2010 Taxation Review by Domondon 1

PRIMUS PRE-BAR REVIEW DIVISION

“BAR STAR NOTES”

TAXATION
VER. 2010.08.12
copyrighted 2010

Prepared by Prof. Abelardo T. Domondon

(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs
Broker, Management Consultant, Professor of Law and Pre-Bar Reviewer)

How to use the “BAR STAR NOTES.” The “BAR STAR NOTES” in the form of
questions and answers as well as textual discussion were specially prepared by Prof.
Domondon for the exclusive use of Bar Reviewees who attended the 2010 Wrap-Up
Lectures on TAXATIONconducted by Primus Information, Center, Inc., and the Bar
Reviewees of various law schools and Review Centers where he was invited to lecture on
Taxation. Included in the presentation are doctrines contained in Supreme Court decisions
up to April 2010.

The purpose of the ‘BAR STAR NOTES” is to provide the Bar Reviewee with a handy
review material which serves as “memory-joggers” for the September 12, 2010 Bar
Examinations in Taxation. The author tries to second guess what would be included in the Bar
Exams using statistical analysis. The actual Bar questions may not be formulated in the same
manner as the “BAR STAR NOTES”. However, the doctrines tested in the Bar would in all
probability be included in these Notes.

If pressed for time, the author suggests that the reader should focus his attention on
the following:
 Nice to know
 Should know
 Must know and master
It is further suggested that the reader should merely browse those without stars.

The BAR STAR NOTES in TAXATION is the 4 th in the series of Bar Star Notes
the author has prepared for all the eight Bar subjects. The other Bar Star Notes may
be availed of by enrolling in the 2010 Wrap-Up lectures conducted by PRIMUS
INFORMATION CENTER, INC. Please feel free to call Baby, Tel. No. 816-07-68 or 817-84-
49; Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-790-8406, or Venny,
Mobile No. 0917-337-6479.

WARNING:

These materials are copyrighted and/or based on the writer’s books on Taxation and
future revisions. It is prohibited to reproduce any part of these Notes in any form or any
means, electronic or mechanical, including photocopying without the written permission of
the author. These materials are authorized for the use only of PRIMUS Reviewees and others
who attended the author’s lectures on Taxation. Unauthorized users shall not be prosecuted
but SHALL BE SUBJECT TO THE LAW OF KARMA SUCH THAT THEY WILL NEVER PASS
THE BAR OR WOULD BE UNHAPPY IN LIFE for stealing the intellectual property of the
author.

THE BEST OF LUCK AND ADVANCE CONGRATULATIONS

TAXATION

GENERAL PRINCIPLES OF TAXATION

TAXATION, IN GENERAL

 1. State briefly and concisely the nature of taxation. Alternatively, define

taxation.
SUGGESTED ANSWER: The inherent power of the sovereign exercised through the
legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose
of raising revenues to carry out the legitimate objects of government.

 2. What is the nature of the State’s power to tax ? Explain briefly.
SUGGESTED ANSWER: The nature of the state’s power to tax is two-fold. It is both
an inherent power and a legislative power. It is inherent in nature being an attribute of
sovereignty. This is so, because without the taxes, the state’s existence would be imperiled.
There is thus, no need for a constitutional grant for the state to exercise this power. It is a
legislative power because it involves the promulgation of rules. Taxation is a set of rules,
how much is the tax to be paid, who pays the tax, to whom it should be paid, and when the
tax should be paid.

 3. What is the underlying theory of taxation ? Explain briefly.
SUGGESTED ANSWER: Taxes are the lifeblood of the nation. Without revenue
raised from taxation, the government will not survive, resulting in detriment to
society. Without taxes, the government would be paralyzed for lack of motive power to
activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA
8, 16-17)

 4. Marshall said that, “the power to tax involves the power to destroy.” On the
other hand, Holmes stated that “the power to tax is not the
power to destroy while the court sits.” Reconcile the statements. In the
alternative, what are the implications that flow from the above statements ?
SUGGESTED ANSWERS: Marshall’s view refers to a valid tax while the Holmes’ view refers to
an invalid tax.
A. The imposition of a valid tax could not be judicially restrained merely because it would
prejudice taxpayer’s property.
B. An illegal tax could be judicially declared invalid and should not work to prejudice a
taxpayer’s property.

 5. Discuss briefly the basis/bases, or rationale of taxation.

SUGGESTED ANSWER:
a. Reciprocal duties of protection and support between
the state and its citizens and residents. Also called “symbiotic relation” between the
state and its citizens.
b. Jurisdiction by the state over persons and property within its territory.

 6. Discuss briefly but comprehensively the objectives or purposes of

taxation.
SUGGESTED ANSWER:
The purposes or objectives of taxation are the following:
a. The primary purpose:
1) Revenue purpose.

b. The secondary purposes

1) Sumptuary or regulatory purpose.
2) Compensatory purpose.
3) To implement the power of eminent domain.

 7. Distinguish a tax from a license fee.

SUGGESTED ANSWER: The following are the distinctions:
a. Purpose: Tax imposed for revenue while license fee for regulation. Tax for general
public purposes while license fee for regulatory purposes
only.
b. Basis: Tax imposed under power of taxation while license fee under police
power.
c. Amount: In taxation, no limit as to amount while license fee limited to cost of the
license and the expenses of police surveillance and
regulation.
d. Time of payment: Taxes normally paid after commencement of business while
license fee before.
e. Effect of payment: Failure to pay a tax does not make the business illegal while
failure to pay license fee makes business illegal.
f. Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for
lawful consideration while a license fee may be surrendered with or without
consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial Company v.
Romualdez, et al., 49 Phil. 924)

 8. How may the power to tax be utilized to carry out the social justice
program of our government ?
SUGGESTED ANSWER: 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)

9. Explain the sumptuary purpose of taxation.

SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general
welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise
of the power of taxation and police power where regulatory taxes are collected.
Taxation may be made the implement of the state’s police power. The motivation behind
many taxation measures is the implementation of police power goals. [Southern Cross Cement
Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540,
August 3, 2005) The reader should note that the August 3, 2005 Southern Cross case is the
decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision.
The so-called “sin taxes” on alcohol and tobacco manufacturers help dissuade the
consumers from excessive intake of these potentially harmful products. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No.
158540, August 3, 2005)

10. Taxation distinguished from police power. Taxation is distinguishable

from police power as to the means employed to implement these public goals. Those doctrines
that are unique to taxation arose from peculiar considerations such as those especially punitive
effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power
to destroy and the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood
of the government, their prompt and certain availability is of the essence.”
These considerations necessitated the evolution of taxation as a distinct legal concept
from police power. (Ibid.)

11. How the power of taxation may be used to implement power of

eminent domain. Tax measures are but ”enforced contributions exacted on pain of penal
sanctions” and “clearly imposed for public purpose.” In most recent years, the power to tax
has indeed become a most effective tool to realize social justice, public welfare, and the
equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, April 16, 2005)
Establishments granting the 20% senior citizens discount may claim the discounts
granted to senior citizens as tax deduction based on the net cost of the goods sold or
services rendered: Provided, That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is granted. Provided, further, That
the total amount of the claimed tax deduction net of value added tax if applicable, shall be
included in their gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code, as
amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3,
2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]

 12. What are the three basic principles of a sound tax system? Explain
each briefly. SUGGESTED ANSWER: The canons of a
sound tax system, also known as the characteristics or, principles of a sound tax system, are
used as a criteria in order to determine whether a tax system is able to meet the purposes or
objectives of taxation. They are:
a. Fiscal adequacy.
b. Administrative feasibility.
c. Theoretical justice.

 13. What are the elements or characteristics of a tax ?

SUGGESTED ANSWER:
a. Enforced contribution.
b. Generally payable in money.
c. Proportionate in character.
d. Levied on persons, property or exercise of a right or privilege.
e. Levied by the state having jurisdiction.
f. Levied by the legislature.
g. Levied for a public purpose.
h. Paid at regular periods or intervals.

14. State the requisites of a valid tax.

SUGGESTED ANSWER:
a. A valid tax should be within the jurisdiction of the taxing authority.
b. That the assessment and collection of certain kinds (The same as the
inherent limitations of the power of taxation) should be for a public purpose.
c. The rule of taxation should be uniform.
 d. That either the person or property of taxes guarantees against injustice
to individuals, especially by way or notice and opportunity for hearing be provided.
e. The tax must not impinge on the inherent and Constitutional limitations on
the power of taxation.

15. What are the classes or kinds of taxes according to the subject matter or
object ?
SUGGESTED ANSWER:
a. Personal, poll or capitalization – imposed on all residents, whether citizen or
not. Example – Community Tax.
b. Property - Imposed on property. Example – Real property tax.
c. Excise – imposed upon the performance of an act, the enjoyment of a
privilege or the engaging in an occupation. Example – income tax, estate tax.

16. What are the kinds of taxes classified as to who bears the burden
? Explain each briefly.
SUGGESTED ANSWER:
Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden
of taxation, taxes may be classified into:
a. Direct taxes. Those that are extracted from the very person who, it is
intended or desired, should pay them (Commissioner of Internal Revenue v. Philippine Long
Distance Telephone Company, G. R. No. 140230, December 15, 2005); they are impositions
for which a taxpayer is directly liable on the transaction or business he is engaged in,
(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,
supra) which liability cannot be shifted or transferred to another. Example – income tax,
estate tax, donor’s tax, etc.
b. Indirect taxes are those that are demanded in the first instance, from, or
are paid by, one person in the expectation and intention that he can shift the burden to
(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra)
to someone else not as a tax but as part of the purchase price. (Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June
29, 2005 citing various cases and authorities) Example – value added tax (VAT), documentary
stamp tax, excise tax, percentage tax, etc.

17. Silkair (Singapore) PTE, Ltd., an international carrier, purchased

aviation gas from Petron Corporation, which it uses for its operations. It now claims
for refund or tax credit for the excise taxes it paid claiming that it is exempt from the
payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997 which
provides that petroleum products are exempt from excise taxes when sold
to “Exempt entities or agencies covered by tax treaties, conventions, and other international
agreements for their use and consumption: Provided, however, That the country of said
foreign international carrier or exempt entities or agencies exempts from similar taxes
petroleum products sold to Philippine carriers, entities or agencies”
Silkair further anchors its claim on Article 4(2) of the Air Transport
Agreement between the Government of the Republic of the Philippines and the
Government of the Republic of Singapore (Air Transport Agreement between RP and
Singapore) which reads: “Fuel, lubricants, spare parts, regular equipment and aircraft
stores introduced into, or taken on board aircraft in the territory of one Contracting party by,
or on behalf of, a designated airline of the other Contracting Party and intended solely for use
in the operation of the agreed services shall, with the exception of charges corresponding to
the service performed, be exempt from the same customs duties, inspection fees and other
duties or taxes imposed in the territories of the first Contracting Party , even when these
supplies are to be used on the parts of the journey performed over the territory of the
Contracting Party in which they are introduced into or taken on board. The materials referred
to above may be required to be kept under customs supervision and control.”
Silkair likewise argues that it is exempt from indirect taxes because the Air
Transport Agreement between RP and Singapore grants exemption “from the same
customs duties, inspection fees and other duties or taxes imposed in the territory
of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291,
May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the
National Power Corporation (NPC) on the ground that the NPC is exempt even from
the payment of indirect taxes.

Is Silkair entitled to the tax refund or credit it seeks ? Reason out your
answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following
reasons:
a. The excise tax on aviation fuel is an indirect tax. The proper party to question,
or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the burden thereof to
another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028,
July 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that the excise tax should be
paid by the manufacturer or producer before removal of domestic products from place of
production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled
to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional
amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay
as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127 Phil.
461, 470 (1967)]
b. Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291,
May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National
Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of
indirect taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,
G.R. No. 140230, December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling
in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held
that an exemption from “all taxes” granted to the National Power Corporation (NPC) under
its charter includes both direct and indirect taxes.
An exemption from “all taxes” excludes indirect taxes, unless the exempting statute,
like NPC’s charter, is so couched as to include indirect tax from the exemption. The
amendment under Republic Act No. 6395 enumerated the details covered by NPC’s
exemption. Subsequently, P.D. 380, made even more specific the details of the exemption
of NPC to cover, among others, both direct and indirect taxes on all petroleum products used
in its operation. Presidential Decree No. 938 [NPC’s amended charter] amended the tax
exemption by simplifying the same law in general terms. It succinctly exempts NPC from “all
forms of taxes, duties, fees…” The use of the phrase “all forms” of taxes demonstrates the
intention of the law to give NPC all the tax exemptions it has been enjoying before.
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of
the Air Transport Agreement between RP and Singapore cannot, without a clear showing of
legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions
must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority, and if an exemption is found to exist, it must not be enlarged by
construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R. No.
173594, February 6, 2008)

 18. What are the different kinds of taxes classified as to purpose

?
SUGGESTED ANSWER:
a. General, fiscal or revenue – imposed for the purpose of raising public funds
for the service of the government
b. Special or regulatory – imposed primarily for the regulation of useful or non-
useful occupation or enterprises and secondarily only for the raising of public funds.
LIMITATIONS OR RESTRICTIONS ON THE POWER

1. Purpose for the limitations on the power of taxation.

The inherent and constitutional limitations to the power of taxation are safeguards which
would prevent abuse in the exercise of this otherwise unlimited and plenary power.
The limitations also serve as a standard to measure the validity of a tax law or the act
of a taxing authority. A violation of the limitations serves to invalidate a tax law or act in the
exercise of the power to tax.

INHERENT LIMITATIONS

 1. What are the inherent limitations on the power of taxation ?

SUGGESTED ANSWERS:
a. Public purpose. The revenues collected from taxation should be devoted to a
public purpose.
b. No improper delegation of legislative authority to tax. Only the legislature can
exercise the power of taxes unless the same is delegated to some other governmental body by
the constitution or through a law which does not violate any provision of the constitution.
c. Territoriality. The taxing power should be exercised only within territorial
boundaries of the taxing authority.
d. Recognition of government exemptions; and
e. Observance of the principle of comity. Comity is the respect accorded by
nations to each other because they are equals. On the other hand taxation is an act of
sovereign. Thus, the power should be imposed upon equals out of respect.
Some authorities include no double taxation.

 2. What are the principles to consider in the determination of whether

tax revenues are devoted for a public purpose ?
SUGGESTED ANSWER:
a. The tax revenues are for a public purpose if utilized for the benefit of the
community in general. An alternative meaning is that tax proceeds should be utilized only
to attain the objectives of government.
b. Inequalities resulting from the singling out of one particular class for taxation
or exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax that the legislature is free to select the
subjects of taxation.
BASIS: The lifeblood theory.
c. An individual taxpayer need not derive direct benefits from the tax.
REASON: The paramount consideration is the welfare of the greater portion of the
population.
d. A tax may be imposed, not so much for revenue purposes, but under
police power for the general welfare of the community. This would still be for a public purpose.
e. Public purpose continually expanding. Areas formerly left to private
initiative now lose their boundaries and may be undertaken by the government if it is to meet
the increasing social challenges of the times.
f. Tax revenue must not be used for purely private purposes or for the
exclusive benefit of private persons.
g. Private persons may be benefited but such benefit should be merely
incidental as its main object is the benefit of the community in general.
h. Determined at the time of enactment of tax law and not at the time of
implementation.
i. There is a presumption of public purpose even if the tax law does not
specifically provide for its purpose. (Santos & Co., v. Municipality of Meycauayan, et al., 94
Phil. 1047)
j. Public use is no longer confined to the traditional notion of use by the public but
held synonymous with public interest, public benefit, public welfare, and public convenience.
(Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April
16, 2005)

 3. A law was enacted imposing a tax on manufacturers of coconut oil, the

proceeds of which are to be used exclusively for the protection and promotion of
the coconut industry, namely, to improve the working conditions in coconut mills
and to conduct research on the use of coconut oil for motor fuel. Some of the
manufacturers of coconut oil challenge the validity of the law, contending that the
tax is to be used for a private purpose, and therefore, the law violates the rule that
public revenues shall not be appropriated for anything but a public purpose. Decide
with reason.
SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied that the
coconut industry is one of the major industries supporting the national economy. It is,
therefore, the state’s concern to make it a strong and secure source not only of the livelihood
of the significant segment of the population, but also of export earnings, the sustained
growth of which is one of the imperatives of economic growth. (Philippine Coconut Producers
Federation, Inc. (Cocofed v. Presidential Commission on Good Government, 178 SCRA 236,
252)

 4. Requisites for taxpayers, concerned citizens, voters or legislators to

have locus standi to sue.
a. In general, the case should involve constitutional issues. (David, et al., v.
President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)
b. For taxpayers, there must be a showing:
1) That tax money is “being extracted and spent in violation of specific
constitutional protections against abuses of legislative power.” (Flast v. Cohen, 392
U.S. 83)
2) That public money is being deflected to
any improper purpose (Pascual v. Secretary of Public Works, 110 Phil.
33) or a claim of illegal disbursement of public funds or that the tax measure is
unconstitutional. (David, supra)
3) A taxpayer is allowed to sue where there is a claim that public
funds are illegally disbursed, or that public money is being deflected to any improper
purpose, or that there is a wastage of public funds through the enforcement
of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919,
February 14, 2007; Garcia v. Enriquez, Jr. G.R. No. 112655 December
9, 1993, Minute Resolution)
A taxpayer’s suit is properly brought only when there is an
exercise of the spending or taxing power of Congress. (Automotive Industry
Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R.
No. 157509, January 18, 2005 citing Gonzales v. Narvasa, G. R.
No. 140835, August 14, 2000, 337 SCRA 733, 741)

c. For voters, there must be a showing of obvious interest in the validity of the
election law in question.
d. For concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early.
e. For legislators, there must be a claim that the official action complained of
infringes upon their prerogatives as legislators. (David, et al., v. President Gloria Macapagal-
Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

5. Only those directly affected have locus standi to impugn the alleged
encroachment by the executive department into the legislative domain of Congress.
a. Only those who shall be directly affected by such executive encroachment,
such as for example employees who would find themselves subject to disciplinary powers that
may be imposed under the questioned Executive Order as they have a direct and specific
interest in raising the substantive issue therein (Automotive Industry Workers Alliance
(AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005) or employees
who are going to be demoted, transferred or otherwise affected by any personnel action
subject o the rule on exhaustion of administrative remedies.
b. Moreover, and if at all, only Congress, can claim any injury from the alleged
executive encroachment of the legislative function to amend, modify and/or repeal laws.
(Automotive Industry Workers Alliance (AIWA),etc., et al., supra, citing Gonzales v.
Narvasa, G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)

6. Locus standi being merely a matter of procedure, have been waived in

certain instances where a party who is not personally injured may be allowed to bring
suit. The following are examples of instances where suits have been brought by parties who
have not have been personally injured by the operation of a law or any other government act
but by concerned citizens, taxpayers or voters who actually sue in the public interest:
a. Taxpayer’s suits to question contracts entered into by the national government
or government-owned or controlled corporations allegedly in contravention of the law.
b. A taxpayer is allowed to sue where there is a claim that public funds are illegally
disbursed, or that public money is being deflected to any improper purpose, or that there is a
wastage of public funds through the enforcement of an invalid or unconstitutional law. (Abaya
v. Ebdane, G. R. No. 167919, February 14, 2007)

 7. The VAT law provides that, the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%) after any of the following conditions have been
satisfied. “(i) value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds
one and one-half percent (1 ½%).”
Was there an invalid delegation of legislative power ?
 SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only
of the discretion as to the execution of the law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority. In the above
case the Secretary of Finance becomes merely the agent of the legislative department, to
determine and declare the even upon which its expressed will takes place. The President cannot
set aside the findings of the Secretary of Finance, who is not under the conditions acting as the
execute alter ego or subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G.
R. No. 168056, September 1, 2005 and companion cases citing various cases]]

8. Instances of proper delegation: When taxing power could be

delegated: Exceptions to the rule on non-delegation:
a. Delegation of tariff powers by Congress to the President under the flexible tariff
clause, Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to the President under Section 23 (2) of Article
VI of the Constitution.
c. The delegation to the President of the Philippines to enter into executive
agreements, and to ratify treaties which may contain tax exemption provisions subject to the
concurrence by the Senate in the ratification made by the President.
d. Delegation to the people at large.
e. Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS),
etc., v, Ermita, et al., G. R. No.168056, September 1, 2005], which is referred to as
subordinate legislation.
In this instance, there is a requirement that the law is complete in all aspects so what
is delegated is merely the implementation of the law or there exists sufficiently determinate
standards to guide the delegate and prevent a total transference of the taxing power.

9. “Paradigm shift” from exclusive Congressional power to direct grant

of taxing power to local legislative bodies. The power to tax is no longer vested exclusively
on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
charges pursuant to Article X, section 5 of the 1987 Constitution. (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)
Local government legislation, “is not regarded as a transfer of general legislative power,
but rather as the grant of authority to prescribe local regulations, according to immemorial
practice, subject, of course, to the interposition of the superior in cases of necessity.” (People
v. Vera, 65 Phil. 56)

10. Taxing power of the local government is limited. The taxing power of
local governments is limited in the sense that Congress can enact legislation granting tax
exemptions.
While the system of local government taxation has changed with the onset of the 1987
Constitution, the power of local government units to tax is still limited.
While the power to tax by local governments may be exercised by local legislative
bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local
taxation remains essentially the same, “the power to tax is [still] primarily vested in the
Congress.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,
October 6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan Cebu
International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA
667, 680)

11. Further amplification by Bernas of the local government’s power to

tax. “What is the effect of Section 5 on the fiscal position of municipal corporations? Section
5 does not change the doctrine that municipal corporations do not possess inherent powers
of taxation. What it does is to confer municipal corporations a general power to levy taxes
and otherwise create sources of revenue. They no longer have to wait for a statutory grant
of these powers. The power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on municipal
powers. Moreover, these limitations must be “consistent with the basic policy of local
autonomy.” The important legal effect of Section 5 is thus to reverse the principle that doubts
are resolved against municipal corporations. Henceforth, in interpreting statutory provisions
on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for a public purpose,
uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the
local unit to pass.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)
 12. Reconciliation of the local government’s authority to tax and the
Congressional general taxing power. Congress has the inherent power to tax, which
includes the power to grant tax exemptions. On the other hand, the power of local
governments, such as provinces and cities for example Quezon City, to tax is prescribed by
Section 151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the City or a province
may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit
grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of Congress to grant
tax exemptions over and above the power of the local government’s delegated power to tax.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6,
2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R.
No. 162015, March 6, 2006, 484 SCRA 16)
“Indeed, the grant of taxing powers to local government units under the Constitution
and the LGC does not affect the power of Congress to grant exemptions to certain persons,
pursuant to a declared national policy. The legal effect of the constitutional grant to local
governments simply means that in interpreting statutory provisions on municipal taxing
powers, doubts must be resolved in favor of municipal corporations.” [Ibid., referring
to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao]

 13. General principles of income taxation in the Philippines or the

source rule of income taxation as provided in the NIRC 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. (Sec.
23, NIRC of 1997, emphasis supplied)

14. Juliane a non-resident alien appointed as a commission agent by a

domestic corporation with a sales commission of 10% all sales actually concluded
and collected through her efforts. The local company withheld the amount of
P107,000 from her sales commission and remitted the same to the BIR.
She filed a claim for refund alleging that her sales commission is not taxable
because the same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. 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.
Since the activity of securing the sales were in Germany, then the income did not
originate from sources from within the Philippines. (Commissioner of Internal Revenue v.
Baier-Nickel, G. R. No. 153793, August 29, 2006)

 15. Ensite, Ltd.. is a Canadian corporation not doing business in the

Philippines. It holds 40% of the shares of Philippine Stamping Plant, Inc.,., a
Philippine company while the 60% is owned by Fred Corporation, a Filipino-owned
Philippine corporation. Ensite Co. also owns 100% of the shares of Susanto Co., an
Indonesian company which has a duly licensed Philippine branch. Due to worldwide
restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided to sell all its shares in
Philippine Stamping Plant, Inc. and Susanto Co. The negotiations for the buy-out
and the signing of the Agreement of Sale were all done in the Philippines. The
Agreement provides that the purchase price will be paid to Ensite Ltd’s bank account
in the U.S. and that title to the Philippine Stamping Plant, Inc. and Susanto Co. shall
be transferred to General Co., in Toronto Canada where stock certificates will be
delivered. General Co. seeks your advice as to whether or not it will subject the
payments of the purchase price to withholding tax. Explain your
advice. SUGGESTED ANSWER: The payments of the purchase price will be
subject to withholding tax. Considering that all the activities (sales) occurred within the
Philippines, the income is considered as income from within, subject to Philippine income
taxation. Ensite, Ltd. being a foreign corporation is to be taxed on its income derived from
sources within the
Philippines.

 16.Ensite, Ltd. is a Canadian corporation, which has a duly licensed Philippine

branch engage in trading activities in the Philippines. Ensite, Ltd.. also invested
directly in 40% of the shares of stock of Philippine Stamping Plant, Inc.., a
Philippine corporation. These shares are booked in the Head Office of Ensite, Ltd..
and are not reflected as assets of the Philippine branch. In 2009, Philippine
Stamping Plant, Inc.. declared dividends to its stockholders. Before remitting the
dividends to Ensite Ltd.,., Philippine Stamping Plant, Inc. Co. seeks your advice as
to whether it will subject the remittance to withholding tax. There is no need to
discuss WT rates, if applicable. Focus your discussion on what is the
issue.
SUGGESTED ANSWER: Philippine Stamping Plant, Inc.. should subject the remittance to
withholding tax.. Since Philippine Stamping Plant. is a Philippine corporation, its shares of
stock have obtained a business situs in the Philippines, hence the dividends are considered
as income from within. Ensite. Ltd., being a foreign corporation, should be subject to tax on
its income from within.

 17. Philippine Stamping Plant, Inc., a Philippine corporation, has an

executive Larry who is a Filipino citizen. Philippine Stamping Plant, Inc,. has a
subsidiary in Malaysia (Kuala Lumpur Manufacturing, Inc.) and will assign Larry for
an indefinite period to work full time for Kuala Lumpur Manufacturing, Inc.. Larry
will bring his family to reside in Malaysia and will lease out his residence in the
Philippines. The salary of Larry will be shouldered 50% by Philippine Stamping
Plant, Inc.. while the other 50% plus housing, cost of living and educational
allowances of Larry’s dependents will be shouldered by Kuala Lumpur
Manufacturing, Inc.. Philippine Stamping Plant, Inc.. will credit the 50% of Larry’s
salary to his Philippine bank account. Larry will sign the contract of employment in
the Philippines. He will also be receiving rental income for the lease of his
Philippine residence.
Are these salaries, allowances and rentals subject to Philippine income tax? Explain
briefly.
SUGGESTED ANSWER: The salaries and allowances of Larry, being derived from labor or
personal services rendered outside of the Philippines is considered as income from
without. Since Larry is an OCW, then he is to be taxed only on his income derived from within
the Philippines such as the rentals on his Philippine residence, and not on his income from
without.

18. Obama Airlines, Inc., a foreign airline company which does not
maintain any flight to and from the Philippines sold air tickets in the Philippines,
through a general sales agent, relating to the carriage of passengers and cargo
between two points, both outside the Philippines.
a. Is Obama, Inc., subject to income taxes on the sale of the tickets ?
SUGGESTED ANSWER: Yes. The source of income which is taxable is that “activity”
which produced the income. The ”sale of tickets” in the Philippines is the activity that
determines whether such income is taxable in the Philippines.
The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines. the flow of wealth
proceeded from and occurred, within the Philippine territory, enjoying the protection accorded
by the Philippine Government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government. [Commissioner of Internal Revenue v. British
Overseas Airways Corporation (BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in the Philippines are engaged in or
doing business in the Philippines and their income from sales of passage documents here is
income from within the Philippines. Thus, the off-line air carrier liable for the 32% (now 30%)
tax on its taxable income. [South African Airways v. Commissioner of Internal Revenue, G.R.
No. 180356, February 16, 2010 citing Commissioner of Internal Revenue v. British Overseas
Airways Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA
395]

b. Supposing that Obama, Inc., sells tickets outside of the Philippines for
passengers it carry from Gold City, South Africa to the Philippines but returns to South
Africa without any cargo or passengers. Would it then be subject to any Philippine
tax on such sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any
income tax because the activity which generated the income (the sale of the tickets) was
performed outside of the Philippines.
 It is not subject to the carrier’s tax based on gross Philippine billings because there were
no lifts that originated from the Philippines. “Gross Philippine Billings” refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or passage document.” [NIRC of 1997, Sec.
28(A)(3)(a)]

c. Would your answer be the same if Obama, Inc. sold tickets outside of
the Philippines for travelers who are going to picked up by Obama, Inc., planes from
the Diosdado Macapagal Intl. Airport at Clark, Angeles, Pampanga, bound for Nairobi,
Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the
carrier’s tax based on Gross Philippine Billings. (GPB).
“Gross Philippine Billings” refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo and mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or issue and the place of payment
of the ticket or passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur
from the Philippines, income is included in GPB. (South African Airways v. Commissioner of
Internal Revenue, G.R. No. 180356, February 16, 2010)

19. No improper delegation of legislative authority to tax. The power to

tax is inherent in the State, such power being inherently legislative, based on the principle
that taxes are 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, G. R. Nos. 167274-75, July 21, 2008)
CONSTITUTIONAL LIMITATIONS

1. Constitutional limitations on the power of taxation . The general or

indirect constitutional limitations as well as the specific or direct constitutional limitations.

2. The general or indirect constitutional limitations on the power of taxation

are:
a. Due process clause;
b. Equal protection clause;
c. Freedom of the press;
d. Religious freedom;
e. No taking of private property without just compensation;
f. Non-impairment clause;
g. Law-making process:
1) Bill should embrace only one subject expressed in the title thereof;
2) Three (3) readings on three separate days;
3) Printed copies in final form distributed three (3) days before passage.
h. Presidential power to grant reprieves, commutations and pardons and remittal
of fines and forfeiture after conviction by final judgment.

3. The specific or direct constitutional limitation.

a. No imprisonment for non-payment of a poll tax;
b. Taxation shall be uniform and equitable;
c. Congress shall evolve a progressive system of taxation;
d. All appropriation, revenue or tariff bills shall originate exclusively in the
House of Representatives, but the Senate may propose and concur with amendments;
e. The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he
does not object;
f. Delegated power of the President to impose tariff rates, import and export
quotas, tonnage and wharfage dues:
1) Delegation by Congress
2) through a law
3) subject to Congressional limits and restrictions
4) within the framework of national development program.
g. Tax exemption of charitable institutions, churches, parsonages and convents
appurtenant thereto, mosques, and all lands, buildings and improvements of all kinds actually,
directly and exclusively used for religious, charitable or educational purposes;
h. No tax exemption without the concurrence of majority vote of all members of
Congress;
i. No use of public money or property for religious purposes except if priest is
assigned to the armed forces, penal institutions, government orphanage or leprosarium;
j. Money collected on tax levied for a special purpose to be used only for such
purpose, balance if any, to general funds;
k. The Supreme Court's power to review judgments or orders of lower courts in
all cases involving the legality of any tax, impose, assessment or toll or the legality of any
penalty imposed in relation to the above;
l. Authority of local government units to create their own sources of revenue, to
levy taxes, fees and other charges subject to guidelines and limitations imposed by Congress
consistent with the basic policy of local autonomy;
m. Automatic release of local government's just share in national taxes;
n. Tax exemption of all revenues and assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative educational
institutions subject to limitations provided by law including restrictions on dividends and
provisions for reinvestment of profits;
p. Tax exemption of grants, endowments, donations or contributions used
actually, directly and exclusively for educational purposes subject to conditions prescribed by
law.

5. Equal protection of the law clause is subject to reasonable

classification. If the groupings are characterized by substantial distinctions that make real
differences, one class may be treated and regulated differently from another. The classification
must also be germane to the purpose of the law and must apply to all those belonging to the
same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)

 6. Requisites for valid classification. All that is required of a valid

classification is that it be reasonable, which means that a. the classification should
be based on substantial distinctions which make for real differences,
b. that it must be germane to the purpose of the law;
c. that it must not be limited to existing conditions only; and
 d. that it must apply equally to each member of the class.
The standard is satisfied if the classification or distinction is based on a reasonable
foundation or rational basis and is not palpably arbitrary. [ABAKADA Guro Party List, etc., v.
Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

7. Equal protection does not demand absolute equality. It merely

requires that all persons shall be treated alike, under like circumstances and conditions, both
as to the privileges conferred and liabilities enforced. (Santos v. People, et al, G. R. No.
173176, August 26, 2008)
It is imperative to duly establish that the one invoking equal protection and the
person to which she is being compared were indeed similarly situated, i.e., that they
committed identical acts for which they were charged with the violation of the same provisions
of the NIRC; and that they presented similar arguments and evidence in their defense - yet,
they were treated differently. (Santos, supra)

8. Tests to determine validity of classification. The United States

Supreme Court has established different tests to determine the validity of a classification and
compliance with the equal protection clause. The recognized tests are:
a. The traditional (or rational basis) test.
b. The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class) test.
9. The traditional (or rational basis) test used in order to determine the
validity of classification. The classification is valid if it is rationally related to a
constitutionally permissible state interest.
The complainant must prove that the classification is “invidous,” “wholly arbitrary,”
or ”capricious,” otherwise the classification is presumed to be valid. (Lindsley v. Natural
Carboinic Gas Co., 220 U.S. 61; McGowan v. Maryland, 366 U.S. 420; United States Railroad
Retirement Board v. Fritz, 449 U.S. 166)

10. The strict scrutiny (or compelling interest) test used in order to
determine the validity of the classification. Government regulation that intentionally
discriminates against a “suspect class” such as racial or ethnic minorities, is subject to strict
scrutiny and considered to violate the equal protection clause unless found necessary to
promote a compelling state interest.
A classification is necessary when it is narrowly drawn so that no alternative, less
burdensome means is available to accomplish the state interest.
Thus, it was held that denial of free public education to the children of illegal aliens
imposes an enormous and lasting burden based on a status over which the children have no
control is violative of equal protection because there is no showing that such denial furthers
a “substantial” state goal. (Plyler v. Doe, 457 U.S. 202)

11. The intermediate level of scrutiny (or quasi-suspect class) test used
in order to determine the validity of he classification. Classification based on gender
or legitimacy are not “suspect,” but neither are they judged by the traditional or rational basis
test.
Intentional discriminations against members of a quasi-suspect class violate equal
protection unless they are substantially related to important government objectives. (Craig
v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows, but not widowers,
has been held valid for it furthers the state policy of cushioning the financial impact of spousal
loss upon the sex for whom that loss usually imposes a heavier burden. (Kahn v. Shevin, 416
U.S. 351)

12. Equality and uniformity of taxation may mean the same as equal
protection. In such a case, the terms would mean that all subjects and objects of taxation
which are similarly situated shall be subject to the same burdens and granted the same
privileges without any discrimination whatsoever.
13. It is inherent in the power to tax that the State be free to select the
subjects of taxation, and 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)

 9. Benjie is a law-abiding citizen who pays his real estate taxes

promptly. Due to a series of typhoons and adverse economic conditions, an
ordinance is passed by Soliman City granting a 50% discount for payment of unpaid
real estate taxes for the preceding year and the condonation of all penalties on fines
resulting from the late payment.
Arguing that the ordinance rewards delinquent tax payers and discriminates
against prompt ones, Benjie demands that he be refunded an amount equivalent to
one-half of the real property taxes he paid. The municipal attorney rendered an
opinion that Benjie cannot be reimbursed because the ordinance did not provide for
such reimbursement. Benjie files suit to declare the ordinance void on the ground
that it is a class legislation. Will his suit prosper ? Explain your answer briefly.
SUGGESTED ANSWER: No. There is no class legislation because there is no violation
of the equal protection suit. There is a valid classification between those who already paid
their taxes and those who have not. Furthermore, the taxing authority has the prerogative
to select the subjects and objects of taxation, including granting a 50% discount in
the payment of unpaid real estate taxes, and the condonation of all penalties on fines
resulting from late payment.

10. The rewards law to tax collectors does not violate equal
protection. The equal protection clause recognizes a valid classification, that is, a
classification that has a reasonable foundation or rational basis and not arbitrary. With respect
to RA 9335, it’s expressed public policy is the optimization of the revenue-generation
capability and collection of the BIR and the BOC. Since the subject of the law is the revenue-
generation capability and collection of the BIR and the BOC, the incentives and/or sanctions
provided in the law should logically pertain to the said agencies. Moreover, the law concerns
only the BIR and the BOC because they have the common distinct primary function of
generating revenues for the national government through the collection of taxes, customs
duties, fees and charges.
Indubitably, such substantial distinction is germane and intimately related to the
purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC
under RA 9335 fully satisfy the demands of equal protection. (ABAKADA Guro Party List, etc.,
v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)

11. The prosecution of one guilty person while others equally guilty are
not prosecuted, however, is not, by itself, a denial of the equal protection of the
laws. Where the official action purports to be in conformity to the statutory classification, an
erroneous or mistaken performance of the statutory duty, although a violation of the statute,
is not without more a denial of the equal protection of the laws.
The unlawful administration by officers of a statute fair on its face, resulting in its
unequal application to those who are entitled to be treated alike, is not a denial of equal
protection unless there is shown to be present in it an element of intentional or purposeful
discrimination. This may appear on the face of the action taken with respect to a particular
class or person, or it may only be shown by extrinsic evidence showing a discriminatory design
over another not to be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)

12. Equal protection should not be used to protect commission of

crime. While all persons accused of crime are to be treated on a basis of equality before the
law, it does not follow that they are to be protected in the commission of crime. It would be
unconscionable, for instance, to excuse a defendant guilty of murder because others have
murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal laws as to some persons
should be converted into a defense for others charged with crime, the result would be that
the trial of the district attorney for nonfeasance would become an issue in the trial of many
persons charged with heinous crimes and the enforcement of law would suffer a complete
breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

 13. Illustration of double taxation in local taxation. there is indeed double

taxation if Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance
No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of
doing business in the City of Manila; (2) for the same purpose – to make persons conducting
business within the City of Manila contribute to city revenues; (3) by the same taxing authority
– City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of
the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same
kind or character – a local business tax imposed on gross sales or receipts of the
business. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845,
August 4, 2009)

14. A lawful tax on a new subject, or an increased tax on an old one, does
not interfere with a contract or impairs its obligation, within the meaning of the
constitution. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)

15. The withdrawal of a tax exemption should not be construed as

prohibiting future grants of exemption from all taxes. (Philippine Long Distance
Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)

16. Tax exemptions in franchises are always subject to withdrawal. A

legislative franchise is granted with the express condition that it is subject to amendment,
alteration, or repeal. (1987 Constitution, Art. XII, Sec. 11)
 It is enough to say that the parties to a contract cannot, through the exercise of
prophetic discernment, fetter the exercise of the taxing power of the State. For not only are
existing laws read into contracts in order to fix obligations as between parties, but the
reservation of essential attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against impairment
presupposes the maintenance of a government which retains adequate authority to secure
the peace and good order of society. (Smart Communications, Inc. v. The City of Davao, etc.,
et al., G. R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone Company, Inc., v. City
of Davao, et al., etc., G. R. No. 143867, August 22, 2001 made the observation that since
Smart’s franchise was granted after the effectivity of the Local Government Code that its tax
exemption privilege was reinstated. However, Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008 is explicit in its holding that Smart
is not entitled to a tax exemption.

 17. When withdrawal of a tax exemption impairs the obligation of

contracts. The Contract Clause has never been thought as a limitation on the exercise of
the State’s power of taxation save only where a tax exemption has been granted for a valid
consideration. (Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No.
155491, September 16, 2008) citing Tolentino v. Secretary of Finance, G. R. No. 115455,
August 25, 1994, 235 SCRA 630, 685) The author opines that since practically all franchises
granted to telecommunications companies are similarly worded that the above doctrine finds
application to the others)

18. The primary reason for the withdrawal of tax exemption privileges
granted to government owned and controlled corporations and all other units of
government was that such privilege resulted to serious tax base erosion and distortions in the
tax treatment of similarly situated enterprises, hence resulting in the need for these entities to
share in the requirements of development, fiscal or otherwise, by paying the taxes and other
charges due them. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)

19. National Power Corporation (NPC) is of the insistence that it is not

subject to the payment of franchises taxes imposed by the Province of Isabela
because all of its shares are owned by the Republic of the Philippines. It is thus, an
instrumentality of the National Government which is exempt from local taxation. As
such it is not a private corporation engaged in “business enjoying franchise”
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v. City
of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of
Davao, a local government unit, to impose and collect a local franchise tax because the Local
Government Code has withdrawn all tax exemptions previously enjoyed by all persons and
authorized local government units to impose a tax on business enjoying a franchise tax
notwithstanding the grant of tax exemption to them.

20. “In lieu of all taxes” in the franchise of ABS-CBN does not exempt it
from local franchise taxes. It does not expressly provide what kind of taxes ABS-CBN is
exempted from. It is not clear whether the exemption would include both local, whether
municipal, city or provincial, and national tax. Whether the “in lieu of all taxes provision”
would include exemption from local tax is not unequivocal.
The right to exemption from local franchise tax must be clearly established and cannot
be made out of inference or implications but must be laid beyond reasonable doubt. Verily,
the uncertainty in the “in lieu of all taxes” provision should be construed against ABS-
CBN. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed
but has failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier
case involving another telecommunications company Smart Communications, Inc. v. The
City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that
since practically all franchises granted to telecommunications companies are similarly worded
that the above doctrine finds application to the others.)

 21. “In lieu of all taxes” refers to national internal revenue taxes and
not to local taxes. The “in lieu of all taxes” clause applies only to national internal revenue
taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice
Antonio T. Carpio in a similar case involving a demand for exemption from local franchise
taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than
income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes"
clause does not apply to local taxes. The proviso in the first paragraph of Section 9 of Smart's
franchise states that the grantee shall "continue to be liable for income taxes payable under
Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9
speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his
duly authorized representative in accordance with the National Internal Revenue Code."
Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the
Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear
intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal
Revenue Code and not to local taxes. Even with respect to national internal revenue taxes,
the "in lieu of all taxes" clause does not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply
to local taxes, Congress would have expressly mentioned the exemption from municipal and
provincial taxes. Congress could have used the language in Section 9(b) of Clavecilla's old
franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description levied, established
or collected by any authority whatsoever, municipal, provincial or national, from which the
grantee is hereby expressly exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes. Congress used
the "in lieu of all taxes" clause only in reference to national internal revenue taxes. The only
interpretation, under the rule on strict construction of tax exemptions, is that the "in lieu of
all taxes" clause in Smart's franchise refers only to national and not to local taxes. [Smart
Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16,
2008 citing Philippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571,
594 (2003)]
NOTES AND COMMENTS: The author opines that the above finds application to all
telecommunications companies.

22. The “in lieu of all taxes” clause in the franchise of ABS-CBN has
become functus officio with the abolition of the franchise tax on broadcasting
companies with yearly gross receipts exceeding Ten Million Pesos. The clause “in
lieu of all taxes” does not pertain to VAT or any other tax. It cannot apply when what is paid
is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies
with yearly gross receipts exceeding ten million pesos has been abolished, the “in lieu of all
taxes” clause has now become functus officio, rendered inoperative. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier
case involving another telecommunications company. Smart Communications, Inc. v. The
City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that
since practically all franchises granted to telecommunications companies are similarly worded
that the above doctrine finds application to the others.)

 23. Double taxation in its generic sense, this means taxing the same
subject or object twice during the same taxable period. In its particular sense, it may
mean direct duplicate taxation, which is prohibited under the constitution because it violates
the concept of equal protection, uniformity and equitableness of taxation. Indirect duplicate
taxation is not anathematized by the above constitutional limitations.

 24. Elements of direct duplicate taxation:

a. Same
1) Subject or object is taxed twice
2) by the same taxing authority
3) for the same taxing purpose
4) during the same taxable period
b. Taxing all of the subjects or objects for the first time without taxing all of them
for the second time.
If any of the elements are absent then there is indirect duplicate taxation which is not
prohibited by the constitution.

NOTES AND COMMENTS:

a. Presence of the 2nd element violates the equal protection clause. If

only the 1 element is present, taxing the same subject or object twice, by the same taxing
st

authority, etc., there is no violation of the equal protection clause because all subjects and
objects that are similarly situated are subject to the same burdens and granted the same
privileges without any discrimination whatsoever,
The presence of the 2nd element, taxing all of the subjects and objects for the first time,
without taxing all for the second time, results to discrimination among subjects and objects that
are similarly situated, hence violative of the equal protection clause.

25. Double taxation a valid defense against the legality of a tax measure if the
double taxation is direct duplicate taxation, because it would violate the equal protection
clause of the constitution.
 26. When an item of income is taxed in the Philippines and the same
income is taxed in another country, this would be known as international juridical
double taxation which is the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical grounds. (Commissioner
of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)

 27. Methods for avoiding double taxation (indirect duplicate taxation).

a. Tax treaties which exempts foreign nationals from local taxation and local
nationals from foreign taxation under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as deductions from local taxes
that are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.

28. Tax credit generally refers to an amount that is subtracted directly from one’s
total tax liability, an allowance against the tax itself, or a deduction from what is owned.
A tax credit reduces the tax due, including –whenever applicable – the income tax that
is determined after applying the corresponding tax rates to taxable income. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

29. A tax deduction is defined as a subtraction fro income for tax purposes, or
an amount that is allowed by law to reduce income prior to the application of the tax rate to
compute the amount of tax which is due.
A tax deduction reduces the income that is subject to tax in order to arrive at taxable
income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No.
159647, April 15, 2005)

 30. The petitioners allege that the R-VAT law is constitutional because the
Bicameral Conference Committed has exceeded its authority in including provisions
which were never included in the versions of both the House and Senate such as
inserting the stand-by authority to the President to increase the VAT from 10% to
12%; deleting entirely the no pass-on provisions found in both the House and Senate
Bills; inserting the provision imposing a 70% limit on the amount of input tax to be
credited against the output tax; and including the amendments introduced only by
Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added
tax. Thus, there was a violation of the constitutional mandate that revenue bills shall
originate exclusively from the House of Representatives.
Are the contentions of such weight as to constitute grave abuse of discretion
which may invalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the
changes and modifications made by the Bicameral Conference Committee were germane to
subjects of the provisions referred to it for reconciliation.
The Bicameral Conference Committee merely exercised the judicially recognized long-
standing legislative practice of giving said conference committee ample latitude for
compromising differences between the Senate and the House. [Abakada Guro Party List (etc.)
v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases]

31. The VAT while regressive is NOT violative of the mandate to evolve a
progressive system of taxation. Do you agree ? The mandate to Congress is not to
prescribe but to evolve a progressive system of taxation. Otherwise, sales taxes which perhaps
are the oldest form of indirect taxes, would have been prohibited with the proclamation of the
constitutional provision. Sales taxes are also regressive. . [Abakada Guro Party List (etc.) v.
Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Tolentino
v. Secretary of Finance, et al., G. R. No. 115455, August 25, 1994, 235 SCRA 630]

32. All revenues and assets of non-stock, non-profit educational

institutions that are actually, directly and exclusively used for educational purposes
shall be exempt from taxation.

33. Revenues and assets of proprietary educational institutions, including

those which are cooperatively owned, may be entitled to exemptions subject to
limitations provided by law including restrictions on dividends and provisions for
reinvestments. There is no law at the present which grants exemptions, other the exemptions
granted to cooperatives.