UP Law C2015 Taxation Law 1
MODULE 1—GENERAL PRINCIPLES OF TAXATION
A. Concept, Nature, Basis,
Purpose
1. CONCEPT
Taxation is the act of laying a tax, i.e., the
process or means by which the sovereign,
through its law-making body, raises income to
defray the necessary expenses of government.
As a power, taxation refers to the inherent power
of the state to demand enforced contributions
for public purpose or purposes. (de Leon)
Taxation is a mode by which governments make
exactions for revenue in order to support their
existence and carry out their legitimate
objectives. The term may refer to either or both
the power to tax or the act or process by which
the taxing power is exercised. (Vitug)
2. NATURE OF THE POWER OF TAXATION
(1) IT IS INHERENT IN SOVEREIGNTY
It is an incident or attribute of sovereignty and is
essential to the existence of every government.
It exists apart from constitutions and without
being expressly conferred by the people. Hence,
it can be exercised by the government even
when the constitution is silent on the subject.
In our constitution, the provisions relating to the
power of taxation merely constitute limitations
upon a power which would otherwise be
practically without limit.
(2) IT IS LEGISLATIVE IN CHARACTER
It cannot be exercised by the executive or
judicial branch of the government.
While it is the Congress that can impose taxes,
the levy of a tax may also be made by a local
legislative body, subject to such limitations as
may be provided by law.
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(3) IT IS SUBJECT TO CONSTITUTIONAL AND
INHERENT LIMITATIONS
Most limitations are specifically provided in the
Constitution or implied therefrom, while the rest
are inherent and they are those which spring
from the nature of the taxing power itself.
Individual equities or equalities are not
regarded. The mere fact that taxation is unjust
or oppressive with respect to a particular
taxpayer does not of itself render a tax law
invalid, where no constitutional provision has
been violated.
3. THEORY AND BASIS OF TAXATION
(1) The power of taxation proceeds upon the
theory that the existence of the government
is a necessity; that it cannot continue
without means to pay its expenses. For
these means, it has a right to compel all of
its citizens and property within its limits to
contribute.
Taxes are the lifeblood of the government and
their prompt and certain availability are an
imperious need. (Commissioner v. Pineda)
Upon taxation depends the government’s ability
to serve the people for whose benefit taxes are
collected. (Vera v. Fernandez)
(2) The basis of taxation is found in the
Benefits-Received Principle where there is a
reciprocal duty of protection and support
between the state and its inhabitants. In
return for his contribution, the taxpayer
receives the general advantages and
protection which the government affords
the taxpayer and his property.
But there is a qualification: It does not mean
that only those who pay taxes can enjoy the
privileges and protection given to a citizen by
the government. Even those who do not pay
taxes enjoy such privileges and protection. The
reason is that the protection in the enjoyment of
his rights is a duty owed by the State to every
citizen.
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From the contribution received, the government
renders no special or commensurate benefit to
any particular property or person. A tax is not
imposed on the basis of a special benefit
accruing to each citizen in proportion to the tax
paid.
The only benefit the taxpayer is entitled to is
that derived from his enjoyment of the privileges
of living in an organized society.
Taxation is the indispensable and inevitable
price for civilized society; without taxes, the
government would be paralyzed. (Commissioner
v. Algue)
4. PURPOSE OF TAXATION
The primary purpose of taxation on the part of
the government is to provide funds or property
with which to promote the general welfare and
protection of its citizens.
CASES
Commissioner v. Pineda (1967)
Facts: Manuel’s father Atanasio died. After
Atanasio’s estate was divided, the BIR
investigated the income tax liability of the
estate and found that the corresponding
income tax returns were not filed. Manuel was
held liable to pay all of the unpaid taxes. He
now claims that he is liable only up to the
extent of and in proportion to any share he
received.
Held: Manuel is liable for the whole amount.
The Government has 2 ways of collecting the
tax in question. One, by going after all the heirs
and collecting from each one of them the
amount of the tax proportionate to the
inheritance received. Two, pursuant to the lien
created by Sec. 315 of the Tax Code, is by
subjecting said property of the estate which is in
the hands of an heir or transferee to the
payment of the tax due the estate– which was
availed of here. The BIR must be given the
necessary discretion to avail if the most
expeditious way to collect tax. This is because
“taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need.” Nonetheless, Manuel can still
demand contribution from his co-heirs.
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Vera v. Fernandez (1979)
Facts: The government here is claiming unpaid
taxes from the estate of Luis Tongoy. The
administrator Francis opposed, claiming that
the government was barred under Rule 86, Sec.
5 of the Rules of Court, which provides that all
claims for money against the decedent, arising
from contracts must be filed within the time
limited in the notice ; otherwise they are barred
forever. Issue is WON the statute of non-claims
of the RoC bars the government’s claim for
unpaid taxes.
Held: No. While the rule invoked by Francis does
not apply to monetary obligations created by
law, there is another reason why the
government is not barred: Upon taxation
depends the government ability to serve the
people, for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of
government officials entrusted with the collection
of taxes should not be allowed to bring harm or
detriment to the people. In the same manner,
private persons may be made to suffer
individually on account of his own negligence,
the presumption being that they take good care
of their personal affairs. This should not hold
true to government officials with respect to
matters not of their own personal concern. This
is the philosophy behind the government's
exception, as a general rule, from the operation
of the principle of estoppel.
Commissioner v. Algue (1988)
Facts: Algue, Inc. was assessed delinquency
income taxes by the CIR. Algue protested and
claimed a P75k deduction as legitimate
business expenses. This was denied.
Held: Algue’s appeal was filed seasonably. Its
letter of protest was not taken into account
before the warrant of distraint and levy was
issued. The Collector of Internal Revenue was
incorrect in disallowing the P75k deduction. The
amount was legitimately paid by Algue in the
form of promotional fees. The burden is on the
taxpayer to prove the validity of the claimed
deduction. In this case, the onus has been
discharged satisfactorily.
Taxes are what we pay for civilized society.
Without taxes, the government would be
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paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural
reluctance to surrender part of one's hard
earned income to the taxing authorities, every
person who is able to must contribute his share
in the running of the government.
The government for its part is expected to
respond in the form of tangible and intangible
benefits intended to improve the lives of the
people and enhance their moral and material
values.
This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion
that it is an arbitrary method of exaction by
those in the seat of power.
B. Principles of a Sound Tax
System
1. FISCAL ADEQUACY
Sources of revenue, taken as a whole, should be
sufficient to meet the demands of public
expenditure. Excess or deficiency is not in
keeping with this principle.
2. EQUALITY OR THEORETICAL JUSTICE
The tax burden should be in proportion to the
taxpayer’s ability to pay. This is known as the
Ability-to-Pay Principle. It also connotes that the
contribution of each person towards the
expense of the government should be so
apportioned such that he would feel neither
more nor less inconveniences from his share of
the payment than every other person
experiences from his.
3. ADMINISTRATIVE FEASIBILITY
Tax laws should be capable of convenient, just,
and effective administration. Each tax in the
system should be clear and plain to the
taxpayer, capable of uniform enforcement by
the government officials, convenient as to time,
place, and manner of payment, and not unduly
burdensome upon, or discouraging to business
activity. Tax laws should close up loopholes for
tax evasion and deter unscrupulous officials
from committing frauds in the assessment and
collection of taxes.
C. Aspects of Taxation
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1. Taxation— Levying or imposition of tax
which is a legislative act.
2. Tax Administration— Collection of tax
levied which is essentially administrative in
character.
The two processes together constitute the
“Taxation System”
D. Essential Characteristics of
Taxation
1. IT IS AN ENFORCED CONTRIBUTION
A tax is not a voluntary payment or donation
and its imposition is not dependent upon the
will or assent of the person taxed.
2. IT IS GENERALLY PAYABLE IN MONEY
Tax is an exaction to be discharged alone in the
form of money which must be in legal tender.
Take note: “generally.” Property can be
expropriated in payment of taxes and
government bonds can also be used to pay for
taxes.
3. IT IS PROPORTIONATE IN CHARACTER
A tax is laid based on ability to pay.
4. IT IS LEVIED OF PERSONS OR PROPERTY
A tax may also be imposed on acts, transaction,
rights, or privileges. In each case, it is only a
person who pays the tax. The property is
resorted to for the purpose of ascertaining the
amount of tax that must be paid and of
enforcing payment in case of default of the
taxpayer.
5. IT IS LEVIED BY THE STATE WHICH HAS
JURISDICTION OVER THE PERSON OR
PROPERTY
The object to be taxed must be subject to the
jurisdiction of the taxing state. This necessary in
order that the tax can be enforced.
6. IT IS LEVIED BY THE LAW-MAKING BODY
OF THE STATE
The power to tax is a legislative power which
under the Constitution only the Congress can
exercise through the enactment of tax statutes.
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However, local governments are also granted
the power to tax, subject to such limitations as
may be provided by law.
7. IT IS LEVIED FOR PUBLIC PURPOSE OR
PURPOSES
Taxation involves a charge or burden imposed
to provide income for public purposes—the
support of the government, the administration
of the law, or the payment of public expenses.
Revenues derived from taxes cannot be used for
purely private purposes.
E. Classification of Taxes
1. AS TO SUBJECT MATTER OR OBJECT
(1) PERSONAL, POLL, OR CAPITATION
Tax of a fixed amount imposed on persons
residing within a specified territory, whether
citizens or not, without regard to their property
or the occupation or business in which they may
be engaged.
Ex.: Community Tax
(2) PROPERTY
Tax imposed on property, whether real or
personal, in proportion either to its value, or in
accordance with some other reasonable method
of apportionment.
Ex.: Real Estate Tax
(3) EXCISE
Any tax which does not fall within the
classification of a poll tax or a property tax.
It is a charge imposed upon the performance of
an act, the enjoyment of a privilege, or the
engaging in an occupation, profession, or
business. Synonymous with “privilege tax.”
Ex.: income tax, VAT, estate tax, donor’s tax
2. AS TO WHO BEARS THE BURDEN
(1) DIRECT
Tax which is demanded from the person who
also shoulders the burden of the tax; or tax for
which the taxpayer is directly liable or which he
cannot shift to another.
Ex.: Corporate and individual income taxes,
community tax, estate tax, donor’s tax
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(2) INDIRECT
Tax which is demanded from one person in the
expectation and intention that he shall
indemnify himself at the expense of another.
The burden is passed on to another.
Ex.: VAT, excise taxes on certain specific goods,
customs duties
3. AS TO DETERMINATION OF AMOUNT
(1) SPECIFIC
Tax of a fixed amount imposed by the head or
number, or by some weight or measurement.
Ma’am L: There is less room for corruption with
this kind of tax.
Ex.: Tax on distilled spirits, wines, fireworks
(2) AD VALOREM
Tax of a fixed proportion of the value of the
property with respect to which the tax is
assessed.
Ad Valorem literally means “according to
value.”
Ex.: Real estate tax, excise taxes on cigarettes,
gasoline and others, customs duties
4. AS TO PURPOSE
(1) GENERAL, FISCAL, OR REVENUE
Tax imposed for the general purpose of the
government
Ex.: Income tax, VAT, and almost all taxes
(2) SPECIAL OR REGULATORY
Tax imposed for a special purpose, i.e. to
achieve some social or economic ends
irrespective of whether revenue is actually
raised or not.
Ex.: Protective tariffs, or customs duties on
imported goods
5. AS TO SCOPE (OR AUTHORITY
IMPOSING THE TAX)
(1) NATIONAL
Tax imposed by the national government
Ex.: National internal revenue taxes, customs
duties, and national taxes imposed by special
laws
(2) MUNICIPAL OR LOCAL
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Tax imposed by municipal corporations or local regulation

government units Imposed on the right Also imposed on
Ex.; Real estate tax, professional tax to exercise a privilege persons or property,
aside from privilege
6. AS TO GRADATION OR RATE Failure to pay makes Failure to pay does not
the act or business necessarily makes the
(1) PROPORTIONAL illegal act or business illegal
Tax based on a fixed percentage of the amount
of the property, receipts, or other basis to be CASES
taxed.
Ex.: Real estate tax, VAT, and other percentage
Procter and Gamble v. Municipality of Jagna
taxes
(1979)
(2) PROGRESSIVE OR GRADUATED Facts: P&G owns a bodega in the Municipality of
Tax the rate of which increases as the tax base Jagna where it stores copra. It was taxed by the
or bracket increases. Municipality pursuant to an ordinance imposing
Ex.: Income tax, estate tax, donor’s tax storage fees on all exportable copra deposited
in the bodega within the Municipality of Jagna.
(3) REGRESSIVE P&G assails the validity of the ordinance.
Tax rate of which decreases as the tax base or Held: The ordinance is valid. Municipalities are
bracket increases. authorized to impose 3 kinds of licenses: 1)
We have no regressive taxes. regulation of useful occupations or enterprises; 2)
for restriction or regulation of non-useful
(4) MIXED occupations or enterprises; and 3) license for
Part progressive, part regressive. revenue. The Ordinance is a license for revenue,
its purpose being to reimburse the Municipality
for the service of supervising the copra being
F. Distinguished from Certain stored in bodegas within its territory.
“License tax” has no fixed meaning, and may
Kinds of Exactions refer to different impositions exacted for the
exercise of various privileges
1. LICENSE FEE Municipalities are allowed wide discretion in
determining the rates of imposable license fees,
A charge imposed under the police power for and it falls upon P&G to prove any alleged
purposes of regulation. It is in the nature of a arbitrariness of the questioned rates. There was
special privilege, of a permission or authority to no sufficient showing of arbitrariness of the rate
do what is within its terms. It makes lawful and imposed by the Ordinance.
act which would otherwise be unlawful. The Ordinance is also a valid exercise of police
power granted to municipalities under Sec.
License Fee Tax 2238 of the Revised Administrative Code or the
Legal compensation An enforced general welfare clause. Since warehouses used
or reward of an officer contribution assessed for storing copra may endanger public safety
for specific services by sovereign authority (the oil content of copra, when ignited, is
to defray public different to put under control by water — use of
expenses chemicals is needed to put out the fire), all
exportable copra deposited within the
Imposed for regulation Levied for revenue
municipality is “part of the surveillance and
Involves the exercise of Involves the exercise of
lookout of the municipal authorities.”
police power taxing power
Amount should be No limit as to the
limited to the amount of tax that
Morcoin v. City of Manila (1961)
necessary expenses of may be imposed Facts: Morcoin owned and operated a jukebox in
inspection and the City of Manila. Pursuant to an Ordinance,

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they paid P5.00 annually for the right to
operate the jukeboxes. One day, the City of
Manila, in order to curb the use of pinball
machines, amended the Ordinance to the effect
that any mechanical contrivance or automatic
apparatus which functions through the
introduction of money shall require a license to
operate. The license called for an annual fee of
P300.00. Morcoin brought an action before the
CFI assailing the Ordinance on the ground that
the license fee of P300.00 was exorbitant,
excessive, confiscatory, and substantially
disproportionate to the reasonable expenses of
issuing the license for and regulating the said
machines.
Held: The City of Manila’s Charter granted the
Municipal Board the power to regulate the
operation of slot machines—not to impose tax.
Since regulation of license fees involves the
exercise of police power, the rates could not be
so high as to be confiscatory. It should be
approximately commensurate with and sufficient
to cover all the necessary or probable expenses of
issuing the license and of such inspection,
regulation, and supervision as may be lawful. Any
ordinance which imposes a license fee which is
substantially in excess of the reasonable expense
of issuing the license and regulating the
occupation to which it pertains, is invalid.
Golden Ribbon Lumber v. City of Butuan
(1964)
Facts: Golden Ribbon operated a lumber mill
and lumber yard in the city of Butuan. The City
enacted an ordinance supposedly imposing a
tax on the lumber yard or mills but requiring tax
to be paid for every board foot of lumber sawn,
manufactured, or produced. The City collected
tax from Golden Ribbon, alleging that the
ordinance imposed a license tax on lumber
mills. Golden Ribbon contends that the tax was
on sawn manufactured lumber which are forest
products and are therefore beyond the power of
the city to impose.
Held: The ordinance is invalid. The tax imposed
was not for the enjoyment of the privilege to
engage in a particular trade or business. Neither
is it a condition precedent to the enjoyment of
such privilege. It also does not state that the
non-payment of tax would result in the
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cancellation of any previous license granted.
The only consequence of its non-payment
appears to be the imposition of a surcharge or
liability to suffer the penal sanctions.
Progressive Development Corp. v. Quezon
City (1989)
Facts: Progressive, owner of Farmers Market,
opposed the City’s 5% tax on gross receipts on
rentals of privately-owned market spaces.
According to Progressive, the tax was an income
tax—a type of tax that cannot be imposed by
local governments.
Held: The tax constituted a license tax or fee for
the regulation of the business in which
Progressive is engaged. Local governments are
allowed wide discretion in determining the rates
of imposable license fees even in cases of purely
police power measures, in the absence of proof
as to particular arbitrariness or
unreasonableness of the questioned rates. As a
market established for the rendition of service to
the general public, it warrants close supervision
and control by Quezon City for the protection of
the health of the people. This regulation is for
the protection and promotion of public interest;
thus, it is within the City’s authority to authorize
the tax.
PAL v. Edu (1988)
Facts: Pursuant to a legislative act, PAL is
exempt from the payment of taxes. Since 1956,
PAL has not been paying motor vehicle
registration fees. In 1971, the Land
Transportation Commissioner issued a
regulation requiring all tax exempt entities,
among them PAL to pay motor vehicle
registration fees. PAL protested invoking the
legislative act. The LTC contended that
registration fees of motor vehicles are not taxes,
but regulatory fees imposed as an incident of
the exercise of the police power of the state.
Held: They are taxes. If the purpose is primarily
revenue, or if revenue is at least one of the real
and substantial purposes, then the exaction is a
tax. Here, the law itself provides that all such
money from motor vehicle registration fees shall
accrue to the funds for the construction and
maintenance of public roads, streets and
bridges. It is thus obvious that the fees are not
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collected for regulatory purposes for their
express object is to provide revenue for the
construction and maintenance of public
highways for everybody's use. They are veritable
taxes, not merely fees.
2. TOLL
A sum of money for the use of something,
generally applied to a consideration which is
paid for the use of a road, bridge, or the like, of a
public nature.
and passengers travelling public roads. The toll
for use of a toll road is for its use in travelling
thereon, not for its use as a parking place for
vehicles. Considering that the buses are only
charged the fee when they stop on "any portion
of the existing parking areas for the purpose of
loading or unloading passengers or cargoes,"
the fees collected are actually in the nature of
parking fees and not toll fees for the use of
Zulueta Street.
3. SPECIAL ASSESSMENT OR LEVY

Toll Tax An enforced proportional contribution from

Demand of Demand of owners of lands especially or peculiarly
proprietorship sovereignty benefited by public improvements.
Paid for the use of Paid for the support of
another’s property government Special Assessment Tax
Amount of toll Generally no limit on Levied only on land Levied on persons and
depends upon the cost the amount of tax that property
of construction, may be imposed Not a personal liability May be personal
maintenance of the of the person liability of person
public improvement assessed, i.e. his assessed
used liability is limited only
May be imposed by May be imposed only to the land involved
the government or by the government Based wholly on Based on necessity
private individuals or benefits and benefits
entities Exceptional both as to Has general
time and place application

CASES 4. DEBT OR ORDINARY OBLIGATION

City of Ozamiz v. Lumapas (1975) Based upon juridical tie and is created by law,
Facts: Lumapas, a bus operator, opposed the contract, quasi-contract, delict, and quasi-delict
imposition of a parking fee by Ozamiz City on between parties for their private interest, or
his buses that were temporarily parked on resulting from their own acts or omissions.
Zulueta Street while waiting for passengers to
board. According to him, the charge was not a Debt Tax
parking fee but a toll fee in disguise. The local Generally based on Based on law
government cannot impose toll fees without the contract, express or
approval of the president; and as a result, the implied
ordinance imposing parking fee is null and void. assignable Cannot generally be
assigned
Held: It is a parking fee for the regulation of the May be paid in kind Generally payable in
use of Ozamiz’s streets. The ordinance defines money
parking mean the stoppage of a motor vehicle May be subject of a Generally not subject
of whatever kind on any portion of the existing set-off or to set-off or
parking areas for the purpose of loading and compensation compensation
unloading passengers or cargoes. The word Person cannot be Imprisonment is a
"toll" when used in connection with highways imprisoned for non- sanction for the non-
has been defined as a duty imposed on goods payment of debt payment of tax (except

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poll tax)
Governed by ordinary Governed by special
periods of prescription prescriptive periods
provided for in the tax
code
Draws interest when it Does not draw interest
is so stipulated or except only when
when there is default delinquent
CASES
Victorias Milling Co. v. PPA (1987)
Facts: VMC operated a private wharf on its own
land. It spends for the wharf’s repair and
maintenance. The PPA required VMC to pay
berthing fees and remit 10% of its gross income
as handling charges. VMC refused claiming that
it was exempt from paying the charges because
the wharf was its own and was located on its
own property.
Held: VMC is not exempt from paying the fees
and charges. The fees and charges PPA collects
are not for the use of the wharf that petitioner
owns but for the privilege of navigating in public
waters, of entering and leaving public harbors
and berthing on public streams or waters.
Berthing charges against a vessel are collectible
regardless of the fact that mooring or berthing
is made from a private pier or wharf. This is
because the government maintains bodies of
water in navigable condition and it is to support
its operations in this regard that dues and
charges are imposed for the use of piers and
wharves regardless of their ownership.
As to the 10% remittance, Section 6B-(ix) of the
Presidential Decree No. 857 authorized the PPA
"To levy dues, rates, or charges for the use of the
premises, works, appliances, facilities, or for
services provided by or belonging to the
Authority, or any organization concerned with
port operations." This 10% government share of
earnings of arrastre and stevedoring operators
is in the nature of contractual compensation to
which a person desiring to operate arrastre service
must agree as a condition to the grant of the
permit to operate.
Philex Mining Corp. v. CIR (1998)
Facts: The BIR demanded that Philex pay its tax
liabilities. Philex protested on the ground that it
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had pending claims for VAT input credit/refund
that it had paid before. They ask that the refund
be applied against the tax liabilities.
Held: Taxes cannot be subject to compensation
for the reason that the government and the
taxpayer are not creditors and debtors to each
other. There is a distinction between taxes and
debt: Debts are due to the government in its
corporate capacity. Taxes are due to the
government in its sovereign capacity.
G. Scope and Limitations of
Taxation
1. IN GENERAL
The power to tax is not without limitations,
these may be classified into:
(1) INHERENT LIMITATIONS
or those which restrict the power although they
are not embodied in the Constitution
1. Taxation is for public purpose
2. Taxation is inherently legislative
3. Taxation is territorial
4. Taxation is subject to international
comity
5. Exemption of government agencies and
instrumentalities
(2) CONSTITUTIONAL LIMITATIONS
or those expressly found in the Constitution or
implied from its provisions.
1. Due Process and Equal Protection
2. Non-impairment of obligations of
contracts
3. No imprisonment for failure to pay a
poll tax
4. Equality and Uniformity
5. Delegation of taxing power to President
6. Exemption of Religious, Charitable, and
Educational Institutions fro Property tax
7. Concurrence of Congress in granting tax
exemptions
8. Tax levied for special purpose shall be
put in a special fund
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9. Presidential Veto of tariff and revenue
bills
10. Non-impairment of jurisdiction of SC in
tax cases
11. Delegation of taxing power to Local
Governments
12. Exemption of non-stock, non-profit
educational institutions from tax
CASES
Sison v. Ancheta (1984)
Facts: Sison challenged the constitutionality of
BP 135, a new Tax Law amending Sec. 21 of the
NIRC, that imposed a lower rate on net income
than gross income, depending on employment.
Held: BP 135 upheld, since it was not shown to
have violated any of the restrictions in the
Constitution.
The field of state activity has assumed a much
wider scope, because the areas which used to
be left to private enterprise and initiative
continue to lose their well-defined boundaries
and to be absorbed within activities that the
government must undertake if it is to meet the
increasing social challenges of the times, hence
the need for more revenues.
The power to tax, an inherent prerogative, has
to be availed of to assure the performance of
vital state functions. It is the bulk of public
funds. Taxes being the lifeblood of the
government, their prompt and certain ability is
of the essence.
According to Justice Malcolm, the power to tax
is an attribute of sovereignty. It is the strongest
of all the powers of government. However, it is
not unconfined, as there are restrictions in the
Constitution, specifically the due process and
equal protection clauses. If it were otherwise,
then the power of tax would involve the power
to destroy, as stated by Justice Frankfurter.
Commissioner v. Algue (1988)
Facts: Algue was assessed delinquency income
taxes. Although it filed a letter of protest, it was
still presented with a warrant of distraint and
levy.
Held: Algue’s appeal was filed seasonably. Its
letter of protest was not taken into account
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before the warrant of distraint and levy was
issued.
Taxes are what we pay for civilization society.
Without taxes, the government would be
paralyzed for lack of the motive power to
activate and operate it. Despite the natural
reluctance to surrender part of one’s hard
earned income to taxing authorities, every
person who is able must contribute his share in
the running of 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. But even as we
concede the inevitability and indispensability of
taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is
not, then the taxpayer has a right to complain
and the courts will then come to his succor.
Pepsi Cola v. Municipality of Tanuan (1976)
Facts: Pepsi assails RA 2264, or the Local
Autonomy Act (LAA) for being an undue
delegation of taxing authority as well as
Ordinances 23 and 27 of the municipality of
Tanuan, Leyte, declared null and void for
covering the same subject matter and imposing
the same production rates.
Held: RA 2264 is constitutional. the legislative
power to create political corporations for
purposes of local self-government carries with it
the power to confer on the latter the power to
tax, for local concerns. Local governments are
authorized by the Constitution to create their
own sources of revenue. In delegating authority,
State is not limited to exact measure of power
which is exercised by itself. There may be
delegated such measure of power to impose
and collect taxes as the legislature may deem
expedient. Thus, municipalities may be
permitted to tax subjects, which for reasons of
public policy the State has not deemed wise to
tax for general purposes.
2. INHERENT LIMITATIONS
(1) TAXATION IS FOR A PUBLIC PURPOSE
Public/Governmental purpose:
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UP Law C2015 Taxation Law 1
Purpose affecting the inhabitants of the state or
taxing district as a community and not merely
as individuals.
Test:
Proceeds of tax must be used:
 For the support of the government.
 For any of the recognized objects of
government.
 To promote the welfare of the community.
Reason:
Tax levied for private purpose constitutes taking
of property without due process of law. Since
the government is established for public
purpose, public money can only be spent for the
same purpose.
The purpose need not be exclusively public; it
can have incidental benefit to private interest.
The test is not as to who receives the money but
the character of the purpose for which it is
expended.
Taxpayer’s right to question purpose of tax:
Taxpayers have sufficient interest of preventing
illegal expenditures of money raised by
taxation; but he is not relieved from obligation
of paying a tax because of his belief that it is
being misappropriated by certain officials.
However, a taxpayer has no legal standing to
question executive acts that do not involve use
of public funds.
CASES
Pascual v. Secretary of Public Works (1960)
Facts: A feeder road was private property of Jose
Zulueta. He offered to donate the said road to
the Municipality of Pasig, but no deed of
donation had been executed. RA 920 was
passed appropriating funds for public work on
the road. On the same day, a deed of donation
was finally executed.
Held: RA 920 was unconstitutional. Legislature
is without power to appropriate public revenues
for anything but a public purpose. It is the
essential character of the direct object of the
expenditure which must determine its validity as
justifying a tax and not the magnitude of the
interests to be affected nor the degree to which
the general advantage of the community may
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be ultimately benefited by their promotion.
Incidental advantage to the public or to the
State, which results from the promotion of
private enterprises or businesses, does not
justify their aid by the use of public money.
Lutz v. Araneta (1955)
Facts: The US was going to tax imported sugar.
In response, the Sugar Adjustment Act imposed
new tax in,to protect the sugar industry. Lutz
challenged the constitutionality of the tax
imposed on owners of lands devoted to the
cultivation of sugarcane, saying that it is for the
aid of the sugar industry exclusively, which is
not a public purpose for which a tax may be
constitutionally levied.
Held: Court held that it was valid because the
protection, promotion and advancement of the
sugar industry, a crucial industry in the country,
would redound to the benefit of the general
welfare. It is inherent in the power to tax that a
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 for taxation or exemption
infringe no constitutional limitation. There
might be other industries that are also in need
of similar protection; but the legislature is not
required by the Constitution to adhere to a
policy of all or none.
Gomez v. Palomar (1968)
Facts: Benjamin Gomez sent a letter which was
returned to him for not bearing a special anti-
TB stamp which was implemented by RA 1635
and subsequent AOs by the postmaster general.
Gomez filed a case praying for the
unconstitutionality of the law it being violative
of equal protection.
Held: The eradication of a dreaded disease is a
public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a
return for what he pays, then it is sufficient
answer to say that the only benefit to which the
taxpayer is constitutionally entitled is that
derived from his enjoyment of the privileges of
living in an organized society, established and
safeguarded by the devotion of taxes to public
purposes. Any other view would preclude the
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UP Law C2015 Taxation Law 1
levying of taxes except as they are used to
compensate for the burden on those who pay
them and would involve the abandonment of
the most fundamental principle of government
— that it exists primarily to provide for the
common good.
Valentin Tio v. Videogram Regulatory Board
(1987)
Facts: Tio challenged the constitutionality of PD
1987, the law creating the Videogram
Regulatory Board, pointing out, among others,
that its tax provision is harsh and oppressive.
Held: The creation of the VRB is a necessary
measure to protect the then rising video
industry, which was up against the abundance
of pirated and pornographic materials in the
market.
A tax does not cease to be valid merely because
it regulates, discourages, or even definitely
deters the activities taxed. The power to impose
taxes is one so unlimited in force and so
searching in extent, that the courts scarcely
venture to declare that it is subject to any
restrictions whatever, except such as rest in the
discretion of the authority which exercises it.
The public purpose of a tax may legally exist
even if the motive which impelled the
legislature to impose the tax was to favor one
industry over another. It is inherent in the power
to tax that a state be free to select the subjects
of taxation, and it has been repeatedly held that
"inequities which result from a singling out of
one particular class for taxation or exemption
infringe no constitutional limitation".
(2) TAXATION IS INHERENTLY LEGISLATIVE
General Rule
The power of taxation being purely legislative,
Congress cannot delegate the power to others.
(Based on the doctrine of separations of powers
which is implied from the provisions of the
Constitution.)
Exception
Proper delegation to:
1. President
Constitutionally authorized under Sec. 28
(2) of Article VI.
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2. LGUs
In line with the well accepted principle that
the power to create municipal corporations
for purposes of local self-government
carries with it by necessary implication, the
power to confer the power to tax on such
local governments.
Also now expressly granted in our
Constitution (Sec. 5, Art. X) and the Local
Government Code
3. Administrative agencies
Other aspects of the taxing process that are
not legislative may be vested in an
administrative agency.
Limitations on Delegation
1. It shall not contravene any constitutional
provision or inherent limitation.
2. It is effected either by the Constitution or by
validly enacted legislative measures or
statute.
3. The delegated levy power, EXC when the
delegation is by an express provision of
Constitution, should only be in favor of the
local legislative body of the local or
municipal government concerned.
Legislative authority includes the authority:
1. To determine:
a. Nature (kind)
b. Object (purpose)
c. Extent (amount or rate)
d. Coverage (subjects and objects)
e. Situs (place)
2. To grant tax exemptions or condonations.
3. To specify or provide for administrative,
judicial remedies that either the
government or taxpayer may avail
themselves of in the proper implementation
of the measure.
CASES
National Power Corporation v. Albay (1990)
Facts: The Province of Albay auctioned of
properties of NAPOCOR to settle the tax
deficiencies of NAPOCOR. NAPOCOR claims
that their tax exemption had been restored
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UP Law C2015 Taxation Law 1
under FIRB Resolution No. 17-87, which was
also affirmed by Executive Secretary Macaraig.
Held: Under PD 776 which created the FIRB, the
FIRB has no authority to impose taxes or revoke
existing ones, which, after all, is legislative
under the Constitution. They merely have the
power to “recommend” tax exemptions, and
cannot by itself prescribe or restore taxability.
EO 93 which gave the prerogative to restore tax
and/or duty exemptions may only be given
prospective effect and cannot affect the Board’s
past acts.
Cu Unjieng v. Patstone (1917)
Facts: Cu Enjieng wanted to build a warehouse,
but the City of Manila wanted him to comply
with City Ordinance 301, and make an arcade
and pay an exhorbitant license fee for it before
giving him a building permit. He filed a petition
for mandamus to compel the city engineer to
issue him the permit. Lower court refused.
Held: The SC held that while the Municipal
Board could compel him to build an arcade, it
did not have the power to impose a fee purely
for revenue, because such a power is legislative
in nature, and thus should be expressly
conferred on them. Legislative powers in regard
to taxes and licenses are not inherent in
municipal corporations; they must be granted
by statute either expressly or by necessary
implication. Like other delegated powers,
taxation by municipal corporations are subject
to strict construction.
Cervantes v. Auditor General (1952)
Facts: Cervantes, the manager and board
chairman of NAFCO was given the maximum
salary granted by its charter and also quarters
allowance. However, the Auditor General
disallowed such disapproved by the Control
Committee of the Government Enterprises
Council, which was created by EO 93 in
pursuance to the President’s authority under RA
51.
Held: EO 93 did not constitute an illegal
delegation of legislative power. So long as the
Legislature "lays down a policy and a standard
is established by the statute" there is no undue
delegation. R.A. No. 51 in authorizing the
President of the Philippines, among others, to
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make reforms and changes in government-
controlled corporations, lays down a standard
and fixes a policy that the purpose shall be to
promote simplicity, economy and efficiency in
their operations. The President had to carry the
mandate. This he did by promulgating the
executive order in question which, tested by the
rule above cited, does not constitute an undue
delegation of legislative power.
Maceda v. Macaraig (1993)
Facts: The petition sought to nullify certain
decisions, orders, ruling, and resolutions of the
Executive Secretary, Secretary of Finance,
Commissioner of Internal Revenue,
Commissioner of Customs, and the FIRB
exempting NPC from indirect tax and duties.
Commonwealth Act 120 created NPC as a
public corporation. RA 6395 revised the charter
of NPC and provided in detail the exemption of
NPC from all taxes, duties and other charges by
the government. There were many resolutions
and decisions that followed after RA 6395
which withdrew/reinstated NPC’s tax
exemption.
Held: NPC, as a non-profit public corporation,
was created for the general good and welfare of
the people. From the very beginning of its
corporate existence, NPC enjoyed preferential
tax treatment to enable it to pay its debts and
obligations. From the changes made in the NPC
charter, the intention to strengthen its
preferential tax treatment is obvious. The tax
exemption is intended not only to insure that
the NPC shall continue to generate electricity
for the country but more importantly, to assure
cheaper rates to be paid by consumers.
The FIRB Resolution, restoring NPC’s tax
exemption was validly issued. The delegation in
the law, to the President and/or Ministry of
Finance, of the power to restore tax exemptions
was held to be valid. EO 93, which is complete
in itself, was a sufficient delegation of power
then to the FIRB.
(3) TAXATION IS TERRITORIAL
General Rule
A state may not tax property lying outside its
borders or lay an excise or privilege tax upon the
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UP Law C2015
exercise or enjoyment of a right or privilege
derived from the laws of another estate and
therein exercised and enjoyed.
Within the territorial jurisdiction, the taxing
authority may determine the place of taxation
(tax situs)
Reason
Tax laws do not operate beyond a country’s
territorial limits; property wholly within the
jurisdiction of another state receives none of the
protection for which a tax is supposed to be
compensation.
Exception
A person may be taxed where there is between
him and the taxing state, a privity of relationship
justifying the levy.
(4) TAXATION IS SUBJECT TO
INTERNATIONAL COMITY
Art. II, §2, 1987 Constitution
The Philippines renounces war as an instrument
of national policy, adopts the generally accepted
principles of international law as part of the law of
the land and adheres to the policy of peace,
equality, justice, freedom, cooperation, and amity
with all nations.
Under international comity, the property of
foreign state or government may not be taxed
by another.
Basis:
1. Sovereign equality among states (one state
cannot exercise its sovereign powers over
another).
2. Usage among states (when one enters the
territory of another, there is an implied
understanding that the former does not
intend to degrade its dignity by placing
itself under the jurisdiction of the latter).
3. Foreign government may not be sued
without its consent.
Government agencies and instrumentalities are
exempted from taxation
 Reason: Government would be taxing itself
if it levies a tax upon public property;
functions of government shall not be unduly
impeded; to reduce amount that has to be
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handled by the government in the course of
its operations.
 Entities exempted: Government entities
through which the government immediately
exercises its sovereign powers.
 GOCCs performing proprietary functions:
Generally subject to tax in absence of tax
exemptions in their charters or special laws
creating them.
 However, if Congress so desires, it may tax
the government as there is no constitutional
prohibition against the government taxing
itself.
3. CONSTITUTIONAL LIMITATIONS
Constitutional provisions are meant and
intended more to regulate and define, rather
than to grant, the power emanating therefrom.
(Vitug)
(1) ART. III, §1, 1987 CONSTITUTION (DUE
PROCESS OF LAW AND EQUAL
PROTECTION OF THE LAWS)
No person shall be deprived of life, liberty, or
property without due process of law, nor shall any
person be denied the equal protection of the laws.
Application of Due Process to taxation:
 A tax imposed for a private purpose or
which is beyond the jurisdiction of the
government to levy and collect offends the
due process of law.
 If judicially declared as invalid, any tax
levied cannot be enforced and thus must be
refunded if paid.
 A taxpayer may not be deprived of his
property for non-payment of taxes without
notice of tax liability as well as of the sale at
public auction.
 A tax law denying taxpayer the fair
opportunity to assert his substantial rights
before a competent tribunal is invalid.
 The procedure prescribed for paying the tax
or contesting the same must be reasonable
and not unjust or oppressive to title
taxpayer.
Application of Equal Protection of the law.
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 All persons subject to legislation shall be
treated alike under all circumstances and
conditions both in the privileges conferred
and liabilities imposed.
 What the Constitution prohibits is class
legislation. So long as there are rational or
reasonable grounds for so doing, Congress
may group the persons or properties to be
taxed and it is sufficient if all of the same
class are subject to the same rate and the
tax is administered impartially upon them.
 Applies alike to all entities placed in similar
situation, or differently to entities belonging
to different classes, provided all those
belonging to one class are treated alike.
 Equal treatment under the law and may
involve the same or different treatment
depending on the circumstances.
(2) ART. III, §10, 1987 CONSTITUTION (NON-
IMPAIRMENT OF THE OBLIGATION OF
CONTRACTS)
No law impairing the obligation of contracts shall
be passed.
This provision is impaired when its terms or
conditions are changed by law or by a party
without the consent of the other, thereby
weakening the position or the rights of the
latter.
 Includes contracts entered into by the
government, executive orders,
administrative orders or circulars, and
ordinances.
Exception
A franchise granted by the government,
although in a sense is an exemption based on a
contract, such may be revoked because under
the Constitution, a franchise is “subject to
amendment, alteration or repeal” by Congress.
(3) ART. III, §20, 1987 CONSTITUTION (NO
IMPRISONMENT FOR NON-PAYMENT OF A
POLL TAX)
No person shall be imprisoned for debt or non-
payment of a poll tax.
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The only penalty for delinquency is payment of
surcharge in the form of interest. (24% pa under
the LGC)
A person is subject to imprisonment for violation
of community tax law other than for non-
payment of tax and for non-payment of other
taxes if so expressly provided for.
Basis: Liberty of abode
(4) ART. VI, §28 (1), 1987 CONSTITUTION (RULE
OF UNIFORMITY AND EQUITY IN
TAXATION)
The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive
system of taxation.
General Rule
All taxable articles or properties of the same
class shall be taxed at the same rate. (Rate is
uniform on the same class everywhere)
There should be uniform application and
operation, without discrimination, of the tax in
every place where the subject of it is found.
 Equality in burden, NOT equality in amount
or equality in its strict and literal meaning.
Uniformity implies equality in burden, not
equality in amount or equality in its strict and
literal meaning.
 The rule of uniformity has been interpreted
as equivalent to the requirements of valid
classification under the equal protection
guarantee for all that is required is that the
tax applies equally to all persons, firms and
corporations place in similar situation.
Uniformity in taxation is effected through the
apportionment of the tax burden among the
taxpayers which under the Constitution must be
equitable.
 Such apportionment must be more or less
just in the light of the taxpayer’s ability to
shoulder the tax burden.
 It may be uniform but inequitable where the
amount of tax imposed is excessive or
unreasonable.
 The requirement implies the use of
reasonable classification of entities or
individuals who are to be affected by a tax.
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UP Law C2015 Taxation Law 1
Progressive System:
Tax laws shall place emphasis on direct rather
than indirect taxation, with ability to pay as
principal criterion.
Distinction between equal protection and
uniformity and equity
While equal protection refers to like treatment
of persons in like circumstances, uniformity and
equity refer to proper relative treatment for tax
purposes of persons in unlike circumstances.
Ma’am L: They are practically the same.
CASES
City of Baguio v. De Leon (1968)
Facts: Ordinance 99 is at question, which
imposed a license fee on entities doing business
in Baguio. It is being assailed on the grounds
that it imposed double taxation and violated the
rule of uniformity as guaranteed by the
Constitution.
Held: Affirming that the ordinance was valid,
the Court cited RA 329 which gave authority to
Baguio to promulgate said ordinance. Equality
and uniformity in taxation means that all
taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing
power has the authority to make reasonable
and natural classifications for purposes of
taxation. To satisfy this requirement then, all
that is that the statute or ordinance in question
"applies equally to all persons, firms and
corporations placed in similar situation."
Pepsi v. City of Butuan (1968)
Facts: M.O. No. 110 was enacted by the City of
Butuan, imposing a tax any agent and/or
consignee of any person, association,
partnership, company or corporation engaged in
selling soft drinks or carbonated drinks.
Held: M.O. No. 110, as amended, is null and void
for being in the nature of an import tax and for
being discriminatory.
Only sales by "agents or consignees" of outside
dealers would be subject to the tax. Sales by
local dealers, not acting for or on behalf of other
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merchants, regardless of the volume of their
sales, and even if the same exceeded those
made by said agents or consignees of producers
or merchants established outside the City of
Butuan, would be exempt from the disputed
tax.
The classification made in the exercise of this
authority, to be valid, must, however, be
reasonable and this requirement is not deemed
satisfied unless:
(1) it is based upon substantial distinctions
which make real differences;
(2) these are germane to the purpose of the
legislation or ordinance;
(3) the classification applies, not only to
present conditions, but, also, to future
conditions substantially identical to those of
the present; and
(4) the classification applies equally all those
who belong to the same class.
Eastern Theatrical Co v. Alfonso (1949)
Facts: Motion picture corporations questioned
an ordinance passed by the Municipal Board of
Manila which imposed a fee on the price of
admission tickets, crying unconstitutionality,
injustice and abuse of power by the Board, as
well as a conflict between the Revised
Administrative Code and the National Internal
Revenue Code. Defendants in turn opposed
them and also alleged that the corporations
have actually been pocketing the money that
was taxed from their patrons instead of giving it
to the government.
Held: The ordinance stands. The NIRC did not
repeal the RAC and thus take away the power to
impose amusement tax, and neither can the
RAC be interpreted to only grant the City of
Manila the authority to grant tax on business
and not amusement tax. Equality and
uniformity in taxation means that all taxable
articles or kinds of property of the same class
shall be taxed at the same rate. Just because
some places of amusement are taxed while
others are not is no argument against equality
and uniformity in taxation, which means that all
taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing
power has the authority to make reasonable
and natural classifications for purposes of
taxation.
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UP Law C2015 Taxation Law 1
Basco v. Pagcor (1991)
Facts: The four petitioner-lawyers sought to
have the PAGCOR Charter, PD 1869, annulled
based on several grounds—one of which is its
alleged forcing the City of Manila to waive its
right to impose taxes since the PAGCOR can
practically operate tax-free.
Held: The Court said that the City, as a
municipal corporation, is without an inherent
right to impose taxes, and that as such, it
cannot tax instrumentalities of the National
Government, such as PAGCOR. The Equal
Protection clause does not preclude
classification of individuals who may be
accorded different treatment under the law as
long as the classification is not unreasonable or
arbitrary. A law does not have to operate in
equal force on all persons or things to be
conformable to the Equal protection clause. The
"equal protection clause" does not prohibit the
Legislature from establishing classes of
individuals or objects upon which different rules
shall operate. The Constitution does not require
situations which are different in fact or opinion
to be treated in law as though they were the
same.
Association of Customs Broker v. Municipal
Board of Manila (1953)
Facts: Petitioners question Ordinance 3379
which levies a property tax, claiming that inter
alia it constitutes double taxation as violates the
rule on uniformity of taxation.
Held: the ordinance infringes the rule of the
uniformity of taxation ordained by our
Constitution. The ordinance exacts the tax upon
all motor vehicles operating within the City of
Manila. It does not distinguish between a motor
vehicle for hire and one which is purely for
private use; and does not distinguish between a
motor vehicle registered in the City of Manila
and one registered in another place but
occasionally comes to Manila and uses its
streets and public highways.
There is no pretense that the ordinance equally
applies to motor vehicles who come to Manila
for a temporary stay or for short errands, and it
cannot be denied that they contribute in no
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small degree to the deterioration of the streets
and public highway. The fact that they are
benefited by their use they should also be made
to share the corresponding burden. This is an
inequality which is found in the ordinance, and
which renders it unconstitutional.
Sison v. Ancheta (1953)
Facts: Supra
Held: According to Justice Laurel in Philippine
Trust v. Yatco, this requirement is met when the
tax operates with the same force and effect in
every place where the subject may be found. It
does not call for perfect uniformity or perfect
equality, because this is hardly attainable.
Equality and uniformity of taxation means that
all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The
taxing power has authority to make reasonable
and natural classifications for the purposes of
taxation. Where the differentiation complained
of conforms to the practical dictates of justice
and equity, it is not discriminatory and therefore
uniform. All that the principle requires is that
the tax applies equally to all persons, firms, and
corporations placed in a similar situation.
(5) ART. VI, §28 (2), 1987 CONSTITUTION
(DELEGATION OF TAXING POWER TO THE
PRESIDENT)
The Congress may, by law, authorize the
President to fix within specified limits, and subject
to such limitations and restrictions as it may
impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or
imposts within the framework of the national
development program of the Government.
Section 401, Tariff and Customs Code
Flexible Clause. —
a. In the interest of national economy, general
welfare and/or national security, and subject
to the limitations herein prescribed, the
President, upon recommendation of the
National Economic and Development
Authority (hereinafter referred to as NEDA), is
hereby empowered: (1) to increase, reduce or
remove existing protective rates of import
duty (including any necessary change in
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classification). The existing rates may be
increased or decreased to any level, in one or
several stages but in no case shall the
increased rate of import duty be higher than
a maximum of one hundred (100) per cent ad
valorem; (2) to establish import quota or to
ban imports of any commodity, as may be
necessary; and (3) to impose an additional
duty on all imports not exceeding ten (10%)
per cent ad valorem whenever necessary;
Provided, That upon periodic investigations
by the Tariff Commission and
recommendation of the NEDA, the President
may cause a gradual reduction of protection
levels granted in Section One Hundred and
Four of this Code, including those
subsequently granted pursuant to this
section.
b. Before any recommendation is submitted to
the President by the NEDA pursuant to the
provisions of this section, except in the
imposition of an additional duty not
exceeding ten (10) per cent ad valorem, the
Commission shall conduct an investigation in
the course of which they shall hold public
hearings wherein interested parties shall be
afforded reasonable opportunity to be
present, produce evidence and to be heard.
The Commission shall also hear the views
and recommendations of any government
office, agency or instrumentality concerned.
The Commission shall submit their findings
and recommendations to the NEDA within
thirty (30) days after the termination of the
public hearings.
c. The power of the President to increase or
decrease rates of import duty within the limits
fixed in subsection "a" shall include the
authority to modify the form of duty. In
modifying the form of duty, the
corresponding ad valorem or specific
equivalents of the duty with respect to
imports from the principal competing foreign
country for the most recent representative
period shall be used as bases.
d. The Commissioner of Customs shall regularly
furnish the Commission a copy of all customs
import entries as filed in the Bureau of
Customs. The Commission or its duly
authorized representatives shall have access
to, and the right to copy all liquidated
customs import entries and other documents
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appended thereto as finally filed in the
Commission on Audit.
e. The NEDA shall promulgate rules and
regulations necessary to carry out the
provisions of this section.
f.
Any Order issued by the President pursuant to the
provisions of this section shall take effect thirty (3)
days after promulgation, except in the imposition
of additional duty not exceeding ten (10) per cent
ad valorem which shall take effect at the
discretion of the President.
(6) ART. VI, §28 (3), 1987 CONSTITUTION
(EXEMPTION OF RELIGIOUS, CHARITABLE,
AND EDUCATIONAL ENTITIES NON-PROFIT
CEMETERIES AND CHURCHES FROM
PROPERTY TAXATION)
Charitable institutions, churches and
personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or
educational purposes shall be exempt from
taxation.
This provision covers only PROPERTY TAXES.
It is the USE of property, and NOT ownership
that is taxed.
To be exempt, the property must be ACTUALLY,
DIRECTLY AND EXCLUSIVELY USED for the
purposes mentioned.
 The word “exclusively” was originally
interpreted to mean “primarily”. However,
jurisprudence has explained that it means
“solely”
The exemption extends to facilities which are
incidental to or reasonably necessary for
accomplishment of said purposes.
CASES
Herrera v. QC Board of Assessment Appeals
(1961)
Facts: The Herreras were running St. Catherine’s
Hospital, a hospital and midwifery school in QC.
Though initially granted a tax exemption, after
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UP Law C2015 Taxation Law 1
three years they were assessed for real property
taxes.
Held: Though the hospital derived some profit,
since it was spent in improving the charity ward
the hospital’s purpose was still primarily for
charity. The admission of pay patients does not
detract from the charitable character of a
hospital, if all its funds are devoted exclusively
to the maintenance of the institution as a public
charity, Also, the exemption in favor of property
used exclusively for charitable or educational
purposes is “not limited to property actually
indispensable” therefor, but extends to facilities
which are “incidental to and reasonably
necessary for” the accomplishment of said
purposes. The presence of the school furnished
another ground for exemption, hence it was
improper to assess the Herreras’ hospital
properties for real property taxes. The
Constitution grants real property tax
exemptions to institutions which are exclusively
devoted to religious, charitable, or educational
purposes.
Abra Valley College v. Aquino (1988)
Facts: The lot and building of Abra Valley
College were subjected to auction because of
non-payment of taxes because part its first floor
was being leased for a commercial purpose and
because its second floor was being used by the
school director as a residence for him and his
family. A complaint to void its sale and seizure
failed because of the same reasons.
Held: Buildings used exclusively for educational
purposes, as well as facilities which are
incidental to and reasonably necessary for the
accomplishment of said purposes, are exempt
from tax via the Constitution. The test of
exemption from taxation is the use of the
property for purposes mentioned in the
Constitution. The term "exclusively used for
educational purposes" is not limited to property
actually indispensable therefor but extends to
facilities which are incidental to and reasonably
necessary for the accomplishment of said
purposes. The use of the second floor may be
argued to be incidental, but the leasing of part
of the first floor for a commercial purpose
necessitates the payment of taxes.
Lung Center v. QC (2004)
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Facts: The petitioner Lung Center of the
Philippines is a non-stock and non-profit entity
established by virtue of Presidential Decree No.
1823. A big space at the ground floor is being
leased to private parties, for canteen and small
store spaces, and to medical or professional
practitioners who use the same as their private
clinics for their patients whom they charge for
their professional services. Almost one-half of
the entire area on the left side of the building
along Quezon Avenue is vacant and idle, while a
big portion on the right side, at the corner of
Quezon Avenue and Elliptical Road, is being
leased for commercial purposes to a private
enterprise known as the Elliptical Orchids and
Garden Center. The petitioner accepts paying
and non-paying patients. It also renders
medical services to out-patients, both paying
and non-paying. Aside from its income from
paying patients, the petitioner receives annual
subsidies from the government
Held: To determine whether an enterprise is a
charitable institution/entity or not, the elements
which should be considered include the statute
creating the enterprise, its corporate purposes,
its constitution and by-laws, the methods of
administration, the nature of the actual work
performed, the character of the services
rendered, the indefiniteness of the beneficiaries,
and the use and occupation of the properties.
In the legal sense, a charity may be fully defined
as a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of
persons, either by bringing their minds and
hearts under the influence of education or
religion, by assisting them to establish
themselves in life or otherwise lessening the
burden of government. It may be applied to
almost anything that tend to promote the well-
doing and well-being of social man. It
embraces the improvement and promotion of
the happiness of man. The word “charitable” is
not restricted to relief of the poor or sick. The
test of a charity and a charitable organization
are in law the same. The test whether an
enterprise is charitable or not is whether it exists
to carry out a purpose reorganized in law as
charitable or whether it is maintained for gain,
profit, or private advantage.
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The words “dominant use” or “principal use”
cannot be substituted for the words “used
exclusively” without doing violence to the
Constitutions and the law. Solely is synonymous
with exclusively.
(7) ART. VI, §28 (4) 1987 CONSTITUTION
(CONCURRENCE BY A MAJORITY OF ALL
THE MEMBERS OF CONGRESS FOR THE
PASSAGE OF A LAW GRANTING TAX
EXEMPTION)
No law granting any tax exemption shall be
passed without the concurrence of a majority of
all the Members of the Congress.
(8) ART. VI, §29 (3), 1987 CONSTITUTION (TAX
LEVIED FOR SPECIAL PURPOSE AS
SPECIAL FUND)
All money collected on any tax levied for a special
purpose shall be treated as a special fund and
paid out for such purpose only. If the purpose for
which a special fund was created has been
fulfilled or abandoned, the balance, if any, shall
be transferred to the general funds of the
Government.
CASE
Gaston v. Republic Planters Bank (1988)
Facts: Pursuant to Sec. 7 of PD No 388 (creating
the PHILSUCOM), a stabilization fund was set
up in favor of the sugar industry. The fund was
maintained through the deduction of P1.00 per
picul from sugar proceeds of the sugar
producers. Petitioners who are sugar producers,
planters, and millers now pray for a writ of
mandamus to command Republic Planters
Bank (RPB) to implement its privatization by the
transfer and distribution of the shares of stock in
the bank now held by the SRA, on the ground
that such stocks were funded by the
stabilization fund. Petitioners argue that the
stabilization fees collected from sugar planters
and millers pursuant to Sec. 7 of P.D. No. 388
are funds in trust for them. Therefore, the stocks
also belonged to them.
Held: The stocks in RPB also belong to the
Government. The stabilization fees collected are
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in the nature of a tax, which is within the power
of the State to impose for the promotion of the
sugar industry. The levy is primarily in the
exercise of the police power of the State. To rule
in petitioners' favor would contravene the
general principle that revenues derived from
taxes cannot be used for purely private
purposes or for the exclusive benefit of private
persons. The Stabilization Fund is to be utilized
for the benefit of the entire sugar industry.
(9) ART. VI, §27 (2), 1987 CONSTITUTION
(POWER OF THE PRESIDENT TO VETO ANY
PARTICULAR ITEM OR ITEMS IN A
REVENUE OR TARIFF BILL)
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.
General Rule:
The President may not veto a bill in part and
approve it in part.
Exceptions:
Appropriation, revenue or tariff bill.
(10) ART. VIII, §5 (2.B), 1987 CONSTITUTION
(NON-IMPAIRMENT OF THE JURISDICTION
OF THE SUPREME COURT IN TAX CASES)
The Supreme Court shall have the following
powers:
(2) Review, revise, reverse, modify, or affirm on
appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of
lower courts in:
(b) All cases involving the legality of any tax,
impost, assessment, or toll, or any penalty
imposed in relation thereto.
The Supreme Court is the final arbiter of tax
cases.
(11) ART. X, §5 (2), 1987 CONSTITUTION
(DELEGATION OF TAX POWER TO LOCAL
GOVERNMENTS)
Each local government unit shall have the power
to create its own sources of revenues and to levy
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UP Law C2015 Taxation Law 1 Midterms 2013

taxes, fees and charges subject to such guidelines stock Educational and Donor’s Tax
and limitations as the Congress may provide, Institution
consistent with the basic policy of local Proprietary Property Tax and
autonomy. Such taxes, fees, and charges shall Educational Income Tax if
accrue exclusively to the local governments. Institutions provided by law.

This provision is an exception to the general rule

that constitutional tax provisions, normally
addressing themselves to national tax where
H. Interpretation and
the power inheres in sovereignty, are designed Construction of Tax Statutes
to limit rather than to grant tax powers. (Vitug)
A SUMMARY OF THE RULES
Power to create municipal corporations for
purposes of local self-government carries with 1. When law is clear, NO ROOM FOR
it, by necessary implication, the power to confer INTERPRETATION. Plain meaning only.
the power to tax on such local governments.
2. In case of DOUBT, apply the following rules:
(12) ART. XIV, §4(3), 1987 CONSTITUTION
(EXEMPTION OF NON-STOCK, NON-  General Rule: Strictly against government;
PROFIT EDUCATIONAL INSTITUTIONS liberally in favor of taxpayer.
FROM TAXATION)  WHY: As taxes are a burden, they are not to
be presumed beyond what the statute
All revenues and assets of non-stock, non-profit expressly and clearly declares.
educational institutions used actually, directly,  Exceptions:
and exclusively for educational purposes shall be o EXEMPTIONS: Strictly against
exempt from taxes and duties. Upon the claimants. In case of doubt, rule in favor
dissolution or cessation of the corporate existence of taxation.
of such institutions, their assets shall be disposed  Cannot be granted by vague
of in the manner provided by law. implication.
 Exemptions by omission: strict
Proprietary educational institutions, including against government.
those cooperatively owned, may likewise be  Exceptions: When exemptions
entitled to such exemptions, subject to the liberally construed in favor of
limitations provided by law, including restrictions claimants:
on dividends and provisions for reinvestment. • When law provides for the
exemption.
Covers income, property and donor’s taxes and • Exemptions in favor of the
customs duties, and other taxes imposed by government, its political
either or both national government or political subdivisions or
subdivisions. instrumentalities.
o REFUNDS: Same rule as Exemptions.
The exemption does not cover revenues derived o REWARDS: Liberally in favor of
from or assets used in unrelated activities or awardees.
enterprise.  WHY: Positive and effective means
to check anomalies committed to
Institution Exemption the detriment of the State’s
Religious, Property Tax finances; leads to collection of
Charitable and revenue.
Educational o AMNESTIES:
Entities  General pardon or intentional
Non-profit, non- Income, Property overlooking by the State of its

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UP Law C2015 Taxation Law 1
authority to impose penalties on
persons otherwise guilty of evasion
or violation of revenue or tax law.
Policy of “forgive and forget”.
 Terms of amnesty: Strictly against
applicant.
 Effects of amnesty: Liberally in favor
of qualified claimant.
3. Other rules:
 Law must be interpreted according to the
purpose for which it was passed.
 Special laws prevail over general laws.
o The National Internal Revenue
Code prevails over general statutes
like the Civil Code.
 Courts may take judicial notice of the origin
and history of the statutes, as well as
jurisprudence of the jurisdiction from which
the statute is derived.
o As the NIRC was taken from the
United States, U.S. decisions have
suppletory application in
interpretation.
CASES
Commissioner v. Fireman’s Fund Insurance
(1987)
Facts: Fireman’s Fund bought and paid for
documentary stamps for its insurance policies;
however, it affixed these stamps onto
documents not authorized by law. These
documents were later lost, so the CIR assessed
documentary stamp taxes against Fireman’s
Fund, with a penalty for failing to affix the
stamps onto the policies themselves. The CIR’s
decision was reversed by the CTA, which ruling
was affirmed by the SC.
Held: In cases of doubt, tax statutes must be
construed strongly against the government and
in favor of the citizens, because the burden
shouldn’t be imposed beyond what the statutes
expressly and clearly meant. Fireman’s Fund
had presented uncontested evidence that it had
bought and paid for the stamps; the
government shouldn’t unjustly enrich itself by
demanding that Fireman’s Fund pay the taxes
again.
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CIR v. CA (1999)
Facts: Two companies purchased certain
quantities of manufactured mineral oil, motor
fuel, diesel and fuel oil which were used in their
mining and forest concessions respectively.
They then filed claims with the Commissioner of
Internal Revenue (CIR) for a tax refund
representing 25% of the specific taxes collected
on the items they purchased. Their cases
reached the Court of Tax Appeals which granted
refunds pursuant to Sec. 5 of R.A. 1435, in
relation to Sec. 142 (b) and (c) of the National
Internal Revenue Code and Sec. 145 as
prescribed under Secs. 1 and 2 of R.A. 1435. The
cases were eventually brought before the SC
with the companies arguing that the refund
should have been based on the higher rates
under the 1977 Tax Code as amended by P.D.
1672 and E.O. 672.
Held: A partial refund under Sec. 5 of R.A. 1435
is in the nature of a tax exemption, and
therefore, must be construed strictissimi juris
against the grantee. Since there is nothing in
Sec. 5 of R.A. 1435 which authorizes a tax
refund based on the higher rates under Sections
153 and 156 of the Tax Code, such rates cannot
be used as basis for the refund.
Floro Cement v. Gorospe (1991)
Facts: The Municipality of Lugait filed a
complaint for collection of taxes against Floro
Cement Corporation (FCC). The taxes sought to
be collected referred to “manufacturer’s and
exporter’s taxes” based on Ordinances Nos. 5
and 10 which were enacted pursuant to P.D. No.
231 and P.D. No. 426 respectively. In its defense,
FCC claimed that it wasn’t liable to pay the
taxes because under Sec. 42 of P.D. No. 463,
the Municipality cannot levy and collect taxes of
any kind on mines, mining claims, mineral
products, or on any operation, process, or
activity connected therewith.
Held: Tax exemptions cannot be allowed upon a
mere vague implication or inference. It must be
shown indubitably to exist. Here, FCC was not
able to clearly show that it was entitled to the
tax exemption. The manufacture and export of
cement is not exempted from taxation because
it is not a mineral product.
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UP Law C2015 Taxation Law 1
Luzon Stevedoring v. CTA (1988)
Facts: Luzon Stevedoring insisted on getting a
tax refund for the imported parts used for the
maintenance of the tugboats, claiming that
tugboats fall under “cargo vessel” under the tax
exemption provisions of Sec. 190 of the NIRC.
As such, the spare parts and equipment the
company imported should be exempted from
compensating tax.
Held: Based on the definitions, tugboats aren’t
passenger/cargo vessels; therefore, they
couldn’t be exempted from compensating tax.
As a rule, the relinquishment of tax is never
presumed and any reduction or diminution
thereof with respect to its mode or its rate, must
be strictly construed, and the same must be
coached in clear and unmistakable terms in
order that it may be applied.
NPC v. Albay (1990)
Facts: The Province of Albay, Albay Governor
Romeo R. Salalima, and Albay Provincial
Treasurer Abundio M. Nuñez caused the
publication of a notice of auction sale involving
the properties of petitioner NAPOCOR and
Philippine Geothermal Inc. in their offices at
Tiwi, Albay. The amounts to be realized from
the auction sale would be applied to
NAPOCOR’s tax delinquencies (i.e. real property
taxes on the properties amassed between June
11, 1984 and March 10, 1987). NAPOCOR
opposed the sale, and the SC issued a TRO. But
the TRO didn’t reach respondents on time, and
the sale pushed through.
Held: The auction sale was valid. NAPOCOR’s
tax-exempt status has been granted,
withdrawn, and restored over the years c/o
various R.A.s, P.D.s, Resolutions, and
Memoranda. NAPOCOR must be held liable for
taxes in the interregnum between June 11, 1984
(the date its tax exemption was withdrawn c/o
promulgation of P.D. 1931) and March 10, 1987
(the date it was restored c/o the Memorandum
from the Office of the President affirming
Resolution No. 17-87). The SC saw nothing
wrong with taxing NAPOCOR’s properties
because real property taxes form part and
parcel of the financing apparatus of the
government in development and nation-
Midterms 2013
building, particularly in the local government
level.
Republic v. IAC (1991)
Facts: BIR sued the Spouses Pastor for
deficiency income tax. Spouses alleged that
already availed of the tax amnesty under P.D.
Nos. 23, 213, and 370. TC ruled in favor of the
spouses. Government appealed to the IAC,
alleging that the benefits under P.D. No. 213
only applied to those who had no pending tax
assessments against them. Spouses countered
that nothing in the language of the LOI
regarding implementation of the P.D. gave the
BIR the power to restrict the application of the
P.D.
Held: In case of doubt, tax statutes are to be
construed strictly against the government and
liberally in favor of the taxpayer. A tax amnesty
is a general pardon or intentional overlooking by
the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation
of a revenue or tax law. Its effects must be
construed in favor of qualified claimant.
Wonder Mechanical Engineering v. CTA
(1975)
Facts: Wonder Mechanical was given tax
exemptions for the manufacture of machines for
the making of certain articles. It was assessed
taxes for the manufacture and sale of those
articles.
Held: It is clear that the tax exemption is for the
manufacture of the machines, not the
manufacture and sales of the articles produced
by those machines. Tax exemptions are
disfavored by law. He who claims it must prove
it; it must be clearly expressed and cannot be
established by implication.
Maceda v. Macaraig (1993)
Facts: Maceda questioned the NPC’s exemption
from tax. He argued that since there was no
mention of the phrase “all taxes” in the
amending law, there is no longer an exemption
and the refunds NPC was asking for must not be
granted.
Held: The rule on strict construction of
provisions providing for tax exemptions does
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UP Law C2015
not apply in the case of exemptions running to
the benefit of the government itself or its
agencies. Strict construction is applied to
statutes granting tax exemptions or deductions
to minimize differential treatment and foster
impartiality, fairness and equality of treatment
among tax payers. This reason does not apply in
the case of exemptions running to the benefit of
the government itself or its agencies. In such
case, the practical effect of an exemption is
merely to reduce the amount of money that is to
be handled by government in the course of its
operations. Therefore, provisions granting
exemptions to government agencies may be
construed liberally, in favor of non-tax liability of
such agencies.
Penid v. Virata (1983)
Facts: Petitioners filed Confidential Information
No. 28 with the BIR, informing Commissioner
Vera of underpayment of the 2% common
carriers percentage tax by 27 shipping
companies and agents. When interviewed by a
BIR Examiner, petitioners revealed that it was a
common practice. Because of this, the BIR
investigated ALL shipping companies and
agents operating in the Philippines, and in
December 1962 eventually assessed certain
firms for deficiency taxes. One of those was Pan
Fil Co., Inc., which was NOT one of the 27 firms
listed. Collection was held in abeyance pending
resolution of a protest filed by Royal Inter-
Ocean Lines with the CTA. When BIR finally
collected, the total collection included an
amount paid by Pan Fil. Petitioners filed a claim
for 25% of the deficiency taxes collected, as
their reward under Sec. 1 of R.A. No. 2338.
Finance Secretary Virata excluded the amount
collected from Pan Fil in computing petitioners’
reward, and set the reward at 25% of the
deficiency taxes collected ONLY for the period
covered by Confidential Information No. 28,
excluding taxes which accrued after 1962.
Held: The deficiency taxes collected from Pan
Fil should be included in the computation of the
reward. Petitioners’ information allowed the
government to discover the erroneous method
of computation used by Pan Fil, even though it
wasn’t listed in Confidential Information No. 28,
and thus recover a substantial (if unexpected)
income. To exclude the amount paid by Pan Fil
Taxation Law 1 Midterms 2013
would constitute a derogation of the basic tenet
of both American and Philippine jurisprudence:
statutes offering rewards must be liberally
construed in favor of informers, and with regard
for their intended purpose.
CIR v. CA and Ateneo de Manila University
(1997)
Facts: The CIR assessed Ateneo for alleged
deficiency contractor’s tax, because of the work
undertaken by its Institute of Philippine Culture.
Ateneo contested the assessment, claiming it
was not covered by the 3% tax because it was
not an independent contractor. The CIR claims
that Ateneo had the burden of proving it was
exempted from the law.
Held: Tax statutes are to be construed strictly
against the government, and that CIR must
have first proved that Ateneo was covered by
the law. The SC also found that Ateneo was not
an independent contractor. A statute will not be
construed as imposing a tax unless it does so
clearly, expressly, and unambiguously. A tax
cannot be imposed without clear and express
words for that purpose.
Republic v. Gancayco (1964)
Facts: Gancayco was assessed by the CIR on
June 13, 1946 for P11k. Gancayco made several
requests for reinvestigation. His last request
was made on March 14, 1949. CIR took no
action on his request until May 17, 1960, when
the CIR requested to Gancayco to pay. When he
failed to pay CIR filed an action against him
with CFI on July 16, 1960. Gancayco moved to
dismiss on the ground of prescription. The
Solicitor General, citing the civil code, argued
that extrajudicial demands tolled the
prescriptive period.
Held: CIR’s action is barred by prescription.
According to the internal revenue code, only a
written agreement between the taxpayer before
the expiration of the 5-year prescriptive period
can suspend it. The Internal Revenue Code
being a special law, prevails over a general law.
US v. De Guzman (1915)
Facts: Venancio de Guzman was discharged as
an accused by the prosecution in exchange for
his testimony against the accused. However,
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UP Law C2015
when the time came for him to testify, he
refused to do so. A second case was thus filed
against him in which he as convicted.
Held: For the proper construction and
application of the terms and provisions of
legislative enactments which have been
borrowed, it is, at times, essential to review the
legislative history of such enactments and to
find an authoritative guide for their
interpretation and application in the decision of
American and English courts of last resort
construing and applying similar legislation in
those countries.
People v. Papaguitan (1999)
Facts: Pagpaguitan and Salazar were found
guilty by the trial court of the rape of Evelyn.
Held: [same ruling as US v. De Guzman]
I. CLASSIFICATIONS OF
TAX EXEMPTION
EXEMPTION
It is a grant of immunity to particular persons or
corporations or to persons or corporations of a
particular class from a tax which persons and
corporations generally within the same state or
taxing district are obliged to pay.
It is an inherent attribute of sovereignty, much
like the power to tax itself.
RATIONALE
Public interest will be subserved by the
exemption allowed. This public benefit or
interest will be sufficient to offset the monetary
loss entailed in the grant of the exemption
GROUNDS
1. Contract
Ordinarily, the provisions of a contract of
exemption from taxation are contained in
the charter of the corporation to which the
exemption in granted.
2. Public policy
 To encourage new and necessary industries
 To foster charitable and other benevolent
institutions
Taxation Law 1 Midterms 2013
 To make the public at large interested in
favoring or encouraging the class or interest
in whose behalf the exemption is made.
3. Reciprocity, or to lessen the rigors of
international double or multiple
taxation
 NOTE: Equity is not a ground for tax
exemption.
NATURE
1. Personal privilege of grantee
 Cannot be assigned
 No vested rights
 Construed strictly against claimant
2. Generally revocable by government
 Unless founded on a contract protected by
the non-impairment clause.
3. Implies waiver on part of government of
its right to collect what would be due it
4. Not necessarily discriminatory
 As long as the exemption has a reasonable
foundation or rational basis; otherwise, it
may be challenged under the equal
protection clause.
AS TO MANNER OF CREATION
1. Express or Affirmative
 Granted by Constitution, statutes, treaties,
ordinances, franchises or contracts
2. Implied or by Omission
 Occurs when a tax levied on certain classes
of persons, properties or transactions
without mentioning the other classes.
 The omission may be accidental or
intentional/
 Example: In documentary stamp tax, if not
within the list of DST, it is exempt by
implication.
3. Contractual:
 Those agreed to by the taxing authority in
contracts lawfully entered into by them
under an enabling law.
 Usually by virtue of a franchise, or
registration agreement with PEZA.
 For franchises:
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UP Law C2015 Taxation Law 1
o Tax exemptions for franchises can
be subject to amendment by
Congress (Art XII §11); the non-
impairment of contracts clause
does not apply.
o When a special law granted a tax
exemption to a legislative franchise,
it could not have been said to have
been repealed by a more general
taxing statute unless there was an
intent to repeal or alter the special
law.
AS TO SCOPE
1. Total
 When certain persons, property or
transactions are exempted, expressly or
impliedly, from all taxes.
2. Partial
 When certain persons, property or
transactions are exempted, expressly or
impliedly, from certain taxes, either entirely
or in part.
AS TO OBJECT
1. Personal
 Granted directly in favor of such persons as
are within the contemplation of the law
granting the exemption.
2. Impersonal
 Those granted directly in favor of a certain
class of property.
CASES
Cagayan Electric v. Commissioner (1985)
Facts: Cagayan Electric’s franchise was granted
a tax exemption. However, RA 5431 was later
passed amending the Tax Code, removing the
tax exemption for all corporate taxpayers not
specifically exempt under Sec. 27 of the Tax
Code. The Commissioner held Cagayan Electric
liable for income tax.
Held: The franchise was subject to amendments
by Congress, which in this case came in the form
of RA 5431. Cagayan Electric was liable.
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Province of Misamis Oriental v. Cagayan
Electric (1990)
Facts: Pursuant to a PD, the Province of
Misamis Oriental enacted a provincial revenue
ordinance imposing a franchise tax of ½% on
businesses enjoying franchise. The Provincial
Treasurer demanded payment from CEPALCO.
The province filed in the CFI, a complaint for
declaratory relief, praying that the court exercise
its power to construe the Local Tax Code in
relation to the franchise of CEPALCO and
declare that the Local Tax Code has amended
the franchise.
Held: A special and local statute applicable to a
particular case is not appealed by a later statute
which is general in terms, unless there is
manifest intent to repeal or alter the special
law. Presumption: special statutes are
exceptions to the general law because they
pertain to a special charter granted to meet a
particular set of conditions and circumstances.
CIR v. CTA (1991)
Facts: Eastern Extension was a foreign company
with a legislative franchise to operate a
submarine telegraph cable in Manila. Under its
franchise, it was exempted from paying any
taxes other than a franchise tax. The CIR
declared that the franchise was ineffective, since
Eastern violated the constitutional requirement
that a corporation with a franchise be at least
60% Filipino-owned, and assessed deficiency
income taxes. The CTA ruled in favor of Eastern.
Held: The SC affirmed the CTA’s decision and
said that the legislative franchise granted to
Eastern was an operative act; therefore Eastern
was tax-exempt. Franchises sprung from
contracts between the sovereign power and
private citizens made upon valuable
considerations, for purposes of individual
advantage as well as public benefit. It was
generally considered that the obligation resting
upon the grantee to comply with the terms and
conditions of the grant constituted a sufficient
consideration. It could also be said that the
benefit to the community might constitute the
sole consideration for the grant of a franchise by
the state. Such being the case, the franchise
was the law between the parties and they were
bound by the terms thereof.
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UP Law C2015 Taxation Law 1
J. Certain Doctrines in
Taxation
1. PROSPECTIVITY OF TAX LAWS
Laws shall have no retroactive effect, unless the
contrary is provided. (Hydro Resources v. CA)
A tax statute may be applied retroactively, but
the legislative intent for such retroactive effect
should be perfectly clear. (Lorenzo v. Posadas)
If a tax law is so harsh and oppressive in its
retroactive application, it transgresses the
Constitution. (Republic v. Fernandez)
The prohibition on ex post facto laws only
applies to criminal or penal matters; the
collection of interest in tax cases is not penal in
nature. (Central Azucarera v. CTA)
Tax laws are not political in nature; they
continue in force even during enemy
occupation. (Hilado v. Collector)
CASES
Hydro Resources v. CA (1990)
Facts: In 1978, Hydro entered into a contract
with the NIA for the Magat River Project. Hydro
was allowed to procure construction equipment,
the payment of which would be advanced by
NIA. Hydro would then reimburse NIA, and upon
completion of payment, ownership over the
equipment would be transferred to Hydro. The
transfer of ownership was done in 1983. Hydro
was assessed a 3% ad valorem tax prescribed by
EO 860, which took effect in 1982.
Held: Hydro should not be made to pay the ad
valorem tax. The contract was entered into in
1978, while EO 860 took effect in 1982. It is a
cardinal rule that laws shall have no retroactive
effect, unless the contrary is provided. EO 860
does not provide for its retroactivity.
Hilado v. Collector (1956)
Facts: Hilado filed his income tax return for
1951. Pursuant to GC No. V-123 issued by the
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Collector of Internal Revenue, he claimed a
certain sum as a deductible item from his gross
income as a loss consisting in a portion of his
war damage claim. Meanwhile, GC No. V-139
was issued. It revoked the earlier GC, and laid
down the rule that losses of property during the
war are only deductible in the year of actual
loss, in line with the NIRC which provides that
losses sustained are only allowable as
deduction only during the taxable year.
Consequently, Hilado's claim for deduction was
disallowed. Hilado contends that there is no
such taxable year during the war since tax laws
are unenforceable during enemy occupation.
Held: Hilado cannot claim the deduction. Tax
laws are not political in nature; they continued
in force even during the enemy occupation.
Such tax laws are deemed to be laws of the
occupied territory, not of the occupying enemy.
Law, once established, continues until changed
by some competent legislative power; it is not
changed merely by change of sovereignty. GC
No. V-123, having been issued on a wrong
construction of the law, could not have given
rise to a vested right. Thus, GC No. V-139 can be
given retroactive effect.
Central Azucarera v. CTA (1967)
Facts: Central was assessed deficiency income
tax. It protested the assessment. A revised
assessment was made, under which interest
was imposed. The interest imposed was by
virtue of RA 2343, which amended the NIRC,
and became effective on June 20, 1959, while
the taxable income involved were earned prior
to the effectivity of the said law. Central argues
that the imposition of the interest is tantamount
to giving the law retroactive effect.
Held: There is no retroactive application of the
law. Prior to the amendment, the interest is
imposed from the time the tax became due;
after the amendment, the interest is imposed on
the deficiency from the date prescribed for the
payment of the tax. Since the deficiency income
tax was assessed and unpaid when the
amendment was in force, and the CIR sought to
collect the interest only from the date of
effectivity of the amendment, the interest was
validly imposed. There is no ex post facto
application of the law. The prohibition on ex
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UP Law C2015 Taxation Law 1
post facto laws only applies to criminal or penal
matters; the collection of interest in tax cases is
not penal in nature.
Lorenzo v. Posadas (1937)
Facts: Thomas Hanley died in 1922. Lorenzo
was appointed as executor of the estate. In 1931,
the Collector of Internal Revenue assessed
inheritance tax due from the estate of Hanley.
The assessment was done under the provisions
of Act No. 3606, which went into effect in 1930,
thus not in force at the time of Hanley's death.
Held: Inheritance taxation is governed by the
statute in force at the time of death of the
decedent. A tax statute may be applied
retroactively, but the legislative intent for such
retroactive effect should be perfectly clear. Act
No. 3606 contains no provision indicating
legislative intent to give it retroactive effect.
Republic v. Fernandez (1956)
Facts: The Spouses Olimpio and Angelina
Fernandez acquired several real properties
during the Japanese occupation. Olimpio died
before the end of the war. After the war, the War
Profits Tax Law was enacted. The Collector of
Internal Revenue assessed war profits tax on
Olimpio's estate.
Held: The prohibition on ex post facto laws only
applies to criminal or penal matters, not to laws
which concern civil matters or proceedings
generally, or which affect or regulate civil or
private rights. Retrospective laws, when not of a
criminal nature, do not come in conflict with the
Constitution, unless obnoxious to its provisions
on other grounds. In order to declare a tax as
transgressing the constitutional limitation, it
must be so harsh and oppressive in its
retroactive application. The War Profits Tax Law,
far from being harsh and oppressive, is both
wise and just.
Commissioner v. Marubeni Corporation
(2001)
Facts: Marubeni was assessed several deficiency
taxes. It filed petitions for review with the CTA
on September 1968. EO 41 was issued on
August 1968. It provided for a tax amnesty
covering unpaid income tax. The scope of the
tax amnesty under EO 41 was expanded by EO
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64. The CTA ruled in favor of Marubeni. The
Collector contends that Marubeni is disqualified
from availing of the tax amnesty under EO 41
because as provided “those with income tax
cases already filed in Court as of the effectivity
hereof” may not avail of the amnesty.
Held: With respect to the benefits claimed
under EO 41, Marubeni is not liable to pay the
assessed tax. When EO 41 took effect, Marubeni
had not yet filed cases with the CTA, thus is did
not fall under the exception. With respect to the
benefits claimed under EO 64, the ruling with
regard to EO 41 cannot be applied. While an
amendment is generally construed as if it had
always been contained in the original act, it may
not be given a retroactive effect unless it is so
provided expressly or by necessary implication.
Where a statute amending a tax law is silent as
to whether it operates retroactively, the
amendment will not be given a retroactive effect
so as to subject to tax past transactions not
subject to tax under the original at. In an
amendatory act, every case of doubt must be
resolved against its retroactive effect.
2. IMPRESCRIPTIBILITY OF TAXES
The right of the Government to assess and
collect taxes is imprescriptible, unless otherwise
provided by express statutory provision.
(Commissioner v. Ayala Securities Corporation)
CASES
Commissioner v. Ayala Securities
Corporation (1980)
Facts: In 1961, Ayala was assessed 25% surtax
and interest on the company's surplus for 1955.
It is contented that the assessment was made
beyond the 5-year prescriptive period provided
in Sec. 331 of the NIRC.
Held: There is no prescription in this case. Sec.
331 does not apply to taxes which don't require
the filing of a return, such as the tax assessed
upon Ayala. The limitations upon the right of
the government to assess and collect taxes will
not be presumed in the absence of clear
legislation to the contrary. Where the
government has not by express statutory
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UP Law C2015 Taxation Law 1
provision provided a limitation upon its right to
assess unpaid taxes, such right is
imprescriptible.
3. DOUBLE TAXATION
There is no constitutional prohibition against
double taxation in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional requirement
is not violated. (Villanueva v. City of Iloilo)
In order to constitute double taxation in the
prohibited sense, the same property must be:
taxed twice when it should be taxed but once;
both taxes must be imposed on the same
property or subject-matter, for the same
purpose, by the same State, Government, or
taxing authority, within the same jurisdiction or
taxing district, during the same taxing period,
and they must be the same kind or character of
tax. (Villanueva v. City of Iloilo)
In its broad sense, double taxation is taxation
other than direct duplicate. It extends to all
cases in which there is a burden of two or more
pecuniary nature. (De Leon)
Double taxation in its narrow sense is
undoubtedly unconstitutional, but in the
broader sense is not necessarily so. (De Leon)
Where double taxation in its narrow sense
occurs, the taxpayer may seek relief under the
uniformity rule or the equal protection
guarantee. (De Leon)
Ma’am Loriega: Double taxation in its strict
sense is a violation of due process.
CASES
Villanueva v. City of Iloilo (1968)
Facts: Ordinance 11 was enacted by the City of
Iloilo. It imposed license tax on tenement
houses. It is contended that the ordinance
constitutes double taxation because the
taxpayers were already paying real estate tax on
the property, and income tax on derived from
the property, as provided in the NIRC.
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Held: There is no constitutional prohibition
against double taxation in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional requirement
is not violated. There is no double taxation in
this case: 1) the same tax may be imposed by
the national government as well as by the local
government; 2) license tax may be levied upon a
business or occupation although the land or
property used therein is subject to property tax.
Procter & Gamble v. Municipality of Jagna
(1979)
Facts: Procter & Gamble owns a bodega in the
Municipality of Jagna where it stores copra
purchased in the municipality. The municipality
enacted an ordinance where a storage fee is
imposed on exportable copra deposited within
the jurisdiction of Jagna. The company argues
that the ordinance constitutes double taxation
because its products is already subjected to tax.
Held: No double taxation. A tax on the
company's products is different from a tax on
the privilege of storing copra in a bodega
situated within the territorial boundary of
defendant municipality.
Commissioner v. Lednicky (1964)
Facts: The Spouses Lednicky are American
citizens residing the Philippines. They derive
their income wholly from Philippine sources.
They paid their taxes, but subsequently claimed
for refunds based on the income taxes they paid
to the US government. They claim that such
payment should be deducted from the taxes
they paid in the Philippines, otherwise they
would be subject to double taxation.
Held: No double taxation. Double taxation
becomes obnoxious where the taxpayer is taxed
twice for the benefit of the same governmental
entity. While the taxpayers would have to pay
two taxes on the same income, the Philippine
government only receives the proceeds of one
tax. Justice and equity demand that the tax on
the income should accrue to the benefit of the
Philippines, for it is where the income was
earned, and the taxpayer is domiciled. Any relief
from the alleged double taxation should come
from the US since the its right to burden the
taxpayer is solely predicated on his citizenship,
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UP Law C2015 Taxation Law 1
without contributing to the production of the
wealth that is being taxed.
4. POWER TO TAX INVOLVES THE POWER TO
DESTROY
The power to tax is not the power to destroy
while this Court sits. (Justice Holmes in
Panhandle Oil Co. v Mississippi)
"The web of unreality spun from Marshall's
famous dictum was brushed away by one stroke
of Mr. Justice Holmes's pen: 'The power to tax is
not the power to destroy while this Court sits.' "
So it is in the Philippines. (Justice Fernando in
Sison v Ancheta, quoting Justice Frankfurter,
quoting Justice Holmes)
"The web of unreality spun from Marshall's
famous dictum was brushed away by one stroke
of Mr. Justice Holmes's pen: 'The power to tax is
not the power to destroy while this Court sits.'
"So it is in the Philippines. (Justice Fernando in
Sison v. Ancheta, quoting Justice Frankfurter,
quoting Justice Marshall)
CASES
Sison v. Ancheta (1984)
Facts: BP 135 was enacted, amending the NIRC.
It prescribed a higher tax rate for professionals
than compensation income earners. Sison
argues that the law violated due process, equal
protection, and uniformity in taxation.
Held: The power to tax is an attribute of
sovereignty. But, there are restrictions to such
power as defined in the Constitution. Adversely
affecting as it does property rights, both the due
process and equal protection clauses may
properly be invoked to invalidate in appropriate
cases a revenue measure. Otherwise, there
would be truth to the dictum that “the power to
tax involves the power to destroy.” Since there
are restrictions to such power, “the power to tax
is not the power to destroy while this Court sits.”
However, the petition must be dismissed, for
Sison has not shown any violation of the
Constitution.
5. ESCAPE FROM TAXATION
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Note: Ma’am Loriega discussed only Tax Evasion
and Tax Avoidance
(1) SHIFTING
Transfer of the burden of a tax by the original
payer or one whom the tax was assessed or
imposed to another. It is possible only when
there is an exchange of commodities.
(2) CAPITALIZATION
Reduction in the price of the taxed object equal
to the capitalized value of the future taxes
which the purchaser expects to be called upon
to pay. It occurs when the tax falls on an
income-producing property.
(3) TRANSFORMATION
Method of escape where the manufacturer upon
whom tax has been imposed, fearing the loss of
his market if he should add the tax to the price,
pays the tax and endeavors to recoup himself by
improving his process of production thereby
turning out his units of products at a lower
costs. In such case, the loss occasioned by the
tax may be offset by the gains resulting from
the economics of production.
(4) EXEMPTION
The grant of immunity to particular persons or
corporations or to persons or corporations of a
particular class from a tax which persons and
corporations generally within the same state or
taxing district are obliged to pay.
(5) EVASION
The use by the taxpayer of illegal or fraudulent
means to defeat or lessen the payment of tax. It
is also known as tax dodging, and it is
punishable by law.
(6) AVOIDANCE
The use by the taxpayer of legally permissible
alternative tax rates or methods of assessing
taxable property or income, in order to avoid or
reduce tax liability. The taxpayer uses tax saving
devices or means allowed by law. It is also
called tax planning, or tax minimization.
TAX EVASION V. TAX AVOIDANCE (De Leon)
Evasion is accomplished by breaking the letter
of the tax law. Avoidance covers escape
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UP Law C2015
accompanied by legal procedures or means
which may be contrary to the intent of the
sponsors of the tax law, but nevertheless do not
violate the letter of the law. The tax evader
breaks the law; the tax avoider sidesteps it.
Tax Evasion Tax Avoidance
Illegal Legal
Breaks the law Uses the law to lessen
taxes
The legal right of a taxpayer to decrease the
amount of what otherwise could be his taxes or
altogether avoid them, by means which the law
permits, cannot be doubted. (Delpher Trades
Corporation v. IAC)
CASES
Delpher Trades Corporation v. IAC (1988)
Facts: The Pachecos leased real property to
Hydro Pipes, with a provision granting a right of
first refusal in favor of Hydro Pipes. A deed of
exchange was executed between the Pachecos
and Delpher, where the former conveyed the
leased property for shares of stocks of the latter.
Hydro Pipes challenged the deed of exchange
arguing that it was a violation of the right of first
refusal; that Delpher is a family corporation
used for estate planning scheme to avoid taxes.
Held: Delpher was used as a business conduit of
the Pachecos. They invested their properties
and change the nature of their ownership from
unincorporated to incorporated form by
organizing Delpher Trades Corporation to take
control of their properties and at the same time
save on inheritance taxes. There is nothing
objectionable about this estate planning
scheme of the Pachecos. The legal right of a
taxpayer to decrease the amount of what
otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot
be doubted. There was no violation of the right
of first refusal since there was no sale; the
Pachecos merely changed their ownership from
one form to another.
Ma'am Loriega: Under Rev. Reg. 6-2013, the
scheme by Delpher will not be allowed.
Taxation Law 1 Midterms 2013
6. DOCTRINE OF EQUITABLE RECOUPMENT
(taken from Collector v. UST)
There is Equitable Recoupment:
(1) For the taxpayer, when the refund of a tax
illegally or erroneously collected or overpaid
by a taxpayer is barred by the statute of
limitations and a tax is being presently
assessed against the taxpayer, said present
tax may be recouped or set off against the
tax, the refund of which has been barred.
(2) For the government, when the government
has failed to collect a tax within the period
of limitation and said collection is already
barred, and the taxpayer has to his credit a
tax illegally or erroneously
collected/overpaid, whose refund is not yet
barred, the Government need not make
refund of all the illegally/erroneously
collected tax, but it may set off against it
the tax whose collections is barred by the
statute of limitations.
The reason for the doctrine is to mitigate the
harshness of the law on limitations which bar:
(3) The collection of any tax after a certain
period from the time that the tax return is
filed or an assessment thereon by the
Government, through its agents.
(4) The refund of a tax illegally or erroneously
collected or any overpayment made by the
taxpayer, after a certain period from said
collection or payment.
Reasons to not apply the doctrine:
 It lowers the bars of prescription. The
statute of limitations has a salutary effect;
under which, the parties won’t sleep on their
rights, and would not burden the courts
with suits for collection of taxes already
barred or refund of taxes also barred.
 It could tempt the collecting agency to
neglect the collection of taxes because it
could still recover such the tax by having it
recouped from any tax which it may have
illegally collected from the tax payer.
 It could tempt the taxpayer to delay the
filing of suit for refund of erroneously
collected tax, because he can recover by
refusing to pay a valid tax assessed against
him by compelling the government to set
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UP Law C2015 Taxation Law 1
off the same against a tax payment he
could no longer recover.
 When the taxpayer remembers and decides
to get the refund, the Government may find
itself financially embarrassed because it has
already spent the money. On the other
hand, if the Government suddenly decides
to collect the tax by way of recoupment, the
taxpayer might be unable to meet the
demand.
 The Doctrine of Equitable Recoupment is
not applicable in the Philippines, unless the
Legislature makes it so.
CASES
Collector v. UST (1958)
Facts: UST claimed a refund against the
Government for taxes erroneously paid. The
Collector denied the refund, and assessed the
payment of deficiency tax. Upon review by the
CTA, it ruled that the claim of UST is
erroneously collected tax, but it cannot be
refunded because the claim was filed out of
time. However, the CTA applied the doctrine of
equitable recoupment to set-off the refund
claim of UST against the deficiency assessment
charged by the Collector.
Held: The doctrine of equitable recoupment is a
common law principle, and is not binding in this
jurisdiction. Though there are advantages both
to the government and the taxpayer, its
drawbacks outweigh the benefits. It cannot be
applied, unless the Legislature finds it fit to
introduce the doctrine in this jurisdiction.
7. SET-OFF OF TAXES
A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
(Republic v. Mambulao Lumber)
Tax may be set-off if the claims of the
Government and the taxpayer against each
other are due, demandable, and fully liquidated.
(Domingo v. Garlitos)
Ma’am Loriega: Republic v. Mambulao is still the
rule. Domingo v. Garlitos is a deviation; apply its
ruling only in very similar facts.
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A person cannot refuse to pay a tax on the
ground that the government owes him an
amount equal to or greater than the tax being
collected. (Francia v. IAC)
Taxes are not subject of compensation because
the government and the tax payer are not
mutually creditors and debtors of each other.
(Philex Mining Corporation v. Commissioner)
It is the general rule not to allow the setting of
of excess taxes paid against other taxes payable
to the Government. The Commissioner of
Internal Revenue, however, is authorized by Sec.
204(C) of the NIRC to grant refund or credit of
taxes erroneously or illegally paid. (De Leon)
CASES
Republic v. Mambulao Lumber (1962)
Facts: The defendants are being charged by the
Government certain amounts of money for
forest charges. They claim that they had
previously paid reforestation charges; that the
reforestation charges were not used by the
Government; therefore, the charges they
already paid should be used to compensate the
charge presently levied against them.
Held: The reforestation charges are in the
nature of taxes. Taxes cannot be subject of set-
off or compensation. A claim for taxes is not
such a debt, demand, contract or judgment as is
allowed to be set-off.
Domingo v. Garlitos (1963)
Facts: The Government claimed inheritance and
estate taxes against the estate of the late
Walter Price. In a previous case, the tax claims
were declared final and executory. The
Government then sought to execute the claim
against the estate. The petition to execute the
judgment was denied because the Government
owed the estate a higher sum of money, and
that the money was already appropriated by
virtue of RA 2700.
Held: The denial of the execution was proper.
Under the circumstances, compensation could
take place by operation of law. The claims of the
Government against the estate, and the claims
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of the estate against the government are both
overdue, demandable, and liquidated.
Francia v. IAC (1988)
Facts: Part of Francia's land was expropriated
for P4,116.00. Later, since he had a real estate
tax delinquency of P2,400.00, his property was
sold a public auction. Francia filed a complaint
to annul the public sale. He contends that he
had no tax liability because the the said liability
was set-off by operation of law by the amount
owed him by the government due to the
expropriation.
Held: Francia is liable for the tax delinquency.
There can be no off-setting of taxes against the
claims that the taxpayer may have against the
government. A person cannot refuse to pay a
tax on the ground that the government owes
him an amount equal to or greater than the tax
being collected.
Philex Mining Corporation v. Commissioner
(1998)
Facts: Philex was asked by BIR to settle its tax
liabilities. Philex protested saying that it has a
pending tax refund claim. BIR rejected Philex's
claim saying that the refund has not yet been
established with certainty. Philex was orderd by
the CTA to pay its tax liabilities. Eventually,
Philex was given the tax refund. It claimed that
such refund should work as a set-off or
compensation to it tax liabilities.
Held: Taxes are not subject of compensation.
The government and the tax payer are not
mutually creditors and debtors of each other.
Taxes are not debts which can be the subject of
compensation. Debts are due to the
Government in its corporate capacity, while
taxes are due to the Government in its sovereign
capacity.
Ma'am Loriega: While the appeal was pending,
Philex was granted its tax refund. While there
could have been set-off, the question presented in
this appeal is whether a tax refund claim may be
compensated with a tax claim.
8. MANDATORY AND DIRECTORY
PROVISIONS OF TAX STATUTES
Midterms 2013
Mandatory provisions - those provisions of a
statute relating to the assessment of taxes,
which are intended for the security of the citizen,
or to insure the equality of taxation, or for
certainty as to the nature and amount of each
person's tax.
Directory provisions - those designed merely for
the information or direction of officers or to
secure methodical and systematic modes of
proceedings are merely directory. (Hijos de
Pedro Roxas v. Rafferty)
The omission to follow the mandatory
provisions renders invalid the act or proceeding
which it relates; the omission to follow the
directory provisions does not involve such
consequence.
CASES
Hijos de Pedro Roxas v. Rafferty (1918)
Facts: The city assessor and collector of Manila
assessed the unfinished improvements of Roxas
Building. The assessment and the notice of such
assessment were done prior to the completion
of the improvements.
Held: The notice of the assessment was not
given during the time fixed by the Manila
Charter.
The Manila Charter provides for a period when a
notice of tax assessment must be given. Such
provision is intended for the security of the
citizen, therefore it is a mandatory provision.
Since the notice of the assessment was not give
during the time fixed by the law, the assessment
is invalid.
9. COMPROMISES
Ma’am Loriega: One way of paying taxes.
Two grounds of the BIR to compromise tax:
(1) Reasonable doubt as to the validity of the
claim against the taxpayer; or
(2) Inability of taxpayer to pay. (NIRC, Sec
204[A])
K. Sources of Tax Laws
INDEPENDENT SOURCES OF TAX LAWS:
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UP Law C2015 Taxation Law 1 Midterms 2013

(1) Constitution
(2) Legislation (includes PDs during the martial
law, EOs when the President possessed
legislative powers)

OTHER SOURCES: (Necessarily based on the

Constitution or existing laws)

(1) Tax ordinance by local governments.

(2) Administrative rules and regulations;
rulings or opinions of tax officials,
particularly the Commissioner of Internal
Revenue, including the Secretary of Justice.
(3) Judicial decisions. They evidence what the
law means.

L. Tax Treaties
Tax treaties or agreements entered into by the
Philippines with other countries are also a
source of tax law. They have the same force and
effect as statutes. They are entered into for the
avoidance of double taxation. (De Leon)

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MODULE 2—GENERAL PRINCIPLES OF TAXATION
A. Overview of Income
Taxation
1. INCOME TAX
A tax on all yearly profits arising from property,
profession, trades or offices, or as a tax on a
person’s income, emoluments, profits and the
like.
It is a direct tax on actual presumed income of a
taxpayer during the taxable year.
A final income tax may also be imposed on
certain one-time transactions like the sale of
real properly classified as capital asset.
2. INCOME TAX LAW
(1) RA 8424 (TAX REFORM ACT OF 1997)
The Philippine income tax law is embodied in
Title II of the National Internal Revenue Code of
1997, consisting of 16 chapters and 62 Sections.
RA 8424 became effective January 1, 1998.
Ma’am Loriega: Covers Secs. 22-83.
(2) REVENUE REGULATIONS
These are the formal interpretations of Tax
Code provisions promulgated by the Secretary
of Finance upon the recommendation of the
Commissioner of Internal Revenue. They cannot
just be amended or changed by rulings or other
administrative issuances signed by the
Commissioner. To revoke, modify or amend
existing regulations, another regulation is
required.
(3) BIR RULINGS
These are less formal interpretations of the Tax
Code provisions issued by the Commissioner of
Internal Revenue. To revoke, modify or amend
existing BIR rulings, another ruling is necessary.
(4) OTHER SOURCES
Constitution, tax treaties, general and special
laws, judicial decisions (SC, CA, CTA)
Taxation Law 1 Midterms 2013
3. FEATURES OF PHILIPPINE INCOME TAX
LAW
(1) IT IS A DIRECT TAX
The tax burden is borne by the income recipient
upon whom the tax is imposed. It is a tax
demanded from the very person who, it is
intended or desired, should pay it. This is unlike
indirect tax where the tax is demanded in the
first instance from one person in the expectation
and intention that he can shift the burden to
someone else.
Ma’am Loriega: It is something you cannot pass
on.
(2) IT IS A PROGRESSIVE TAX
The tax base increases as the tax rate increases.
It is founded on the ability to pay principle –
those who receive more income and thus have
more capacity to pay shall pay more in taxes.
This is consistent with the Constitutional
provision that “Congress shall evolve a
progressive system of taxation” (Sec.. 28, Art VI,
1987 Constitution)
Maam Loriega: true only for individual income
tax. Income of Corporations are subjected to a
fixed rate.
(3) THE PHILIPPINES HAS ADOPTED THE MOST
COMPREHENSIVE SYSTEM OF IMPOSING INCOME
TAX
Three principles are adopted. Any one of the
tree principles is enough to justify the
imposition of income tax on the income of a
resident citizen and domestic corporations tat
are taxed on worldwide income. Other types of
taxpayers are taxed only on their income from
sources within the Philippines beginning
January 1, 1998, following the territoriality
principle.
 Citizenship principle
 Residence Principle
 Source Principle
Some Questions by Ma’am Loriega:
1. What if a nonresident foreign corporation
sells its land in the Philippines?
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Taxable because source of income is the
Philippines.
2. What if a Japanese lawyer earns income
from a case in the Philippines
Taxable because source of income is the
Philippines.
(4) THE PHILIPPINES FOLLOWS THE SEMI-
SCHEDULAR, SEMI-GLOBAL SYSTEM OF INCOME
TAXATION
 Schedular
The different types of income tax are subject to
different set of graduated or flat income tax
rates. The applicable tax rates will depend on
the classification of taxable income and the
basis could be gross income or net income.
Different sources of income are categorized, and
different categories have different tax rates.
 Global
The total allowable deductions, sans
exemptions, are deducted from the gross or
sum total of all items of table income, profit and
gain, to arrive at the net taxable income. The
net taxable income is then subjected to income
tax rates, regardless of the type.
Aggregate of all items/sources of income,
minus the deductions and exemptions, shall be
subject to a single tax rate/range of tax rates.
 Semi-schedular, semi-global (System
adopted in the Philippines)
Compensation income, business or professional
income, capital gain and passive income not
subject to final tax, and other income are added
together to arrive at the gross income. Then the
sum of allowable deductions and personal and
additional exemptions are deducted from the
gross income to arrive at the taxable income.
Such taxable income is subjected to one set of
tax rates (Semi-global). However, for passive
investment income subject to final tax and
capital gain for the sale or transfer of stocks of a
domestic corporation and real properties
remain subject to different sets of taxes and
covered by different tax returns (Semi-
schedular)
Ma’am Loriega’s Discussion:
Midterms 2013
Step 1. identify the items subject to the schedular
rate. Then apply the respective rates.
Step 2. Lump the rest of the income together and
apply the fixed rate.
(5) PHILIPPINE TAX LAW IS OF AMERICAN ORIGIN
As a result, authoritative decisions of the
American official charged with enforcing the US
Internal Revenue Code has peculiar force and
persuasive effect for the Philippines. When
meaning of provisions are doubtful, great
weight should be given to the construction of a
department charged with its execution.
4. CRITERIA IN IMPOSING PHILIPPINE
INCOME TAX
1. CITIZENSHIP
A citizen of the Philippines is subject to
Philippine tax on:
 Worldwide income, if he resides in the
Philippines; or
 Only on his income from sources within the
Philippines, if he qualifies as a nonresident
citizen; hence, his income from sources
outside the Philippines shall be exempt
from Philippine income tax
2. RESIDENCE
 An alien used to be subject to Philippine
Income tax on his worldwide income
because of his residence in the Philippines.
RA 8424 discarded this, in view of the
complex tax administration required. Now,
a resident alien is liable to pay Philippine
income tax only on his income from sources
within the Philippines.
3. SOURCE OF INCOME
 An alien is subject to Philippine income tax
because he derives income from sources
within the Philippines. Thus, a non-resident
alien is liable to pay Philippine income tax
on his income from sources within the
Philippines, such as dividend, interest, rent,
or royalty, despite the fact that he has not
set foot in the Philippines.
5. TYPES OF PHILIPPINE INCOME TAX
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UP Law C2015 Taxation Law 1
(1) Graduated income tax on individuals
(2) Normal corporate income tax on
corporations
(3) Minimum corporate income tax on
corporations
(4) Special income tax on certain corporations
(5) Capital gains tax on sale or exchange of
shares of stock of a domestic corporation
classified as capital assets
(6) Capital gains on sale or exchange of real
property classified as a capital asset
(7) Final withholding tax on certain passive
investment income paid to residents
(8) Final withholding tax on income payments
made to non-residents
(9) Fringe benefit tax on fringe benefits of
supervisory or managerial employees
(10) Branch profit remittance tax
(11) Tax on improperly accumulated earnings of
corporations
6. WHEN IS INCOME TAXABLE
Income, gain, or profit is subject to income tax,
when the following requisites are present:
(1) There is income, gain or profit;
(2) The income, gain or profit is received or
realized during the taxable year;
(3) The income, gain or profit is not exempt
from income tax
Income may be defined as an amount of money
coming to a person or corporation within a
specified time, whether as payment for services,
interest or profit from investment. Unless
otherwise specified, it means cash or its
equivalent. Income can also be thought of as
flow of the fruits of one's labor. (Conwi v
Commissioner)
Income is realized from the sale, exchange, or
other disposition of property. No income is
derived nor a loss incurred by the owner until
after the actual sale or other disposition of the
property in excess of its cost or adjusted basis.
Income is received not only when it is actually
handed to a person, but also when it is merely
constructively paid to him. (Mamalateo)
For example: where a tenant deposited in court
his rental payment in court due to the refusal of
lessor to accept the payment, through no fault
Midterms 2013
of the tenant, the lessor is deemed to have
constructively received payment. Thus, the fact
that the rental was withdrawn at a later time is
not a justification for its non-declaration as
income tax. (Limpan Investment v
Commissioner)
Ma'am Loriega:
It depends on the applicable accounting method:
1. Cash Basis—realized when received
2. Accrual basis—realized when income is
realized. In Accounting, you realize income
when the earnings process is complete, or
virtually complete.
 The earnings process is complete when there
is exchange or specifically, delivery of the
money.
 Example of virtual completion: When there is
a ready market such as the power sector, the
moment you produce the power, there is
already income realized.
 In installment sales, we recognize income
using the gross profit method:
o For example you sell 10M worth on
installment (1M per fiscal year) with a
30% gross profit.
o On the first installment only 300,000
is realized (1M x 30%)
When your assets increase, there is a flow of
wealth. Thus, there may be taxable income.
Some Questions by Ma’am Loriega:
In these cases, is there a flow of wealth?
1. You borrow a book and return it after 10
days (NO)
2. What if inside the book there is a bookmark
worth $1.99. (YES, assets increased)
3. You own a parcel of land worth 1M. You
place it in a corporation in exchange for 1M
worth of shares of stocks. (NO, assets only
converted. Still end up with 1M worth of
property)
4. What if you get 1.5M worth of stocks (YES,
assets increased by 0.5M)
5. What if you get into an accident and your
face got disfigured. You undergo cosmetic
surgery.
 If repair only for damage—NO
 If repair with enhancement, and more
money is asked—YES
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UP Law C2015 Taxation Law 1
6. Inheritance of money (YES, but WON it
creates taxable income is another matter)
CASES
Conwi v Commissioner (1992)
Facts: Conwi et. al. are Filipino citizens, who are
employees of P&G, and were assigned to work
abroad, during which they were paid in US
Dollars. They filed their ITRs using a USD-PHP
conversion rate prescribed under a BIR ruling
and 2 Revenue Memorandum Circulars. Later,
they filed amended ITRs using the par value of
the peso. This caused a difference in the values,
thus they claimed a refund. They claimed that
the BIR ruling and the Memorandum Circulars
did not apply to them because they were
working abroad, and no part of their income was
remitted to the Philippines.
Held: Their dollar earnings are the fruits of their
labors. It was a definite amount of money which
came to them within a specified period of time
as payment for their services. The NIRC provides
that a tax shall be imposed upon the taxable
net income received during each taxable year
from all sources by every individual, whether a
citizen of the Philippines residing therein or
abroad. Being taxable, such income is subject to
the rules and regulations promulgated for the
enforcement of the provisions of the NIRC.
Limpan Investment v Commissioner (1966)
Facts: Limpan is in the business of leasing real
property. The BIR discovered that Limpan
underdeclared its income tax from some of its
rental income. One of its contentions is that a
tenant deposited his rental payment in court;
that such rental payment was only withdrawn
by Limpan in the following year; and therefore,
it is correct in not declaring the rental payment
in the year it was alleged to have underdeclared
its income.
Held: The deposit in court of the tenant of his
rental was resorted to due to the refusal of
Limpan to accept the payment. Limpan is
deemed to have constructively received such
rental in the year it was deposited. Thus, it
should have declared it as part of its income.
Midterms 2013
7. EFFECTS OF APPLICATION OF TAX
TREATIES
Generally, the provisions of the tax code shall
apply only on the income of any person liable to
Philippine income tax. However, there are
bilateral tax treaties which the Philippines has
concluded with other States that may have
difference tax treatments with respect to
incomes and tax rates.
In case of conflict between the tax treaty and
the domestic tax law, the provisions of the treaty
generally prevail. However, there are occasions
when the domestic law is applied, such as when
the rate of tax imposed by the domestic law is
lower. The purpose of entering into tax treaties
is to avoid double taxation on the same income,
not to increase tax collection arising from higher
tax rates under the treaty.
The Heart of Income Taxation
SEC. 23, NIRC. General Principles of Income
Taxation in the Philippines. - Except when
otherwise provided in this Code:
(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 from abroad as an
overseas contract worker is taxable only on
income derived 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
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only on income derived from sources within the
Philippines.
SEC. 42, NIRC. Income from Sources Within the
Philippines.-
(A) Gross Income From Sources Within the
Philippines. - The following items of gross income
shall be treated as gross income from sources
within the Philippines:
(1) Interests. - Interests derived from sources
within the Philippines, and interests on bonds,
notes or other interest-bearing obligation of
residents, corporate or otherwise;
(2) Dividends. - The amount received as
dividends:
a) from a domestic corporation; and
b) 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 ration 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.
(3) Services. - Compensation for labor or personal
services performed in the Philippines;
(4) Rentals and royalties. - Rentals and royalties
from property located in the Philippines or from
any interest in such property, including rentals or
royalties for -
a) The use of or the right or privilege to use in
the Philippines any copyright, patent, design
or model, plan, Secret formula or process,
goodwill, trademark, trade brand or other like
property or right;
b) The use of, or the right to use in the
Philippines any industrial, commercial or
scientific equipment;
c) The supply of scientific, technical, industrial
or commercial knowledge or information;
d) The supply of any assistance that is ancillary
and subsidiary to, and is furnished as a
means of enabling the application or
enjoyment of, any such property or right as is
Midterms 2013
mentioned in paragraph (a), any such
equipment as is mentioned in paragraph (b)
or any such knowledge or information as is
mentioned in paragraph (c);
e) The supply of services by a nonresident
person or his employee in connection with the
use of property or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus purchased
from such nonresident person;
f) Technical advice, assistance or services
rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme; and
g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection
with television; and
(iii) Tapes for use in connection with radio
broadcasting.
(5) Sale of Real Property. - gains, profits and
income from the sale of real property located in
the Philippines; and
(6) Sale of Personal Property. - gains; profits and
income from the sale of personal property, as
determined in SubSection (E) of this Section.
xxx
(E) Income From Sources Partly Within and Partly
Without the Philippines.- Items of gross income,
expenses, losses and deductions, other than
those specified in SubSections (A) and (C) of this
Section, shall be allocated or apportioned to
sources within or without the Philippines, under
the rules and regulations prescribed by the
Sec.retary of Finance, upon recommendation of
the Commissioner. Where items of gross income
are separately allocated to sources within the
Philippines, there shall be deducted (for the
purpose of computing the taxable income
therefrom) the expenses, losses and other
deductions properly apportioned or allocated
thereto and a ratable part of other expenses,
losses or other deductions which cannot definitely
be allocated to some items or classes of gross
income. The remainder, if any, shall be included in
full as taxable income from sources within the
Philippines. In the case of gross income derived
from sources partly within and partly without the
Philippines, the taxable income may first be
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UP Law C2015 Taxation Law 1
computed by deducting the expenses, losses or
other deductions apportioned or allocated thereto
and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to
some items or classes of gross income; and the
portion of such taxable income attributable to
sources within the Philippines may be determined
by processes or formulas of general
apportionment prescribed by the Secretary of
Finance. Gains, profits and income from the sale
of personal property produced (in whole or in
part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by
the taxpayer without and sold within the
Philippines, shall be treated as derived partly from
sources within and partly from sources without
the Philippines.
Gains, profits and income derived from the
purchase of personal property within and its sale
without the Philippines, or from the purchase of
personal property without and its sale within the
Philippines shall be treated as derived entirely
form sources within the country in which sold:
Provided, however, That gain from the sale of
shares of stock in a domestic corporation shall be
treated as derived entirely form sources within the
Philippines regardless of where the said shares
are sold. The transfer by a nonresident alien or a
foreign corporation to anyone of any share of
stock issued by a domestic corporation shall not
be effected or made in its book unless: (1) the
transferor has filed with the Commissioner a
bond conditioned upon the future payment by
him of any income tax that may be due on the
gains derived from such transfer, or (2) the
Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized
from such sale or transfer have been paid. It shall
be the duty of the transferor and the corporation
the shares of which are sold or transferred, to
advise the transferee of this requirement.
Ma'am Loriega's discussion:
- Section 23 is the heart of income taxation.
Categories of income tax payers under Sec. 23
Income from within and Only income from within
without the Philippines the Philippines taxable
taxable
Resident citizens (Sec. Nonresident citizen (Sec.
Midterms 2013
23[A]) 23[B])
Domestic corporation Overseas contract worker
(Sec. 23[E]) (Sec. 23[C])
Alien individual (Sec.
23[D])
Foreign corporation (Sec.
23[F])
How do you determine whether income is from
within or without the Philippines?
- By using the situs rules in Section 42.
Basic situs rules under Section 42:
1. For interests, situs is the residence of the
debtor. (Sec. 42[A][1]), (Sec. 42[C][1])
2. For dividends, situs is where the corporation
is located.
3. For services, situs is the place of
performance. (Sec. 42[A][3]), (Sec. 42[C][3])
4. Situs not changed by place of payment. Ex:
A person who worked in the Philippines, but
was paid outside. His income is considered
from within the Philippines.
5. For rentals, situs is where the property
generating the income is located. (Sec.
42[A][4]), (Sec. 42[C][4])
6. For sale of real property, situs is where the
property is located. (Sec. 42[A][5]), (Sec.
42[C][5])
7. For sale of personal property, situs is the
place of sale, except where the subject of
the sale is the share - of stock of a domestic
corporation. (Sec. 42[A][6]), (Sec. 42[E])
B. Definition of terms
Note: Ma’am discussed only until (M)
SEC.. 22, NIRC. Definitions - When used in this
Title:
(A) The term 'person' means an individual, a trust,
estate or corporation.
(B) The term 'corporation' shall include
partnerships, no matter how created or
organized, joint-stock companies, joint accounts
(cuentas en participacion), association, or
insurance companies, but does not include
general professional partnerships and a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
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UP Law C2015 Taxation Law 1
operations pursuant to an operating consortium
agreement under a service contract with the
Government. 'General professional partnerships'
are partnerships formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business.
(C) The term 'domestic,' when applied to a
corporation, means created or organized in the
Philippines or under its laws.
(D) The term 'foreign,' when applied to a
corporation, means a corporation which is not
domestic.
(E) The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to
the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite
intention to reside therein.
(2) A citizen of the Philippines who leaves the
Philippines during the taxable year to reside
abroad, either as an immigrant or for
employment on a permanent basis.
(3) A citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be physically
present abroad most of the time during the
taxable year.
(4) A citizen who has been previously considered
as nonresident citizen and who arrives in the
Philippines at any time during the taxable year to
reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the
taxable year in which he arrives in the Philippines
with respect to his income derived from sources
abroad until the date of his arrival in the
Philippines.
(5) The taxpayer shall submit proof to the
Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to
return to and reside in the Philippines as the case
may be for purpose of this Section.
(F) The term 'resident alien' means an individual
whose residence is within the Philippines and who
is not a citizen thereof.
(G) The term 'nonresident alien' means an
individual whose residence is not within the
Philippines and who is not a citizen thereof.
(H) The term 'resident foreign corporation' applies
to a foreign corporation engaged in trade or
business within the Philippines.
Midterms 2013
(I) The term 'nonresident foreign corporation'
applies to a foreign corporation not engaged in
trade or business within the Philippines.
(J) The term 'fiduciary' means a guardian, trustee,
executor, administrator, receiver, conservator or
any person acting in any fiduciary capacity for
any person.
(K) The term 'withholding agent' means any
person required to deduct and withhold any tax
under the provisions of Section 57.
(L) The term 'shares of stock' shall include shares
of stock of a corporation, warrants and/or
options to purchase shares of stock, as well as
units of participation in a partnership (except
general professional partnerships), joint stock
companies, joint accounts, joint ventures taxable
as corporations, associations and recreation or
amusement clubs (such as golf, polo or similar
clubs), and mutual fund certificates.
(M) The term 'shareholder' shall include holders of
a share/s of stock, warrant/s and/or option/s to
purchase shares of stock of a corporation, as well
as a holder of a unit of participation in a
partnership (except general professional
partnerships) in a joint stock company, a joint
account, a taxable joint venture, a member of an
association, recreation or amusement club (such
as golf, polo or similar clubs) and a holder of a
mutual fund certificate, a member in an
association, joint-stock company, or insurance
company.
xxx
Ma'am Loriega's discussion:
Under Sec. 22(B) the definition of 'Corporation' is
very broad. It need not be formed under the
Corporation Code; it also includes partnership,
joint ventures, etc.
General professional partnerships (GPPs) are not
taxable for income tax purposes. But while they
do not pay income tax, the partners pay income
tax.
For GPPs, take note that they must be formed for
“the sole purpose of exercising their common
profession”. Thus, a partnership by a lawyer and
accountant is taxable.
Under Sec. 22(E)(3), “most of the time” means
more than 50% of the year, which means at least
183 days in a year.
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UP Law C2015 Taxation Law 1
Under Sec. 22(E)(4), part of the income earned in
one year may be earned as a non-resident, while
part may be earned as resident.
Sec. 22 (L) follows the broad definition of a
corporation.
C. Kinds of Income Taxpayers
1. INDIVIDUAL TAXPAYERS
KINDS OF INDIVIDUAL TAXPAYERS:
1. Resident citizen: taxable on worldwide
income
2. Non-resident citizen: taxable only on
income from sources within the Philippines
3. Alien individuals: whether or not a resident
of the Philippines, taxable on income
derived from sources within the Philippines.
CITIZENSHIP
Who are citizens?
 Under the 1987 Constitution Art. IV § 1:
(1) Those who are citizens of the Philippines at
the time the 1987 Constitution was adopted:
February 2, 1987 [De Leon v Esguerra]
(2) Those whose fathers or mothers are citizens
of the Philippines.
(3) Those born before January 17, 1973, of
Filipino mothers, who elect Philippine
citizenship upon reaching the age of
majority.
(4) Those who are naturalized in accordance
with law.
 Filipino citizens who marry aliens shall
retain their Philippine citizenship, unless by
their omission they are deemed under the
law to have renounced their citizenship.
Loss or reacquisition of citizenship is in the
manner provided by law.
RESIDENCE
Important because taxation of worldwide
income is justified by the protection he gets
from the Philippine government even when he is
outside its territory. For as long as one is a
citizen of the Philippines, the Philippines retains
Midterms 2013
personal jurisdiction over the person of the
former.
Resident Citizen [RC]
 Three types:
(1) RC without an employer: engaged
in trade or business or in the
exercise of a profession in the
Philippines without an employer-
employee relationship
(2) RC employed by a company: not
engaged in trade or business or in
the exercise of a profession in the
Philippines
(3) RC with mixed income: engaged in
trade/business or in the exercise of
a profession and deriving
compensation and other income.
 The above distinction is important because
an RC engaged in trade or business or in
the exercise of a profession is entitled to
deduct certain items of deduction from his
business or professional income, capital
gains not subject to final tax and other
income.
Non-Resident Citizen [NRC]
SEC. 22. Definitions - When used in this Title:
E) The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to
the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite
intention to reside therein.
(2) A citizen of the Philippines who leaves the
Philippines during the taxable year to reside
abroad, either as an immigrant or for
employment on a permanent basis.
(3) A citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be physically
present abroad most of the time during the
taxable year.
(4) A citizen who has been previously considered
as nonresident citizen and who arrives in the
Philippines at any time during the taxable year to
reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the
taxable year in which he arrives in the Philippines
with respect to his income derived from sources
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 UP Law C2015 Taxation Law 1
abroad until the date of his arrival in the
Philippines.
(5) The taxpayer shall submit proof to the
Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to
return to and reside in the Philippines as the case
may be for purpose of this Section.
 Under § 22 (E):
(1) A citizen of the Philippines who
establishes to the satisfaction of the
Commissioner the fact of his physical
presence abroad with a definite
intention to reside therein.
(2) A citizen of the Philippines who leaves
the Philippines during the taxable year
to reside abroad, either as an immigrant
or for employment on a permanent
basis.
(3) A citizen of the Philippines who works
and derives income from abroad and
whose employment thereat requires
him to be physically present abroad
most of the time during the taxable
year.
o “Most of the time”: at least 183
days, or half of the taxable year.
The presence abroad need not
be continuous.
(4) A citizen who has been previously
considered as nonresident citizen and
who arrives in the Philippines at any
time during the taxable year to reside
permanently in the Philippines shall
likewise be treated as a nonresident
citizen for the taxable year in which he
arrives in the Philippines with respect to
his income derived from sources abroad
until the date of his arrival in the
Philippines.
 Overseas contract workers: 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: 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 [§ 23 (C)]
Midterms 2013
 The taxpayer shall submit proof to the
Commissioner of Internal Revenue to show his
intention of leaving the Philippines to reside
permanently abroad or to return to and reside in
the Philippines as the case may be.
ALIENS
SEC. 22. Definitions - When used in this Title:
(F) The term 'resident alien' means an individual
whose residence is within the Philippines and who
is not a citizen thereof.
(G) The term 'nonresident alien' means an
individual whose residence is not within the
Philippines and who is not a citizen thereof.
 Two types:
(1) Resident Aliens - an individual
whose residence is within the
Philippines and who is not a citizen
thereof [§ 22 (F)]
(2) Non-Resident Aliens - an individual
whose residence is not within the
Philippines and who is not a citizen
thereof [§ 22 (G)]
 Both types are taxable only on income from
sources within the Philippines.
 The taxing power is derived from the
Philippines being a “host state” or “country
of source” exercising its taxing rights due to
the territorial link of the income.
Resident Aliens [RA]
Revenue Regulation No. 2
Sec. 6. Loss of residence by alien. -
An alien who has acquired residence in the
Philippines retains his status as a resident
until he abandons the same and actually
departs from the Philippines. An intention to
change his residence does not change his status
as a resident alien to that of a nonresident alien.
Thus an alien who has acquired a residence in the
Philippines is taxable as a resident for the
remainder of his stay in the Philippines.
An alien actually present in the Philippines
who is not a mere transient or sojourner is a
resident for income tax purposes.
 No/Indefinite Intention = RESIDENT: If he
lives in the Philippines and has no definite
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intention as to his stay, he is a resident.
A mere floating intention indefinite as to
time, to return to another country is not
sufficient to constitute him a transient.
 Definite Intention = TRANSIENT: One
who comes to the Philippines for a
definite purpose, which in its nature may
be promptly accomplished, is a transient.
 Exception: Definite Intention but such
cannot be promptly accomplished; If his
purpose is of such nature that an
extended stay may be necessary for its
accomplishment, and thus the alien
makes his home temporarily in the
Philippines, then he becomes a resident.
 A resident alien who leaves the Philippines
with a re-entry permit is not considered to
have abandoned his residence in the
Philippines [BIR Ruling, Mar. 12, 1974]
Non-Resident Aliens [NRA]
Revenue Regulation No. 2
Sec. 5. Definition. – A “non-resident alien
individual means an individual” –
(a) Whose residence is not within the
Philippines; and(b) Who is not a citizen of
the Philippines.
An alien actually present in the Philippines
who is not a mere transient or sojourner is a
resident of the Philippines for purposes of
the income tax. Whether he is a transient or not
is determined by his intentions with regard to the
length and nature of his stay. A mere floating
intention indefinite as to time, to return to
another country is not sufficient to constitute him
a transient. If he lives in the Philippines and has
no definite intention as to his stay, he is a
resident. One who comes to the Philippines for a
definite purpose which in its nature may be
promptly accomplished is a transient. But if his
purpose is of such a nature that an extended stay
may be necessary for its accomplishment, and to
that end the alien makes his home temporarily in
the Philippines, he becomes a resident, though it
may be his intention at all times to return to his
domicile abroad when the purpose for which
he came has been consummated or
abandoned.
Two sub-classifications:
Midterms 2013
(1) NRA engaged in trade or business in the
Philippines
 deemed thus if the aggregate
period of his stay in the country is
more than 180 days during each
calendar year [§ 25 (A)]
 taxed on income within the
Philippines at the graduated
income tax rates of 5% to 32%
while his passive investment
incomes shall generally be subject
to 20% final tax.
(2) NRA not engaged in trade or business in the
Philippines
 if the aggregate period of his stay
does not exceed 180 days, the
alien’s compensation, business or
professional income, capital gain,
passive investment income and
other income from sources within
the Philippines is taxed at a flat rate
of 25%
 but capital gains from sales or
exchanges of shares of stocks in a
domestic corporation shall be
subject to the capital gains tax or
stock transaction tax, as the case
may be
2. DOMESTIC CORPORATIONS
Sec.. 22, NIRC. (B) The term 'corporation' shall
include partnerships, no matter how created or
organized, joint-stock companies, joint accounts
(cuentas en participacion), association, or
insurance companies, but does not include
general professional partnerships and a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
Government. 'General professional partnerships'
are partnerships formed by persons for the sole
purpose of exercising their common profession,
no part of the income of which is derived from
engaging in any trade or business
Sec.. 22, NIRC. (C) The term 'domestic,' when
applied to a corporation, means created or
organized in the Philippines or under its laws.
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UP Law C2015 Taxation Law 1
General Rule: Domestic Corporations are
taxable on all income derived from sources
within and without the Philippines.
Exceptions:
1. General Professional Partnerships
2. Joint Ventures or Consortiums formed for
the purpose of:
 Undertaking construction projects
 Engaging in petroleum, coal,
geothermal, and other energy
operations pursuant to an operating or
consortium agreement under a service
contract with the Government
The partners of a business partnership are taxed
on a two-tier level
 First, at the corporate level at 32%
 Second, at the level of individual
partners at 10% of the after-tax profit
deemed distributed
No legal personality is required to be formed in
order for the partnership to be taxable.
(Collector v. BTCo.)
Whether a partnership is formed for a single
venture (Gatchalian v. CIR) or for a continuing
business (Evangelista v. CIR), they are subject to
tax.
Joint Ventures is a gray area in Philippine
jurisprudence. Usually, there is a single business
transaction where:
 Each party makes a contribution of
capital, services skills, knowledge,
material, or money.
 Profits are shared
 Each party has a joint proprietary
interest and right of mutual control over
the subject matter of the enterprise.1
CASES
Collector v. Batangas Transport Corp. (1958)
Facts: BTCo. and LTBCo. entered into a joint
management called “Joint Emergency
Operation” to economize in overhead expenses.
At the end of each calendar year, the net profits
1
BIR Ruling No. 317-92
Midterms 2013
were divided fifty-fifty. Each company then
prepared its separate income tax.
Held: The Joint Emergency Operation is a
taxable entity. The tax code defines the term
”corporation” as including partnership no
matter how created or organized, thereby
indicating that a joint venture need not be
undertaken in any of the standard forms, or in
conformity with the usual requirements of the
law on partnerships, in order that one could be
deemed constituted for purposes of the tax on
corporations.
Although no legal personality may have been
created by the Joint Emergency Operation,
nevertheless, said joint management operated
the business affairs of the 2 companies as
though they constituted a single entity,
company or partnership.
Ma’am L: The term “corporation” is very broad
Gatchalian v. CIR (1939)
Facts: Gatchalian et. al. contributed a total of
P2 to purchase a sweepstakes ticket. They won
P100,000 and the CIR required them to file the
corresponding income tax return covering the
prize won.
Held: A partnership was formed because each
of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally
the prize which they may win. Hence, the
winnings were taxable.
Evangelista v. CIR (1957)
Facts: The sisters Evangelista borrowed money
from their father in order to buy a grand total of
24 parcels of land. For their transactions, the
CIR assessed income tax on corporations,
residence tax on corporations, and real estate
broker’s tax on them. They contended that they
should not be assessed such tax, as they were
merely co-owners, not partners.
Held: They formed a partnership and are thus
subject to tax. The two essential elements of a
partnership are (a) an agreement to contribute
money, property or industry to a common fund,
and (b) an intention to divide the profits among
the parties.
Here, both the elements are present. While the
first element is clearly existent, as the
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UP Law C2015 Taxation Law 1
Evangelistas had already agreed to contribute
money and property to a common fund, the
Second element of intent had to be justified by
the SC, as it did via the ff.:
1. The common fund was not inherited by the
siblings pro indiviso. They created it
purposely, by jointly borrowing a substantial
portion thereof in order to establish the
fund.
2. The common fund was not merely invested
in one transaction, but in a series of
transactions, as listed in the facts portion.
The number of lots acquired and the brief
period in between the transactions is
strongly indicative of a common design not
limited to the conservation and preservation
of the common fund and property. There
was a character of habituality peculiar to
business transactions engaged in with the
purpose of gain.
3. The lots they bought were not used for
residential or personal use; they were leased
to several persons in consideration of rents.
4. The properties had been placed under the
management of Simeon, who was
authorized to perform acts as if handling
the affairs of a corporation or business
operated for profit.
5. These conditions have existed for more than
15 years.
6. No evidence has been adduced by the
Evangelista to show what their purpose was
in creating the relation between
themselves.
While all these circumstances, if taken singly,
might not be enough to establish the intent
necessary to form a partnership, taken together,
they leave no doubt as to the existence of the
partnership to form a partnership.
Gatchalian Evangelista
Difference Single venture Continuing
venture
Similarity Contributed money
Divided the profit among
themselves
Some Questions by Ma’am Loriega:
1. What if an accountant and a lawyer form a
partnership? Is the partnership exempted
from income tax?
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No. In order to be exempted, the partnership
must be for the sole purpose of exercising a
common profession.
2. What if the accountant, who is good at
singing, and the lawyer, who is good at
cooking, put up a singing waiter restaurant?
No. The partnership must not be engaged in
any trade or business.
3. Bhoyet owns an apartment compound
which is being rented out. When he died, his
children Jhun, Bubhoy, and Bheng Beng
inherited it and continued renting it out. Is
the income taxable?
No. There is no partnership, only a co-
ownership. They did not contribute to a
common fund for the purpose of dividing the
profits among themselves. They merely
inherited it. If, however, they start investing
funds into the apartment for its repair, a
partnership is formed, and they will be liable for
income tax. The inevitable deterioration of the
property is the reason why ma’am says co-
ownerships formed by reason of inheritance
cannot be sustainable.
3. FOREIGN CORPORATIONS
Sec.. 22, NIRC. (D) The term 'foreign,' when
applied to a corporation, means a corporation
which is not domestic.
Sec.. 22, NIRC. (H) The term 'resident foreign
corporation' applies to a foreign corporation
engaged in trade or business within the
Philippines.
Sec.. 22, NIRC. (I) The term 'nonresident foreign
corporation' applies to a foreign corporation not
engaged in trade or business within the
Philippines.
A nonresident foreign corporation is not taxable
for income earned in the Philippines because its
source of income is not earned in the
Philippines.
For a resident foreign corporation, its can only
be taxed on the income it earns from the
Philippines.
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UP Law C2015 Taxation Law 1
Marubeni Corp. v. CIR (1989)
Facts: Marubeni had a Philippine branch
through which it did business locally. It also
invested in and was paid dividends by AG&P.
Marubeni sough a ruling from the BIR on
whether or not the dividends it received from
AG&P are effectively connected with its conduct
or business in the Philippines as to be
considered as branch profits. It claimed
however, that the dealings with AG&P resulted
in a singular tax liability to the Marubeni local
branch and head office, based on its agency
relationship. BIR ruled that the dividends
received by Marubeni from AG&P are not
income arising from the business activity in
which Marubeni is engaged. The dividends are
not to be considered branch profits since the
income was not derived from the business
activity in which the corporation is engaged.
Held: The alleged overpaid taxes were incurred
for the remittance of dividend income to the
head office in Japan, a separate and distinct
income taxpayer from the Philippine branch.
The general rule that a foreign corporation is
the same juridical entity as its branch office in
the Philippines is inapplicable. But when the
foreign corporation transacts business in the
Philippines independently of its branch, the
principal-agent relationship is set aside. The
transaction becomes one of the foreign
corporation, not of the branch. Consequently,
the taxpayer is the foreign corporation, not the
branch or the resident foreign corporation.
Corollarily, if the business transaction is
Midterms 2013
conducted through the branch office, the latter
becomes the taxpayer, and not the foreign
corporation.
Ma’am L: This case illustrates that for tax
purposes, there can be dual personalities. In this
case, Marubeni was both a resident foreign corp.
and a nonresident foreign corp.
CIR v. BOAC (1987)
Facts: BOAC is a 100% British-owned GOCC
operating air transportation services. It was not
authorized to land in the Philippines. However,
through a local sales agent, it sold
transportation tickets over the routes of the
other Interline Air Transport Association (IATA)
members. It was assessed by the CIR for
deficiency income taxes. BOAC claimed that it
should be absolved from liability for the
deficiency income tax because it did not perform
any of its services within the Philippines.
Held: BOAC is a resident foreign corporation
under Sec.. 22(h) of the NIRC. There is no
specific criterion as to what constitutes "doing"
or "engaging in" or "transacting" business. In
order that a foreign corporation may be
regarded as doing business within a State, there
must be continuity of conduct and intention to
establish a continuous business, such as the
appointment of a local agent, and not one of a
temporary character.
“TOX”
(2013)
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UP Law C2015 Taxation Law 1 Midterms 2013

Bar Questions:

1. There is no taxable income until such income is recognized. Taxable income is recognized when the
(A) taxpayer fails to include the income in his income tax return.
(B) income has been actually received in money or its equivalent.
(C) income has been received, either actually or constructively.
(D) transaction that is the source of the income is consummated.

2. Which theory in taxation states that without taxes, a government would be paralyzed for lack of power to activate
and operate it, resulting in its destruction?
(A) Power to destroy theory
(B) Lifeblood theory
(C) Sumptuary theory
(D) Symbiotic doctrine

3. Double taxation in its general sense means taxing the same subject twice during the same taxing period. In this
sense, double taxation
(A) violates substantive due process.
(B) does not violate substantive due process.
(C) violates the right to equal protection.
(D) does not violate the right to equal protection.

4. Guidant Resources Corporation, a corporation registered in Norway, has a 50 MW electric power plant in San
Jose, Batangas. Aside from Guidant's income from its power plant, which among the following is considered as part
of its income from sources within the Philippines?
(A) Gains from the sale to an Ilocos Norte power plant of generators bought from the United States.
(B) Interests earned on its dollar deposits in a Philippine bank under the Expanded Foreign Currency Deposit
System.
(C) Dividends from a two-year old Norwegian subsidiary with operations in Zambia but derives 60% of its gross
income from the Philippines.
(D) Royalties from the use in Brazil of generator sets designed in the Philippines by its engineers.

5. Tong Siok, a Chinese billionaire and a Canadian resident, died and left assets in China valued at P80 billion and
in the Philippines assets valued at P20 billion. For Philippine estate tax purposes the allowable deductions for
expenses, losses, indebtedness, and taxes, property previously taxed, transfers for public use, and the share of his
surviving spouse in their conjugal partnership amounted to P15 billion. Tong's gross estate for Philippine estate tax
purposes is
(A) P20 billion.
(B) P5 billion.
(C) P100 billion.
(D) P85 billion.

6. Aplets Corporation is registered under the laws of the Virgin Islands. It has extensive operations in Southeast
Asia. In the Philippines, Its products are imported and sold at a mark-up by its exclusive distributor, Kim's Trading,
Inc. The BIR compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets net income
derived from its exports to Kim. Is the BIR correct?
(A) Yes. Aplets is a non-resident foreign corporation engaged in trade or business in the Philippines.
(B) No. The tax should have been computed on the basis of gross revenues and not net income.
(C) No. Aplets is a non-resident foreign corporation not engaged in trade or business in the Philippines.
(D) Yes. Aplets is doing business in the Philippines through its exclusive distributor Kim's Trading. Inc.

7. The actual effort exerted by the government to effect the exaction of what is due from the taxpayer is known as
(A) assessment.
(B) levy.
(C) payment.
(D) collection.

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UP Law C2015 Taxation Law 1 Midterms 2013

8. Although the power of taxation is basically legislative in character, it is NOT the function of Congress to
(A) fix with certainty the amount of taxes.
(B) collect the tax levied under the law.
(C) identify who should collect the tax.
(D) determine who should be subject to the tax.

9. Federico, a Filipino citizen, migrated to the United States some six years ago and got a permanent resident
status or green card. He should pay his Philippine income taxes on
(A) the gains derived from the sale in California, U.S.A. of jewelry he purchased in the Philippines.
(B) the proceeds he received from a Philippine insurance company as the sole beneficiary of life insurance taken by
his father who died recently
(C) the gains derived from the sale in the New York Stock Exchange of shares of stock in PLDT, a Philippine
corporation.
(D) dividends received from a two year old foreign corporation whose gross income was derived solely from
Philippine sources.

10. An example of a tax where the concept of progressivity finds application is the
(A) income tax on individuals.
(B) excise tax on petroleum products.
(C) value-added tax on certain articles.
(D) amusement tax on boxing exhibitions.

11. What is the rule on the taxability of income that a government educational institution derives from its school
operations? Such income is
(A) subject to 10% tax on its net taxable income as if it is a proprietary educational institution.
(B) Exempt from income taxation if it is actually, directly, and exclusively used for educational purposes.
(C) subject to the ordinary income tax rates with respect to incomes derived from educational activities.
(D) Exempt from income taxation in the same manner as government-owned and controlled corporations.

12. Alain Descartes, a French citizen permanently residing in the Philippines, received several items during the
taxable year. Which among the following is NOT subject to Philippine income taxation?
(A) Consultancy fees received for designing a computer program and installing the same in the Shanghai facility of
a Chinese firm.
(B) Interests from his deposits in a local bank of foreign currency earned abroad converted to Philippine pesos.
(C) Dividends received from an American corporation which derived 60% of its annual gross receipts from
Philippine sources for the past 7 years.
(D) Gains derived from the sale of his condominium unit located in The Fort, Taguig City to another resident alien.

13. Income is considered realized for tax purposes when

(A) it is recognized as revenue under accounting standards even if the law does not do so.
(B) the taxpayer retires from the business without approval from the BIR.
(C) the taxpayer has been paid and has received in cash or near cash the taxable income.
(D) the earnings process is complete or virtually complete and an exchange has taken place.

14. Real property owned by the national government is exempt from real property taxation unless the national
government
(A) transfers it for the use of a local government unit.
(B) leases the real property to a business establishment.
(C) gratuitously allows its use for educational purposes by a school established for profit.
(D) sells the property to a government-owned non-profit corporation.

15. Real property taxes should not disregard increases in the value of real property occurring over a long period of
time. To do otherwise would violate the canon of a sound tax system referred to as
(A) theoretical justice.
(B) fiscal adequacy.
(C) administrative feasibility.
(D) symbiotic relationship.

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UP Law C2015 Taxation Law 1 Midterms 2013

16. The power to tax is the power to destroy. Is this always so?
(A) No. The Executive Branch may decide not to enforce a tax law which it believes to be confiscatory.
(B) Yes. The tax collectors should enforce a tax law even if it results to the destruction of the property rights of a
taxpayer.
(C) Yes. Tax laws should always be enforced because without taxes the very existence of the State is endangered.
(D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected.

17. Zygomite Minerals, Inc., a corporation registered and holding office in Australia, not operating in the Philippines,
may be subject to Philippine income taxation on
(A) gains it derived from sale in Australia of an ore crusher it bought from the Philippines with the proceeds
converted to pesos.
(B) gains it derived from sale in Australia of shares of stock of Philex Mining Corporation, a Philippine corporation.
(C) dividends earned from investment in a foreign corporation that derived 40% of its gross income from Philippine
sources.
(D) interests derived from its dollar deposits in a Philippine bank under the Expanded Foreign Currency Deposit
System.

18. Pierre de Savigny, a Frenchman, arrived in the Philippines on January 1, 2010 and continued to live and engage
in business in the Philippines. He went on a tour of Southeast Asia from August 1 to November 5, 2010. He returned
to the Philippines on November 6, 2010 and stayed until April 15, 2011 when he returned to France. He earned
during his stay in the Philippines a gross income of P3 million from his investments in the country. For the year
2010, Pierre’s taxable status is that of
(A) a non-resident alien not engaged in trade or business in the Philippines.
(B) a non-resident alien engaged in trade or business in the Philippines.
(C) a resident alien not engaged in trade or business in the Philippines.
(D) a resident alien engaged in trade or business in the Philippines.

19. Lualhati Educational Foundation, Inc., a stock educational institution organized for profit, decided to lease for
commercial use a 1,500 sq. m. portion of its school. The school actually, directly, and exclusively used the rents for
the maintenance of its school buildings, including payment of janitorial services. Is the leased portion subject to
real property tax?
(A) Yes, since Lualhati is a stock and for profit educational institution.
(B) No, since the school actually, directly, and exclusively used the rents for educational purposes.
(C) No, but it may be subject to income taxation on the rents it receives.
(D) Yes, since the leased portion is not actually, directly, and exclusively used for educational purposes.

20. Which of the following are NOT usually imposed when there is a tax amnesty?
(A) Civil, criminal, and administrative penalties
(B) Civil and criminal penalties
(C) Civil and administrative penalties
(D) Criminal and administrative penalties

21. Which among the following concepts of taxation is the basis for the situs of income taxation?
(A) Lifeblood doctrine of taxation
(B) Symbiotic relation in taxation
(C) Compensatory purpose of taxation
(D) Sumptuary purpose of taxation

22. The head priest of the religious sect Tres Personas Solo Dios, as the corporation sole, rented out a 5,000 sq. m.
lot registered in its name for use as school site of a school organized for profit. The sect used the rentals for the
support and upkeep of its priests. The rented lot is
(A) not exempt from real property taxes because the user is organized for profit.
(B) exempt from real property taxes since it is actually, directly, and exclusively used for religious purposes.
(C) not exempt from real property taxes since it is the rents, not the land, that is used for religious purposes.
(D) exempt from real property taxes since it is actually, directly, and exclusively used for educational purposes.

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UP Law C2015 Taxation Law 1 Midterms 2013

True or false:
1. A law that allows taxes to be paid either in cash or in kind is valid.
2. When the financial position of the taxpayer demonstrates a clear inability to pay the tax, the Commissioner
of Internal Revenue may validly compromise the tax liability.
3. The doctrine of equitable recoupment allows a taxpayer whose claim for refund has prescribed to offset
tax liabilities with his claim of overpayment.
4. A law imposing a tax on income of religious institutions derived from the sale of religious articles is valid.

Essay:
1. XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and the
West Coast of the U.S. The company’s vessels load and unload cargoes at the Port of Manila, albeit it does not
have a branch or sales office in Manila. All the bills of lading and invoices are issued by the branch office in
Makati which is also the company’s principal office.
The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the Port of
Manila.
Can the City Government of Manila legally impose said levy on the corporation? Explain. (3%)

2. A inherited a two-storey building in Makati from his father, a real estate broker in the ‘60s. A group of Tibetan
monks approached A and offered to lease the building in order to use it as a venue for their Buddhist rituals
and ceremonies. A accepted the rental of P1 million for the whole year.
The following year, the City Assessor issued an assessment against A for non-payment of real property taxes.
Is the assessor justified in assessing A’s deficiency real property taxes? Explain. (3%)

3. The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a storage fee
of ten centavos (P0.10) for every 100 kilos of copra deposited in any bodega within the Municipality's
jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal office in Makati, is engaged in
the manufacture of soap, edible oil, margarine, and other coconut oil-based products. It has a warehouse in
Sampaloc, Quezon, used as storage space for the copra purchased in Sampaloc and nearby towns before the
same is shipped to Makati. MMC goes to court to challenge the validity of the ordinance, demanding the
refund of the storage fees it paid under protest.
Is the ordinance valid? Explain your answer. (4%)

4. Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed
to do business in the Philippines. Its commercial airplanes do not operate within Philippine territory, or service
passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent,
Philippine Airlines (PAL), a Philippine corporation.
KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The
total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of
Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA's
airline ticket sales constituted income derived from sources within the Philippines.
KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from
sources outside the Philippines since KIA only serviced passengers outside Philippine territory.
Is the position of KIA tenable? Reason. (4%)

5. The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons
practicing various professions in the city. Among those subjected to the occupation tax were lawyers. Atty.
Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation tax under protest. He
goes to court to assail the validity of the ordinance for being discriminatory. Decide with reasons. (3%)

6. Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (4%)

7. The City of Manila enacted an ordinance, imposing a 5% tax on gross receipts on rentals of space in privately-
owned public markets. BAT Corporation questioned the validity of the ordinance, stating that the tax is an
income tax, which cannot be imposed by the city government.
Do you agree with the position of BAT Corporation? Explain. ( 5% )

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UP Law C2015 Taxation Law 1 Midterms 2013

8. What is the nature of the taxing power of the provinces, municipalities and cities? How will the local
government units be able to exercise their taxing powers?

9. What kind of taxes, fees and charges are considered as National Internal Revenue Taxes under the National
Internal Revenue Code (NIRC)?

10. XYZ Corporation, an export oriented company, was able to secure a Bureau of Internal Revenue (BIR) ruling in
June 2005 that exempts from tax the importation some of its raw materials. The ruling is of first impression,
which means the interpretations made by the Commissioner of Internal Revenue is one without established
precedents. Subsequently, however, the BIR issued another ruling which in effect would subject to tax such
kind of importation. XYZ Corporation is concerned that said ruling may have a retroactive effect, which means
that all their importations done before the issuance of the second ruling could be subject to tax.
a. What are BIR rulings?
b. What is required to make a BIR ruling of first impression a valid one?
c. Does a BIR ruling have a retroactive effect, considering the principle that tax exemptions should be
interpreted strictly against the taxpayer?

11. Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came back to
the Philippines as a balikbayan. Every time he comes to the Philippines, he stays here for about a month. He
regularly receives a pension from his former employer in the United States, amounting to US$1, 000 a month.
While in the Philippines, with his pension pay from his former employer, he purchased three condominium
units in Makati which he is renting out for P15, 000 a moth each.
a. Does the US$1, 000 pension become taxable because he is now residing in the Philippines? Reason
briefly.
b. Is his purchase of the three condominium units subject to any tax? Reason briefly.

12. Enumerate the 3 stages or aspects of taxation. Explain each. 5%

13. Distinguish "direct taxes" from "Indirect taxes". Give examples. 5%

14. What properties are exempt from the real property tax? 5%

15. The Constitution provides "charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, and non- profit cemeteries and all lands, buildings, and improvements actually, directly and
exclusively used for religious, charitable or educational purposes shall be exempt from taxation." This provision
exempts charitable institutions and religious institutions from what kind of taxes? Choose the best answer.
Explain. 5%
a. from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax
b. from income tax only
c. from value-added tax only
d. from real property tax only
e. from capital gains tax only

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UP Law C2015 Taxation Law 1 Midterms 2013

Answers to MCQ

1. C
2. B
3. C
4. A
5. A
6. C
7. D
8. B
9. C
10. A
11. B
12. A
13. D
14. B
15. B
16. D
17. B
18. B
19. D
20. A
21. B
22. D

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