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H o m e o f the N a t io n s T o p B a r R e v ie w
GENERAL PRINCIPLES
Definition
Taxation is a mode of raising revenue for
public purposes.
Taxes, on the other hand, are enforced
proportional contributions from persons
and property, levied by the state by virtue
of its sovereignty for the support of the
government and for all its public needs
("Cooley's definition, " 1 Cooley 62).
Concepts of taxation
1 Power to tax
2. The act or process by which the taxing
power is exercised (Vitug and Acosta, Tax
Lazo and jurisprudence, 2006 ed., p.l).
Nature of taxation
Taxation is both an inherent power and a
legislative power. The power of taxation is
an essential and inherent attribute of
sovereignty, belonging as a matter of right
to every independent government without
being expressly granted by the people (Pepsi
- Cola Bottling Co. o f the Philippines, Inc. vs.
Municipality o f Tanauan, Leyte, G.R. No. L-
31156, 27 Feb. 1976). The power of taxation
is generally vested with the legislature
(Secretary of Finance vs. Ilarde, 458 SCRA
218).
Characteristics of taxation
1. It is a forced charge, imposition or
contribution. As such, it operates ad
invitum; i.e., it is in no way dependent
upon the will or contractual assent,
express or implied, of the person taxed.
It is not contractual, either express or
implied, but positive acts of government
(Reviewer on Taxation, Mamalateo, 2nd
Ed., 2008, pp. 7-8).
2. It is assessed in accordance with some
reasonable rule of apportionment which
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ers
means that it conforms with the
constitutional mandate for Congress to
evolve a progressive tax system, taxes
must be based on taxpayer's ability to
pay (Sec. 28 [1], Art. VI, 1987
Constitution).
3. It is a pecuniary burden payable in
money, but back pay certificates may be
used in payment of tax (Borja vs. Gella, 8
SCRA 602). The taxpayer is not allowed
to settle his tax liability by conveying his
property (real or personal) in view of
the problem of assigning value to such
property (Ibid. p.8).
4. It is imposed by the State on persons,
property, or excises within its
jurisdiction, in accordance with the
principle of territoriality (Ibid. p.8).
5. It is levied by the legislative body of the
State. Taxes are obligation created by
law (Vera vs. Fernandez, 89 SCRA 199). It
creates a civil liability on the part of the
delinquent taxpayer, although the non
payment thereof creates a criminal
liability which could be the subject of
criminal prosecution under existing
laws. It is one's civil liability to pay
national internal revenue taxes that
gives rise to criminal liability, not the
other way around. Criminal cases
cannot operate to discharge defendant-
appellee from the duty of paying the
taxes which the law requires to be paid,
since that duty is imposed by the statute
prior to and independently of any
attempts by the taxpayer to evade
payment (Republic vs. Patanao, 20 SCRA
712).
6. It is levied for a public purpose (Ibid.
p.8).
7. It is personal to the taxpayer. A
corporation's tax delinquency cannot be
enforced against its stockholders. A
corporation is vested by law with a
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personality that is separate and distinct
from those of the persons composing it
as well as that of any other legal entity
to which it may be related (Sunio vs.
National Labor Relations Commission, 127
SCRA 390).
Power of taxation compared with other
powers
1. Taxation distinguished from Police
Power
a. As to PURPOSE
Taxation is levied for the purpose of
raising revenues; Police power is
exercised to promote public welfare
through regulation (Tax Principles
and Remedies, Dimaampao, 4lh ed.,
2011, p. 28).
b. As to AMOUNT OF EXACTION
The amount gathered in the exercise
of Taxation contemplates of no
limits; in Police power, the exaction
is limited to the cost of regulation,
issuance of the license, or
surveillance (Ibid. p. 28).
c. A s to the BENEFITS RECEIVED BY
THE TAXPAYER
In Taxation, no special or direct
benefits is received by the taxpayer
other than the fact that the
government secures to the citizen
that general benefit resulting from
the protection of his person and
property and the welfare of all (51
am. Jur. 42-43).
Similarly, no direct benefits are
received through the exercise of
police power, yet a healthy
economic standard of society is
maintained (Ibid, p.28-29).
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d. As to SUPERIORITY OF
CONTRACTS
Taxation recognizes the obligations
imposed by contracts (Art. Ill, Sec.
10, Constitution). This limitation does
not apply to Police power (Ibid. p.
29).
e. As to TRANSFER OF PROPERTY
RIGHTS
In Taxation, the taxes paid form part
of the public funds, whereas police
power allows merely the restraint on
the exercised of property rights (ibid,
p. 29).
2. Taxation and the Power of Eminent
Domain
a. As to PURPOSE
Taxation is exercised in order to
raise public revenue; Eminent
domain or expropriation is the
taking of property for public use
(Ibid. p. 29).
b. As to COMPENSATION
Payment of taxes accrues to the
general benefit of the citizens of the
taxing state; in Eminent domain, just
compensation is given the owner of
the expropriated property (Ibid. p.
29).
c. As to PERSONS AFFECTED
Taxation applies to all persons,
property and excises that may be
subject thereto; in Eminent domain,
only particular property is
comprehended (Ibid. p. 29).
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HOME OF THE NATIONS TOP BAR REVIEWERS1
Purpose of taxation
1. Revenue-raising
The primary purpose of taxation is to
raise funds or property to enable the
state to promote the general welfare and
protection of its citizens (51 Am. Jur. 34).
2. Secondary or non-revenue purposes
a. Reduction of Social Inequality
Our present tax system has adopted
the progressive system of taxation,
i.e., the tax rate increases as the tax
base increases. This system aims at
reducing the inequality in the
distribution of wealth by preventing
its undue concentration in the hands
of a few individuals (Tax Principles
and Remedies, Dimaampao, 4th ed. 2011,
p. 22-23).
b. Encourage the Growth of Local
Industries
It is a settled rule that the power to
tax carries with it the power to grant
tax exemptions. Tax exemptions and
tax reliefs serve as incentives to
encourage investment in our local
industry and thereby promote
economic growth (Ibid. p. 23).
c. Protect our Local Industry Against
Unfair Competition
The Tariff and Customs Code allows
the imposition of certain taxes
(countervailing and dumping
duties) upon imported goods or
articles to further protect our local
industry. R.A. 8752 (Anti-Dumping
Act) imposes stricter conditions
(Ibid. p. 23).
d. As an Implement of Police Power of
the State (Regulatory Measure)
The power of taxation may be used
as an implement of the police power
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of the State through the imposition
of taxes with the end in view of
regulating a particular activity (Ibid,
p. 23).
In the case of Lutz vs. Araneta (G.R.
No. L-7859, December 22, 1955), the
Supreme Court upheld the validity
of the Sugar Adjustment Act, which
imposed a tax on milled sugar since
the purpose of the law was to
strengthen an industry that is so
undeniably vital to the economic
sugar industry.
Principles of a sound tax system
1. Principle o f fisca l adequacy simply
means that sources of revenues must be
adequate to meet government
expenditures and their variations
(Abakada Guro Party List vs. Ermita, 469
SCRA 1).
2. Principle o f equality or theoretical
justice means that the tax imposed must
be proportionate to taxpayer's ability to
pay. This suggests that taxation must be
progressive conformably with the
constitutional mandate that Congress
shall evolve a progressive system of
taxation [Sec. 28 (1), Art. VI, 1987
Constitution].
3. Principle o f administrative feasibility
requires that the tax law must be
capable of convenient, just and effective
administration. Taxes should be capable
of being effectively enforced. Hence, it
must not lay down obstacles to business
growth and economic development
(Aban, Law of Basic Taxation In The
Philippines, p. 13).
Theory and basis of taxation
1. The power to tax is an attribute of
sovereignty emanating from necessity. It
is a necessary burden to preserve the
State's sovereignty and a means to give
the citizenry an army to resist an
aggression, a navy to defend its shores
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from invasion, a corps of civil servants
to serve, public improvements designed
for the enjoyment of the citizenry and
those which come within the State's
territory, and facilities and protection
which a government is supposed to
provide (Phil. Guaranty Co. Inc. vs.
Commissioner o f Internal Revenue, G.R.
No. L-22074, 30 April 1965).
2. Taxation is described as a symbiotic
relationship whereby in exchange of the
benefits and protection that the citizens
get from the government, taxes are paid
(see CIR vs. Algue, Inc., G.R. No. L-28896,
17 Feb 1988).
Lifeblood theory
Taxes are the nation's lifeblood through
which government agencies continue to
operate and with which the State discharges
its functions for the welfare of its
constituents (Visayas Geothermal Company v.
CIR, G.R. No. 197525, June 4, 2014).
Necessity theory
The existence of the government is a
necessity. It has the right to compel ail
citizens and property within its limits to
pay taxes (51 Am. Jur., Taxation, Sec. 9
[1944J).
Benefits-protection theory (symbiotic
relationship)
Taxes are what we pay for a civilized
society. Without taxes, the government
would be paralyzed for lack of the motive
power to activate and operate it. Hence
despite the natural reluctance to surrender
part of their hard-earned income to the
government, every person who is able to
must contribute his share in the running of
the government. 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 symbiotic relationship is the rationale
of taxation and should dispel the erroneous
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B a r R e v ie w ers
notion that it is an arbitrary method of
exaction by those in the seat of power
(Commissioner vs. Algue, 158 SCRA 9).
Doctrines in taxation
Prospectivity of tax laws
The general rule under the Civil Code that
laws shall have prospective application
applies to tax laws. Retroactive application
of revenue laws may be allowed if it will
not amount to denial of due process. There
is violation of due process when the tax law
imposes harsh and oppressive tax (Tax
Principles and Remedies, Dimaampao, 4th Ed.,
2011, p. 146).
Imprescriptibility
1. As a rule, taxes are imprescriptible as
they are the lifeblood of the
government. However, tax statutes may
provide for statute of limitations (Tax
Principles and Remedies, Dimaampao, 4th
Ed., 2011, p. 145). The rules that have
been adopted are as follows:
a. National Internal Revenue Code.
The statute of limitations for
assessment of tax if a return is filed
is within three (3) years from the
last day prescribed by law for the
filing of the return or if filed after
the last, within three years from date
of actual filing. If no return is filed
or the return filed is false or
fraudulent, the period to assess is
w ithin ten years from discovery of
the omission, fraud or falsity (Ibid.).
Any internal revenue tax which has
been assessed within the period of
limitation as prescribed in
paragraph (a) of Sec. 222 may be
collected by distraint or levy or by a
proceeding in court within five (5)
years following the assessment of
the tax (Ibid.).
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b. Tariff and Customs Code. It does not
express any general statute of
limitation; it provides, however, that
"when articles have been entered
and passed free of duty of final
adjustments of duties made, with
subsequent delivery, such entry and
passage free of duty or settlements
of duties will, after the expiration of
three (3) years from the date of the
final payment of duties, in the
absence of fraud or protest or
compliance audit pursuant to the
provisions of this Code, be final and
conclusive upon all parties, unless
the liquidation of the import entry
was merely tentative" (Sec. 4, R.A.
9135).
c. Local Government Code. Local
taxes, fees, or charges shall be
assessed within five (5) years from
the date they became due. In case of
fraud or intent to evade the payment
of taxes, fees or charges the same
may be assessed within ten (10)
years from discovery of the fraud or
intent to avoid payment. They shall
also be collected either by
administrative or judicial action
within five (5) years from date of
assessment (sec. 194, LGC)
Double taxation
1. Double taxation means taxing the same
property twice when it should be taxed
only once, that is, taxing the same
person twice by the same jurisdiction for
the same thing. Otherwise described as
"direct duplicate taxation," the two taxes
must be imposed on the same subject
matter, for the same purpose, by the
same taxing authority, within the same
jurisdiction, during the same taxing
period, and they must be of the same
kind or character. (The City o f Manila vs.
Coca cola Bottlers Philippines, Inc., G.R.
No. 181845, August 4, 2009)
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2. Double taxation is not expressly
forbidden in our Constitution, but the
Court has recognized it as obnoxious
"where the taxpayer is taxed twice for
the benefit of the same governmental
entity or by the same jurisdiction for the
same purpose" (Abakada Guro Party List
vs. Ermita, G.R. No. 168056, September 1,
2005).
Kinds of double taxation
1. DIRECT (Strict sense) constitutes
double taxation in the objectionable or
prohibited sense. This occurs when the
same property is taxed twice when it
should be taxed but once; both taxes
must be imposed on the same property
or subject matter, for the same purpose,
by the same State, Government, or
taxing authority/ within the same
jurisdiction or taxing district, during the
same taxing period, and they must be of
the same kind or character of tax. (84
C.J.S. 131-132)
2. INDIRECT (Broad sense) is
permissible double taxation. This is
allowed if the taxes are of different
nature or character, imposed by
different taxing authorities. It has been
held that a real estate tax and the
tenement tax imposed by local
ordinance although imposed by the
same taxing authority are not of the
same kind or character. (Villanueva vs.
Iloilo city, 26 SCRA 578)
3. DOMESTIC this arises when the
taxes are imposed by the local or
national government (within the same
state). (Tax Principles and Remedies,
Dimaampao, 4th ed., 2011, p. 138).
4. INTERNATIONAL - refers to the
imposition of comparable taxes in two
or more states on the same taxpayer in
respect of the same subject matter and
for identical periods (CIR v. S.C. Johnson
and Sons, Inc., 309 SCRA 102).
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Modes of eliminating double taxation
1. EXEMPTION METHOD - the income
or capital which is taxable in the state of
source or situs is exempted in the state
of residence, although in some instances
it may be taken into account in
determining the rate of tax applicable to
the taxpayer's remaining income or
capital (Tax Principles and Remedies,
Dimaampao, 4th ed. 2011, p. 139).
2. CREDIT METHOD the tax paid in
the state of source is credited against the
tax levied in the state of residence.
The basic difference between the two
methods is that in the exemption
method, the focus is on the income or
capital itself, whereas the credit method
focuses upon the tax (Baker, Double
Taxation Conventions and international
Tax Law, 1994, pp. 70-72).
Escape from taxation
Tax evasion vs. tax avoidance
1. Tax avoidance and tax evasion are the
two most common ways used by
taxpayers in escaping taxation (CIR vs.
The Estate o f Benigno. P. Toda, G.R. No.
147188, September 14, 2004). Tax
avoidance is legal and not subject to
criminal penalty WHILE tax evasion is
illegal and subject to criminal penalty.
2. Tax avoidance is the lessening of tax
liabilities through maximization of
deductions, exclusions, and exemptions
and minimization of income by legal
means. Tax avoidance is tire tax saving
device within the means sanctioned by
the law. This method should be used by
the taxpayer in good faith and at arm's
length (Ibid.). This is also known as tax
minimization.
3. Tax evasion is a scheme used outside of
those lawful means and when availed
of, it usually subjects the taxpayer to
further or additional civil or criminal
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liabilities (Ibid.). Tax evasion occurs
when the taxpayer resorts to unlawful
means to lessen or to get away with his
tax liability. This is also known as tax
dodging.
4. Elements of tax evasion: a) the end to be
achieved, i.e., the payment of less than
that known by the taxpayer to be legally
due, or the non-payment of tax when it
is shown that a tax is due; b) an
accompanying state of mind which is
described as being evil", in bad faith",
"willful", or "deliberate and not
accidental"; and c) a course of action
which is unlawful (Ibid.).
5. Tax evasion connotes fraud through the
use of pretenses and forbidden devices
to lessen or defeat taxes. On the other
hand, tax avoidance is a legal means
used by the taxpayer to reduce taxes
(Benny vs. Commissioner, 25 T. Cl. 78).
Exemption from taxation
1. An "exemption from taxation" is a grant
of immunity, express or implied, to
particular persons or corporations or to
persons or corporations of a particular
class, from a tax upon property or an
excise which persons and corporations
generally within the same taxing district
are obliged to pay. It is freedom from a
charge or burden to which others are
subject (Greenfield vs. Meer, 77 Phil. 394).
2. In countless times the Supreme Court
has ruled that exemption must be clear
in the language of the law granting such
for it is strictly construed and favoured
against the person invoking it (Manila
Electric Company v. The City Assessor,
G.R. No. 166102, August 5, 2015) and
liberally in favor of the taxing
authorityit is the taxpayer's duty to
justify the exemption by words too plain
to be mistaken and too categorical to be
misinterpreted (Radio Communications o f
the Philippines, Inc. (RCPI), vs. Provincial
Assessor o f South Cotabato, 456 SCRA 1).
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3. The basis for the rule on strict
construction to statutory provisions
granting tax exemptions or deductions
is to minimize differential treatment and
foster impartiality, fairness and equality
of treatment among taxpayers (Quezon
City vs. ABS-CBN Broadcasting
Corporation, 567 SCRA 496).
4. The rule that tax exemptions should be
construed strictly against the taxpayer
presupposes that the taxpayer is clearly
subject to the tax being levied against
him unless a statute imposes a tax
clearly, expressly and unambiguously,
what applies is the equally well-settled
rule that the imposition of a tax cannot
be presumed (Commissioner of Internal
Revenue vs. Philippine American Accident
Insurance Company, Inc., 453 SCRA 668).
5. Flowing from the basic precept of
constitutional law that no law is
irrepealable, Congress, in the legitimate
exercise of its lawmaking powers, can
enact a law withdrawing a tax
exemption just as efficaciously as it may
grant the same (Republic vs. Caguioa, 536
SCRA 193).
Kinds of tax exemptions
1. Express. Exemptions which are expressly
granted by organic or statute law.
2. Implied. Exemptions which. exist
whenever particular persons, properties
or excises are deemed exempt as they
fall outside the scope of the taxing
provision itself.
3. Contractual. Since taxation is the rule
and exemption therefrom the exception,
the exception may thus be withdrawn at
the pleasure of the taxing authority. The
only exception to this rule is where the
exemption was granted to private
parties based on material consideration
of a mutual nature, which then becomes
contractual and is thus covered by the
non-impairment clause of the
Constitution (Mactan Cebu International
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Airport Authority vs. Marcos, G.R. No.
120082, September 11, 1996).
The Congress, however, could impair a
taxpayer's legislative franchise by
making it liable for income tax from
which heretofore it was exempted by
virtue of the exemption provided in its
franchise (Cagayan Electric Power and
Light Co. Inc. v. CIR, G.R. No. 60126,
September 25,1985).
Rationale/grounds for exemption
1. The inherent power of the state to
impose taxes naturally carries with it the
power to grant tax exemptions. The
power to exempt from taxation, as well
as the power to tax, is an essential
attribute of sovereignty, and may be
exercised in the Constitution, or in a
statute, unless the Constitution
expressly or by implication prohibits
action by the legislature on the subject
(Tax Principles and Remedies, Dimaampao,
2nd Ed., 2011, p. 107).
2. Cemeteries are exempt from the
payment of taxes because of the
difficulty of collecting taxes thereon and
obvious impropriety of selling the
graves of the dead to defray the
expenses of carrying on the government
of the living (Tax Principles and Remedies,
Dimaampao, 4th Ed., 2Oil, p. 105).
3. Churches and parsonages or covenants
appurtenant thereto, etc., are exempt
from taxation because such institutions
perform work which would otherwise
have to be carried on by the public at
the expense of the taxpayers and that
the expenses of such institutions from
taxation lessens rather than increases
the burden upon other taxpayers (26
R.C.L. 316).
4. It would seem, however, that to be
entitled to the exemption, lands,
buildings and improvements of
religious and charitable institutions
should be "actually, directly and
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exclusively used" for religious and
charitable purposes (Tax Principles and
Remedies, Dimaampao, 4th Ed., 2011, p.
105).
5. The test of exemption from taxation of
real property is tire use of the same for
the purposes mentioned in the
Constitution (Abra Valley College vs. Hon.
Juan Aquino, L-39086, June 15, 1988, 162
SCRA 106),
6. Properties of the national government as
well as those of the local government
units are not subject to tax, otherwise it
will result in the absurd situation of the
government "taking money from one
pocket and putting it in another" (Cooley
on Taxation, Sec. 621, 4th Ed., as cited in
Board o f Assessment Appeals o f Laguna vs.
Court o f Tax Appeals, 8 Phil. 227).
Doctrine of set-off
1. The doctrine presupposes mutual
obligation between the parties. In
taxation, the concept of set-off arises
where a taxpayer is liable to pay tax but
the government for one reason or
another, is indebted to the said
taxpayer.
2. In Republic vs. Mambulao (G.R. No. L-
17725, February 28, 1962), the Supreme
Court ruled that taxes are not subject to
set-off or legal compensation. The
Supreme Court further explained that
[t]he general rule, based on grounds of
public policy is well-settled that no set
off is admissible against demands for
taxes levied for general or local
governmental purposes. The reason on
which the general rule is based, is that
taxes are not in the nature of contracts
between the parties but grow out of a
duty to, and are the positive acts of the
government, to the making and
enforcing of which, the personal consent
of individual taxpayers is not required,
x x x If the taxpayer can properly refuse
to pay his tax when called upon by the
Collector, because he has a claim against
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the governmental body which is not
included in the tax levy, it is plain that
some legitimate and necessary
expenditure must be curtailed. If the
taxpayer's claim is disputed, the
collection of the tax must await and
abide the result of a lawsuit, and
meanwhile the financial affairs of the
government will be thrown into great
confusion (47 Am. Jur. 766-767.)."
3. In Domingo vs. Garlitos (G.R. No. L-18994,
June 29, 1963), the High Court reversed
itself in holding that where the taxes
and the taxpayer's claim are fully
liquidated, due and demandable, legal
compensation under Art. 1279 of the
Civil Code can take place by operation
of law, and both debts are extinguished
to the concurrent amount.
(NOTE: In Domingo, the Supreme Court
took cognizance of the "fact that the court
having jurisdiction o f the estate had found
that the claim o f the estate against the
Government has been recognized and an
amount o f P262,200 has already been
appropriated fo r the purpose by a
corresponding law (Rep. Act No. 2700).";
such fact did not exist in Mambulao).
4. In Francia vs, IAC (G.R. No. 76749, June
28, 1988), the Supreme Court denied the
claim of a taxpayer for set-off or legal
compensation between his tax liability
to the Government and the amount that
the Government owed him by reason of
the confiscation of his property by way
of eminent domain. The Supreme Court
reiterated what it had said in Mambulao,
that the circumstances of this case do
not satisfy the requirements of legal
compensation set forth under Art. 1279,
to wit: "(1) that each one of the obligors
bound principally and he be at the same
time a principal creditor of the other;
xxx (3) that the two debts be due. xxx."
5. The recent cases of United Airlines, Inc.
vs. Commissioner o f Internal Revenue, 631
SCRA 567, 29 September 2010) and South
African Airways vs. Commissioner of
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Internal Revenue (612 SCRA 665, 17 Feb
2010), reiterating the ruling in Philex
Mining Corporation vs. Commissioner of
Internal Revenue (294 SCRA 687, 28 Aug
1998), settles the controversy as to
whether taxes are subject to set-off or
legal compensation, to wit:
"In several instances prior to the instant
case, we have already made the
pronouncement that taxes CANNOT be
subject to compensation for the simple
reason that the government and the
taxpayer are not creditors and debtors
of each other. [NOTE: In these cases, the
Supreme Court upheld the ruling in
Francia and Mambulao.]
Compromise
1. A compromise is an agreement between
two or more persons who, to avoid
lawsuit, amicably settle their differences
on such terms as they can agree on. A
compromise by its very nature implies
mutual agreement by the parties in
regard to the thing or subject matter
which is to be compromised (Ben Chuy,
et al. vs. Collector o f Internal Revenue,
C.T.A. Case, July 16,1958).
2.
2. The Commissioner may compromise the
payment of any internal revenue tax
under two instances: a) when a
reasonable doubt as to the validity of
the claim against the taxpayer exists; or
b) when the financial position of the
taxpayer demonstrates a clear inability
to pay the assessed tax (Taxation Law
Review, Sababan, 2008, p. 192).
Tax amnesty vs. tax exemption
1. Tax amnesty "partakes of an absolute...
waiver by the Government of its right to
collect what otherwise would be due it."
The effect x x x was immunity from
payment of all national internal revenue
taxes as well as all administrative, civil
and criminal liabilities founded upon or
arising from non-payment of national
internal revenue taxes x x x. (ING Bank
TAXATION LAW
N.V. v. CIR, G.R. No. 167679, July 22,
2015) It applies only to past tax periods,
hence of retroactive application (People
vs. Castaneda, G.R. No. L-46881,1988).
2. On the other hand, tax exemption is
immunity from the civil liability only. It
is an immunity or privilege, a freedom
from a charge or burden of which others
are subjected (Florer vs. Sheridon, 137 Ind.
28, 38 NE 365). It is generally
prospective in application (Tax Principles
and Remedies, Dimaampao, 4th Ed., 2011,
p. 122).
Construction and interpretation of:
1. Tax laws. Statutes levying taxes or duties
are to be construed strongly against the
Government and in favor of the subject
or citizens, because burdens are not to
be imposed or presumed to be imposed
beyond what statutes expressly and
clearly declare. No person or property is
subject to taxation unless they fall
within the terms or plain import of a
taxing statute (Commissioner or Internal
Revenue vs. Court o f Appeals, 204 SCRA
182,189 [1991]).
Tax exemption and exclusion. The intent to
grant tax exemption must be clear,
otherwise the rule of construction
applies that exemption from taxation are
to be strictly construed against
exemption and in favor of the right to
tax (Tax Principles and Remedies,
Dimaampao, 4th Ed., 2011, p. 119).
The intention of the legislature to grant
tax exemptions must be expressed in
clear and unmistakable terms; it can
never be implied from language that
will admit of any other reasonable
construction. Exemptions are never
presumed, the burden is upon the
claimant to establish his right to
exemption beyond reasonable doubt
(Ibid.).
Under the 1997 Tax Code, the term
"exclusions" refers to items that are not
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$^ 7 Ho m e o f t h e Na t io n s T o p B ar R e v ie w e r s
included in the determination of gross
income either because: a) they represent
return of capital or are not income, gain
or profit; or b) they are subject to
another kind of internal revenue tax; or
c) they are income, gain, or profit that
are expressly exempt from income tax
under tire constitution, tax treaty, Tax *
Code, or a general or a special law
(Reviewer on Taxation, Mamalateo, 2nd
Ed.,2008, p. 159).
As a general rule, revenue laws are not
intended to be liberally construed, and
exemptions are not given retroactive
application, considering that taxes are
the lifeblood of the government and in
Holmes' memorable metaphor, the price
we pay for civilization, tax laws must be
faithfully and strictly implemented
(Commissioner of Internal Revenue v.
Acosta, etc., G. R. No. 154068, August 3,
2007). However, statutes may provide
for prescriptive periods for the
collection of particular kinds of taxes.
3. Penal provisions. Penal provisions of tax
laws are to be construed liberally.
4. Non-retroactive application to taxpayers. As
a rule, taxing statutes must be applied
prospectively, except by express
provision of the law. The mere fact that
a law is retroactive does not make it
invalid or against due process because
retroactivity must be so harsh and
oppressive in its application in order to
invalidate the law.
Scope and limitations of taxation
Inherent limitations on the power of
taxation
1. Public purpose
The term "public purpose" is not defined. It
is an elastic concept that can be hammered
to fit modem standards. Jurisprudence
states that "public purpose" should be
given a broad interpretation. It does not
only pertain to those purposes which are
TAXATION LAW
traditionally viewed as essentially
government functions, such as buildings
roads and delivery of basic services, but
also include those purposes designed to
promote social justice. Thus, public money
may now be used for the relocation of
illegal settlers, low-cost housing and urban
or agrarian reform (Planters Products, Inc., v.
Fertiphil Corporation, 548 SCRA 485, March
14,2008).
This is a legislative prerogative. The power
to determine whether the purpose of
taxation is public or private resides in
Congress. The independence of the
Legislature is an axiom in government; to
be independent, it must act on its own good
time, on its own judgment, influenced by its
own reason, restrained only as the people
may have seen fit to restrain the grant of
legislative power in making it (1 Cooley
Taxation).
However, this will not prevent the court
from questioning the propriety of such a
statute on the ground that the law enacted
is not for a public purpose; but once it is
settled that the law is for a public purpose,
the court may no longer inquire into the
wisdom, expediency or necessity of such tax
measure (Tax Principles and Remedies,
Dimaampao, 4th Ed., 2011, p. 37).
2. Inherently legislative
a. The power of taxation is a power
that is purely legislative and which
the central legislative body cannot
delegate either to the executive or
judicial department of government
without infringing upon the theory
of separation of powers (Pepsi - Cola
Bottling Co. o f the Philippines, supra).
However, the Congress may, by law,
authorize the President to fix within
specified limits and subject to such
. limitations and restrictions as it may
impose, tariff rates, import and
export quotas, tonnage and
wharfage dues and other duties or
imposts within the framework of the
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H o m e o f the N a t io n s
national development program of
the Government (Section 28, Article
VI, 1987 Constitution).
b. Wlrile the power to tax cannot be
delegated to executive agencies,
details as to the enforcement and
administration of an exercise of such
power may be left to them,
including the power to determine
the existence of facts on which its
operation depends, the rationale
being that the preliminary
ascertainment of facts as basis for
the enactment of legislation is not of
itself a legislative function but is
simply ancillary to legislation. The
Constitution as a continuously
operative charter of government
does not require that Congress find
for itself every fact upon which it
desires to base legislative action or
that it make for itself detailed
determinations which it has
declared to be prerequisite to
application of legislative policy to
particular facts and circumstances
impossible for Congress itself
properly to investigate (Abakada
Guro Party List vs. Ermita, 469 SCRA
1 ).
c. The authority delegated to the
President under Section 28(2),
Article VI may be exercised, in
accordance with legislative sanction,
by the alter egos of the President,
such as department secretariesfor
purposes of the President's exercise
of power to impose tariffs under
Article VI, Section 28(2), it is
generally the Secretary of Finance
who acts as his alter ego (Southern
Cross Cement Corporation vs. Cement
Manufacturers Association o f the
Philippines, 465 SCRA 532).
d. The President or the alter egos may
be properly deemed as agents of
Congress to perform an act that
inherently belongs as a matter of
right to the legislature (Id.).
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T o p B a r R e v ie w ers "
e. Another exception is in the case of
the local taxing power. The
Constitution on this point states:
"Each local government unit shall
have the power to levy taxes, fees
and charges subject to such
guidelines and limitations as the
Congress may provide, consistent
with the basic policy of local
autonomy. Such taxes, fees, and
charges shall accrue exclusively to
the local governments" (Sec. 5, Art.
X, 1987 Constitution).
3. Territoriality
a. Situs of taxation literally means
place of taxation. The general rule is
that the taxing power cannot go
beyond the territorial limits of the
taxing authority. Basically, 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. The factors that
determine the situs of taxation are: i)
Kind or classification of tax being
levied; ii) Situs of the thing or
property taxed; iii) Citizenship of
the taxpayer; iv) Residence of the
taxpayer; v) Sources of the income
taxed; vi) Situs of the excise,
privilege, business or occupation
being taxed.
b. Exceptions to the principle of
territoriality:
i. Doctrine o f International Comity.
According to this principle,
states are juridically equal, enjoy
the same rights, and have equal
capacity in their exercise. The
rights of each one depend upon
the simple fact of its existence
under international law.
International obligations
concomitant with our acceptance
of the principles of international
law as part of our law demand
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HOME OF THE NATIONS TOP BAR REVIEWERS
that certain representatives of
foreign states stationed, and
Principles and Remedies, Dimaampao, 4th
Ed., 2011, p. 46).
property of such foreign states
found, within our territory are Excise tax
exempted from taxation.
Donor's Tax Estate Tax
The basis of this doctrine is (Secs. 98,104, R.A. (Secs. 85,104, R.A.
Article II, Sec. 2 of the 1987 8424) 8424)
Constitution, which provides Place (Non-resident alien)
that "the Philippines renounces Tax based upon Are taxed on
war as an instrument of national properties properties situated
policy, adopts the generally situated within within the
accepted principles of the Philippines. Philippines.
international law as part of the Nationality
law of the land and adheres to (Resident and non-resident citizen)
die policy of peace, equality, Tax based upon Are taxed upon their
justice, freedom, cooperation, properties properties wherever
and amity with all nations. " wherever situated.
situated.
ii. Tax Treaties. Income tax treaties Residence (Resident alien)
reduce the prospect of double Tax based upon Taxes imposed upon
taxation of international flow of properties properties wherever
income. In general, with respect wherever situated (Ibid.)
to any particular item of income, situated.
die country in which die income
arises is required by the treaty 1. Exemptions o f government units must be
under specified circumstances to recognized. Income derived by the
reduce or eliminate its tax in government or its political subdivision
favor of the tax in the country of from any public utility or from the
residence of recipient exercise of any essential government
(Mamalateo, Philippine Tax functions accruing to the government of
Treaties, First Ed., p. 11). the Philippines or to any political
subdivision thereof is exempted from
Income Tax (Sec. 23, R.A. 8424) tax (Sec. 32 [B1 [7J[b], NIRC). Taxes are
financial burdens imposed for the
Place - applied to purpose of raising revenues with which
a. Non-resident alien to defray the cost of the operation of the
b. Non-resident foreign corporations Government, and a tax on property of
c. Non-resident citizen the Government, whether national or
- Taxed upon sources of income derived local, would merely have the effect of
from within the Philippines. taking money from one pocket to put it
Nationality - applied to in another pocket (Cooley on Taxation,
a. Resident citizen Sec. 621, 4th Edition). Hence, it would
b. Domestic corporation not serve, in the final analysis, the main
- Taxed upon sources of income derived purpose of taxation. What is more, it
from within and without the would tend to defeat it, on account of
Philippines. the paper work, time and consequently,
Residence - applied to expenses it would entail (The Law on
a. Resident alien Local Taxation, by Justiniano Y. Castillo, p.
b. Resident foreign corporation 13.)
- Taxed upon income derived from
sources within the Philippines (Tax

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s fa g y H ome o f the N a t i o n s T op
However, all corporations, agencies or
instrumentalities owned or controlled
by the government, except GSIS, SSS,
PHIC, PCSO and local water districts,
shall pay such rate of tax upon their
taxable income as are imposed upon
corporations or associations engaged in
a similar, industry or activity (Sec. 27
[D], NIRC).
Constitutional limitations on the power of
taxation
1. Due process clause (Art. Ill, Sec. 1, 1987
Constitution). The due process clause of
the Constitution guarantees the
protection of personal and property
rights. Pursuant thereto, enforced
contribution from the people cannot be
made without a law authorizing the
same. Hence, the 'due process clause' of
the Constitution is violated where a tax
collection is made not on the basis of a
law enacted by a legitimate government.
Substantive due process requires that a
tax statute must be within the
constitutional authority of Congress to
pass, and that it be reasonable, fair and
just. Whereas, procedural due process
requires notice and hearing or at least
the opportunity to be heard. The
requirements of due process apply not
only to the national legislature but also
to the legislative bodies of local
government units or the local
Sanggunian. However, while the local
legislative bodies are required to
conduct public hearings prior to the
enactment of tax ordinances and
revenue measures (Local Government
Code, Sec. 187), the national legislature
on the other hand has the discretion as
to whether or not to conduct public
hearings before the enactment of tax
laws.
2. Equal protection clause (Art. Ill, Sec. 1,
1987 Constitution). Taxpayers of the
same footing are treated alike, both as to
privileges conferred and liabilities
imposed. The equal protection clause is
violated when taxpayers belonging to
TAXATION LAW
B a r R e v ie w ers
the same classification are treated
differently from one another; and when
taxpayers belonging to different
classifications are treated alike. If the
ordinance passed by a city council is
intended to apply to a specific taxpayer
and to no one else regardless of whether
or not other entities belonging to same
class are established in the future, it is a
violation of the equal protection clause;
but if it is intended to apply also to
similar entities which may be
established in the future, then the tax
ordinance is valid even if in the
meantime, it applies to only one entity
or taxpayer for the simple reason that
there is so far only one member of the
class subject of the tax measure (Ormoc
Sugar Central vs. CIR, 22 SCRA 603). The
requisites are: a) based upon substantial
distinctions; b) germane to the purposes
of the law; c) it must not be limited to
existing conditions only; and d) It must
apply to all members of the class.
The taxing power has authority to make
reasonable classifications for purposes
of taxation. Inequalities resulting from a
singling out of one particular class for
taxation or exemption do not infringe
any constitutional limitation. The real
estate industry is, by itself, a class and
can be validly treated differently from
other business enterprises (Chamber o f
Real Estate and Builders' Associations, Inc.
vs. The Hon. Executive Secretary Alberto
Romulo, et a l, G.R. No. 160756, March 9,
2010).
3. Freedom o f speech and o f the press (Art. Ill,
Sec. 4. 1987 Constitution); Non -
infringement o f religious freedom and
worship (Art. Ill, Sec. 5, 1987
Constitution). This provision contains
two clauses: a) the non - establishment
clause; and b) the free exercise clause.
4. Non - impairment o f contracts (Art. Ill,
Sec. 10, 1987 Constitution). The non -
impairment clause of the Constitution
upholds the people's right and freedom
to contract, as well as sanctity of
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 H O M E O F TH E N A T IO N S T O P BAR REVIEW ERS
contracts. (NOTE: Non - impairment
clause applies only to contracts and not
to a franchise).
5. Non - imprisonment for debt or non -
payment of poll tax (Art. Ill, Sec. 20, 1987
Constitution). Rule requiring that
appropriations, revenue and tariff bills
shall originate exclusively from the
House of Representatives (Art. IV, Sec.
24,1987 Constitution).
6. Uniformity, equitability and progressivity of
taxation (Art. IV, Sec. 28 (1), 1987
Constitution), a) Uniformity - all taxable
articles or kinds of property of the same
class are taxed at the same rate; b)
Equitability the burden falls to those
who are more capable to pay; c)
Progressivity rate increases as the tax
base increases.
7. Limitations on the Congressional power to
delegate to the President the authority to fix
tariff rates, import and export quotas, etc.
(Art. VI, Sec. 28 (2), 1987 Constitution).
8. Tax exemption o f properties actually,
directly and exclusively used for religious,
charitable and educational purposes (Art.
VI, Sec. 28 (3), 1987 Constitution).
9. Voting requirement in connection with the
legislative grant o f tax exemption (Art. VI,
Sec. 28 (4), 1987 Constitution).
10. Non - impairment o f the jurisdiction o f the
Supreme Court in tax cases (Art. VIII, Sec.
2 and 5 (2)(b), 1987 Constitution).
11. Exemption from taxes o f the revenues and
assets o f educational institutions, including
grants, endowments, donations and
contributions (Art. XIV, Sec. 4 (3) and (4),
1987 Constitution).
Stages of taxation
1. Levying of the tax. The imposition of tax
requires legislative intervention. In the
Philippines, it is Congress that levies the
tax. It includes the determination of the
TAXATION LAW
persons, property or excises to be taxed,
the sum or sums to be raised, the due
date thereof and the time and manner of
levying and collecting taxes.
2. Assessment. This means to settle,
determine or fix the amount of tax to be
paid. (84 C.J.S., pp. 749-750)
3. Collection o f the tax levied. This is
essentially an administrative function. It
consists of the manner of enforcement of
the obligation on the part of those who
are taxed (51 Am. Jur. 35).
4. Payment. This is the act of compliance by
the taxpayer, including such options,
schemes or remedies as may be legally
available to him.
Definition and nature of taxes
1. "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
for public needs (1 Cooley 62-63).
2. Taxes are personal to the taxpayer. A
corporation's tax delinquency cannot,
for instance, be enforced against its
stockholders because not only would
this run counter to the principle that
taxes are personal, but it would also not
be in accord with the rule that a
corporation is vested by law with a
personality that is separate and distinct
from those of the persons composing it,
as well as from that of any other legal
entity to which it may be related (Sunio,
et al. vs. National Labor Relations
Commission, et al., GR No. 57767, Jan. 31,
1984).
Requisites of a valid tax
1. That either the person or property taxed
must be within the jurisdiction of the
taxing authority;
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2. That the assessment and collection of 3. Tax distinguished from Special
certain kinds of taxes guarantee against Assessment.
injustice to individuals, especially by
providing notice and opportunity to be Tax Special assessment
heard; Levied on
persons, property
Levied only on land
3. It should be for a public purpose; or the exercise of
a privilege
4. The rule of taxation shall be uniform; Personal liability Not a personal
arid of the person liability of the person
taxed assessed
5. The tax must not infringe on the Based on the
inherent and Constitutional limitations necessities of the
on the power of taxation. government Based wholly on the
without any special benefits to the
Tax as distinguished from other forms of special benefits property assessed
exactions directly accruing
to the taxpayer
Has general Exceptional both as
1. Tax distinguished from Tariff. application to time and place

Tax Tariff 4. Tax distinguished from License Fee.

Paid on domestic Paid on international
economic activity trade Tax License fee
Form o f public Levied for Imposed for
Form o f public debt
revenues revenue regulations
Charged on income Charged on goods Involves exercise Involves an exercise
and wealth upon importation of taxing power of police power
Amount is usually
Amount is
2. Tax distinguished from Toll. Toll is a limited to the
generally not
sum of money collected for use of necessary expenses
limited
something, generally applied to the of regulation
consideration which is paid for the use Imposed on the
of road, bridge, or the like, of a public right to exercise a Imposed on the right
nature. privilege as well to exercise a
as to persons and privilege
Tax Toll property
Demand of Demand of Enforced
sovereignty proprietorship contribution
Legal compensation
Paid for support of Paid for the use of assessed by
or reward of an
the government another's property sovereign
officer for specific
Amount is based on authority to
services
Amount is based the cost of defray public
on the necessities construction or expenses
of the State maintenance of the Failure to pay
public improvement does not Failure to pay makes
used necessarily makes the act or business
May be imposed by the business illegal
Imposed by the
government or by | illegal
government
private entities

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5. Tax distinguished from Debt. apportionment. Example: real estate

tax.
1 Tax Debt
Based on law Based on contract c. Excise - Tax imposed upon the
performance of an act, the
Generally not
Assignable enjoyment of a privilege or the
assignable
engaging in an occupation.
Generally payable
May be paid in kind Examples: estate tax, donor's tax,
in money
value - added tax.
Generally not May be subject of
subject to set - off set - off or
2. As to burden or incidence
or compensation compensation
Imprisonment is a No imprisonment a. Direct - Tax demanded from persons
sanction for non - for non - payment who are intended or bound by law
payment of tax (except when it to pay the tax. Examples:
(except poll tax) arises from crime) community tax, income tax, estate
Governed by tax, donor's tax.
special Governed by the
prescriptive ordinary period of b. Indirect - Tax whose burden can be
period provided in prescription shifted to another. Examples:
the Tax Code customs duties, value - added tax,
Draws interest some percentage taxes.
Does not draw
when it is so
interest except
stipulated or when 3. As to tax rates
when delinquent
there is default
a. Specific - Tax imposed based on a
6. Tax distinguished from Penalty. physical unit of measurement, as by
head or number, weight, or length
Tax Penalty or volume. Examples: tax on
Primarily aimed at Designed to regulate distilled spirits, fermented liquors,
raising revenue conduct cigars, wines, fireworks, etc.
May be imposed by
Imposed by the government or b. Ad valorem - Tax of a fixed
government only private entities proportion of the value of property;
1 needs an independent appraiser to
determine its value. Examples: Real
Kinds of taxes estate taxes, certain customs duties,
excise taxes on cigarettes, gasoline
1. As to subject matter or object and others. Excise taxes on certain
specific goods imposed under the
a. Personal, poll or capitation - Tax of a National Internal Revenue Code are
fixed amount imposed on either specific or ad valorem taxes.
individuals, whether citizens or not,
residing within a specific territory 4. As to purpose
without regard to their property or
the occupation in which they may be a. General, fiscal, or revenue - Tax with
engaged. Example: community tax. no particular purpose or object for
which the revenue is raised, but is
b. Property - Tax imposed on property, simply raised for whatever need
whether real or personal, in may arise.
proportion either to its value or in
accordance with some other
reasonable method of

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Specific or regulatory - Tax imposed

for a special purpose regardless of
whether revenue is raised or not,
and is intended to achieve some
social or economic end. Example:
protective tariffs or customs duties
on certain imported goods to protect
local industries against foreign
competition.

5. As to authority imposing the tax or

scope

a. National - Tax imposed by the

national government. Examples:
internal revenue taxes, tariff and
customs duties.

b. Municipal or local - Tax imposed by

municipal governments for specific
needs. Examples: real estate taxes,
municipal licenses.

6. As to graduation or rate

a. Proportional - Tax based on a fixed

percentage of the amount of
property income or other basis to be
taxed. Examples: value - added tax,
percentage taxes, real estate tax.

b. Progressive or graduated - Tax rate

increases as the tax base increases.
Examples: income tax, estate tax,
donor's tax.

c. Regressive - Tax rate decreases as the

tax base increases. There is no
regressive tax in the Philippines.

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