional both as to time and place.

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NOTE: The term special levy is the name used in the former Real Property Tax Code (P.D.
No. 464, as amended.) and the present Local Government Code.
4. Distinguish tax from permit or license fee.
Permit or license fee is a charge imposed under the police power (infra.) for purposes of
regulation.
1. License fee is imposed for regulation, while a tax is levied for revenue;
2. It involves an exercise of police power, while a tax involves the exercise of the taxing
power;
3. Its amount is usually limited to the necessary expenses of regulation, while there is
generally no limit on the amount of tax that may be imposed;
4. It is imposed on the right to exercise a privilege, while a tax is imposed also on
persons and property;
5. It is the legal compensation or reward of an officer for specific services, while tax is
an enforced contribution assessed by sovereign authority to defray public expenses
(Manila Electric Co. vs. Auditor General, 75 Phil. 128.); and
6. Failure to pay a license fee makes the act or business illegal, while failure to pay a tax
does not necessarily make the act or business illegal.
The general rule is that if the generating of revenue is the primary purpose and regulation
is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the
fact that incidentally, revenue (even if substantial) is also obtained does not make the
imposition a tax. (see Progressive Development Corp. vs. Quezon City, 172 SCRA 629,
April 24, 1989.)
5. Distinguish tax from debt.
(1) A debt is generally based on contract, while a tax is based on law;
(2) A debt is assignable, while a tax cannot generally be assigned;
(3) A debt may be paid in kind, while a tax is generally payable in money;
(4) A debt may be the subject of set-off or compensation, while tax is generally not;
(5) A person cannot be imprisoned for non-payment of debt (except when it arises from a
crime), while imprisonment is a sanction for non-payment of tax (except poll tax);
(6) A debt is governed by the ordinary periods of prescription, while a tax is governed by
the special prescriptive periods provided for in the Tax Code and
(7) A debt draws interest when it is so stipulated or when there is default, while a tax
does not draw interest except only when delinquent.
NOTE: A tax, however, like a debt, is an obligation. (Art. 1157 [1], new Civil Code.) It is
considered a debt for purposes of deduction from gross income of interest paid on
indebtedness. Interest paid by a taxpayer for tax delinquency is deductible as interest on
indebtedness. (Comm. vs. Prieto, L-13912, Sept. 30,1960; Comm. vs. Palanca, L-16626,
Oct. 29, 1969.) A tax secured by a bond is also considered a debt, and the Civil Code
governs the prescriptive period for its collection and not the Tax Code. (see Art. 1144,
Civil Code; Republic vs. Far East American Co., L-17475, Feb. 28,1963, and other
cases.) Like a debt, the payment of taxes may be enforced by judicial action. (see Sec.
205.)

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6. Distinguish tax from subsidy.

Subsidy is a pecuniary aid directly granted by the government to an individual or private
commercial enterprise deemed beneficial to the public. (2 Britannica World Language
Dictionary, 1964 ed., p. 125.) A subsidy, therefore, is not a tax although a tax may have to
be imposed to pay it. (see 1 Cooley 77.)
7. Distinguish tax from revenue.
Revenue refers to all the funds or income derived by the government, whether from tax or
any other source. (see Muir vs. Murray City, 55 Utah 368.) While revenue refers to the
amount collected, tax refers to the amount imposed. (U.S. vs. Wright, 28 fed. 789.)
8. Distinguish tax from internal revenue.
Internal revenue refers to taxes imposed by the legislature other than duties on imports
and exports. (1 Cooley 12.)
9. Distinguish tax from customs duties.
Customs duties (or simply "duties") are taxes imposed on goods exported from or
imported into a country. "Customs duties" are really "taxes" but the latter term is broader
in scope.
10. Distinguish tax from tariff.
Tariff may be used in one of three (3) senses:
1. A book of rates drawn usually in alphabetical order containing the names of several
kinds of merchandise with the corresponding duties to be paid for the same; or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation (or exportation) of
goods. (see Black's Law Dictionary, 3rd ed., p. 1703.)
NOTE: However, the terms "tariff' and "customs duties" are used interchangeably in the
Tariff and Customs Code. (Pres. Decree No. 1464.)
11. State the taxes, fees, and charges deemed to be national internal revenue taxes under
the administration of the Bureau of Internal Revenue.
They are the following:
(1) income tax;
(2) estate and donor's taxes;
(3) value-added tax;
(4) other percentage taxes on:
(a) small business enterprises;
(b) carriers and keepers of garages;
(c) franchise holders or grantees;
(d) persons paying for overseas communications services;
(e) banks and non-bank financial intermediaries;
(f) finance companies;
(g) life insurance companies and agents of foreign insurance companies;

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(h) proprietors, lessees or operators of amusement places;

(i) winners of prizes in horse races and jai-alai and owners of winning race horses;
and
(j) sale, barter or exchange of shares of stock listed and traded through a local stock
exchange, or through initial public offering of shares of stock in closely held
corporations.
NOTE: Starting January 1, 2000, the value-added tax shall be levied on services
rendered by banks, non-bank financial intermediaries, finance companies, and other
financial intermediaries not performing quasi-banking functions. (Sec. 17, R.A. No.
7716, as amended by R.A. No. 8424.)
(5) excise taxes on certain goods, namely:
(a) alcohol products;
(b) tobacco products;
(c) petroleum products;
(d) miscellaneous articles; and
(e) mineral products.
(6) documentary stamp taxes; and
(7) other taxes as are or hereafter may be imposed and collected by the Bureau of Internal
Revenue. (see Sec. 21, NIRC.)
NOTE: The following taxes are among the national taxes imposed by special laws:
(a) customs duties (Pres. Decree No. 1464 which superseded RA. No. 1937.);
(b) sugar adjustment taxes (C.A. No. 567.);
(c) taxes on narcotic drugs (RA. No. 953.);
(d) special education fund taxes (RA. No. 7160.);
(e) energy taxes on aircraft, motorized watercraft, and electric power
consumption (R.A. No. 776 and No. 1937, as amended by Pres. Decrees No.
844 and No. 845, respectively, and B.P. BIg. 36.);
(f) travel tax (Pres. Decree No. 1183.); and
(g) private motor vehicle tax. (Exec. Order No. 43.)

C. SOURCES, NATURE, AND APPLICATION OF TAX LAWS

1.Name the sources of our law on taxation. Discuss them briefly.
They are the following:
1. Constitution. - The pertinent provisions of the Constitution which relate to taxation
are embodied in the different articles thereof. (infra.) They merely regulate or limit
the exercise of the power to tax;
2. Statutes and Presidential Decrees. - The main statutory law on taxation is Presidential
Decree No. 1158 (as amended particulary by R.A. No. 8424.), otherwise known as the
National Internal Revenue Code of 1997, which consolidated and codified the internal
revenue laws of the Philippines, superseding Commonwealth Act No. 466 (as
amended), the former National Internal Revenue Code.

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Customs duties are imposed under Presidential Decree No. 1464, otherwise known as
the Tariff and Customs Code of 1978, which consolidated and codified all the tariff
and customs laws of the Philippines. It superseded Republic Act No. 1937 (as
amended), the former Tariff and Customs Code.
Local taxation was formerly governed by Presidential Decree No. 231 (as amended),
otherwise known as the Local Tax Code, and Presidential Decree No. 464 (as
amended), otherwise known as the Real Property Tax Code. It is now governed by
R.A. No. 7160, the new Local Government Code.

3.

4.

5.

6.

7.

Presidential decrees on taxation promulgated during the period of martial law and
under Amendment No.6 of the 1973 Constitution as well as executive orders issued
under the provisional government and pending the convening of the first Congress
under the 1987 Constitution, have the force of law;
Regulations. - Under Section 244 of the National Internal Revenue Code (cited as
TAX CODE), it is provided that the Secretary of Finance, upon recommendation of
the Commissioner of Internal Revenue, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of the Code. The most formal
pronouncements of the Department of Finance in this respect are known as "Revenue
Regulations";
Administrative rulings and opinions. - Administrative rulings are the less general
interpretations of tax laws being issued from time to time by the Commissioner of
Internal Revenue. They are usually rendered on request of taxpayers to clarify certain
provisions of a tax law. They are known as "BIR Rulings." Rulings in the form of
opinions are also given by the Secretary of Justice who is the chief legal officer of the
Government;
Judicial decisions. - The decisions of the Supreme Court
and the Court of Tax
Appeals applying or interpreting tax laws constitute a major part of the jurisprudence
on taxation. They form a part of the legal system of the Philippines. (Art. 8, Civil
Code) The decisions, however, of the Court of Tax Appeals are appealable to the
Court of Appeals and from there, to the Supreme Court, the decision of which on any
matter is final;
Provincial, city, municipal, and barangay ordinances-. Provinces, cities,
municipalities, and barangays may also impose taxes subject to such limitations as are
provided by the Local Government Code; and
Treaties or international agreements. - An example was 1947 Philippine-United
States Military Bases Agreement which expired on September, 1991. The Philippines
has entered into tax treaties with other countries to avoid or minimize double taxation.
(Chap. 2, G.) A treaty has the force and effect of law.

2. Name the three basic tax laws of the Philippines.

They are namely:
1) National Internal Revenue Code of 1997 (Pres. Decree No., as amended.);
2) Tariff and Customs Code of 1978 (Pres. Decree No. 1464, as amended.); and

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3) The Local Government Code (R.A. No. 7160, as amended.).

3. State the force and effect of revenue regulations.
Unless revoked, such regulations are valid, if not contrary to law and the Constitution and
must be applied and enforced. However in case of conflict, such regulations are null and
void.
4. Are our internal revenue laws political in, nature?
No. They are deemed to be the law of the occupied territory 10t of the occupying
enemy. Thus, our tax laws continued in during the period of Japanese occupation, and
were actually enforced by the occupation government. (Hilado vs. ColI., 100 288.)
5. Are our internal revenue laws penal in nature?
No. They are civil in nature although penalties are provided for their violation.
6. May tax laws be made retroactive?
Yes. The general rule is that tax laws are prospective in operation. While it is not favored,
a tax statute may nevertheless operate retrospectively, provided, it is clearly the
legislative intent. (Lorenzo vs. Posadas, 64 Phil. 353; Comm. vs. Filipinas Cia de
Seguros, 107 Phil. 1055; Cebu Portland Cement Co. vs. ColI., L-20563, Oct. 29, 1968.)
7. May taxes already assessed under the law before its repeal, be collected after such
repeal?
Yes. The rule favoring a prospective operaticn of statutes is applicable to statutes which
repeal tax laws. Accordingly, it is held that where taxes are levied under a law which is
repealed by a subsequent act unless it appears clearly that the legislature intended the
repeal to work retrospectively, it will be assumed that it intended the taxes to be collected
according to the law in force when they were levied. (Co vs. CoIl., 100 Phil. 464, citing 2
Cooley, Sec. 538.)
So, if taxes assessed may still be demanded after the repeal of the law, it follows that
taxes already collected may be and should be retained after the repeal, unless, of course,
the repealing statute provides otherwise. (Ibid.)

D. POWER OF EMINENT DOMAIN AND POLICE POWER

1. Give the concept of the power of eminent domain.
The power of eminent domain is the power of the State or those to whom the power has
been delegated, to take private property for public use upon paying the owner a just
compensation to be ascertained according to law.
2. Give the concept of police power.
Police power has been referred to as the power of the State to enact such laws in relation

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to persons and property as may promote public health, public morals, public safety and
the general welfare of the people. (see U.S. vs. Gomez, 31 Phil. 218.)
3. Give the similarities among the power of eminent domain, police power, and power of
taxation.
They are the following:
(1) They are all necessary attributes of sovereignty, resting necessity;
(2) They all underlie and exist independently of the constitution although the conditions
for their exercise may be prescribed by the Constitution;
(3) They are ways by which the State interferes with private s and property;
(4) They are legislative in nature and character; and
(5) They all presuppose an equivalent compensation (see 1 Cooley 27-30.) received,
directly or indirectly, by the persons affected by the exercise of these powers by the
government.
4. Give the distinctions among the three powers.
They are as follows:
(l) As to authority which exercises the power:
(a) Taxation and police power may be exercised only by the government; and
(b) The exercise of the power of eminent domain may be ranted to public service
companies or public utilities.
(2) As to purpose:
(a) In taxation, the property (generally in the form of money) is taken for the
support of the government;
(b) In eminent domain, the property is taken for public use; and
(c) In police power, the property is taken or destroyed for the purpose of
promoting the general welfare.
(3) As to persons affected:
(a) Taxation and (usually) police power operate upon community or a class of
individuals; and
(b) Eminent domain operates on an individual as the owner of a particular
property.
(4) As to effect:
(a) In taxation, the money contributed in the concept of taxes becomes part of the
public funds;
(b) In eminent domain, there is a transfer of the right to property whether it be of
ownership or a lesser right; and
(c) In police power, there is no transfer of title; at most, there is a restraint on the
injurious use of property.
(5) As to benefits received:
(a) In taxation, it is assumed that the individual receives the equivalent of the
tax in the form of protection and benefits he receives from the government
as such;
(b) In eminent domain, he receives the market value of the property taken from
him; and

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(c) In police power, the person affected receives no direct and immediate
benefit but only such as may arise from the maintenance of a healthy
economic standard of society, often referred to as damnum absque injuria,
i.e., "damage without injury." (Churchill and Tait vs. Rafferty, 32 Phil.
580.)
(6) As to amount of imposition:
(a) In taxation, there is generally no limit on the amount of tax that may be
imposed;
(b) In police power, the amount should only be sufficient to cover the cost of the
license and the necessary expenses of police surveillance and regulation (Cuunjieng vs. Patstone, 42 Phil. 881.); and
(c) In eminent domain, there is no imposition; rather, the owner of the property
taken is paid its market value.
(7) As to relationship to the Constitution:
(a) The taxing power is subject to certain constitutional limitations including the
prohibition against the impairment of the obligation of contracts (infra.);
(b) Eminent domain is also inferior to the impairment prohibition so that the
government cannot expropriate property which under a contract it had
previously bound itself to purchase from the other contracting party (see
Noble vs. City of Manila, 67 Phil. 1.); and
(c) Police power is relatively free from constitutional limitations and is superior
to the impairment provision. In appropriate cases, the provision cannot be
invoked as against the right of the State to exercise its police power. (see
H.S..De Leon, The Fundamentals of Taxation [2000 ed.], pp. 22-25.)

Chapter 2
LIMITATIONS ON THE POWER OF TAXATION
A. IN GENERAL
1. In general, how are the limitations or restrictions on the power of taxation classified?
As follows:
(1) Constitutional limitations or those expressly found in the Constitution or implied from its
provisions; and
(2) Inherent limitations or those which restrict the power although they are not embodied in
the Constitution.
2. Enumerate the constitutional limitations on the power of taxation.
They are the following:
(1) due process of law;
(2) equal protection of the laws;
(3) rule of uniformity and equity in taxation;
(4) no imprisonment for non-payment of a poll tax;

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(5)
(6)
(7)
(8)

non-impairment of the obligation of contracts;

non-infringement of religious freedom;
no appropriation for religious purposes;
exemption of religious, charitable or educational entities, non-profit cemeteries, and
churches from property taxation;
(9) exemption of revenues and assets of non-stock, non-profit educational institutions and
donations for educational purposes from taxation;
(10) concurrence by a majority of all the members of the Congress for the passage of a
law granting any tax exemption;
(11) power of the President to veto any particular item or items in a revenue or tariff bill; and
(12) non-impairment of the jurisdiction of the Supreme Court ax cases.

3. Enumerate the inherent limitations on the power of taxation.

They are the following:
(1) requirement that levy must be for a public purpose (also implied from the Constitution);
(2) non-delegation of the legislative power to tax (also implied n the Constitution);
(3) exemption from taxation of government entities;
(4) international comity; and
(5) territorial jurisdiction.

B. CONSTITUTIONAL LIMITATIONS
1. Discuss briefly the limitation that due process of law must be observed in the imposition
and/or collection of taxes.
(1) Constitutional provision. - "No person shall be deprived of life, liberty, or property
without due process of law, nor shall , person be denied the equal protection of the
laws." (Sec. 1,. . III.)
(2) Meaning. - It can safely be said that any deprivation of liberty, or property by the
government is with due process, provided:
(a) Such deprivation is done after compliance with the reasonable methods of
procedure prescribed by law; and
(b) It is done under the authority of a law that is valid (i.e., not contrary to the
Constitution), or of the Constitution itself.
(3) Application:
(a) A taxpayer may not be deprived of his property for nonpayment of taxes
without giving notice to him as required by law of his tax liability as well as
of the sale at public auction of such property to satisfy the taxes, as this will
amount to a denial of due process. (see Valencia vs. Jimenez, 11 Phil. 492;
Aragon vs. Jorge, 85 Phil. 246.) In this case, the giving of notice is part of the
procedure prescribed by law.
(b) A tax which is imposed for a private purpose or which is beyond the
jurisdiction of the government to levy and collect likewise offends due process
of law. The law imposing such tax is void.
2. Discuss briefly the limitation that equal protection of the laws must be observed in the

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imposition and/or collection of taxes.

(1) Constitutional provision. - supra.
(2) Meaning. - The phrase "equal protection of the laws" signifies
that "all persons subject to legislation shall be treated alike
under like circumstances and conditions both in the privileges
conferred and liabilities imposed." (1 Cooley 824825.)
(3) Application. - The doctrine does not require that persons or properties different in fact
be treated in law as though they were the same. What it prohibits is class legislation
which discriminates against some and favors others. As long as there are rational
grounds for so doing, the legislature may, therefore, group the persons or properties to
be taxed and it is sufficient "if all of the same class are subject to the same rate and
the tax is administered impartially upon them." (1 Cooley 608.)
Thus, there is no violation of the protection
(a) Where those with different incomes are made to pay different rates for taxes
(see Sec. 24 [A], NIRC.);
(b) Where foreign corporations are made to pay higher amount of taxes than that
paid by domestic corporations (see Secs. 27, 28, Ibid.); or
(c) Where stables for race horses are taxed while stables for non-race horses are
not. (see Manila Race Horse Owners Ass. vs. De la Fuente, 88 Phil. 62.)
3. An ordinance imposes a property tax on motor vehicles using the streets of Manila. The
tax is payable only by the owners residing in Manila. Does it violate the constitutional rule
of equality of taxation?
Yes, because owners of vehicles residing outside of Manila who also use the streets are not
made to share the corresponding burden. (see Ass. of Customs Brokers vs. Mun. Board of
Manila, 95 Phil. 107.) In this case, those who use the streets of Manila, regardless of whether
they are residents or not, fall within the same class. However, under the ordinance, the
distinction rests on residence.
4. A municipal council passed an ordinance imposing an occupation tax on the
profession or occupation of "installation manager." X is the only salaried person with
such occupation in the municipality. Can he successfully challenge the validity of the
ordinance as being discriminatory since he is the only one adversely affected?
No. The ordinance is not discriminatory as it taxes all persons falling within the class. All
other installation managers who may come within the jurisdiction of the municipality
would be subject to tax under the ordinance. Furthermore, what the ordinance taxes is the
occupation itself. The number of persons exercising the occupation is not material. (The
Shell Co. vs. Vaiio, 94 Phil. 382.)
5. Discuss briefly the requirement of uniformity and equity in taxation as a limitation in the
imposition and/or collection of taxes.
(1)

Constitutional provision. - "The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation." (Sec. 28 [1], Art. VI.)

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(2)

Meaning. - Uniformity in taxation means that "all taxable articles or properties of the
same class shall be taxed at the same rate." (Tan Kim vs. C.T.A., L-18080, April 22,
1963.) Different articles or other subjects like transactions, business, rights, etc.) may be
taxed at different rates, provided that the rate (not necessarily the amounts) is uniform on
the same class everywhere. Equity of taxation, on the other hand, implies that the amount
of tax must be just in the light of the taxpayer's ability to pay.

(3)

Application. - For example, the uniformity rule is not violated by a statute which imposes
a tax of, say, P2.50 a square meter or fraction thereof on every billboard or sign
anywhere in the country. (Churchill vs. Concepcion, 10 Phil. 381.) The rule requires the
uniform application and operation without discrimination of the tax in every place where
the subject is found. (Churchill vs. Concepcion, 34 Phil. 909.) It does not require identity
or equality under all circumstances, or negate the authority to classify the objects of
taxation. (Pepsi -Cola Bottling Co. of the Phil., Inc. vs. City of Butuan, 24 SCRA 789,
Aug. 28,1968.) Taxation may be uniform but inequitable where the amount of tax
imposed is excessive or unreasonable.

6. The rule of uniformity permits the classification of the subjects to be taxed and the
imposition of the same rate of tax on the subjects belonging to the same class. Give the
requisites for a valid classification.
They are:
(1) It is based upon substantial distinctions which make real differences;
(2) It is germane or relevant to the purpose of the legislation or ordinance;
(3) It applies, not only to present conditions but also, to future conditions substantially
identical to those of the present; and
(4) It applies equally to all those who belong to the same class.(Ibid.)
These conditions are not fully met by a city ordinance which imposes a tax upon the sale
of merchandise payable only by "the agent and/or consignee" of any outside dealer
engaged in selling such merchandise, since only sales by "agents or consignees" of
outside dealers would be subject to tax, while sales by local dealers, not acting for or on
behalf of other merchants, regardless of the volume of their sales and even if the same
exceeded those made by said agents and consignees of producers or merchants
established outside the city, would be exempt from the tax. The ordinance is
discriminatory. (Ibid.)
7. Does the legislature have the power to grant exemptions from payment of taxes without
violating the guarantee of equal protection of the laws or the rule of uniformity and equity
in taxation?
Yes. It is inherent in the power to tax that the state be free to select the subjects and
objects of taxation. No violation is committed by the exemption of certain persons or
properties from the tax as long as such exemption is reasonable and not arbitrary (see
Lutz vs. Araneta, 98 Phil. 148; 1 Cooley 343.)
8. Explain briefly the limitation against imprisonment non-payment of a poll tax.
This limitation proceeds from the constitutional provision that No person shall be

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imprisoned for debt or non-payment of a poll tax (Sec. 20, Art. III.)
By virtue of the above provision, a person cannot be sent to prison for failure to pay the
community tax (formerly residence). Under Section 161 (e) of the Local Government
Code (R.A.7162.), the only penalty for delinquency is the payment of 'charge in the form
of interest; and this is not prohibited by Constitution. But a person is subject to
imprisonment for other violations (e.g., falsification of the community tax certificate) and
non-payment of other taxes if expressly provided by the pertinent law.
9. Explain briefly the limitation against impairment of the obligation of contracts.
This limitation proceeds from the constitutional provision that No law impairing the
obligation of contracts shall be passed."(Sec. 10, Art. III.)
The obligation of a contract is impaired when its terms or conditions are changed by law
or by a party without the consent of other, thereby weakening the position or rights of the
latter. (Edwards vs. Kearney, 96 U.S. 607.) An example of impair1t by law is when a tax
exemption based on a contract is reed by a later taxing statute. (see Casanova vs. Hord, 8
Phil. ; see question No. F-9.)
10. Explain briefly the limitation against infringement of religious freedom.
The constitutional provision reads:
"No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof. The free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall forever be allowed xxx." (Sec. 5, Art. III.)
It has been held that the imposition of license or permit fees on the distribution and sale
of religious literature not for purpose of profit, impairs the constitutional guarantee of the
free exercise and enjoyment of religious profession and worship. (American Bible
Society vs. City of Manila, 101 Phil. 386.) The reason is that the effect of the license is to
restrain in advance the exercise of religious freedom. But a tax on the sale of religious
materials is not unconstitutional because it is imposed after the activity (sale) taxed is
done or completed.
11. For what purpose shall public money be used?
It shall be used for a public purpose and not for a private purpose. The Constitution
provides:
"No public money or property shall ever be appropriated, applied, paid, or employed,
directly or indirectly, for the use, benefit, or support of any sect, church, denomination,
sectarian institution, or system of religion, or of any priest, preacher, minister, or other
religious teacher or dignitary as such, except when such priest, preacher, minister, or
dignitary, is assigned to the armed forces, or to any penal institution, or government
orphanage or leprosarium." (Sec. 29 [2], Art. VI.)
The above provision is based on the requirement that taxes can only be levied for a public
purpose.
12. What properties are constitutionally exempt from taxation?
The Constitution provides:

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"Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable or educational purposes, shall be
exempt from taxation." (Sec. 28 [3], Art. VI.)
The exemption covers only property taxes and not other taxes. (Lladoc vs. Comm., L19201, June 16, 1965.) The test of the exemption is the use of the property and not
ownership. Thus, a property leased by the owner to another who uses it, exclusively r
religious purposes is exempt from property tax but the owner subject to income tax.
Similarly, real property purchased by a religious sect to be used for religious purposes is
not exempt from e tax on the transfer of title to, or ownership of, real property under the
Local Tax Code. (Sec. 7, Pres. Decree No. 231.)
13. State the cases when tax exemption is granted to educational institutions.
They are as follows:
(1) All revenues and assets of educational institutions are exempt from taxes and customs
duties if the institution is non>ck and non-profit and such revenues and assets are
used actually, directly, and exclusively for educational purposes;
(2) Proprietary educational institutions including those cooperatively owned may
likewise be entitled to the above exemptions subject to the limitations provided by
law including restrictions on dividends and provisions for re-investment. The lands,
building and improvements of such institutions "actually, directly d exclusively used
for educational purposes" are exempt from property tax (supra.); and
(3) Grants, endowments, donations or contributions are exempt from tax if used actually,
directly, and exclusively for educational purposes and subject to conditions prescribed
by law. (Sec. 4 [3, 4], Art. XIV.)
14. Explain briefly the limitation on the exercise of the power of Congress to grant tax
exemptions.
The Constitution provides:
"No law granting any tax exemption shall be passed without the concurrence of a
majority of all the members of Congress." (Sec. 28 [4], Art. VI.)
The aim of the provision is to prevent indiscriminate grant of exemptions. At least one
half plus one of all members of each House, voting separately, must concur to the grant.
15. Explain briefly the veto power of the President as a limitation on the legislative power
of taxation.
Under the Constitution, "every bill passed by the Congress shall, before it becomes a law,
be presented to the President." If he does not approve the bill, he vetoes it, in which case
it shall not become a law unless his veto is overridden by a 2/3 vote of all the members of
each House, voting separately. (Sec. 27 [1], Art. VI.) As a general rule, the President may
not veto a bill in part and approve it in part. The exception is provided in the provision
which reads:
"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

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which he does not object." (Sec. 27 [2], Art. VI.)

16. Explain briefly the limitation against impairment of the jurisdiction of the Supreme
Court in tax cases.
With respect to this limitation, the Constitution provides:
"The Supreme Court shall have the following powers: xxx (2) review, revise, reverse,
modify, or affirm xxx final judgments and orders of lower courts in xxx (c) all cases
involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in
relation thereto." (Sec. 5 [2], Art. VIII.)
Under the provision, Congress cannot take away from the Supreme Court the power
given to it as the final arbiter in tax cases.

C. INHERENT LIMITATIONS
1. When is a tax for a "public purpose"?
There is no hard and fast rule as to the meaning of "public purpose." The term, however,
is regarded as synonymous with "governmental purpose." The essential point is that the
purpose of the tax affects the inhabitants as a community and not merely as individuals. It
has been said that the best test of rightful taxation is that the proceeds of the tax must be
used:
(1) "for the support of the government, or
(2) some of the recognized objects of government, or
(3) to promote the welfare of the community." (Dysart vs. St. ouis, 62 A.L.R.
782.)
2. State the reasons behind the limitation that a tax must be levied only for a public
purpose.
(1) A tax levied for a private purpose constitutes a taking of property without due process
of law. (supra.)
(2) It has: been held that: "If there is any restriction implied 1d inherent in the spirit of
the Constitution, it is that the State 1d its subdivisions shall confine themselves to the
business of government for which they were created." (Green vs. Frazier, 253 .S.
233.) In other words, since the government is established for public purpose, public
money can be spent only for the same purpose.
3. May the purpose of a tax be partly public and partly private without violating the
limitation that a tax must be for a public purpose?
Yes. The purpose to be accomplished by taxation need not be exclusively public.
Although private individuals are directly benefited (e.g., giving aid to victims of
natural calamities) the tax [would still be valid, provided such benefit is only
incidental. (see Cooley 391-392.)
4. Explain briefly the limitation of non-delegation of the power to tax.

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The power of taxation being purely legislative, the legislature cannot generally delegate
the power either to the executive or judicial department although powers connected with
the taxing process that are not legislative in character but are merely advisory or
ministerial in their nature (e.g., power to value property, to assess and collect taxes, etc.)
can be delegated. The power cannot also be delegated to private persons or to private
corporations.
1. Our Constitution, however, expressly allows Congress to authorize the President,
subject to such limitations and restrictions as it may impose, to fix within specified
limits, tariff rates and tonnage and wharfage duties and other duties and imposts. etc.
28 [2], Art. VI.)
2. Independently of the Constitution, the power can be delegated to municipal
corporations or local governments, in line with the well-accepted principle that the
power to create municipal corporations for purposes of local self-government carries
with it by necessary implication, the power to confer on them the power to tax. (see 1
Cooley 190; Pepsi Cola Bottling Co. vs. Mun. of Tanauan, L-31156, Feb. 27, 1976.)
NOTE: Under the Constitution, each local government unit is expressly given the power
to create its own sources of revenue and to levy taxes, fees and charges, independently of
legislation subject to such guidelines and limitations as Congress may provide. (Sec. 5,
Art. X.)
5. State the reason for the exemption of government agencies or instrumentalities from
taxation.
The reason is obvious: to levy a tax upon public property would render necessary new
taxes to meet the demand of this tax and thus the government would be taxing itself
to raise money to pay over to itself and no one would be benefited but the officers
employed whose compensation would go to increase the useless levy. (1 Cooley 263.)
The state, however, may tax any of its government-owned or -controlled corporations
exercising proprietary functions.
It has been held that there is no constitutional prohibition against the power of
Congress to tax the Armed Forces of the Philippines if it so desires. (ColI. vs. Bisaya
Land Trans., 105 Phil. 1338.)
The rule, therefore, is: Agencies performing governmental functions are exempt from tax
unless expressly taxed, while those performing proprietary functions are subject to tax
unless expressly exempted.
6. Explain briefly the limitation of international comity on the power of taxation.
Under international comity, the property of a foreign state or government may not be
taxed by another. This principle is based on the sovereign equality among states under
international law by virtue of which, one state cannot exercise its sovereign power over
another, and the rule of international law that a foreign government may not be sued
without its consent so that it is useless to assess the tax since anyway it cannot be
collected. (see French Republic vs. Jefferson County, 252 S.W. 124.)
Incidentally, our Constitution has adopted the generally accepted principles of

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international law as part of the law of our country. (see Sec. 2, Art. II thereof.)
7. Do tax laws operate beyond a country's jurisdiction?
No. A state may not tax property lying outside its borders or lay an excise or privilege tax
upon the exercise or enjoyment of a right or privilege in another state. The reason is that,
tax laws (and this is true of all laws) do not operate beyond a country's jurisdictional
limits (see 61 CJ 87-88.) unless there is, between the taxing state and the object of the
tax, a privity of relationship (e.g., citizenship in the case of income tax) justifying the
levy. Furthermore, property which is wholly and exclusively within the jurisdiction of
another state receives none of the protection for which a tax is supposed to be a
compensation. (Union Refrigerator Transit Co. vs. Kentucky, 188 U.S. 385.)
This limitation is also subject to treaty stipulations.

D. SITUS OF TAXATION
1. What is meant by "situs of taxation"?
Situs of taxation literally means place of taxation. The basic rule is that the state where
the subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is
necessarily in the state which has jurisdiction or which exercises dominion over the
subject in question.
2. What factors determine the situs of taxation?
The taxable situs will depend upon various factors such as the nature of the tax, the
subject matter thereof (which may be person, property, act, or activity), citizenship, and
residence of the taxpayer.
3. Discuss briefly the application of situs of taxation.
Situs of taxation shall be as follows:
(1) Persons. residence of the taxpayer;
(2) Real property. - location of the property;
(3) Tangible personal property. - location of the property;
(4) Intangible personal property. - The general rule is that, it is taxable in the domicile of
the owner. The principle, however, is not controlling when it is inconsistent with
express provisions of statute, or when justice does not demand that it should be, as
where the property has in fact a situs elsewhere. (51 Am. Jur. 475.) Thus, shares of
stock in a domestic corporation of a nonresident foreigner are taxable in the
Philippines. The reason is that, said shares receive the protection and benefit of our
laws (Wells Fargo Bank vs. CoIl., 70 Phil. 325.);
(5) Income. - Residence or citizenship of the taxpayer, or source of the income. The
income tax is founded on the protection afforded by the state to the recipient of the
income in his person, in his right to receive the income, or in his enjoyment of it
when received (Lawrence vs. State Tax Commission, 286 U.S. 276.);
(6) Business, occupation, and transaction. - Place where the business is done, or the

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occupation is engaged in, or the transaction took place'; and

(7) Gratuitous transfer of property. - Residence or citizenship of the taxpayer, or location
of the property.

E. DOUBLE TAXATION
1. Define double taxation.
It may be understood:
(1) In its strict sense (referred to as direct duplicate taxation or direct double taxation), it
means --- (a) taxing twice, (b) by the same public authority, (c) within the same
jurisdiction or taxing district, (d) for the same purpose, (e) in the same year or taxing
period, (f) some of the property in the territory (see 1 Cooley 475.); or
(2) In its broad sense (referred to as indirect duplicate taxation or indirect double taxation),
which is taxation other than direct duplicate. (Ibid.) It extends to all cases in which there
is a burden of two or more pecuniary impositions.
2. Give examples of double taxation in its broad sense.
Such as:
(1) A tax on a mortgage as personal property and upon the mortgaged property as real
estate;
(2) A tax upon a corporation for its property and upon its shareholders for their shares;
(3) A tax upon the same property imposed by two different states (Ibid.);
(4) Where a tax is imposed by the national government and another by the city or
municipality for the exercise of the same occupation or business (see Punzalan vs.
Mun. Board of Manila, ) Phil. 46.); and
(5) Where the real estate dealer's tax is imposed for engaging the business of leasing real
estate in addition to the real estate .x on the property leased and the income tax on the
income derived. (see Sanchez vs. ColI., 97 Phil. 687; People vs. Mendaros, , Phil.
958; see also Procter & Gamble vs. Municipality, L-24265, Dec. 28, 1979.)
3. Does our Constitution prohibit double taxation?
3 Double taxation in its narrow sense is undoubtedly unconstitutional. (26 R.C.L. 264265.) But while double taxation in its broad sense is not forbidden, it has been held
that such taxation should, whenever possible, be avoided and prevented, obviously to
avoid injustice or unfairness. (De Villata vs. Stanley, 32 Phil. 541; see San Miguel
Brewery, Inc. vs. City of Cebu, L-20312, Feb. 26, 1972; Manufacturer's Life Ins. Co.
vs. Meer, 89 Phil.; Hawaii Phil. Co. vs. Coll., L-16315, May 30, 1964; Pepsi Cola
Bottling Co. vs. City of Butuan, L-22814, Aug. 28, 1968; Pepsi Cola Bottling Co. vs.
Mun. of Tanauan, L-31156, Feb. 27, 1976.)
Where it occurs, the taxpayer may seek relief under the uniformity rule or the equal
protection guarantee. (supra.)

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F. EXEMPTION FROM TAXATION*

1. Define the term "exemption from taxation."
Exemption from taxation is the grant of immunity to particular persons or corporations or
to persons or corporations of a particular class from a tax which others generally within
the same taxing district are obliged to pay. (51 Am. Jur. 503.)
It is freedom from a financial charge or burden to which others are subjected. (Greenfield
vs. Meer, 77 Phil. 394.)
2. How may exemptions from taxation be created?
They may be created, expressly or impliedly, by a provision in the: (1) Constitution; (2)
statute; (3) treaty; (4) ordinance; (5) franchise; or (6) contract.
3. What is the theory behind the grant of tax exemption?
The theory is that such exemption will benefit the body of the people, and not upon any
idea of lessening the burden of the individual owners of property. (Ibid., 509-510.)
4. State the exemption provisions on taxation in our Constitution.
See questions Nos. B-12, 13, and 14.
5. When are statutory exemptions from taxation valid?
They are valid when they do not infringe upon any constitutional provision or principle,
such as the uniformity rule and the guarantee of equal protection of the laws. (supra.) In
other words, tax exemptions must have a reasonable basis.
6. On what grounds may exemption from taxation be based?
(1) It may be based on contract, in which case, the public represented by the government
is supposed to receive a full equipment therefor. (2 Cooley 1373.)
(2) It may be based on some ground of public policy (see question No.3.), such as, for
example, to encourage new and necessary industries (Marcelo vs. Coll., L-12401,
Oct. 30, 1960.), or to foster non-profit charitable and other benevolent institutions
(Sec. 30 [H], NIRC.) In this case, the government need not receive any consideration
in return for the exemption.
(3) It may be created in a treaty on grounds of reciprocity or to lessen the rigors of
international donation or multiple taxation (see Comm. vs. Guerrero L-20912, Sept.
22, 1967.) which occurs where there are many taxing jurisdictions, as in the case of
income, estate property left by a decedent, and intangible personal property.
NOTE: As to exempt associations, see Chap. 7-C.
7. State the nature or characteristics of a tax exemption.
(1) An exemption from taxation is personal to the grantee: hence, unless otherwise
provided by law, it is not transferable;
(2) It is a mere privilege of the grantee; hence, it is revocable by law unless founded
on a contract (in which case it becomes a right) which is protected from

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impairment;
(3) It implies a waiver on the part of the government of its right to collect what
otherwise would be due to it; hence, it exists only by virtue of an express grant
and must be strictly construed; and
(4) It is required that it be based upon substantial differences between those exempted
from the tax and those subject thereto; hence, it is not necessarily discriminatory.
8. May a tax exemption be assigned or transferred?
No, without the consent of the legislature which may be given either in the original act
granting the exemption or in a subsequent law. The reason is that tax exemption is a
personal privilege.
9. May a tax exemption be revoked?
Tax exemption is generally revocable. A law granting tax exemption, like laws in general,
is subject to modification in the legislative discretion. In order to be irrevocable, the tax
exemption must be founded on a contract or granted by the Constitution. However, an
exemption provided for in a franchise, although in the nature of a contract, may be
repealed or amended pursuant to the Constitution. (see Sec. 11, Art. XII.)
10. Classify exemption from taxation.
They may be classified as:
(1) Express or affirmative. - when certain persons, property, or transactions are specified
as exempt;
(2) Implied exemption or exemption by omission. - when tax is levied on certain specified
classes or items and others are omitted, either accidentally or intentionally;
(3) Total. - when the exemption is from all taxes; and
(4) Partial. - when the exemption is from certain taxes, either entirely or in part.
11. How are tax exemptions construed?
As a rule, exemptions are construed strictly against the tax payer. The burden is on the
taxpayer to establish clearly his right to exemption.
NOTE
(1) The condonation of a tax liability is in the nature of tax exemption. Being so, it
should be sustained only when expressed in explicit terms and cannot be extended
beyond the plain meaning of those terms. Where the law condones the taxes due from
the taxpayers who failed to pay their taxes, the benefits of the law cannot be extended
to authorize the refund of paid taxes where it does not explicitly provide for a refund.
(Surigao Consolidated Co., Inc. vs. Coil., L-14878, Dec. 26, 1963.)
(2) A refund of taxes partakes of a nature of an exemption. It cannot be allowed unless
granted in explicit and categorical language. (Resins vs. Auditor General, L-17888,
Oct. 29, 1968.)
(3) Equity is not a ground for tax exemption which is allowable only when there is a clear
provision therefor. (infra.)

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12. Are there exceptions to the rule that tax exemptions must be strictly construed against
the taxpayer?
Yes. In the following cases, tax exemptions statutes are liberally construed in favor of the
taxpayer:
(1) When the law itself expressly provides for a liberal construction;
(2) When the exemption is in favor of the government or of religious, charitable, or
educational institutions; and
(3) In case of special laws relating to special cases. (see 1 Cooley 217.)
13. May tax exemptions be created by implication?
No, because exemptions are highly disfavored in law and must, therefore, be based on
clear provisions of law. Thus, exemption from fixed taxes does not include exemption
from income tax, fixed taxes being different from income tax. Taxation is the rule and
exemption is the exception.
14. What is a classification statute? How is it construed?
A classification statute is one which specifies the persons or property subject and not
subject to a tax. (84 C.J.S. 443.) An example is Section 27(A), in relation to Section
22(B) of the Tax Code, which excludes general professional partnerships from the
entities subject to the payment of corporate income tax.
It is not an exemption statute; hence, the general rule that a tax statute will be
construed in favor of the taxpayer applies. (Ibid.) Any doubt as to the person or
property intended to be included in the tax statute will be resolved in favor of the
taxpayer. (51 Am. 433; Comm. vs. Ledesma, 31 SCRA 95, Jan. 30, 1970.)