B.

Nature of taxation

BAR: 1.
a.
b.

Two-fold nature of taxation or nature of the power of taxation. It is both

an inherent power
and a legislative power.

BAR: 2.
Inherent power. Taxation is inherent in nature being an attribute of
sovereignty. [Chamber of Real Estate and Builders Associations, Inc. v. Romulo, 614 SCRA
605 (2010)]
Its basis is the life blood theory because without taxes the state could not exist for
lack of motive power to perform the functions for which it was organized. The states
existence would be imperiled.
Among its manifestations as an inherent power:
a.
There is no need for a constitutional grant for the state to exercise this power.
b.
The state has the right to select objects and subjects of taxation.
c.
It is generally prohibited to issue an injunction to enjoin the collection
of a tax.
b)
No injunction to enjoin collection of tax.
b.
Legislative power. High prerogative of sovereignty.
1)
Basis: Involves promulgation of rules.
2)Manifestation: Prohibition on improper delegation.
BAR: 3.
Legislative power. Taxation is a legislative power because it involves the
promulgation of rules. Taxation is a set of rules.
The power to tax is inherent in the State, such power being inherently legislative,
based on the principle that taxes are a grant of the people who are taxed, and the grant must
be made by the immediate representatives of the people, and where the people have laid the
power. There it must remain and be exercised. [Commissioner of Internal Revenue v.
Fortune Tobacco Corporation, 559 SCRA 160 (2008)]
BAR: 4.
Extent of the legislative power to tax: The legislature wields the power to
define what tax shall be imposed, why it should be imposed, how much tax shall be imposed,
against whom (or what) it shall be imposed and where it shall be imposed. [Chamber of
Real Estate and Builders Associations, Inc. v. Romulo, 614 SCRA 606 (2010)]
The legislative is given the discretion to determine the
a.
nature (kind),
b.
object (purpose),
c.
extent (rate),
d.
coverage (subjects), and
e.
where the situs (place) of taxation primarily lies. (Tan v. Del Rosario Jr.;
Carag, et al. v. Del Rosario Jr. 237 SCRA 324, arrangement and numbering supplied)
C.

Characteristics of taxation

BAR: 10.
Reconciliation of Marshalls view that, The power to tax involves the
power to destroy with the Holmes view that The power to tax is not the power to
destroy.
a. The imposition of a valid tax could not be judicially restrained merely because it
would destroy a taxpayers property rights by taking away his property.

b.
An illegal tax could be judicially declared invalid and should not work to
destroy a taxpayers property rights because the illegal tax could not be the source of
collection.
c.
Marshalls view refers to a valid tax while the Holmes view refers to an
invalid tax.
NOTES AND COMMENTS: While the courts may invalidate tax measures that rum
counter to the Constitution, it bears emphasis that deeply ingrained in our jurisprudence is
the time-honored principle that a statute is presumed to be valid. (Coconut Oil Refiners
Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing
Basco v. Phil. Amusements and Gaming Corporation, G. R. No. 91649, May 14, 1991, 197
SCRA 52)

2.

Non-revenue/special or regulatory

BAR: b. Compensatory purpose: The power of taxation may be exercised in order to

1)
Maintain high level of employment. Tax revenues may be utilized to pump
prime the economy through the creation of high levels of employment. This is done through
the acceleration of the infrastructure projects, farm support activities (financial support for
purchase of fertilizer and other farm inputs), etc.
2)
Control inflation. The government may mop up excess liquidity by imposing
higher taxes, thus limiting the amount of money in circulation,
3)
Achieve social justice through redistribution of income using the progressive
system of taxation. The compensatory purpose of taxation is to implement the social justice
provisions of the constitution through the progressive system of taxation, which would result to
equal distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No.
158540, August 3, 2005)
In recent years, the increasing social challenges of the times expanded the scope of the
state activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as
public welfare and similar objectives.
(Batangas Power Corporation v. Batangas City, et
al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power
Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
G.

Theory and basis of taxation

BAR: 1.
Lifeblood theory. Taxes are the lifeblood of the government [Chamber of
Real Estate and Builders Associations, Inc. v. Romulo, 614 SCRA 605 (2010)] for without
taxes, the government can neither exist nor endure. (National Power Corporation v. City of
Cabanatuan, G.R. No. 149110, April 9, 2003 citing various cases)
Without revenue raised from taxation, the government will not survive, resulting in
detriment to society. Without taxes, the government would be paralyzed for lack of motive

power to activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158
SCRA 8, 16-17)
The lifeblood theory is the underlying theory of taxation.
a.

Concepts that flow from the lifeblood theory.

1)
Collection of taxes may not be enjoined by injunction.
Taxes being the lifeblood of the government should be collected promptly. No court
shall have the authority to grant an injunction to restrain the collection of any internal
revenue tax, fee or charge imposed by the National Internal Revenue Code. [Angeles City v.
Angeles Electric Corporation, 622 SCRA 43 (2010)] For exceptions, see infra.
2)
Taxes could not be the subject of compensation and set-off.
3)
A valid tax may result in destruction of the taxpayers property.
4)
Taxation is an unlimited and plenary power.
b.
No suspension of collection of internal revenue tax, except as herein
prescribed. No appeal taken to the Court of Tax Appeals shall suspend the payment, levy,
distraint, or sale of any property of the taxpayer for the satisfaction of tax liability as provided
under existing laws, except as herein prescribed. (Rep. Act No. 1125, Sec. 11, 4 th par., as
amended by Rep. Act No. 9282; RRCTA, Rule 10, Sec. 1, as amended by A.M. No. 05-1107-CTA)
Reason: The lifeblood doctrine.
c.
No injunction rule does not apply to Court of Tax Appeals and the
Supreme Court. The provisions of R.A. 1125 which authorizes the Court of Tax Appeals,
to issue an injunction prohibiting the Bureau of Internal Revenue from collecting the tax
assessed is considered as an exception to the no injunction rule contained in Sec. 218 of the
National Internal Revenue Code. (Rep. Act No. 1125, Sec. 11, as amended by Rep. Act No.
9282, Sec. 9 )
The Supreme Court may enjoin the collection of taxes under its general judicial power
but it should be apparent that the source of the power is not statutory but constitutional.
3.
Benefits protection theory (Symbiotic relationship).
Reciprocal duties of
protection and support between the state and its citizens and residents.
Also called
symbiotic relation between the state and its citizens.
NOTES AND COMMENTS: Do not confuse the basis of or rationale for taxation
with the concept of the theory of taxation.
BAR:a.
Symbiotic relationship. The reciprocal relation of protection and support
between the state and the taxpayers. The state gives protection and for it to continue giving
protection it must be supported by the taxpayers in the form of taxes.
1) Taxes are what we pay for a civilized society. Without taxes, the government
would be paralyzed for lack of motive power to activate and operate it.
2)
Despite the natural reluctance to surrender part of ones hard-earned
income to the taxing authorities, every person who is able must contribute his share in
running the government.
3)
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 notion that it is an arbitrary method of exaction by those in the seat of power.
(Commissioner of Internal Revenue v. Algue, Inc., et al., 158 SCRA 8, 16-17)
b.
Restatement of the symbiotic relationship.
The expenses of
government, having for their object the interest of all, should be borne by everyone, and the
more man enjoys the advantages of society, the more he ought to hold himself honored in
contributing to those expenses. [Opening quotation in Abakada Guro party List (formerly
AASJAS), etc., v. Ermita, et al., G. R. No. 168056, September 1, 2005 and companion cases
from Anne Robert Jacques Turgot (1727-1781) a French statesman and economist]
H.

Doctrines in taxation

3.
Double taxation. Double taxation presupposes the existence of two tax laws which
impose dual burdens upon the taxpayer.
BAR:a.
Strict sense. Double taxation in its strict sense is direct duplicate taxation
which has the following elements:
1) The same
a) object or property is taxed twice;
b) by the same taxing authority;
c) for the same taxing purpose;
d) during the same tax period;
2)
Taxing all the objects or property within the same territory for
the first time without taxing all of them for the second time.
1) Double taxation in its strict sense or direct duplicate taxation is a defense
against the imposition of taxes. It violates the equal protection, as well as the
uniformity and equality of protection clauses of the 1987 Philippine Constitution
resulting to nullification of one of the tax laws. Consequently, there could only be one
tax collected. The burden falls only once.
NOTES AND COMMENTS: Various jurisprudence including the cases of City of
Manila v. Coca-Cola Bottlers Philippines, Inc., 595 SCRA 299 (20090 and
Commissioner of Internal Revenue v. Solidbank Corporation, G. R. No. 148191,
November 25, 2003, have ruled that, Double taxation means taxing the same property
twice when it should be taxed only once; that is x x x taxing the same person twice by
the same jurisdiction for the same thing. It is obnoxious when the taxpayer is taxed
twice, when it should be but once. 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 taxing period; and they must be of the same kind
or character.
Ericsson Telecommunications, Inc. v. City of Pasig, 538 SCRA 99 (2007)
likewise concludes that the imposition of local business tax based on gross revenue
inevitably results to double taxation taxing of the same person twice by the same
jurisdiction over the same thing.
The author does not dispute this definition for the purpose of determining when
double taxation exists. However, if the issue is whether double taxation should result to
the nullification of a tax statute on the basis of a constitutional infirmity, then the above
Coca-Cola Bottlers Philippines, Inc., Solidbank and Ericsson definitions are clearly
deficient. There is need to show discrimination with the addition of another element,

that is taxing all for the first time, without taxing all for the second time. This
element then clearly indicates violation of the equal protection clause.
The better rule is that enunciated in Velilla v. Posadas, 62 Phil. 624 which was
cited in the above Commissioner of Internal Revenue v. Solidbank Corporation which
characterized subjecting interest income to a 20% FWT and including it in the
computation of the 5% GRT is clearly not double taxation because there is no taxing
twice, by the same taxing authority, within the same jurisdiction, for the same purpose,
in different taxing periods, some of the property in the territory. (Commissioner of
Internal Revenue v. Bank of Commerce, G. R. No. 149636, June 8, 2005, emphasis
supplied)
It is to be noted that the discrimination is contained in the phrase some of the
property in the territory because not all are subject to the same burdens. This violates
the equal protection clause.
BAR: b.
Broad sense. Double taxation, in its broad or generic sense, means taxing the
same subject or object twice during the same taxing period.
Taxation in its broad sense, also known as indirect duplicate taxation, does not
violate the constitution.
There is indirect duplicate taxation when one of the elements of direct duplicate
taxation is absent.
1) Double taxation in its broad sense or indirect duplicate taxation is not a
defense against the imposition of taxes. There is no violation of the constitution
concepts of equal protection, uniformity and equality of taxation. The two laws are
both valid, hence there are two payments and the tax burden falls twice.
BAR:2) Example of double taxation (indirect duplicate) in its broad sense. There
is no prohibited double taxation where a 20% final withholding tax (FWT) on interest
income and a 5% gross receipts tax (GRT) are both imposed upon banks.
a) The taxes are imposed on two different subject matters. The subject
matter of the FWT is the passive income generated in the form of interest on
deposits and yield on deposit substitutes, WHILE the subject matter of the GRT is
the privilege of engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the property,
hence it is an excise rather than a property tax. It is not an income tax, unlike the
FWT. One can be taxed for engaging in business and further taxed differently for
the income derived therefrom. These two taxes are entirely distinct and are
assessed under different provisions. (Commissioner of Internal Revenue v.
Solidbank Corporation, G. R. No. 148191, November 25, 2003 citing Velilla v.
Posadas, 62 Phil. 624, 632)
b) Although both taxes are national in scope because they are imposed by
the same taxing authority the national government under the Tax Code and
operate within the same Philippine jurisdiction for the purpose of raising
revenues, the taxing periods they affect are different.
The FWT is deducted and withheld as soon the income is earned, and is
paid every calendar quarter in which it is earned. On the other hand, the GRT is
neither deducted nor withheld, but is paid only after every taxable quarter in
which it is earned.
c) These two taxes are of different kinds or character. The FWT is an
income tax subject to withholding, WHILE the GRT is a percentage tax not

subject to withholding. (Commissioner of Internal Revenue v. Solidbank

Corporation, G. R. No. 148191, November 25, 2003; Commissioner of Internal
Revenue v. Bank of Commerce, G. R. No. 149636, June 8, 2005)
4.

Escape from taxation

a.

Shifting of tax burden

BAR:1) Ways of shifting the tax burden

a) One way of shifting the economic burden of the tax is to include the
tax as part of the selling price. The tax is not billed separately but included in the
selling price.
b)
Another way is the method of listing the price separately and defining
taxable gross receipts as the amount received less the amount of the tax added.
The tax is then billed separately.
This method merely avoids payment by the seller of a tax on the amount of the
tax. It is still the seller who is subject to the tax and not the buyer. The additional
amount paid by the buyer is not payment for the tax but payment for the purchase
of the electric cables, etc. (Phil. Acetylene v. Commissioner of Internal Revenue,
G.R. No. L-19707, August 17, 1967)
BAR:3) Meaning of impact and incidence of taxation. In indirect taxation, there is a
need to distinguish between the liability for the tax (impact of the tax) and the burden
(incidence) of the tax.
The amount of tax paid may be shifted or passed on by the seller to the buyer.
What is transferred in such instances is not the liability for the tax, but the tax burden
(incidence). In adding or including the VAT due to the selling price, the seller remains
the person primarily and legally liable for the payment of the tax. What is shifted only
to the intermediate buyer and ultimately to the final purchaser is the burden (incidence)
of the tax.
Stated differently, a seller who is directly and legally liable for payment of an
indirect tax, such as the VAT on goods or services, is not necessarily the person who
ultimately bears the burden of the same tax. It is the final purchaser or consumer of
such goods or services who, although not directly and legally liable for the payment
thereof, ultimately bears the burden of the tax. (Contex Corporation v. Commissioner of
Internal Revenue, G. R. No. 151135, dated July 2, 2004; Commissioner of Internal
Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230,
December 15, 2005 citing Deoferio, Jr. and Mamalateo, The Value Added Tax in the
Philippines, 2000 ed., p. 117)
BAR:5) The statutory taxpayer, such as Shell Pilipinas, who is directly liable to
pay the excise tax on its petroleum products, is entitled to a refund or credit of the
excise taxes it paid for petroleum products sold to international carriers, the latter
having been granted exemption from the payment of said excise tax under Sec. 135
(a) of the NIRC. (Commissioner of Internal Revenue v. Pilipinas Shell Petroleum
Corporation, G.R. No. 188497 , February 19, 2014 on the motion for reconsideration
dated May 22, 2012 and Supplemental Motion for Reconsideration dated December 12,
2012 of the decision in the case of Commissioner of Internal Revenue v. Pilipinas Shell
Petroleum Corporation, G.R. No. 188497, April 25, 2012, 671 SCRA 241, 264)

The Supreme Court maintained that Section 135 (a), in fulfillment of

international agreement and practice to exempt aviation fuel from excise tax and other
impositions, prohibits the passing of the excise tax to international carriers who buys
petroleum products from local manufacturers/sellers such as for example, Pilipinas
Shell Petroleum Corporation. (Ibid.)
The exemption from excise tax of aviation fuel purchased by international
carriers for consumption outside the Philippines fulfills a treaty obligation pursuant to
which our Government supports the promotion and expansion of international travel
through avoidance of multiple taxation and ensuring the viability and safety of
international air travel. (Ibid.)
Under the basic international law principle of pacta sunt servanda, we have the
duty to fulfill our treaty obligations in good faith. This entails harmonization of national
legislation with treaty provisions. In this case, Sec. 135(a) of the NIRC embodies our
compliance with our undertakings under the Chicago Convention and various bilateral
air service agreements not to impose excise tax on aviation fuel purchased by
international carriers from domestic manufacturers or suppliers. (Ibid.)
In Shell the Supreme Court interpreted Section 135 (a) as prohibiting domestic
manufacturer or producer to pass on to international carriers the excise tax it had paid
on petroleum products upon their removal from the place of production, pursuant to
Article 148 and pertinent BIR regulations. (Ibid.)
BAR: b.
Tax avoidance. The exploitation by the taxpayer of legally permissible
alternative rates or methods of assessing taxable property or income in order to reduce or
entirely avoid tax liability. Example: Availing of all deductions allowed by law or refraining
from engaging in activities subject to tax.
Tax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms length. (Commissioner of
Internal Revenue v. The Estate of Benigno P. Toda, Jr., etc., G. R. No. 147188, September 14,
2004)
BAR: c. Tax evasion. A term that connotes fraud through the use of pretenses and forbidden
devices to lessen or defeat taxes. (Yutivo Sons Hardware Company v. Court of Tax Appeals, 1
SCRA 160)
A scheme used outside of those lawful means and when availed of, it usually subjects
the taxpayer to further or additional civil or criminal liabilities. [Commissioner of Internal
Revenue v. The Estate of Benigno P. Toda, Jr., etc., G. R. No. 147188, September 14, 2004
citing Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence 44 (2nd ed., 2000)]
1) Factors integrated in 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, willfull, or deliberate and not accidental; and
c) a course of action or failure of action which is unlawful.
[Commissioner of Internal Revenue v. The Estate of Benigno P. Toda, Jr., etc., G.
R. No. 147188, September 14, 2004 citing De Leon, Fundamentals of Taxation
53 (1988 ed.), in turn citing Batter, Fraud under Federal Tax Law 15 (1953 ed.)]

2) Tax consequences of tax evasion. A deficiency tax is due which should be

paid plus a fraud surcharge of 50% of the deficiency for filing a fraudulent return.
Furthermore, the act may be the subject of criminal prosecution for tax evasion.
BAR:d.

Tax avoidance distinguished from tax evasion.

1) Validity. Tax avoidance is legal WHILE tax evasion is illegal and subject to
criminal penalty.
2) Effect. Tax avoidance is minimization of taxes WHILE tax evasion almost
always results in absence of tax payments.
3) Penalties. Tax evasion warrants the imposition of civil, administrative and
criminal penalties WHILE tax avoidance does not.

BAR:d.
Rationale/grounds for exemption. The avowed purpose of a tax exemption
is always "some public benefit or interest, which the law-making body considers sufficient to
offset the monetary loss entailed in the grant of the exemption." (Commissioner of Internal
Revenue v. Pilipinas Shell Petroleum Corporation, G.R. No. 188497 , February 19, 2014,
citing Commissioner of Internal Revenue, et al. v. Botelho Shipping Corp., et al., 126 Phil.
846, 851) Specifically,
1) To benefit the great body of the people, and not for the purpose of - lessening
the burden of an individual or group of individuals.
2) To promote economic development.
3) To enhance employment opportunities. Employment opportunities may also
be created as a result of tax exemptions which would encourage the establishment of
business enterprises.
4) To promote socially or culturally desirable ends. Tax exemptions may be
granted to lower the price of certain commodities and services, e.g. prime commodities,
electricity, etc
5) To foster amity and friendship with other nations,
6) To relieve the government of the burden of engaging in some activities
thereby optimizing the use of scarce government resources.
7) To promote the general welfare and to protect the health, safety or morals of the
inhabitants.
8)
To implement of the states police power. The motivation behind many
taxation exemption measures is the implementation of police power goals.
9) To implement the social justice provisions of the constitution through the
progressive system of taxation, which would result to equal distribution of wealth, etc.
e.

Revocation of tax exemption

BAR:1) Rationale for the withdrawal by the Local Government Code of tax
exemptions granted to government-owned or controlled corporations. The original
reasons for the withdrawal of tax exemption privileges granted to government-owned
or controlled corporations and all other units of government were that such privileges
resulted in serious tax base erosion and distortions in the tax treatment of similarly
situated enterprises. (Mactan Cebu International Airport Authority v. Marcos, et al.,
261 SCRA 667)
With the added burden of devolution, it is even more imperative for government
entities to share in the requirements of development, fiscal or otherwise, by paying

taxes or other charges due them. (National Power Corporation v. City of Cabanatuan,
G.R. No. 149110, April 9, 2003)
b.

Tax exemption and exclusion

BAR:1) General rule. It is hornbook doctrine that tax exemptions are strictly
construed against the claimant. [Cagayan Electric Power and Light Co., Inc. v. City of
Cagayan de Oro, G. R. No. 191761, November 14, 2012; Philippine Amusement and
/gaming Corporation (PAGCOR) v. Bureau of Internal Revenue, 645 SCRA 338 (2011)]
Taxes are what civilized people pay for civilized society. They are the lifeblood
of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris
against the taxpayer and liberally in favor of the taxing authority. A claim of tax
exemption must be clearly shown and based on language in law too plain to be
mistaken. Otherwise stated, taxation is the rule, exemption is the exception. (Quezon
City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082,
September 11, 1996, 261 SCRA 667, 680)
BAR:b) Nature of tax exemption granted to charitable institution. A tax
exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits
from them. Tax exemptions for charitable institutions should therefore be limited
to institutions beneficial to the public and those which improve social welfare. A
profit-making entity should not be allowed to exploit this subsidy to the detriment
of the government and other taxpayers. (Commissioner of Internal Revenue v.
St. Lukes Medical Center, Inc., G.R. No. 195909, September 26, 2012)
BAR:2) Exceptions to strictissimi juris. Instances where tax exemptions are not to be
liberally construed in favor of the taxpayer and strictly against the taxing authority:
a) When the statute granting exemption provides for liberal construction
thereof,
b) In case of special taxes relating to special cases and affecting only
special classes of persons;
c) If exemptions refer to the public property;
d) In cases of exemptions granted to charitable and educational
institutions or their property. (Cooley)
e) In cases of exemptions in favor of a government political subdivision
or instrumentality. (Maceda v. Macaraig, Jr., 197 SCRA 771)
f) A tax refund based on solutio indebeti.
BAR:a) No strictissimi juris interpretation for refunds based on solutio
indebeti.
(1) Strict interpretation of a tax refund that partakes of the nature
of a tax does not apply to tax refund based on erroneous payment or where
there is no law that authorizes collection of the tax. There is parity between
tax refund and tax exemption only when the former is based either on a tax
exemption statute or a tax refund statute. (Commissioner of Internal
Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21,
2008)

(2)
Tax refunds (or tax credits), on the other hand, are not founded
principally on legislative grace but on the legal principle which underlies all
quasi-contracts abhorring a persons unjust enrichment at the expense of
another. [Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay,
Sr., 178 Phil. 482 (1979); Puyat & Sons v. City of Manila, et al., 117 Phil.
985 (1963)]
(3)
The dynamic of erroneous payment of tax fits to a tee the
prototypic quasi-contract, solutio indebeti, which covers not only mistake in
fact but also mistake in law. (Commissioner, supra citing CIVIL CODE,
Arts. 2142, 2154 and 2155)
(4) The Government is not exempt from the application of solutio
indebeti. (Commissioner, supra citing Commissioner of Internal Revenue v.
Firemans Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148
SCRA 315, 324-325; Ramie Textiles, Inc. v. Mathay, supra; Gonzales Puyat
& Sons v. City of Manila, supra)
Indeed, the taxpayer expects fair dealing from the Government, and
the latter has the duty to refund without any unreasonable delay what it has
erroneously collected. (Commissioner, supra citing Commissioner of
Internal Revenue v. Tokyo Shipping Co., supra at 338) If the State expects
its taxpayers to observe fairness and honesty in paying their taxes, it must
hold itself against the same standard in refunding excess (or erroneous)
payments of such taxes. It should not unjustly enrich itself at the expense
of taxpayers. [Commissioner, supra citing AB Leasing and Finance
Corporation v. Commissioner of Internal Revenue, 453 Phil. 297 in turn
citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330 SCRA 507,
510, 518 (2000)] And so, given its essence, a claim for tax refund
necessitates only preponderance of evidence for its approbation like in any
other ordinary civil case. (Commissioner, supra)
(5)
In case of a tax overpayment, where the BIRs obligation to refund or
set-off arises from the moment the tax was paid under the principle of solutio
indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc,
172 SRCA 364)
But note that in order for the rule on solutio indebeti to apply, it is an essential
condition that the petitioner must first show that its payment of the customs
duties was in excess of what was required by the law at the time the subject 16
importations of milk and milk products were made. Unless shown otherwise,
the disputable presumption of regularity of performance of duty lies in favor of
the Collector of Customs. (Nestle Phil. v. Court of Appeals, et al., G.R. No.
134114, July 6, 2001)
I.

Scope and limitation of taxation

BAR: a.

Public purpose. The imposition of the tax is for a public purpose, if:
1) for the welfare of the nation or greater portion of the population.
2) it affects the area as a community rather than as individuals.
3) is designed to support the services of government for some of the recognized
objects of the country.
Stated otherwise, the revenues collected from taxation should be devoted to
achieve the purposes of government.

b.

Inherently legislative
BAR: a) Constitutional basis for impermissible delegation. The
principle of separation of powers ordains that each of the three great branches of
government has exclusive cognizance of and is supreme in matters falling within
its own constitutionally allocated sphere. [Abakada Guro Party List (Formerly
AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1, 2005 citing
Angara v. Electoral Commission, No. 45081, July 15, 1936, 63 Phil. 139, 156]
A logical corollary to the doctrine of separation of powers is the principle
of non-delegation of powers, as expressed in the Latin maxim: potestas delegata
non delegari potest which means what has been delegated, cannot be delegated.
(Abakada, supra citations omitted)
This doctrine is based on the ethical principle that such a delegated power
constitutes not only a right but a duty to be performed by the delegate through the
instrumentality of his own judgment and not through the intervening mind of
another. (Abakada, supra citing United States v. Barrias, No. 4349, September
24, 1908, 11 Phil. 327, 330)

) Exceptions. Instances where the taxing power may be validly exercised other
than by the legislative department.
a) Delegation to local governments. This is one area that is fraught with
controversy. Some Supreme Court decisions consider the power as merely a
delegated power.
However, there are other doctrines that posit that the power is a direct
grant.
Furthermore, there are those who hold that while the power is a direct grant it
is limited because the power to tax is basically a legislative power.
Finally, the author holds that the power is merely a delegated power
because the power of taxation is lodged solely with the legislative department and
any exercise by any other body of government is merely by delegation. This is
so, if we consider that the exercise of the power by local governments is subject
to such guidelines and limitations as Congress may provide. If the constitutional
intent were to directly grant the power then, it would not be subject to
Congressional limitation, but instead to the inherent and constitutional
limitations.
NOTES AND COMMENTS: For examination purposes it is suggested that
the reviewee should carefully read the question in order find out what is the intent
of the examiner..
BAR: If the question intends to test the constitutional limits of the power
of local government units to tax, then it is suggested that the answer should, It is
a direct grant subject to limitations which Congress may provide.
BAR: On the other hand, if the nature of question is to test the nature of
the grant, then it is suggested that the answer should be, It is merely a delegated
power because its exercise is subject to such guidelines and limitations that
Congress may provide. If it is a direct grant it should not anymore be subject to
Congressional guidelines and limitations.

Warning: If confronted with an examination problem, the reader should

answer that it is now a direct grant and use the following discussion to support
the answer.

c.

(1) The constitutional basis of local government units power to

tax and the scope of the authority. Each local government unit shall have
the power:
(1) to create its own sources of revenue and
(2) to levy taxes, fees and charges
(a)
subject to such guidelines and limitations as the
Congress may provide
(b)
consistent with basic policy of local autonomy
(c)
such taxes, fees and charges shall accrue exclusively to
the local government. (1987 Philippine Constitution, Article. X, Sec.
5, numbering and arrangement supplied)
NOTES AND COMMENTS: This is a direct constitutional
grant that may not be taken away entirely by legislative enactment.
Congress, though, has the right to limit the power as directed by the
Constitution.
Territorial
1) Situs of taxation
b) Situs of income tax
BAR:(1) Factors that determine situs of income tax. This is
determined by using the:
(a)
Domiciliary theory. The location where the income
earner resides is the situs of taxation.
REASON: It is there where he is given protection; hence, he
must support it.
(b)
Nationality theory. The country where the income
earner is a citizen is the situs of taxation.
REASON: A citizen is given protection by his country no
matter where he is found or no matter where he earns his income.
He is therefore obligated to support that country, in exchange for the
protection he receives.
The principle of mobilia sequuntur personam may likewise
apply as income taxation laws of his country follow the citizen no
matter where he is found. This applies only to resident citizens on
their incomes derived from sources without the Philippines.
(c)
Source. The country which is the source of the income
is where the activity that produced the income took place. This is the
situs of taxation and not the place where the money originated. The
money may come from one place but if that is not where the activity
that produced the income, then it is not the source of the income for
tax purposes.
The important factor which determines the source of income of
personal services is not the residence of the payor, or the place where

the contract for service is entered into, or the place of payment, but the
place where the services were actually performed.
BAR:(2) Summary of source rule of income taxation as provided in
the NRC of 1997.
(a)
A citizen of the Philippines residing therein is taxable
on all income derived from sources within and without the
Philippines;
(b)
A nonresident citizen is taxable only on income
derived from sources within the Philippines;
(c)
An individual citizen of the Philippines who is
working and deriving income abroad as an overseas contract
worker is taxable only on income from sources within the
Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas
contract worker;
(d)
An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources within
the Philippines;
(e)
A domestic corporation is taxable on all income
derived from sources within and without the Philippines; and
(f)
A foreign corporation, whether engaged or not in trade
or business in the Philippines, is taxable only on income derived
from sources within the Philippines. (NIRC of 1997, Sec. 23,
emphasis, arrangement and numbering supplied)
BAR:
(3)
From sources within the Philippines. The following
items of gross income shall be treated as gross income from sources within
the Philippines:
(a)
Interests. - Interests derived from sources within the
Philippines, and interests on bonds, notes or other interest-bearing
obligation of residents, corporate or otherwise;
(b)
Dividends. - The amount received as dividends:
i.
from a domestic corporation; and
ii.
from a foreign corporation, unless less than fifty
percent (50%) of the gross income of such foreign corporation
for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends or for such
part of such period as the corporation has been in existence was
derived from sources within the Philippines as determined
under the provisions of this Section; but only in an amount
which bears the same ratio to such dividends as the gross
income of the corporation for such period derived from sources
within the Philippines bears to its gross income from all
sources.
(c)
Services - Compensation for labor or personal services
performed in the Philippines;

(d)
Rentals and Royalties. - Rentals and royalties from
property located in the Philippines or from any interest in such
property, including rentals or royalties for
i.The use of or the right or privilege to use in the
Philippines any copyright, patent, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other
like property or right;
ii.
The use of, or the right to use in the Philippines
any industrial, commercial or scientific equipment;
iii.
The supply of scientific, technical, industrial or
commercial knowledge or information;
iv.
The supply of any assistance that is ancillary and
subsidiary to, and is furnished as a means of enabling the
application or enjoyment of, any such property or right as is
mentioned in paragraph i, any such equipment as is mentioned
in paragraph ii or any such knowledge or information as is
mentioned in paragraph iii;
v.
The supply of services by a nonresident person
or his employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such nonresident
person;
vi.
Technical advice, assistance or services rendered
in connection with technical management or administration of
any scientific, industrial or commercial undertaking, venture,
project or scheme; and
vii.
The use of or the right to use:
aa. Motion picture films;
bb. Films or video tapes for use in connection with
television; and
cc. Tapes for use in connection with radio
broadcasting.
(e)
Sale of Real Property. - Gains, profits and income from
the sale of real property located in the Philippines; and
(f)
Sale of Personal Property. - Gains; profits and income
from the sale of personal property, as determined in Subsection (E) of
this Section. [NIRC of 1997, Sec. 42 (A), arrangement and
numbering supplied]
BAR: (5) Statutory definition of OCW and taxability of income. An
individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income
derived from sources within the Philippines [NIRC of 1997., Sec. 23 (C)]
BAR:
(a)
Administrative definition of OCW. OCW
refers to Filipino citizens employed in foreign countries, commonly
referred to as OFWs, who are physically present in a foreign country
as a consequence of their employment thereof. Their salaries and
wages are paid by an employer abroad and is not borne by any entity
or person in the Philippines. (RR No. 1-2011, Section 2, 1st par.)

NOTES AND COMMENTS: It appears from Rev. Reg. No. 12011 that if the salary of a Filipino citizen working abroad is borne
by his Philippine employer, then he is NOT considered as an overseas
contract worker for purposes of taxation.
The author submits that Rev. Reg. No. 1-2011 collides directly
with the provisions of NIRC of 1997, Sec. 42 (C) (3), which treats
Compensation for labor or personal services performed without the
Philippines as income from sources without the Philippines.
If confronted with an actual BAR problem, the author suggests
that the examinee considers as an OCW a Filipino citizen working
abroad as deriving income from without the Philippines despite the
provisions of RR No. 1-2011. However, it is imperative that the
answer should also mention RR No. 1-2011 and its infirmity because
it collides with the provisions of NIRC of 1997, Sec. 42 (C) (3).
(b)
Administrative proof of being an OCW. To be
considered as an OCW or OFW, they must be duly registered as such
with the Philippine Overseas Employment Administration (POEA)
with a valid Overseas Employment Certificate (OEC). (RR No. 12011, Section 2, 1st par.)
(7)

Summary of taxability of interests.

BAR: (a) Requirements for exemption from the tax on interest by non-resident
citizens and non-resident aliens. The tax on interest income from foreign
currency deposit shall be imposed unless the depositor who is a nonresident citizen or a non-resident alien can present documentary evidence
that he is not a resident of the Philippines. Such evidence shall consist of
the original or certified copy of any of the following:
i.
an immigration visa issued by the foreign
government in the country where he is a resident of; or
ii.
a certificate of residency which is issued by the
Philippine Embassy or Consulate in the foreign country of his
residence; or
iii.
a certificate of the contract of employment of an
overseas contract worker which is duly registered with the
Philippine Overseas Employment Agency (POEA); or a
Seamans Certificate, in the case of a Filipino seaman; or
iv.
a certification from the Bureau of Immigration
of the Philippines that a non-resident alien is not a resident of
the Philippines; or
v.
a certification from the Department of Foreign
Affairs (DFA) of the Philippines that the individual is a regular
member of the diplomatic corps of a foreign government and is
entitled to income tax exemption under an international
agreement to which the Philippines is a signatory. [RR No.
10-98, Sec. 2.24 (B), numbering supplied]
BAR: (b)
Partial exemption . If a bank account is jointly in the
name of a non-resident citizen such as an overseas contract worker, or a

Filipino seaman, and his spouse or dependent who is a resident in the

Philippines, fifty percent (50%) of the interest income from such bank
deposit shall be treated as exempt while the other fifty percent (50%) shall
be subject to a final withholding tax of seven and one-half percent (7.5%).
[RR No. 10-98, Sec. 2.24 (A) (2)]
c)

Situs of property taxes

BAR: (2)
Taxes on personal property. Mobilia sequuntur personam.
Generally, the place where the owner is found is the situs of taxation under the
rule that movables follow the person. This is generally, where the owner resides.
(a) Tangible personal property. Where located usually the owners
domicile.
REASON: The place where the tangible personal property is found
gives it protection; hence the property or its owner should support the
government of that place.
(b) Intangible personal property. Usually, the domicile of the
owner.
REASON: The domicile of the owner is the place that provides
protection to the property because the intangible follows the owner.
EXCEPTION: The situs is location not domicile.
Where the
intangible personal property has acquired a business situs in another
jurisdiction.
EXAMPLE: Taxes imposed on the sales of Philippine stocks (stocks
in domestic corporations) are payable in the Philippines no matter
where they may be found, or where owners domicile is.
BAR: (2) Sale of personal property. The situs of taxation of
proceeds from the sale of personal property is the place where the
sales contract was consummated.
Gains, profits and income derived:
(a)
From the purchase of personal property within and its
sale without the Philippines, or
(b)
From the purchase of personal property without and its
sale within the Philippines,
shall be treated as derived entirely from sources within the
country in which sold: Provided, however, That gains from the sales
of shares of stock in a domestic corporation shall be treated as
derived entirely from sources within the Philippines regardless of
where the said shares are sold. [NIRC of 1997, Sec. 42 (e), 2nd par.]

(3)

Value-Added Tax (VAT)

BAR: (a)
Situs of taxation of Zero-rated VAT services such as
facilitating the collection of receivables from credit card members
situated in the Philippines and payment to service establishments
in the Philippines. The place where the service is rendered
determines the jurisdiction (Commissioner of Internal Revenue v.
American Express International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005 citing [N]o state may tax anything not within

its jurisdiction without violating the due process clause of the

[C]constitution. Manila Gas Corp. v. Collector of Internal Revenue,
62 Phil. 895, 900, January 17, 1936, per Malcolm, J.) to impose the
VAT. [Commissioner, supra citing Deoferio, Jr. and Mamalateo, The
Value Added Tax in the Philippines (2000), p. 93]
Performed in the Philippines, the service is necessarily subject
to its jurisdiction
[Commissioner, supra citing Alejandro, The Law on Taxation (1966
rev. ed.) p. 33], for the State necessarily has to have a substantial
connection [Commissioner, supra citing Garner (ed. in chief), Blacks
Law Dictionary (8th ed., 1999), p. 1503] to it in order to enforce a zero
rate. [Commissioner, supra citing De Leon, The Fundamentals of
Taxation (12th ed., 1998), p. 3]
The place of payment is immaterial [Commissioner, supra
citing Deoferio, Jr. and
Mamalateo, The Value Added Tax in the Philippines (2000), p. 93],
much less is the place
where the output of the service will be further or ultimately used.
This is so because the law neither makes a qualification nor
adds a condition in determining the tax situs of a zero-rated service.
(Commissioner, supra)
BAR: 11)
Flexible tariff clause. The flexible tariff clause of the Constitution is the
authority given by the constitution to Congress to delegate some of its powers of taxation to
the President of the Philippines. Specifically,
(a)The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose
(1) tariff rates, import and export quotas, tonnage and wharfage dues, and
(2) other duties or imposts within the framework of the national development
program of the Government. (1987 Philippine Constitution, Article VI,
Sec. 28, no. 2, arrangement and numbering supplied)
(b)In the interest of national economy, general welfare and or national security,
the President, upon recommendation of the NEDA is empowered:
(1) To increase, reduce or remove existing protective rates of import duty,
PROVIDED THAT: The increase should not be higher 100% ad valorem.
(2) To establish import quota or to ban imports to any commodity.
(3) To impose additional duty on all imports not exceeding 10% ad valorem.
(TCC, Sec. 401, as amended by P.D. No. 1690, arrangement and numbering
supplied)
(4) To modify the forms of duty, whether ad valorem or specific. (Ibid.)
BAR:
(a)
Effectivity of flexible tariff order. Any order issued by the
President of the Philippines pursuant to the flexible tariff clause shall take effect
thirty days after promulgation, except in the imposition of additional duty not
exceeding ten (10) percent ad valorem which shall take effect at the discretion of
the President. [TCC, Sec. 401(f)]
NOTES AND COMMENTS: While the TCC provides for effectivity
dates, Executive Orders promulgated to implement the flexible tariff clause
partake of the character of laws that must be obeyed by the people in general.
Consequently, the law requiring publication must be complied with. Laws shall

take effect fifteen days following the completion of their publication in the
Official Gazette, or in a newspaper of general circulation, unless it is otherwise
provided. (Rep. Act No. 386, the Civil Code of the Philippines, Article 2, as
amended by Exec. Order No. 200, dated June 18, 1987)
BAR: 12) Exemption from real property taxes.
Property exempt under the
Constitution from the payment of real property taxes.
(a) Charitable institutions,
(b) churches, parsonages convents appurtenant thereto, mosques,
(c) non-profit cemeteries
(d) all lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes.
[1987Philippine Constitution, Article VI, Sec. 28 (3), arrangement
and
numbering supplied]
BAR: (a)
The phrase actually, directly and exclusively used for religious,
charitable or educational purposes, explained. It is the direct and immediate
and actual application of the property itself to the purposes for which the
religious, charitable institution or educational institution is organized.
It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.
If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purpose but is subject to taxation,. The words
dominant use or principal use cannot be substituted for the words used
exclusively without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. (Lung Center of the Philippines v. Quezon City, et
al., etc., G. R. No. 144104, June 29, 2004)
NOTES AND COMMENTS: The doctrine in Abra Valley College v.
Aquino, 162 SCRA 106, recognizing incidental and reasonably necessary use
as a basis for exempting from realty tax property used for educational purposes is
not doctrinal. Abra Valley College was decided applying the 1935 Constitution
which recognized exemption on all lands, buildings, and improvements used
exclusively for religious, charitable or educational purposes. (Ialics supplied)
Under the 1987 Constitution for the lands, buildings, and improvements to be
exempt, there is a requirement that they must be actually, directly and
exclusively used for educational purposes.
(emphasis supplied)
The
requirement for actually, directly xxx used was not present under the 1935
Constitution.
It likewise appears that the 1987 Constitution provisions on actual, direct
and exclusive use renders qualified the definition of exclusively used for
educational purposes as clarified in the cases of Herrera v. Quezon City Board
of Assessment Appeals, 3 SCRA 186 and Commissioner of Internal Revenue v.
Bishop of the Missionary District, 14 SCRA 991, citing Cooley as follows:
Moreover, the exemption in favor of property used exclusively for charitable or
educational purposes is not limited to property actually indispensable therefore
(Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are
incidental to and reasonably necessary for the accomplishment of said purposes,
such as in the case of hospitals, a school for training nurses, a nurses home,
property used to provide housing facilities for interns, resident doctors,

superintendents, and other members of the hospital staff, and recreational

facilities for student nurses, interns, and residents (84 CJS 6621), such as
Athletic fields including a farm used for the inmates of the institution.
(Cooley on Taxation, Vol. 2, p. 1430). (Abra Valley College, Inc., v. Aquino, et
al., 162 SCRA 106 SCRA 115)
BAR: (b) The phrase shall be exempt from taxation, explained. Sec. 28 (3),
Article VI of the 1987 Philippine Constitution refers to real property tax
exemption.
The constitutional exemption of "all lands, buildings and
improvements," actually directly and exclusively used for religious, charitable
or educational purposes" refers only to property taxes.
What is exempted is not the institution itself, those exempt from real estate
taxes are lands, buildings and improvement actually, directly and exclusively
used for religious, charitable and educational purposes (Davide). Bernas address
to the same view is that the exemption created by the same provision pertained
only to property taxes. (Lung Center of the Philippines v. Quezon City, et al.,
etc., G. R. No. 144104, June 29, 2004 citing Justice Davide; Commissioner of
Internal Revenue v. Court of Appeals, et al., G.R. No. 124043, October 14, 1998)
BAR: (c) The concept of charity and charitable institutions for real
property taxation has been extended by Congress to income taxation. In the
alternative, the distinctions between exemption from real property taxes and
exemption from income taxation. The Constitution exempts charitable
institutions only from real property taxes. In the NIRC, Congress decided to
extend the exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3), Article VI
of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax.
On the other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution actually, directly
and exclusively use the property for a charitable purpose. Section 30(E) of the
NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable
institution must be devoted exclusively for charitable purposes. The
organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section
30(E) of the NIRC specifically requires that the corporation or association
be nonstock, which is defined by the Corporation Code as one where no
part of its income is distributable as dividends to its members, trustees, or
officers (Commissioner of Internal Revenue v. St. Lukes Medical Center,
Inc., G.R. No. 195909, September 26, 2012 and companion case citing
CORPORATION CODE (B.P. Blg. 68), Sec. 87) and that any profit
obtain[ed] as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized. ( Ibid.)

However, any profit by a charitable institution must not only be

plowed back whenever necessary or proper, but must be devoted or used
altogether to the charitable object which it is intended to achieve.
(Commissioner of Internal Revenue v. St. Lukes Medical Center, Inc.,
supra citing Lung Center of the Philippines v. Quezon City, et al., etc.,
G.R. No. 144104, 29 June 2004, 433 SCRA 119, emphasis in the original)
The operations of the charitable institution generally refer to its
regular activities. Section 30(E) of the NIRC requires that these operations
be exclusive to charity. There is also a specific requirement that no part of
[the] net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person. The use of lands,
buildings and improvements of the institution is but a part of its
operations. (Commissioner of Internal Revenue v. St. Lukes Medical
Center, Inc., supra, emphasis supplied)
BAR: (d) Illustration of a non-stock, non-profit institution but not a
charitable institution. There is no dispute that St. Lukes is organized as
a non-stock and non-profit charitable institution. However, this does not
automatically exempt St. Lukes from paying taxes. This only refers to the
organization of St. Lukes. Even if St. Lukes meets the test of charity, a
charitable institution is not ipso facto tax exempt. To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property actually, directly and exclusively
for charitable purposes. To be exempt from income taxes, Section 30(E) of
the NIRC requires that a charitable institution must be organized and
operated exclusively for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution
be operated exclusively for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the
words organized and operated exclusively by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis in the original)
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts any activity for profit, such
activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the
[n]on-stock corporation or association [must be] organized and operated
exclusively for x x x charitable x x x purposes x x x. It likewise qualifies
the requirement in Section 30(G) that the civic organization must be
operated exclusively for the promotion of social welfare.
Thus, even if the charitable institution must be organized and
operated exclusively for charitable purposes, it is nevertheless allowed to
engage in activities conducted for profit without losing its tax exempt
status for ts not-for-profit activities. The only consequence is that the
income of whatever kind and character of a charitable institution
from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax. Prior to the

introduction of Section 27(B), the tax rate on such income from for-profit
activities was the ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%. In 1998, St. Lukes
had total revenues of P1,730,367,965 from services to paying patients. It
cannot be disputed that a hospital which receives approximately P1.73
billion from paying patients is not an institution operated exclusively for
charitable purposes. Clearly, revenues from paying patients are income
received from activities conducted for profit. Indeed, St. Lukes admits
that it derived profits from its paying patients. St. Lukes declared
P1,730,367,965 as Revenues from Services to Patients in contrast to its
Free Services expenditure of P218,187,498. (Commissioner of Internal
Revenue v. St. Lukes Medical Center, Inc., G.R. No. 195909, September
26, 2012 and companion case, emphasis in the original)
BAR:
(e) To avail of the preferential 10% rate a proprietary
institution must not distribute profits. While St. Lukes failed to meet
the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income it remains a proprietary nonprofit hospital under Section 27(B) of the NIRC as long as it does not
distribute any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Lukes, as a proprietary non-profit
hospital, is entitled to the preferential tax rate of 10% on its net income
from its for-profit activities. (Commissioner of Internal Revenue v. St.
Lukes Medical Center, Inc., G.R. No. 195909, September 26, 2012)
NOTES AND COMMENTS: It would seem that the above is
likewise applicable to proprietary educational institutions.
13)

No appropriation or use of public money for religious purposes

b.

Provisions indirectly affecting taxation

1) Due process. The due process clause may correctly be invoked only when
there is a clear contravention of inherent or constitutional limitations in the exercise of
the tax power.
The legislative is given the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects), and where the situs (place) of taxation
primarily lies. The Supreme Court cannot freely delve into those matters which by
constitutional fiat, rightly rests on legislative judgment.
Of course, where a tax measure becomes so unconscionable and unjust as to
amount to confiscation of property, courts will not hesitate to strike it down, for, despite
all its plentitude, the power to tax cannot, override constitutional proscriptions. (Tan v.
Del Rosario Jr.; Carag, et al. v. Del Rosario Jr. 237 SCRA 324)
BAR: 2) Equal protection. Concepts to remember: Equal protection and
uniformity rule.
a) The criteria of equal protection and uniformity, are used
interchangeably. In general, they mean the same.
b) The criteria is MET
(1) when the laws operate uniformly
(a)
on all persons

(b)
under similar circumstances
(2) all persons are treated in the same manner
(a)
the conditions not being different
(b)
both in privileges conferred and liabilities imposed
(c)
favoritism and preference not allowed.
c) The criteria MEANS that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The Constitution does not require things
which are different in fact to be treated in law as though they were the same.
Hence, the constant reiteration of the view that CLASSIFICATION, if rational in
character, IS ALLOWABLE.
d) The taxing authority has the power to make reasonable and natural
classifications for purposes of taxation.
e) The legislature has the inherent power to select the subjects of taxation, hence
it has the power to select whom to exempt.
f) Tax exemptions are not violative of the equal protection clause, so long as
there is valid classification. It. has been repeatedly held that, "inequalities which
result from a singling out of one particular class of taxation, or exemption,
infringe no constitutional limitation." (Commissioner of Internal Revenue, et al.,
v. Santos, et al., 277 SCRA 617)
BAR: a) Requisites of valid classification:
(1) There must be substantial distinctions which must make for real
differences.
(2) The classification must be germane to the issue.
(3) It must apply not only to existing conditions but future conditions as
well.
(4) It must be applicable to all members of the same class. (People
v.Cayat, G. R. No. 45987, May 5, 1939, 68 Phil. 12; People v. Vera, 65
Phil. 56)
It is an established principle of constitutional law that the guaranty of
the equal protection of the laws is not violated by a legislation based on a
reasonable classification. (People v. Cayat, supra)