Taxation Law Pre-Bar Notes 2017

CPU BAROPS 2017 Lecture – Atty. Noel C. Siosan, Jr.
TAXATION
GENERAL PRINCIPLES OF TAXATION
Taxation is the power by which the sovereign, through its law-making body, raises revenue to
defray the necessary expenses of the government. It is merely a way of apportioning the costs of
government among those who in some measure are privileged to enjoy its benefits and must bear its
burdens.
Taxation is the inherent power of the sovereign, exercised through the legislature, to impose
burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out
the legitimate objects of government.
It is also defined as the act of levying a tax, i.e. the process or means by which the sovereign,
through its law-making body, raises income to defray the necessary expenses of government. It is a
method of apportioning the cost of government among those who, in some measure, are privileged to
enjoy its benefits and must therefore bear its burdens.
Essential elements of a tax

1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a right or privilege.
5. It is levied by the State which has jurisdiction over the subject or object of taxation.
6. It is levied by the law-making body of the State.
7. It is levied for public purpose or purposes.
PURPOSES OF TAXATION:
REVENUE OR FISCAL
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 the protection of its citizens and to enable it to finance its
multifarious activities.
SUMPTUARY PURPOSE OF TAXATION

More popularly known as the NON-REVENUE OR REGULATORY purpose of taxation. While the
primary purpose of taxation is to raise revenue for the support of the government, taxation is often
employed as a devise for regulation by means of which certain effects or conditions envisioned by the
government may be achieved.
Non-revenue objectives of Taxation:

a. strengthen anemic enterprises
b. provide incentive for greater production
c. protect local industries
d. bargaining tool with countries having commerce
e. halt inflation – ward off depression
f. reduce inequalities in wealth and income
g. promotion of science and invention1
1 Deloria, Merlin D., Taxation: Notes and Cases.

CPU BAROPS 2017 Lecture – Atty. Noel C. Siosan, Jr. 2
Regulation - Taxation has a regulatory purpose as in the case of taxes levied on excises or privileges like
those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets,
cockpits, etc.
Promotion of General Welfare - Taxation can be used as an implement of police power in order to
promote the general welfare of the people.
Lutz v. Araneta (98 Phil 148) - The SC upheld the validity of the Sugar Adjustment Act, which
imposed a tax on milled sugar since the purpose of the law was to strengthen an industry that is
undeniably vital to the economy - the sugar industry.
Osmeña v. Orbos (G.R. No. 99886, March 31, 1993) - While the funds collected under the OPSF are
referred to as taxes, they are extracted in the exercise of the police power of the State. From such
fund, amounts are drawn to reimburse oil companies when appropriate situations arise for
increases in, as well as under-recovery of, the cost of crude oil importation.
Reduction of Social inequity - This is made possible through the progressive system of taxation
where the objective is to prevent the undue concentration of wealth in the hands of few individuals.
Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger
portion of the tax burden. Examples - income tax, donor's tax and estate tax.
Encourage Economic Growth - The law, at times, grants incentives or exemptions in order to
encourage investments and thereby promote the country's economic growth.
Protectionism - It protects local industries from foreign competition i.e. protective tariffs and customs
duties.
Southern Cross Cement Corp., v. Secretary of Finance et.al. (G.R. No. 158540, July 8,
2004)
- The Safeguard Measures Act (SMA [RA No. 8800]) allows the imposition of emergency measures,
including tariffs, to protect domestic industries and producers from increased imports which inflict
or could inflict serious injury on them. The power to impose general safeguard measure is vested
with the DTI Secretary upon compliance with two conditions, viz:
1. there must be a positive final determination by the Tariff Commission that a product is
being imported into the country in increased quantities, as to be substantial cause of
serious injury or threat to the domestic injury, and;
2. the Secretary must establish that the application of such safeguard measures is in the
public interest.
Note: in the case of imported agricultural products, it is the Secretary of Agriculture who may
impose the protective tariff.
PAL v. Edu, 164 SCRA 320
The legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration
is mainly to raise funds for the construction and maintenance of highways and, to a much lesser degree,
pay for the operating expenses of the administering agency. It is possible for an exaction to be both a tax
and a regulation. License fees are charges, looked to as a source of revenue as well as a means of
regulation. The fees may properly be regarded as taxes even though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial
purposes, then the exaction is properly called a tax.
Tio v. Videogram, 151 SCRA 208
PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax on the gross receipts
payable to the local government. SC upheld the validity of the law ruling that the tax imposed is not only
a regulatory, but also a revenue, measure prompted by the realization that earnings of videogram
establishments of around P600 million annually have not been subjected to tax, thereby depriving the
government of an additional source of revenue. It is a user tax imposed on retailers for every video they
make available for public viewing. The 30% tax also served a regulatory purpose: to answer the need for
regulating the video industry, particularly the rampant film piracy, the flagrant violation of intellectual
property rights, and the proliferation of pornographic video tapes.
Caltex v. Commissioner, 208 SCRA 755
Taxation is no longer a measure merely to raise revenue to support the existence of government. Taxes
may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the police power of the State.
The oil industry is greatly imbued with public interest as it vitally affects the general welfare.
THEORY AND BASIS OF TAXATION:

1. Lifeblood Theory
As stated in the case of CIR vs. Algue [158 SCRA 9], the existence of government is a
necessity; it cannot exist nor endure without the means to pay its expenses; and for those means,
the government has the right to compel all its citizens and property within its limits to contribute
in the form of taxes.
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved. CIR vs.
Algue [158 SCRA 9]
The lifeblood theory states that an assessment of a tax is enforceable despite it being contested
because of the urgency to collect taxes, this being the government’s primary source of revenue.
CIR v. Cebu Portland [156 SCRA 535]
The lifeblood theory can be manifested in the following cases:

1. The prohibition against set-off of taxes [see Section 204(C), NIRC]
2. The prohibition against the issuance of an injunction to restrain the collection of taxes
3. Presumption of correctness of assessments
Illustrative cases:
In CIR v. Cebu Portland [156 SCRA 535], the taxpayer argued that that the deficiency assessment
cannot be enforced because it is still being contested. The Supreme Court held that this argument loses
sight of the urgency of the need to collect taxes as the lifeblood of the government. If the payment of
taxes could be postponed by simply questioning heir validity, the machinery of the state would grind to a
halt and all government functions would be paralyzed.
In PHILIPPINE GUARANTY V. CIR [13 SCRA 775], the Supreme Court stated that the requirement
that the withholding agent should withhold the tax before addressing a query to the Commissioner of
Internal Revenue is not without meaning for it is in keeping with the general operation of our tax laws:
payment precedes defense. Likewise, validity of a tax cannot be assailed until after the taxpayer has paid
the tax under protest. By questioning a tax’s legality without first paying it, a taxpayer, in collusion with
BIR officials, can unduly delay, if not totally evade, the payment of such tax.
In CIR v. CTA [234 SCRA 348], the Supreme Court held that government cannot and must not be
stopped in matters involving taxes as “they are the lifeblood of the nation through which the government
agencies continue to operate and with which the State effects its functions for the welfare of its
constituents.
In PHILIPPINE NATIONAL OIL COMPANY VS. CA [457 SCRA 32], the Supreme Court held that the
Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its
agents. Upon taxation depends the Government’s ability to serve the people for whose benefit the taxes
are collected. Neglect or omission of government officials entrusted to collect taxes should not be allowed
to bring harm or detriment to the people.
In SEC. OF FINANCE VS. ORO MAURA SHIPPING LINES [593 SCRA 14], the Supreme Court
opined that assuming further that MARINA merely committed a mistake in approving the vessel’s
proposed cost and that the Collector of the Port of Manila similarly erred, we reiterate the legal principle
that estoppel generally finds no application against the State when it acts to rectify mistakes, errors,
irregularities, or illegal acts of its officials and agents irrespective of rank. The rule holds true even if the
rectification prejudices parties who had meanwhile received benefits.
2. Necessity Theory
As stated in the case of PHILIPPINE GUARANTY V. CIR [13 SCRA 775], taxation is a
necessary burden to preserve the States sovereignty and a means to give the citizenry an army
to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvements for the enjoyment of the citizenry, and those which come within the State’s
territory and facilities and protection which a government is supposed to provide
3. Benefits-Protection Theory (Symbiotic relationship)

According to this principle, the basis of taxation is found in the reciprocal duties of protection and
support between the State and its inhabitants. In return for his contribution, the taxpayer
receives the general advantages and protection which the government affords the taxpayer and
his property.
In CIR VS. ALGUE [158 SCRA 9], the Supreme Court stated that taxes are what we pay for
civilized society. Hence, despite the natural reluctance to surrender part of one’s hard-earned
income, every person who is able must contribute his share in the running of the government
and the latter, 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
4. Jurisdiction over subject and objects

Jurisdiction is a reason why citizens must provide support to the state so the latter could
continue to give protection. It is the country, state or sovereign that gives protection that has
the right to demand the payment of taxes with which to finance activities so it could continue to
give protection. The basis or rationale of taxation is also used to explain why taxation is basically
territorial in character because it is only within the territorial boundaries of the taxing authority
where tax laws may be enforced. This is so because it is only within the confines of its territory
that a country, state or sovereign may give protection.
“THE POWER TO TAX INVOLVES THE POWER TO DESTROY”
Chief Justice Marshall declared that the power to tax is also called the power to destroy. Therefore, it
should be exercised with caution to minimize injury to the proprietary rights of the taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kills the “hen that lays the golden egg.” And
in order to maintain the general public’s trust and confidence in the government, this power must be
used justly and not treacherously. [Chief Justice Marshall in McCulloch v. Maryland, reiterated
in Roxas v. CTA, 23 SCRA 276]
Justice Holmes seemingly contradicted the Marshallian view by declaring in Panhandle Oil Company
v. Mississippi that “the power to tax is not the power to destroy while this court sits.”
Domondon’s reconciliation of Marshall and Holmes
The imposition of a valid tax could not be judicially restrained merely because it would prejudice
taxpayer’s property.
An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayer’s property.
Marshall’s view refers to a valid tax while Holmes’ view refers to an invalid tax.
NATURE OF TAXING POWER
Two-fold power. The nature of the state’s power to tax is two-fold. It is both inherent and legislative
power. It is inherent in nature being an attribute of sovereignty. This is so because without the taxes
the state’s existence would be affronted. It is legislative in nature because it is subject to constitutional
limitations.
Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. Essentially, this
means that in the legislature primarily lies the discretion to determine the
nature (kind);
object (purpose);
extent (rate);
coverage (subjects); and
situs (place)
of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose
on persons or things within its jurisdiction. In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much shall be imposed, against whom (or
what) it shall be imposed and where it shall be imposed. (CREBA vs. Executive Secretary Romulo, GR No.
160756, March 9, 2010)
As a general rule, the power to tax is plenary and unlimited in its rage, acknowledging in its very nature
no limits, so that the principal check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed
by constitutional limitation. At the same time, like any other statute, tax legislation carries a
presumption of constitutionality. (Ibid.)
Taxation, police power and eminent domain are prerogatives of the state. No express provisions in the
constitution are necessary in order that the three (3) can be exercised. The three (3) powers are
inherent in the very existence of the state and are manifestation of the exercise of sovereign rights. The
constitutional provision affecting the three (3) different powers are limitations and not grants in their
exercise.2
TAXATION distinguished from POLICE POWER and EMINENT DOMAIN
TAXATION POLICE POWER EMINENT DOMAIN

Power of the State to
Power of the State to take
enact such laws in
Power of the State to private property for public
relation to persons and
demand enforced use upon paying to the
DEFINITION property as may promote
contributions for public owner a just compensation
public health, safety,
purposes to be ascertained according
morals, and the general
to law
welfare of the public
Authority May be granted to public
Only the government or Only the government or
Exercising the service companies of public
its political subdivisions its political subdivisions
Power utilities
Enforced contribution is Use of property is
demanded for the regulated for the purpose Property is taken for public
PURPOSE
support of the of promoting the general use
government welfare
Operates upon a Operates upon a Operates on an individual
Persons
community or class of community or class of as the owner of a particular
Affected
individuals individuals (usually) property
No transfer of title, at
Money contributed in the Transfer of the right to
most, there is restraint on
EFFECT concept of taxes becomes property whether it be
injurious use of the
part of public funds ownership or a lesser right
property
Assumed that the Person affected receives
individual receives the no direct and immediate
Person affected receives
BENEFITS equivalent of the tax in benefit but only such as
the market value of the
RECEIVED the form of protection, may arise from the
property taken from him
and benefits received maintenance of a healthy
from the government as economic standard of
2 Deloria, Merlin D., Taxation: Notes and Cases

such society
Amount imposed should
not be more than that No amount imposed but
Generally no limit on the
AMOUNT OF sufficient to cover the rather the owner is paid the
amount of tax that may
IMPOSITION cost of the license and market value of the
be imposed
the necessary expenses property taken
of regulation
Relatively free from Subject to certain
Relationship to
Subject to certain Constitutional limitations Constitutional limitations
the
Constitutional limitations and is superior to the (e.g. inferior to impairment
Constitution
impairment provisions of contracts clause)
1. Police Power
The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue
generation. The "lawful subjects" and "lawful means" tests are used to determine the validity of a law
enacted under the police power. The power of taxation, on the other hand, is circumscribed by inherent
and constitutional limitations. (PLANTERS PRODUCTS, INC. v. FERTIPHIL CORPORATION, G.R.
No. 166006, March 14, 2008)
The motivation behind many taxation measures is the implementation of police power goals. Progressive
income taxes alleviate the margin between rich and poor; the so-called "sin taxes" on alcohol and
tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful
products. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS
ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)
Taxation is distinguishable from police power as to the means employed to implement these public good
goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those
especially punitive effects of taxation, and the belief that taxes are the lifeblood of the state yet at the
same time, it has been recognized that taxation may be made the implement of the state's police power.
(SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF
THE PHILIPPINES, G.R. No. 158540, August 3, 2005)
Unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the government's
general funds but to provide means for the rehabilitation and stabilization of a threatened industry, the
coconut industry, which is so affected with public interest as to be within the police power of the State.
The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388, and the oil price
stabilization funds under P.D. 1956, as amended by E.O. 137. (PAMBANSANG KOALISYON NG MGA
SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R.
Nos. 147036-37 April 10, 2012)
If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a
tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make
the imposition a tax. (GEROCHI v. DEPARTMENT OF ENERGY, 527 SCRA 696 (2007)
While it is true that the power of taxation can be used as an implement of police power, the primary
purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a tax. (PLANTERS
PRODUCTS, INC. v. FERTIPHIL CORPORATION, G.R. No. 166006, March 14, 2008)
It has been the settled law that municipal license fees could be classified into those imposed for
regulating occupations or regular enterprises, for the regulation or restriction of non-useful occupations
or enterprises and for revenue purposes only. Licenses for non-useful occupations are also incidental to
the police power and the right to exact a fee may be implied from the power to license and regulate, but
in fixing the amount of the license fees the municipal corporations are allowed a much wider discretion in
this class of cases. (ERMITA-MALATE HOTEL AND MOTEL OPERATORS ASSOCIATION, INC.,
HOTEL DEL MAR INC. and GO CHIU v. THE HONORABLE CITY MAYOR OF MANILA, G.R. No. L-
24693, July 31, 1967)
2. Power of Eminent Domain
Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but
rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property taken by the State for
public use. (COMMISSIONER OF INTERNAL REVENUE v. CENTRAL LUZON DRUG
CORPORATION G.R. No. 159647 April 15, 2005)
Besides, the taxation power can also be used as an implement for the exercise of the power of eminent
domain. Tax measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly
imposed for a public purpose." In recent years, the power to tax has indeed become a most effective tool
to realize social justice, public welfare, and the equitable distribution of wealth. (COMMISSIONER OF
INTERNAL REVENUE v. CENTRAL LUZON DRUG CORPORATION G.R. No. 159647 April 15,
2005)
TAXATION AS AN IMPLEMENT OF POLICE POWER
In Walter Lutz vs. J. Antonio Araneta, 98 Phil. 148 , the SC upheld the validity of the tax law
increasing the existing tax on the manufacture of sugar. “The protection and promotion of the sugar
industry is a matter of public concern; the legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. If objective and methods alike are
constitutionally valid, there is no reason why the state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the implement of the State’s police power.”
In Tio vs. Videogram Regulatory Board, 151 SCRA 208, the levy of a 30% tax under PD 1987, was
imposed primarily for answering the need for regulating the video industry, particularly because of the
rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of
pornographic videotapes, and therefore VALID. While the direct beneficiaries of the said decree is the
movie industry, the citizens are held to be its indirect beneficiaries.
Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the
government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and
stabilization of a threatened industry which is affected with public interest s to be within the police power
of the state. (CALTEX PHILIPPINES, INC. v. COMMISSION ON AUDIT G.R. NO. 92585, MAY 8,
1992)
TAXATION AS AN IMPLEMENT OF EMINENT DOMAIN
In CIR vs. Central Luzon Drug Corp. (GR No. 159647, April 15, 2005), the SC held that as a
result of the 20% discount imposed by RA 7432, respondent becomes entitled to a just compensation.
The taxation power can also be used as an implement for the exercise of the power of eminent domain.
Tax measures are but “enforced contributions exacted on pain of penal sanctions” and
“clearly imposed for a public purpose.” In recent years, the power to tax has indeed become a
most effective tool to realize social justice, public welfare, and the equitable distribution of wealth.
While it is a declared commitment under Section 1 of RA 7432, social justice “cannot be invoked to
trample on the rights of property owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our constitution is not intended to take away rights from a
person and give them to another who is not entitle thereto.” For this reason, a just compensation for
income that is taken away from respondent becomes necessary. It is in tax credit that our legislators
find support to realize social justice, and no administrative body can alter that fact.
It is noteworthy, however, that RA 9257 specifically provides that the senior citizen’s
discount should now be treated as a deductible expense. In other words, if previously (CIR
vs. Central Luzon Drug Corp. case) the treatment is a tax deduction by way of tax credit,
with the advent of RA 9257, the said discount is now considered an allowed deduction, that
is, to be deducted from gross income.
CONSTITUTIONAL PROVISIONS ON TAXATION
The following are provisions of the 1987 Constitution concerning taxation:
Article VI –
Section 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of Representatives, but
the Senate may propose or concur with amendments.
Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
(2) 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.
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used
for religious, charitable, or educational purposes shall be exempt from taxation.
(4) No law granting any tax exemption shall be passed without the concurrence of a majority of
all the Members of the Congress.
Section 29. (3) 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.
Article X –
Section 5. Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments.
ASPECTS OF TAXATION
1. Levy – the power of taxation is vested on and exercised by the legislative department. The
determination of what should be taxed, when, how, or where lies in the legislative department.
The power to tax is primarily vested in the Congress; however, it may exercised by local legislative bodies
pursuant to direct authority conferred by Sec. 5, Art. X of the Constitution. Under the said provision, the
exercise of the power may be subject to such guidelines and limitations as the Congress may provide
which, however, must be consistent with the basic policy of local autonomy. (MACTAN CEBU
INTERNATIONAL AIRPORT AUTHORITY VS. MARCOS, 261 SCRA 667)
2. Assessment and Collection – exercised by the Executive Department. The agency in charge of the
collection of internal revenue taxes is the BIR. For the most part of the lifeblood of the nations, the duty
to collect rests with the BIR.
3. Payment and/or Exercise of Remedies – compliance and/or resistance by the taxpayer. The
exercise of remedy is initially either through the Executive or Legislative Department and ultimately
through the Judiciary.
THREE BASIC PRINCIPLES OF A SOUND TAX SYSTEM
1. Fiscal Adequacy – sources of revenue must be adequate to meet expenditures. Violation of this
principle will make the law unsound but still valid and not unconstitutional.
2. Theoretical Justice – Taxes must be based on the taxpayer’s ability to pay and proportional to the
relative value of the property. Violation of this principle will make the law unsound,
invalid and unconstitutional.
3. Administrative Feasibility – The taxes should be capable of being effectively enforced. Violation of this
principle will make the law unsound but still valid and not unconstitutional.
Does non-observance of administrative feasibility, as a principle of sound tax system,

invalidate a tax imposition?
No, it will not render a tax imposition invalid except to the extent that specific constitutional (or
statutory limitations in the case of local taxation) are impaired. (Diaz vs. Secretary.G.R. No. 193007, 19
July 2011)
DOCTRINES IN TAXATION
1. Prospectivity of tax laws

As held in CEBU PORTLAND V. COLLECTOR [G.R. NO. 18649, FEBRUARY 27, 1965], the general
rule under the Civil Code that laws shall have prospective application applies to tax laws.
While, as a general rule, taxes must only be imposed prospectively, taxes, as an exception,
may be imposed retroactively if the law expressly provides and if it will not amount to a denial of
due process. Hence, in resolving the issue of whether a statute favorable to a taxpayer-heir can
be given retroactive effect, the Supreme Court held in LORENZO VS. POSADAS [64 PHIL. 353]
that inheritance taxation is governed by the statute in force at the time of the death of the
decedent, unless the language of the statute clearly demands or expresses that it shall have a
retroactive effect which is not the case. And such Revenue laws are not to be classed penal laws,
so even if favorable, should not be given retroactive effect.
2. Imprescriptibility
As a general rule, taxes are imprescriptible. However, as an exception, the tax law may
provide otherwise. In particular, the NIRC and LGC provides for prescriptive periods for
assessment and collection of taxes.
3. Double Taxation
Double taxation is defined as taxing the same property twice when it should be taxed but once.
It has also been defined as taxing the same person twice by the same jurisdiction over the same
thing. It is sometimes known as “duplicate taxation.”
Double taxation may be direct (strict sense) or indirect (broad sense).
In the strict sense, double taxation means direct double taxation. This means that the same
property is taxed twice when it should be taxed only once and that both taxes are imposed on
the same subject matter for the same purpose, by the same taxing authority within the same
jurisdiction during the same taxing period and covering the same kind of tax.
In the broad sense, double taxation means indirect double taxation. Double taxation is
indirect where some elements of direct double taxation are absent. It applies to all cases in which
there are two or more pecuniary impositions.
Is double taxation prohibited under the Constitution?

It depends. The Constitution does not prohibit the imposition of double taxation in the broad sense.
However, if double taxation amounts to a direct double taxation, then it becomes legally objectionable for
being oppressive and inequitable. It violates the equal protection and uniformity clauses of the
Constitution.
There is direct double taxation if the two taxes are imposed:

1. On the same subject matter
2. For the same purpose
3. By the same taxing authority
4. Within the same jurisdiction
5. During the same taxing period
6. The taxes must be of the same kind or character PEPSI-COLA BOTTLING COMPANY V. MUN. OF
TANAUAN [69 SCRA 460]
VILLANUEVA V. CITY OF ILOILO, 265 SCRA 528

An ordinance imposing a municipal tax on tenement houses was challenged because the owners already
pay real estate taxes and also income taxes under the NIRC. The Supreme Court held that there was no
double taxation. The same tax may be imposed by the National Government as well as the local
government. There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to
the same occupation, calling, or activity by both the State and a political subdivision thereof. Further, a
license tax may be levied upon a business or occupation although the land used in connection therewith
is subject to property tax.
International Juridical Double Taxation

It is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the
same subject matter and for identical periods. The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international investment climate
and the protection against double taxation is crucial in creating such a climate. (CIR VS. S.C. JOHNSON
AND SON, INC., 309 SCRA 87)
Remedies against Double Taxation

a. Reciprocity clause – e.g. Sec. 104 of the NIRC, on intangibles personal properties of a non-
resident alien decedent or donor;
b. Tax sparing rule – e.g. Sec. 28 (5)(b), intercorporate dividends received by an non-resident
foreign corporation from a domestic corporation;
c. Tax credit method – e.g. Sec. 34 (C)(3), credit against taxes paid for taxes of foreign countries
by citizen and domestic corporations; tax credit for estate taxes paid to foreign country by
citizens or resident alien decedent under Sec. 86 (E); tax credits for donor’s taxes paid by citizens
or resident alien donors to a foreign country under Sec. 101 (C);
d. Exemption method – e.g. Sec. 35 (D), personal exemption allowable to non-resident alien
individual;
e. Tax treaties – e.g. The RP-US Tax Treaty, RP-Japan Tax Treaty, RP-Netherlands Tax Treaty, etc.
4. Escape from Taxation

1. Shifting
2. Capitalization
3. Transformation
4. Evasion
5. Avoidance – or Tax Planning.
6. Exemption
SHIFTING – the transfer of the burden of a tax by the original payer or the one whom the tax was
assessed or imposed to another or someone else.
It should be borne in mind that what is transferred is not the payment of the tax but the burden of the
tax.
Taxes that can be shifted

Only indirect taxes may be shifted; direct taxes cannot be shifted.
Ways of shifting the tax burden

1. Forward shifting
When the burden of the tax is transferred from a factor of production through factors of
distribution until it finally settles on the ultimate purchaser or consumer.
Example: Manufacturer or producer may shift tax assessed to wholesaler, who in turn
shifts it to the retailer, who also shifts it to the final purchaser or consumer.
2. Backward shifting
When the burden of the tax is transferred from the consumer or purchaser through the factors of
distribution to the factor of production.
Example: Consumer or purchaser may shift tax imposed on him to retailer by

purchasing only after the price is reduced, and from the latter to the wholesaler, and finally to
the manufacturer or producer.
3. Onward shifting
When the tax is shifted two or more times either forward or backward.
Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the wholesaler,
then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the retailer,
we have three shifts in all.
Impact and incidence of taxation
Impact of taxation is the point on which a tax is originally imposed. In so far as the law is
concerned, the taxpayer is the person who must pay the tax to the government. He is also
termed as the statutory taxpayer – the one on whom the tax is formally assessed. He is the
subject of the tax.
Incidence of taxation is that point on which the tax burden finally rests or settle down. It takes
place when shifting has been effected from the statutory taxpayer to another.
Statutory taxpayer
The statutory taxpayer is the person required by law to pay the tax or the one on whom the
tax is formally assessed. In short, he or she is the subject of the tax.
In direct taxes, the statutory taxpayer is the one who shoulders the burden of the tax while in
indirect taxes, the statutory taxpayer is the one who pay the tax to the government but the
burden can be passed to another person or entity.
Relationship between impact, shifting, and incidence of a tax

The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence
is the result. Thus, the impact in a sales tax (i.e. VAT) is on the seller (manufacturer) who shifts
the burden to the customer who finally bears the incidence of the tax.
Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the
setting or coming to rest of the tax.
CAPITALIZATION – reduction in the price of the taxed object equal to the capitalized value of future
taxes which the purchaser expects to be called upon to pay.
TRANSFORMATION – the manufacturer or producer upon whom the 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 cost.
EVASION – use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax.
It is also known as “TAX DODGING.” It is punishable by law.
Tax evasion is a term that connotes fraud through the use of pretenses or forbidden devices to
lessen or defeat taxes. [Yutivo v. Court of Tax Appeals, 1 SCRA 160]
Example: Deliberate failure to report a taxable income or property; deliberate reduction of

income that has been received.
Evidence to prove evasion
Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from
the circumstances of the case.
In Republic v. Gonzales [13 SCRA 633], the Supreme Court affirmed the assessment of a
deficiency tax against Gonzales, a private concessionaire engaged in the manufacturer of furniture inside
the Clark Air Base, for underdeclaration of his income. SC held that the failure of the taxpayer to declare
for taxation purposes his true and actual income derived from his business for two (2) consecutive years
is an indication of his fraudulent intent to cheat the government if its due taxes.
AVOIDANCE – OR TAX PLANNING. It is the use by the taxpayer of legally permissible alternative tax
rates or methods to avoid or reduce tax liability. The taxpayer uses tax saving device or means
sanctioned or allowed by law. Politely called “TAX MINIMIZATION”
In DELPHERS TRADERS CORP. V. INTERMEDIATE APPELLATE COURT [157 SCRA 349],

the Supreme Court upheld the estate planning scheme resorted to by the Pacheco family in converting
their property to shares of stock in a corporation which they themselves owned and controlled. By virtue
of the deed of exchange, the Pacheco co-owners saved on inheritance taxes. The Supreme Court said the
records do not point to anything wrong and objectionable about this estate planning scheme resorted to.
The legal right of the 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.
EXEMPTION – grant of immunity from tax.
5. Exemption from Taxation

Taxation is the rule and exemption is the exception, and therefore, he who claims
exemption must be able to justify his claim or right thereto, by a grant expressed in terms “too
plain to be mistaken and too categorical to be misinterpreted.”
Exemption from taxation

Taxation is the rule and exemption is the exception. (FELS ENERGY, INC. v. PROVINCE OF
BATANGAS, 516 SCRA 186 (2007))
Since the power to tax includes the power to exempt thereof which is essentially a legislative
prerogative, it follows that a municipal mayor who is an executive officer may not unilaterally
withdraw such an expression of a policy thru the enactment of a tax. (PHILIPPINE
PETROLEUM CORPORATION v. MUNICIPALITY OF PILILLA, G.R. No. 90776, June 3,
1991)
A tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by
the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The
excise tax imposed on petroleum products under Section 148 is the direct liability of the
manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are
international carriers; nevertheless, the manufacturer, as the statutory taxpayer who is directly
liable to pay the excise tax on its petroleum products, is entitled to a refund or credit of the
excise taxes it paid for petroleum products sold to international carriers (COMMISSIONER OF
INTERNAL REVENUE v. PILIPINAS SHELL PETROLEUM CORPORATION, G.R. No.
188497, February 19, 2014)
In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, the issue that the
Court had to resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna
in view of the "in lieu of all taxes" clause in its franchise and Section 23 of RA 7925. Applying the
rule of strict construction of laws granting tax exemptions and the rule that doubts are resolved
in favor of municipal corporations in interpreting statutory provisions on municipal taxing powers,
the Court held that Section 23 of RA 7925 could not be considered as having amended
petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes.
(SMART COMMUNICATIONS, INC. v. THE CITY OF DAVAO, G.R. No. 155491, July 21,
2009)
PLDT's contention that the "in-lieu-of-all-taxes" clause does not refer to "tax exemption" but to
"tax exclusion" and hence, the strictissimi juris rule does not apply. The Supreme Court explains
that these two terms actually mean the same thing, such that the rule that tax exemption should
be applied in strictissimi juris against the taxpayer and liberally in favor of the government
applies equally to tax exclusions (PHILIPPINE LONG DISTANCE TELEPHONE COMPANY vs
PROVINCE OF LAGUNA G.R. No. 151899, August 16, 2005)
May a tax exemption be revoked?

Yes. Since taxation is the rule and exemption therefrom is the exception, the exemption may be
withdrawn at the pleasure of the taxing authority.
Hence, in MCIAA V. MARCOS [261 SCRA 667], the Supreme Court noted that Section 234 of the the
Local Government Code unequivocally withdrew exemptions from payments of real property taxes
granted to natural or juridical persons, including government-owned and control corporations. Since
MCIAA is a GOCC, it follows that its exemption granted under a charter prior to the LGC has been
withdrawn.
In SMART V. CITY OF DAVAO [565 SCRA 237], the Supreme Court noted that the “in lieu of all taxes”
clause in its charter has become functus officio with the abolition of franchise tax on telecommunications
companies in accordance with the VAT law.
In REPUBLIC V. CAGUIOA [536 SCRA 194] held that there is no vested right in a tax exemption and
more so when the latest expression of legislative intent renders it continuance doubtful. In the said case,
RA 7227 granted private domestic corporations doing business in the Subic SEZ tax exemptions on
importations of general merchandise. However, RA 9334 withdrew the tax exemption on the importations
of cigars, cigarettes, distilled spirits, fermented liquors and wines.
In NITAFAN V. CIR [152 SCRA 284], the Supreme Court held that the salaries of members of the
judiciary are subject to income tax as applied to all taxpayers. The payment of income tax by Justices
and Judges do not fall within the constitutional protection against decrease of their salaries during their
continuance in office.
6. Compensation and Set-off

As held in CALTEX VS. COA [208 SCRA 727], taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and debtors of each other. A
claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. (see
FRANCIA V. IAC [162 SCRA 753]).
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 taxes on the ground that the government owes him
an amount equal or greater than the tax being collected (PHILEX MINING V. CIR [294 SCRA
687]).
Taxes cannot be the subject of set-off because they are not in the nature of contracts between
parties but grow out of a duty to, and, are positive acts, of the Government, to the making and
enforcing of which, the personal consent of the taxpayer is not required (REPUBLIC V. MAMBULAO
LUMBER [4 SCRA 622])
NOTE: In one case, DOMINGO V. GARLITOS [8 SCRA 443], the Supreme Court allowed the set-off between
taxes and debts. It opined that if the obligation to pay taxes and the taxpayer’s claim against the
government are both overdue, demandable, as well as fully liquidated, compensation takes place by
operation of law and both obligations are extinguished to their concurrent amounts. In the said case, the
taxpayer who has been assessed municipal taxes was allowed to assign in favor of the municipality a final
judgment obtained by him against the said municipality to cover the assessment. Atty. Domondon
reconciled the rulings of the Supreme Court in DOMINGO V. GARLITOS [8 SCRA 443] and FRANCIA V. IAC
[162 SCRA 753] by stating that in the former case, both claims being overdue, demandable, and fully
liquidated while in the latter case, the claim against the government was not overdue and demandable as it
was already settled. Atty. Domondon submits that when confronted with a bar problem, we follow the
doctrine laid down in FRANCIA V. IAC [162 SCRA 753] unless the facts would involve the (1) the
application of the principle of solutio indebiti or (2) it involves local government taxes.
Is the civil concept of solutio indebiti applicable to taxation?

Yes. In the case of FILINVEST DEVELOPMENT CORPORATION VS. CIR [529 SCRA 605], the Court held
that in the field of taxation where the State exacts strict compliance upon its citizens, the State must
likewise deal with taxpayers with fairness and honesty. Hence, under the principle of solutio indebiti, the
Government has to restore to petitioner the sums representing erroneous payments of taxes.
What is the doctrine of equitable recoupment?

This doctrine basically refers to a taxpayer who has a claim for refund against the government, but was
not able to file his written claim for tax refund because the reglementary period within which to file his
valid claim for tax refund has already prescribed. As such, despite the lapse of the period, this doctrine
allows that the tax that should have been refunded be credited instead to his existing or
other tax liability. This doctrine of equitable recoupment is not allowed in this jurisdiction.
It is highly disfavored.
7. Compromise
Compromises are allowed and enforceable when the subject matter thereof is not prohibited from
being compromised and the person entering into it is duly authorized to do so. In fact, under
SECTION 204 OF THE TAX CODE, payment of internal revenue taxes may be compromised on the
grounds of (1) doubtful validity of the assessment or (2) financial incapacity.
8. Tax Amnesty
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.
REPUBLIC V. IAC [196 SCRA 335]
LIMITS OF TAXATION
 Inherent limitation
 Constitutional limitation
INHERENT LIMITATIONS
1. Levied for public purpose
2. Non-delegability of taxing power
3. Territoriality or situs of taxation
4. Tax exemption of government entities
5. Recognition of international comity
6. Prohibition on double taxation (some authorities do not consider this as inherent limitation)
1. Public Purpose
Tests to determine public purpose, broad interpretation. The proceeds of the tax will directly promote
the welfare of the community in equal measure. Public purpose is now given the broadest interpretation
so as to include even indirect public advantage or benefit. The mere fact that the tax will be directly
enjoyed by a private individual does not make it invalid so long as some link to the public welfare is
established.
The right of taxation can only be used in aid of a public purpose. In PASCUAL V. SECRETARY OF PUBLIC WORKS
[110 SCRA 331], the Supreme Court explained that the right of the legislature to appropriate public funds is
correlative with its right to tax and as such the power of taxation may only be exercised for public purposes.
In that case, the appropriation of public funds for the construction of feeder roads on land owned by a private
person is invalid for being made for other than a public purpose.
Examples of Public Purpose:

1. Tax on sugar for rehabilitation and upliftment of the sugar industry. (Lutz vs. Araneta);
2. Semi-postal stamp on mail matter to raise funds for the eradication of tuberculosis. (Gomez vs.
Palomar);
3. Pensions paid to war veterans because they will encourage emulation of their services by others
assured that their patriotism will be acknowledged and rewarded;
4. Unemployment relief, support for the handicapped and care of the aged;
5. Scholarships for poor but deserving students;
PRESUMPTION OF PUBLIC PURPOSE: Where the purpose of the tax is not specifically stated, there
is a presumption that it is created for a public purpose. (Mendoza Santos & Co. vs. Municipality of
Meycauayan, 94 Phil 1047)
2. Non-delegability of taxing power
GENERAL RULE: The power of taxation is exclusively legislative. The power of taxation, being purely
legislative, Congress cannot delegate such power. Note, however, that the power of the legislature is
itself a delegated power given by the people.
EXCEPTIONS (Delegable Powers)

(a) Delegation to the President (Tariff Powers)
Congress may authorize the President to fix within the specified limits and subject to such limitations and
restrictions as it may impose:
1. tariff rates;
2. import and export quotas;
3. tonnage and wharfage dues; and
4. other duties or imposts within the framework of the national development program of
the Government.
The reason for this delegation is the necessity, not to say expediency, of giving the chief executive the
authority to act immediately on certain matters affecting the national economy lest delay result in
hardship to the people. It is recognized that the legislative process is much too cumbersome for the
speedy solution of some economic problems, especially those relating to foreign trade.
When Congress tasks the President or his/her alter egos to impose safeguard measures under the
delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to
perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law that
the agent may not act beyond the specifically delegated powers or disregard the restrictions imposed by
the principal. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT MANUFACTURERS
ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)
Flexible tariff clause

In the interest of national economy, general welfare and/or national security, the President, upon
recommendation of the National Economic and Development Authority, is empowered:
1. To increase, reduce, or remove existing protective rates of import duty, provided that the
increase should not be higher than 100% ad valorem;
2. To establish import quota or to ban imports of any commodity; and
3. To impose additional duty on all imports not exceeding 10% ad valorem.
(b) Delegation to local governments (Local Taxing power)

The theory of non-delegation of legislative power does not apply in matters of local concern. Each local
government unit shall have the power to create its own sources of revenues and to levy taxes, fees and
charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic
policy of local autonomy.
Section 5, Article X of the Constitution does not change the doctrine that municipal corporations do not
possess inherent powers of taxation; what it does is to confer municipal corporations a general power to
levy taxes and otherwise create sources of revenue and they no longer have to wait for a statutory grant
of these powers and the power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on municipal powers. The important
legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal
corporations; henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be
resolved in favor of municipal corporations. (QUEZON CITY, et al. v. ABS-CBN BROADCASTING
CORPORATION, G.R. No. 162015, March 6, 2006)
(c) Delegation to administrative agencies (Administrative Matters)

Valuation of property pursuant to fixed rules; equalization of assessment by a central body; collection of
taxes.
Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts
or conditions, or the happening of contingencies, on which the operation of a statute is, by its terms,
made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their
authority. While the power to tax cannot be delegated to executive agencies, details as to the
enforcement and administration of an exercise of such power may be left to them, including the power to
determine the existence of facts on which its operation depends. (ABAKADA GURO PARTY LIST
(Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO v. THE
HONORABLE EXECUTIVE SECRETARY G.R. No. 168056 September 1, 2005)
NON-DELEGABLE POWERS:
1. Selection of property or transaction to be taxed;
2. Determination of purposes;
3. Rate of taxation;
4. Rules of taxation.
3. Territoriality or situs of taxation
However broad the power of taxation may be as to its character and no matter how searching it is in its
extent, such power is necessarily limited only to persons, property or businesses within its
jurisdiction.
Thus, in ILOILO BOTTLERS INC. VS. CITY OF ILOILO [164 SCRA 607], the Supreme Court, on the
issue of whether a bottling company which sells soft drinks in Iloilo City but operates its bottling plant in
another is liable for the excise tax imposed by said City on the distribution, manufacture and bottling of
soft drinks, held that since truck sales were made in the City, the acts or privileges of the company is
within its jurisdiction.
In CIR V. MARUBENI [204 SCRA 377], what was involved was a contract on a turn-key basis (In a
turn key contract, the contractor is entrusted to design, construct, commission and handover the project
to the employer in a completed state) which the CIR sought to tax as an indivisible contract. The
Supreme Court held that the contract actually involved two taxing jurisdictions. While the construction
and installation work were completed in the Philippines, some pieces of equipment and supplies were
completely designed and engineered in Japan. These services made and completed in Japan are not
subject to contractor’s tax as they are rendered outside the taxing jurisdiction of the Philippines.
In REAGAN V. CIR [30 SCRA 968], the Supreme Court held that bases under lease to the US under
the Military Bases Agreement remain part of Philippine territory. It is not foreign territory for purposes of
income tax legislation. The power to tax has been preserved except for those matters where an
appropriate exemption was provided for.
What is “situs of taxation?”

The situs of taxation is the place or authority that has the right to impose and collect taxes.
4. Tax exemption of government entities
The property of the state, its agencies and subdivisions devoted to government uses and purposes is
generally exempt from taxation even in the absence of an express provision of law.
The constitution does not contain any provision granting tax exemption to the government. It is a matter
of public policy and no constitutional grant is necessary.
Can local governments tax the national government, its agencies, and instrumentalities?
No. In MIAA v. CA [495 SCRA 591], the Supreme Court, in resolving the issue on whether the
lands and buildings owned by the Manila International Airport Authority were subject to real
property tax, ruled in the negative. The Supreme Court opined that since MIAA is not a GOCC but
instead as government instrumentality vested with corporate powers or a government corporate
entity, it is exempt from real property tax. By express provision of the Local Government Code,
local governments cannot levy taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities.
Furthermore, the said lands and buildings are property of the public dominion and therefore
owned by the State. They are devoted to public use. Thus, they cannot be auctioned as they are
outside the commerce of man. However, the portions of the property leased to private entities
are subject to real property tax.
The following Government-owned or –controlled Corporations, Agencies, or Instrumentalities are EXEMPT

from payment of income tax:
a. Government Service Insurance System (GSIS);
b. Social Security System (SSS);
c. Philippine Health Insurance Corporation (PhilHealth);
d. Philippine Charity Sweepstakes Office (PCSO); and
e. Local Water Districts (LWD)
Under RA 10026 (March 11, 2011), Local Water Districts were added as government-exempt
corporations. PAGCOR was previously exempt from payment of income tax, but said exemption was
withdrawn by RA 9337 (November 1, 2005).
PAGCOR subject to income tax, exempt from VAT. With the passage of Republic Act No. (RA)
9337, the Philippine Amusement and Gaming Corporation (PAGCOR) has been excluded from the list of
government-owned and –controlled corporations (GOCCs) that are exempt from tax under Section 27(c)
of the Tax Code; PAGCOR is now subject to corporate income tax.
According to the SC, RA 9337 does not contain any provision that subjects PAGCOR to VAT. Instead, the
SC finds support to the VAT exemption of PAGCOR under Section 109(k) of the Tax Code, which provides
that transactions exempt under international agreements to which the Philippines is a signatory or under
special laws [except Presidential Decree No. (PD) 529] are exempt from VAT. Considering that PAGCOR’s
charter, i.e., PD 1869 — which grants PAGCOR exemption from taxes — is a special law, it is exempt
from payment of VAT.
5. Recognition of International Comity.
The property or income of a foreign state or government may not be the subject of taxation by another.
As held in TANADA V. ANGARA [272 SCRA 18], by their voluntary act, nations may surrender some
aspects of their state power in exchange for greater benefits granted or derived from a convention of
pact. The underlying consideration in this partial surrender of sovereignty is the reciprocal commitment of
the other contracting states in granting the same privilege and immunities to the Philippines, its officials
and its citizens. The point is that a portion of sovereignty may be waived without violating the
Constitution, based on the rationale that the Philippines "adopts the generally accepted principles of
international law as part of the law of the land and adheres to the policy of … cooperation and amity with
all nations."
6. Double Taxation
CONSTITUTIONAL LIMITATIONS
1. Due process clause
2. Equal protection clause
3. Freedom of the speech and of press
4. Religious freedom
5. Non-impairment clause
6. No imprisonment for debt or non-payment of poll tax
7. All appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments
8. The President shall have the veto power to 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
9. Taxation shall be uniform, equitable. The Congress shall evolve a progressive system of taxation
10. Limited power of the congress to delegate taxing power to the President
11. Delegated authority of President to 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
12. No tax exemption without concurrence of the majority of all the members of the Congress
13. Subject to exception no public money or property shall be appropriated, applied, paid, or
employed, directly, or indirectly for religious purposes
14. Money collected on tax levied for special purpose to be treated as a special fund and paid for
such purpose only
15. Supreme Court’s power to review judgments or orders of lower courts
16. Authority of LGUs to create its own sources of revenues and to levy taxes, fees, and charges
subject to the limitations as the Congress may provide
17. Actually, directly and exclusively clause
PROVISIONS DIRECTLY AFFECTING TAXATION

 Prohibition against imprisonment for non-payment of poll tax
 Uniformity and equality of taxation
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; inequalities which result from a singling out of one particular class
for taxation or exemption infringe no constitutional limitation. (KAPATIRAN NG MGA NAGLILINGKOD
SA PAMAHALAAN NG PILIPINAS, INC. v. HON. BIENVENIDO TAN, G.R. No. 81311, June 30,
1988)
 Grant by Congress of authority to the president to impose tariff rates
It is Congress which authorizes the President to impose tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts. Thus, the authority cannot come from the Finance
Department, the National Economic Development Authority, or the World Trade Organization, no matter
how insistent or persistent these bodies may be. (SOUTHERN CROSS CEMENT CORPORATION v.
CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3,
2005)
The authorization granted to the President must be embodied in a law. Hence, the justification cannot be
supplied simply by inherent executive powers. (SOUTHERN CROSS CEMENT CORPORATION v.
CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3,
2005)
The authorization to the President can be exercised only within the specified limits set in the law and is
further subject to limitations and restrictions which Congress may impose. Consequently, if Congress
specifies that the tariff rates should not exceed a given amount, the President cannot impose a tariff rate
that exceeds such amount. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT
MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August 3, 2005)
Assuming there is a conflict between the specific limitation in Section 28 (2), Article VI of the Constitution
and the general executive power of control and supervision, the former prevails in the specific instance of
safeguard measures such as tariffs and imposts, and would thus serve to qualify the general grant to the
President of the power to exercise control and supervision over his/her subalterns. (SOUTHERN CROSS
CEMENT CORPORATION v. CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES,
G.R. No. 158540, August 3, 2005)
 Prohibition against taxation of religious, charitable entities, and educational entities
The test of exemption is the use of the property. Actual use is necessary, “use” takes precedence over
“ownership.” If the property owned by religious, charitable or educational institutions is actually used for
a non-exempt purpose, the exemption is withdrawn. Thus, the lease of a portion of school to a
commercial establishment is subject to tax. (ABRA VALLEY COLLEGE, INC. v. AQUINO, L-39086,
June 15, 1988). Conversely, a property owned by a criminal but actually used by religious,
charitable or educational institutions is exempt from tax.
Incidental use is also covered by the exemption. Examples: a vegetable garden of a parish priest
adjacent to a convent and lodging place for religious functions are exempted; training school for nurses,
facilities for interns, doctors and staff of a hospital are exempt from taxes; canteen and drugstore in a
charitable hospital; and income of charitable hospital from admission of pay patients if the income is
dedicated to charitable purposes.
The word "charitable" is not restricted to relief of the poor or sick. The test whether an enterprise is
charitable or not is whether it exists to carry out a purpose recognized in law as charitable or whether it
is maintained for gain, profit, or private advantage. (LUNG CENTER OF THE PHILIPPINES v.
QUEZON CITY, G.R. No. 144104, June 29, 2004)
Even as we find that the petitioner is a charitable institution, we hold that those portions of its real
property that are leased to private entities are not exempt from real property taxes as these are not
actually, directly and exclusively used for charitable purposes. On the other hand, the portions of the land
occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying,
are exempt from real property taxes. (LUNG CENTER OF THE PHILIPPINES v. QUEZON CITY, G.R.
No. 144104, June 29, 2004)
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung
Center. Charity is essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide for free goods and services to the public
which would otherwise fall on the shoulders of government. (COMMISSIONER OF INTERNAL
REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)
In Lung Center, this Court declared: "exclusive" is defined as possessed and enjoyed to the exclusion of
others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude;
as enjoying a privilege exclusively." The words "dominant use" or "principal use" cannot be substituted
for the words "used exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL
CENTER, INC. G.R. No. 195909 September 26, 2012)
Services to paying patients are activities conducted for profit. There is a "purpose to make profit over and
above the cost" of services. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL
CENTER, INC. G.R. No. 195909 September 26, 2012)
Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or
social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or
(G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-
profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the
ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
(COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No.
195909 September 26, 2012)
A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter
vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an
impairment of the Constitution. The phrase "exempt from taxation," as employed in the Constitution
should not be interpreted to mean exemption from all kinds of taxes. (REV. FR. CASIMIRO LLADOC v.
COMMISSIONER OF INTERNAL REVENUE, G.R. No. L-19201, June 16, 1965)
 Prohibition against taxation of non-stock, non-profit institutions
An organization may be considered as non-profit if it does not distribute any part of its income to
stockholders or members. However, despite its being a tax exempt institution, any income such
institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph
of Section 30. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER, INC.
G.R. No. 195909 September 26, 2012)
 Majority vote of Congress for grant of tax exemption
The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same
to the John Hay SEZ finds no support therein. The challenged grant of tax exemption would circumvent
the Constitution's imposition that a law granting any tax exemption must have the concurrence of a
majority of all the members of Congress. (JOHN HAY PEOPLES ALTERNATIVE COALITION, et al. v.
VICTOR LIM, et al., G. R. No. 119775, October 24, 2003)
 Prohibition on use of tax levied for special purpose
The coco-levy funds, on the other hand, belong to the government and are subject to its administration
and disposition. Thus, these funds, including its incomes, interests, proceeds, or profits, as well as all its
assets, properties, and shares of stocks procured with such funds must be treated, used, administered,
and managed as public funds; the coco-levy funds are evidently special funds. (PAMBANSANG
KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE
SECRETARY G.R. Nos. 147036-37 April 10, 2012)
 President's veto power on appropriation, revenue, tariff bills
An "item" in a revenue bill does not refer to an entire section imposing a particular kind of tax, but rather
to the subject of the tax and the tax rate; thus, in the portion of a revenue bill which actually imposes a
tax, a section identifies the tax and enumerates the persons liable therefor with the corresponding tax
rate. To construe the word "item" as referring to the whole section would tie the President's hand in
choosing either to approve the whole section at the expense of also approving a provision therein which
he deems unacceptable or veto the entire section at the expense of foregoing the collection of the kind of
tax altogether. (COMMISSIONER OF INTERNAL REVENUE v. HON. COURT OF TAX APPEALS,
G.R. No. L-47421, May 14, 1990)
 Non-impairment of jurisdiction of the Supreme Court

 Grant of power to the local government units to create its own sources of revenue
For a long time, the country's highly centralized government structure has bred a culture of dependence
among local government leaders upon the national leadership. The only way to shatter this culture of
dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient
powers to generate their own sources for the purpose. (NATIONAL POWER CORPORATION v. CITY
OF CABANATUAN G.R. No. 149110 April 9, 2003)
Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the
payment of local franchise tax; it merely replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead VAT. The imposition of local franchise tax is not
inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the
national government for VAT inures to the benefit of the national government, while a local franchise tax
is a revenue of the local government unit. (SMART COMMUNICATIONS, INC. v. THE CITY OF
DAVAO, G.R. No. 155491, July 21, 2009)
 Flexible tariff clause

 Exemption from real property taxes
For real property taxes, the incidental generation of income is permissible because the test of exemption
is the use of the property and this test requires that the institution use the property in a certain way, i.e.
for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its
charitable character when it used a portion of its lot for commercial purposes since the effect of failing to
meet the use requirement is simply to remove from the tax exemption that portion of the property not
devoted to charity. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER,
INC. G.R. No. 195909 September 26, 2012)
The Constitution exempts charitable institutions only from real property taxes while the NIRC extends the
exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is materially
different from Section 28(3), Article VI of the Constitution: Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax while Section 28(3), Article VI of the
Constitution does not define a charitable institution, but requires that the institution "actually, directly and
exclusively" use the property for a charitable purpose. (COMMISSIONER OF INTERNAL REVENUE v.
ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)
To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be
exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be
"organized and operated exclusively" for charitable purposes. (COMMISSIONER OF INTERNAL
REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)
 No appropriation or use of public money for religious purposes
PROVISIONS INDIRECTLY AFFECTING TAXATION

 Due process
In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in
the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for
being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer.
(CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATION, INC. V. ROMULO, 614 SCRA 605
(2010))
The support for the poor is generally recognized as a public duty and has long been an accepted exercise
of police power in the promotion of the common good but, in the instant case, the declarations do not
distinguish between wealthy coconut farmers and the impoverished ones. Consequently, such
declarations are void since they appropriate public funds for private purpose and, therefore, violate the
citizens' right to substantive due process. (PAMBANSANG KOALISYON NG MGA SAMAHANG
MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37
April 10, 2012)
 Equal protection
The real estate industry is, by itself, a class and can be validly treated differently from other business
enterprises. What distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. (CHAMBER OF REAL ESTATE AND BUILDERS'
ASSOCIATION, INC. V. ROMULO, 614 SCRA 605 (2010))
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records
of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means,
show that PAGCOR's exemption from payment of corporate income tax, as provided in Section 27 (c) of
R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid
classification based on substantial distinctions. The legislative records show that the basis of the grant of
exemption to PAGCOR from corporate income tax was PAGCOR's own request to be exempted.
(PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) v. THE BUREAU OF
INTERNAL REVENUE G.R. No. 172087 March 15, 2011)
 Religious freedom
The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries
with it the right to disseminate religious information. Any restraints of such right can only be justified like
other restraints of freedom of expression on the grounds that there is a clear and present danger of any
substantive evil which the State has the right to prevent. (AMERICAN BIBLE SOCIETY v. CITY OF
MANILA, G.R. No. L-9637, April 30, 1957)
It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in
some instances a little bit higher than the actual cost of the same but this cannot mean that appellant
was engaged in the business or occupation of selling said "merchandise" for profit. For this reason We
believe that the City of Manila Ordinance No. 2529 requiring the payment of license fee cannot be applied
to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and
worship as well as its rights of dissemination of religious beliefs. (AMERICAN BIBLE SOCIETY v. CITY
OF MANILA, G.R. No. L-9637, April 30, 1957)
The Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the sales
are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay
so that to tax the sales would be to increase the price, while reducing the volume of sale. Granting that
to be the case, the resulting burden on the exercise of religious freedom is so incidental as to make it
difficult to differentiate it from any other economic imposition that might make the right to disseminate
religious doctrines costly. (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE
COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)
On the other hand the registration fee of P1,000.00 imposed by Sec. 107 of the NIRC, as amended by
Sec. 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration
and enforcement of provisions such as those relating to accounting in Sec. 108 of the NIRC. That the PBS
distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the payment of
this fee because it also sells some copies. (ARTURO M. TOLENTINO v. THE SECRETARY OF
FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30,
1995)
The withdrawal of the exemption did not also violate freedom of religion as regards the activities of PBS
on religious articles, as the Free Exercise of Religious clause does not prohibit imposing a generally
applicable sale and use tax on the sale of religious materials by a religious organization as held by the US
Supreme Court in Jimmy Swaggart Ministries v. Board of Equalization (1990). The VAT registration fee
does not constitute censorship of such freedom as held in the American Bible Society case. The fee is a
mere administrative fee and not imposed on the exercise of a privilege, much less a constitutional right.
But for the purpose of defraying cost of registration which is a requirement and a central feature in the
VAT system so as to provide record of tax credits of the taxpayer. (ARTURO M. TOLENTINO v. THE
SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No.
115455, October 30, 1995)
 Non-impairment of obligations of contracts
The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt GOCCs by RA
9337 does not violate the right to equal protection of the laws under Section 1, Article III of the
Constitution, because PAGCOR’s exemption from payment of corporate income tax was not based on
classification showing substantial distinctions; rather, it was granted upon the corporation’s own request
to be exempted from corporate income tax. Legislative records likewise reveal that the legislative
intention is to require PAGCOR to pay corporate income tax.
With regard to the issue that the removal of PAGCOR from the exempted list violates the non-impairment
clause contained in Section 10, Article III of the Constitution — which provides that no law impairing the
obligation of contracts shall be passed. Franchises such as that granted to PAGCOR partake of the nature
of a grant, and is thus beyond the purview of the non-impairment clause of the Constitution.
(PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) v. THE BUREAU OF
INTERNAL REVENUE G.R. No. 172087 March 15, 2011)
Even though such taxation may affect particular contracts, as it may increase the debt of one person and
lessen the security of another, or may impose additional burdens upon one class and release the burdens
of another, still the tax must be paid unless prohibited by the Constitution, nor can it be said that it
impairs the obligation of any existing contract in its true legal sense." Indeed not only existing laws but
also "the reservation of the essential attributes of sovereignty, is read into contracts as a postulate of the
legal order." (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE and THE
COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)
Definition, nature and characteristics of taxes

Taxes are enforced proportional contributions from persons and property, levied by the state by virtue of
its sovereignty for the support of the government and for all its public needs.
The characteristics or elements of a tax (essential elements of a tax) are:

1. Enforced contributions
2. Generally payable in money
3. Proportional in character, since taxes are based on one’s ability to pay
4. Levied on persons, property, or exercise of a right or privilege
5. Levied by the State having jurisdiction
6. Levied by the legislature
7. Levied for a public purpose
8. Paid at regular periods or intervals
Tax as distinguished from other forms of exactions
1. Tariff
A tax is an all embracing term to include various kinds of enforced contributions imposed upon
persons for the attainment of public purposes, while a tariff should be understood to mean a kind
of tax imposed on articles which are traded internationally.
2. Toll
TAX TOLL
Definition Enforced proportional contributions Sum of money for the use of something, a
from persons and property consideration which is paid for the use of a
property which is of a public nature
Basis A demand of sovereignty A demand of proprietorship
Amount No limit as to the amount of tax Amount of toll depends upon the cost of
construction or maintenance of the public
improvement used
Authority May be imposed only by the May be imposed by the government or

government private individuals or entities
3. License fee
TAX LICENSE FEE
Purpose Imposed for revenue purposes Imposed for regulatory purposes
Basis Imposed under the power of taxation Imposed under the police power of the
State
Time of Normally paid after the start of Normally paid before the commencement
payment business of the business
Effect of Non- Failure to pay the tax does not make Failure to pay the license fee makes the
payment the business illegal business illegal
As held in the case of PROGRESSIVE DEVELOPMENT CORPORATION VS. QUEZON CITY [172 SCRA 629], the
term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is often
loosely used to include levies for revenue as well as levies for regulatory purposes such that license fees
are frequently called taxes although license fee is a legal concept distinguishable from tax: a license fee
is imposed in the exercise of police power primarily for purposes of regulation, while a tax is imposed
under the taxing power primarily for purposes of raising revenues (see also COMPANIA GENERAL DE
TABACOS DE FILIPINAS V. CITY OF M ANILA [8 SCRA 367].)
4. Special assessment
TAX SPECIAL ASSESSMENT
Definition Enforced proportional contribution An enforced proportional contribution from
from persons and property owners of lands especially or peculiarly
benefited by public improvements
Basis Based on necessity Based wholly on benefits
Subject Levied on: Levied only on land

(1) persons
(2) Property
(3) Acts
Scope Has general application Failure to pay the license fee makes the
business illegal
Person liable It is a personal liability of the taxpayer Not a personal liability of the person
assessed; his liability is limited only to the
land involved
5. Debt
TAX DEBT
Basis Based on law Based on contract or judgment
Effect of Non- Taxpayer may be imprisoned for his No imprisonment for failure to pay a debt
payment failure to pay the tax
Mode of Generally payable in money May be payable in money, property and

payment services
Assignability Not assignable Can be assigned
Interest Does not draw interest unless Draws interest if stipulated or delayed
delinquent
Authority Imposed by public authority Can be imposed by private individuals
Prescription Prescriptive periods for tax are Civil Code governs the prescriptive period
determined under the NIRC of debts
INCOME TAXATION
NOTES IN THE ORGANIZATION AND FUNCTIONS OF THE

BUREAU OF INTERNAL REVENUE
1. Power and duties of the Bureau of Internal Revenue
The bureau of the Internal Revenue is under the control and supervision of the Department of
Finance and its powers and duties include the assessment and collection of all national internal
revenue taxes, fees and charges; the enforcement of all forfeitures, penalties, and fines; and the
execution of judgments in all cases decided in its favor by the court of tax appeals and the
ordinary courts.
2. Chief officials of the bureau of internal revenue
The bureau of internal revenue is headed by chief known as the commissioner, with 4 assistants
known as deputy commissioners.
3. Powers of the commissioner
a. Power of the commissioner to interpret tax laws and to decide tax cases
b. Power of the commissioner to obtain information; and to summon and to take testimony
of persons (authority to administer oath)
c. Power of the commissioner to make assessments and prescribed additional requirements
for tax administration to and enforcement
4. Power of the commissioner to make assessments and prescribe additional requirements for tax
administration to and enforcement, includes:
a. Authority to examine returns and determine tax due

b. Authority to conduct inventory-taking, surveillance and to prescribe presumptive gross
sales and receipts
c. Authority to terminate taxable period
d. Authority to prescribe real property values
e. Authority to inquire into bank deposit accounts
Authority to terminate taxable period
When it comes to the knowledge of the commissioner that a taxpayer is retiring from business
subject to tax; is intending to leave the Philippines; intending to remove his property from the
Philippine; or intending to hide or conceal his property; or his performing any act tending to
obstruct the proceedings for the collection of the tax, the commissioner may declare the tax
period of such taxpayer terminated at any time and shall send the taxpayer a notice of such
decision, together with request for the immediate payment of the tax for the period so declared
terminated and the tax for the preceding year or quarter, and shall be subject to all the penalties,
unless paid within the time fixed in the demand made by the commissioner.
Authority to prescribe real property values
The commissioner is authorized to divide the Philippine into different zones or areas and shall
determine the fair market value of real properties located in each zone or area
For purposes of computing any internal revenue tax, the value of the property is whichever is the
higher of:
1. The fair market value as determined by the commissioner or

2. The fair market value as shown in the schedule of values of the provincial and city assessors.
Authority to inquire into bank deposit accounts
Notwithstanding any contrary provision of republic act no. 1405 (bank secrecy law) and other
general or special laws, the commissioner is authorized to inquire into bank deposits of:
1. A decedent to determine his gross estate; and
2. Any taxpayer who has filed an application for compromise of his tax liability by reasons of
financial incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless he waives in writing his privileges under republic act
no. 1405 or under other general or special laws and such waiver shall constitute the authority of
the commissioner to inquire into the bank deposits of the taxpayer.
Issuance and rulings of the bureau of internal revenue
Revenue regulations (RRs) (RMOs) are issuance that provide directives or instructions; prescribe
guidelines; and outline processes, operations, activities, workflows, methods and procedures
necessary in the implementation of stated policies, goals, objectives, plans and programs of the
bureau in all areas of operations, except auditing.
Revenue memorandum rulings (RMRs) are rulings, opinions and interpretations of the
commissioner of internal revenue with respect to the provisions of the tax code and other tax
laws, as applied to a specific set of facts, with or without established precedents, and which the
commissioner may issue from time to time for the purpose of providing taxpayers guidance on
the tax consequence in specific situations. BIR rulings, therefore, cannot contravene duly issued
RMRs; otherwise, the rulings are null and void ab initio.
Revenue memorandum circular (RMCs) are issuance that publish pertinent and applicable issued
by the BIR and other agencies/offices.
Revenue Bulletins (RB) refer to periodic issuances, notice and official announcements of t6he
Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue’s position on
certain specific issues of law or administration in relation to the provisions of the Tax Code,
relevant tax laws and other issuances for the guidance of the public.
BIR Rulings are official position of the bureau to requires raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax laws
5. Delegations of power
The commissioner may delegate the powers vested in him under the tax code to any or
such subordinate officials with the rank equivalent to a division chief or higher. The following
powers of the commissioner may not be delegated:
a. The power to recommend the promulgation of rules and regulations by the secretary of
finance;
b. The power to issue rulings of first impression or to reverse, revoke or modify any existing
ruling of the bureau;
c. The power to compromise or abate any tax liability: provided, however, that assessment
issued by the regional offices involving basic deficiency taxes of P500,000 or less, and
minor criminal violations, discovered by regional and district officials, may be
compromised by a regional evaluation board which shall be composed of the regional
director as chairman, the assistant regional director, the heads of the legal, assessment
and collection divisions and the revenue district officer having jurisdiction over the
taxpayer, as members;
d. The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.
6. Authority of internal revenue officers to make arrest and seizures
The commissioner, the deputy commissioners, the revenue regional directors, the revenue district
and other internal revenue officers have the authority to make arrests and seizures for the violation of
any penal law, rule or regulation administered by the bureau revenue.
7. Collection agents (internal revenue taxes)
a. The commissioner of customs and his subordinates with respect to the collection of national
internal revenue taxes on imported goods;
b. The head of the appropriate government office and his subordinates with respect to the
collection of energy tax:
c. Banks duly accredited by the commissioner with respect to receipt of payments of internal
revenue taxes.
A. Income taxation
Income tax systems
a) Global tax system
Global treatment is a system where the tax treatment views indifferently the tax base
and generally treats in common all categories of taxable income of the taxpayer. (TAN v. DEL
ROSARIO, JR. 237 SCRA 324)
Where the taxpayer is required to lump up all items of income earned during a taxable
period and pay under a single set of income tax rates on these different items of income. (Simply
put, varying taxes are imposed on passive income)
b) Schedular tax system
Schedular approach is a system employed where the income tax treatment varies and
made to depend on the kind or category of taxable income of the taxpayer. (TAN v. DEL
ROSARIO, JR. 237 SCRA 324)
Where there are different tax treatments of different types of income so that a separate
tax return is required to be filed for each type of income and the tax is computed on a per return
or per schedule basis. (Simply put, one rate for all types of gross income).
c) Semi-schedular or semi-global tax system
Where the tax system is either (a) global (e.g. taxpayer with compensation income not
subject to final withholding tax or business or professional income or mixed income –
compensation and business or professional income) or (b) schedular (e.g. taxpayer with
compensation, capital gains, passive income, or other income subject to final withholding tax) or
(c) both global and schedular may be applied depending on the nature of the income realized by
the taxpayer during the year.
Distinguish “schedular treatment” from “global treatment” as used in income taxation?

Under the schedular tax system, the various types of income (i.e. compensation; business/professional
income) are classified accordingly and are accorded different tax treatments, in accordance with
schedules characterized by graduated tax rates. Since these types of income are treated separately, the
allowable deductions shall likewise vary for each type of income.
On the other hand, under the global tax system, all income received by the taxpayer are grouped
together, without any distinction as to type or nature of the income, and after deducting therefrom
expenses and other allowable deductions, are subjected to tax at a graduated or fixed rate (see TAN VS.
DEL ROSARIO [OCTOBER 3, 1994]).
What is Income?
Income refers to “an amount of money coming to a person within a specified time, whether as payment
for services, interest or profit from investment.” I means cash or its equivalent. It is gain derived and
severed from capital, from labor or from both combined.
Stock dividends issued by the corporation are considered unrealized gains, and cannot be subjected to
income tax until those gains have been realized. Before the realization, stock dividends are nothing but a
representation of an interest in the corporate properties. As capital, it is not yet subject to income tax.
Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The determining factor
for the imposition of income tax is whether any gain or profit was derived from a transaction (CIR v. CA,
301 SCRA 152)
SOURCES OF REVENUE (Sec. 21, NIRC)

1. Income tax;
2. Estate and donor’s taxes;
3. Value-added taxes;
4. Other percentage taxes;
5. Excise taxes;
6. Documentary stamp taxes; and
7. Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal
Revenue.
Persons Subject to Income Tax

1. Individual
2. Corporation
3. Estates and Trusts
4. Other entities including partnership
1. Individuals
a. Resident citizen
b. Non-resident citizen
c. Overseas Contract Worker
d. Resident Alien
e. Non-resident alien engaged in trade or business
f. Non-resident alien not engaged in trade or business
2. Corporatons
a. Domestic corporation
b. Resident foreign corporation
c. Non-resident foreign corporation
3. Estates and Trusts

a. Income accumulated in trust for the benefit of unborn or unascertained person or persons
with contingent interests, and income accumulated or held for future distribution under the terms of the
will or trust;
b. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to be held or distributed as the court may direct;
c. Income received by estates of deceased persons during the period of administration or
settlement of the estate; and
d. Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries
or accumulated.
4. Other Entities including Partnerships

In Sec 22 (B), the term CORPORATION shall include:
a. Partnerships, no matter how created or organized, but does not include:
i. General Professional Partnerships
ii. Joint venture or consortium formed for the purpose of undertaking construction
projects; and
iii. Joint venture or consortium formed for the purpose of engaging in petroleum,
coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government.
b. Joint-stock companies;
c. Joint accounts (cuentas en participacion);
d. Association; and
e. Insurance companies.
Kinds of Income Tax

1. Net income tax
2. Final income tax
3. Gross income tax
4. Minimum corporate income tax (MCIT)
5. Improperly accumulated income tax (IAET)
6. Optional gross income tax (OGIT)
CLASSIFICATION OF TAXPAYER
1. Classification of taxpayer and taxable sources of income.
Taxpayer Taxable Sources
a. Resident citizen All sources
b. Nonresident citizen Within
c. Overseas contract worker/Seaman Within
d. Resident alien Within
e. Nonresident Alien Within
f. Domestic corporation All sources
g. Foreign corporation within
According to the NIRC, a NONRESIDENT CITIZEN may be any of the following:

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 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.
Per Revenue Regulation, a citizen of the Philippines who shall have stayed outside the Philippines
for 183 days or more by the end of the year is a nonresident citizen for that year.
According to BIR Ruling, in order that income derived by overseas contract workers abroad be
exempt from income tax, the time spent abroad is not material. All that is required is for the
employment contract to pass through and registered with the Philippine Overseas Employment
Administration (POEA).
A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate
period of more than 180 days during any calendar year shall be deemed a nonresident alien
doing business in the Philippines.
TAX ON INDIVIDUALS
1. Income subject to tax and type of tax

a. Taxable income -Normal tax
b. Passive income -Final tax
c. Capital gain -Capital gains tax
2. Only passive income derived within the Philippines shall be subject to final tax.
Capital Gain
a. Capital gain from Sale of Shares of Stock not Traded in the Stock Exchange
Not over P100,000 5%

On any amount in excess of P100,000 10%
3. The capital gain tax on sale of share of stock shall be imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of share of stock in a
domestic corporation, except shares sold, or disposed of through the stock exchange.
4. The capital gain tax on sale of real property shall be imposed upon capital gains presumed to
have been realized from the sale, exchange, or other disposition of Real property, classified as
capital assets, including pacto de retro sales and other forms of conditional sales.
For sale of real property to the government, the gain or the presumed gain shall be subject to
capital gain tax or normal tax under Sec. 24-A, at the option of the taxpayer.
5. Capital gain tax shall be imposed on gain or presumed gain arising from transaction involving
capital assets.
Taxation of Income of Resident Citizens
General Rule: Resident Citizen is taxable on ALL income derived from ALL sources WITHIN and
WITHOUT the Philippines subject to the following tax rates:
1. His REGULAR TAXABLE INCOME for each taxable year shall be subject to the schedular tax
rates of 5% to 32% imposed under Section 24 (A)(2) of the NIRC.
2. However, his PASSIVE INCOMES shall be subject to the applicable final withholding taxes
depending on the kind of passive income received by him.
 Estates and trusts are taxable in the same manner as a resident citizen.
Taxation of Income of Nonresident Citizens
 OCW or OFWs are also considered as nonresident citizens for income tax purposes.
Rule: The income of a nonresident citizen derived from ALL sources WITHIN the Philippines for
each taxable year shall be subject to the following tax rates:
Taxation of Income of Resident Aliens
 An alien actually present in the Philippines who is not a mere transient or sojourner is a resident
of the Philippines for purposes of income tax. Whether he is a transient or not is determined by
his intentions with regard to the length and nature of his stay.
Rule: The income of a resident alien individual derived during the taxable year from ALL sources
WITHIN the Philippines shall be subject to the following tax rates:
Taxation of Income of Married Individuals
 Married individuals are required by law to file a consolidated income tax return, but they shall
compute separately their individual income tax on their income from employment based on their
respective total taxable income.
 If the spouses are only physically separated and there is no legal separation, they are still
required by law to file consolidated or joint returns for which they are considered as jointly and
severally liable to the tax.
 Separate computation of tax liabilities of husband and wife - designed to avoid the "marriage
penalty tax."
Taxation of Income of Minimum Wage Earners (MWEs)
 Compensation income of MWEs being paid the Statutory Minimum Wage (SMW) shall be exempt
from income tax.
 A senior citizen whose salary is equivalent to the SMW shall also be considered as MWE entitled
to exemption from income tax.
 Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be exempted from income tax. However, an employee who
receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits
in excess of the allowable statutory amount of P82,000 (starting January 1, 2015), taxable
allowances and other taxable income other than the SMW, his/her entire earnings are not
exempt from income tax and, consequently, from withholding tax.
Taxation of Passive Income of Citizens and Resident Aliens
 Income subject to the final tax refers to an income which tax due is fully collected through the
withholding tax system in the form of final withholding tax. The recipient is NO longer
required to include the item of income subject to “final tax” as part of his gross
income in his income tax returns.
 Under the new income tax form, however, individuals are required to report their passive
income in the ITR which had been subjected to the final withholding tax.
Capital Gains from Sale of Shares of Stock
 Net capital gains from the sale, barter, exchange or other disposition of shares of stock of a
domestic corporation NOT LISTED AND NOT TRADED IN THE LOCAL STOCK EXCHANGE
held as capital asset shall be subject to the CAPITAL GAINS TAX of 5% on the net capital gains
not over P100,000 plus 10% on any amount in excess of P100,000.
 In case, however, of sale, barter, exchange or other disposition of shares of stock of a domestic
corporation which are TRADED AND LISTED IN THE LOCAL STOCK EXCHANGE also held as
capital asset, the same shall be subject to the 1/2 of 1% STOCK TRANSACTION TAX based on
the gross selling price or gross value in money of shares of stock sold or transferred.
 On the other hand, if the sale is made by a dealer in securities, the resulting gain is
considered as ordinary income subject to the scheduler rates of 5%-32% in the case of
individual and the normal corporate tax rate of 30% in the case of corporations.
 Gains from shares of stock in a foreign corporation are not subject to capital gains tax but to the
scheduler rates of 5% to 32% in the case of individual seller and the normal corporate income
tax rate of 30% in the case of corporate-seller.
Capital Gains from Sale of Real Property
 The sale of real property by an individual will be subject to the capital gains tax if the said
property is considered as his capital asset which is located in the Philippines, including pacto de
retro sales and other forms of conditional sales. The said sale shall be subject to the capital
gains tax of 6% based on the presumed gain which is the higher value between the current fair
market value (i.e., zonal value) or the gross selling price. Actual gain is not required for the
imposition of the tax but it is the presumed gain by the fiction of law which is taxable.
 In case the disposition of real property classified as capital asset by individuals to the
government, the tax to be imposed shall be determined either the capital gains shall be added to
the gross income subject to the scheduler rates OR subject to final tax on the presumed capital
gains form sale of real property of 6%, at the option of the individual taxpayer-seller.
Sale of Principal Residence
 If the purpose for the sale of principal residence is not to buy a new principal residence, the sale,
barter, exchange of the said principal residence shall be subject to the capital gains tax based on
the presumed gain on the sale.
What is the nature of personal exemptions?

Personal exemptions are the theoretical personal, living and family expenses of an individual taxpayer.
These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to
the minimum of subsistence, taking into account the personal status and additional qualified dependents
of the taxpayer. (Pansacola v. CIR, G.R. No. 159991, November 16, 2006).
Taxation of Members of a General Professional Partnership (GPP) –

A GPP is a partnership 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.
The net income (distributable net income) of the GPP is computed in the same manner as a corporation,
i.e. Gross income less deductions.
TAX ON CORPORATIONS
1. Classification of corporate taxpayers

a. Domestic corporation
b. Resident foreign corporation
c. Nonresident foreign corporation
2. Income tax subject to tax and type of tax
a. Taxable income - Normal tax (NT) – 30%

Gross income tax (GIT) – 15%
Minimum corporate income tax (MCIT) – 2%
b. Passive income - Final tax(FT)
c. Capital gain - Capital gain tax (CGT)
Passive income shall include income derived from sources within the Philippines.
Income derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks and interest income from foreign currency loans
granted by such depository banks under said expanded foreign currency deposit system to residents are
subject to final income tax at the rate of 10%
Any income of nonresidents, whether individuals or corporations, from transactions with depository banks
under the expanded system is exempt from income tax.
For Capital gain

a. Capital gain from Sale of Shares of stock not Traded in the Stock Exchange
Not over P100,000 5%

On any amount in excess of P100,000 10%
b. Capital gain from sale of real property
6% of gross selling price or the fair market value, whichever is higher

Special Rules for special corporations

TAXPAYER TAX BASE RATE
a. Proprietary educational institution taxable income 10%
b. Hospitals which are nonprofit taxable income 10%
c. Government owned or controlled
Corporations
1. If the gross income from unrelated trade, business or other activity of a proprietary educational
institution or nonprofit hospital exceeds 50% of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed on ordinary corporations
shall be imposed on the entire taxable income.
The term unrelated trade, business or other activity’ means any trade, business or other activity,
the conduct of which is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function.
2. Government owned or controlled corporations are subject to the same tax imposed on ordinary
corporation engaged in similar business or industry.
The following government owned or controlled corporations are exempt from income tax:
a) Government service insurance system (GSIS)
b) Social security system (SSS)
c) Philippine health insurance corporation (PHIC)
d) Philippine charity sweepstakes office (PCSO)
e) Local Water District (LWD)
3. Resident foreign corporation and applicable income taxes
TYPE OF TAX TAX BASE TAX RATE

a) Normal tax taxable income 30%
b) Gross income tax gross income 15%
c) Minimum corporate income tax gross income 2%
Taxable income shall include income derived from sources within
Rules on GIT applicable to domestic corporations are also applicable to resident foreign corporations.
Rules on MCIT applicable to domestic corporations are also applicable to resident foreign corporations.
Branch profit remittance tax – any profit remitted by a branch to its head office shall be subject to a tax
of 15% which shall be based on the total profits applied or earmarked for remittance without any
deduction for the tax component thereof.
Interest, dividends, rents, royalties, including remuneration for technical services, salaries, wages
premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits.
Income and capital gains received by a foreign corporation during each taxable year from all sources
within the Philippines shall not be treated as branch profits unless the same are effectively connected
with the conduct of its trade or business in the Philippines.
Special rules for special corporations
TAXPAYER TAX BASE RATE

a) International carrier doing Gross Philippine
Business in the Philippines Billings 2½%
b) Regional or area headquarters of

Multinational companies exempt exempt
c) Regional operating headquarters
Of multinational companies taxable income 10%
1. Improperly accumulated earnings tax shall be imposed on every corporation formed or availed for
the purpose of avoiding the income tax with respect to its shareholders or the shareholders of
any other corporation, by permitting earnings and profits to accumulate instead of being divided
or distributed.
2. The fact that the earnings or profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation proves to the contrary
3. The term “reasonable needs of the business’ means reasonably anticipated needs of the
business.
4. The fact that any corporation is a mere holding company or investment company shall be prima
facie evidence of a purpose to avoid the tax upon its shareholders or members.
5. The rationale is that if the earnings and profits were distributed, the shareholders would then be
liable to income tax thereon, whereas if the distribution were not made to them, they would incur
not tax in respect to the undistributed earnings and profits of the corporation. Thus a tax is
being imposed in the nature of a penalty to the corporation.
6. The improperly accumulated earnings tax does not apply to the following corporations:
a) banks and other non-bank financial intermediaries;
b) insurance companies;
c) publicly-held corporations;
d) taxable partnership
e) general professional partnership
f) non-taxable joint ventures;
g) enterprises duly registered with the Philippine economic zone authority (PEZA) under R.A
7916, and enterprises registered pursuant to the bases conversion and development act
of 1992 under R.A. 7227
MINIMUM CORPORATE INCOME TAX (MCIT)
2% of the gross income as of the end of the taxable year is hereby imposed upon any domestic
corporation beginning on the 4th taxable year immediately following the year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of MCIT is greater than the normal income tax
computed due from such corporation.
Any excess of the MCIT over the normal income tax as computed shall be carried forward on an annual
basis and credited against the normal income tax for the three (3) immediately succeeding taxable years.
1998 1999 2000

Normal Income Tax (30%) P 50,000 P 60,000 P100,000
MCIT (2% of Gross Income) 75,000 100,000 60,000
Amount of tax payable P 75,000 P100,000 P100,000

Excess of MCIT over Normal Income Tax 1998 (25,000)
25,000 40,000 1999 (40,000)
P35,000
Domestic corporations which are not subject to MCIT:

a. Proprietary educational institutions subject to tax at 10%
b. Non-profit hospitals subject to tax at 10%
c. Depositary banks under expanded foreign currency deposit system subject to tax at 10%
TAXABLE INCOME – refers to the gross income subject to tax, less deductions, whether itemized or
optional standard deductions, and/or personal and additional exemptions, if any, authorized for such type
of income. In short, this term refers to the “tax base.”
GROSS INCOME – all income from whatever source derived, including, but not limited to the following
items:
a. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items
b. Gross income derived from the conduct of trade or business or the exercise of a
profession
c. Gains derived from dealings in property
d. Interest
e. Rents
f. Royalties
g. Dividends
h. Annuities
i. Prizes and winnings
j. Pensions
k. Partner’s distributive share from the net income of the general professional partnership.
Exclusions from gross income
The following items shall not be included in gross income and shall be exempt from income tax:
a. Life insurance – the proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single sum or otherwise, but if such amounts
are held by the insurer under an agreement to pay interest thereon, the interest
payments shall be included in gross income.
b. Amount received by insured as return of premium – the amount received by the insured,
as a return of premiums paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term mentioned in the contract
or upon surrender of the contract.
c. Gifts, bequests, and devises – the value of property acquired by gift, bequest, devise or
descent, income from such property, as well as gifts, bequest, devise or descent of
income from any property, in case of transfer of divided interest, shall be included in
gross income.
d. Compensation for injuries or sickness – amounts received, through accident or health

insurance, as compensation for personal injuries or sickness, plus the amounts of any
damages received on account of such injuries or sickness
e. Income exempt under treaty
f. Retirement benefits, pensions, gratuities
Conditions:
1. The retiring official or employee has been in the service of the same employer for at
least ten 10 years;
2. Is not less than fifty (50) years of age at the time of his retirement;
3. In accordance with a reasonable private benefit plan maintained by the employer;
4. The benefits granted may be availed of by an official or employee only once.
Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer
because of death sickness or other physical disability or for any cause beyond the control
of the said official or employee.
g. Income derived by a foreign government
h. Income derived by the government or its political subdivisions. – income derived from
any public utility or from the exercise of any essential government function accruing to
the government of the Philippines or to any political subdivisions thereof.
i. Prizes and awards
Conditions:
1. In recognition of religious, charitable, scientific, educational, artistic, literary, or
civic achievement;
2. The recipient was selected without any action on his part to enter the contest or
proceeding;
3. The recipient is not required to render substantial future services as a condition

to receiving the prizes or ward.
j. Prizes and awards in sports competition – all prizes and awards granted to athletes in
local and international sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national sports associations.
k. Thirteen month pay and other benefits – these benefits shall not exceed P82,000
l. GSIS, SSS, medicare and Pag-ibig contributions, and union dues of individuals
m. Gains realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five (5) years
NOTES IN ALLOWABLE DEDUCTIONS

AND ITEMS NOT DEDUCTIBLE
ALLOWABLE DEDUCTIONS
1. ordinary and necessary expenses
Only expenses which are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of a profession are allowed
as deductions.
A reasonable allowance for salaries, wages, and other forms of compensation for
personal services actually rendered, including the grossed-up monetary value of fringe
benefit furnished or granted by the employer to the employee.
a. Substantiation requirements- no deduction from gross income shall be allowed unless the
taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate
records.
b. Bribes, kickbacks and other similar payments are not allowed as deductions from gross income.
c. Special expenses allowable to private educational institutions – private educational institutions

may at their option elect either:
a. To deduct expenditures, considered as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school facilities; or
b. To deduct allowance for depreciation
2. interest expense
1. interest expense must be connected with trade or business of the taxpayer in order to be
allowed as deduction from gross income.
If the amount borrowed is momentarily deposited with the bank and earns interest income
subject to final tax, the interest expense deductible from gross income shall be reduced by 33%
of the interest income.
2. optional treatment of interest expense – at the option of the taxpayer, interest incurred to
acquire property used in trade business or exercise of a profession may be allowed as a
deduction (outright) or treated as a capital expenditure (depreciation).
3. taxes
Taxes must be connected with the trade or business of the taxpayer in order to be deductible
from gross income.
The following are non-deductible taxes:

a. Income tax
b. Income tax paid to a foreign country claimed as tax credit
c. Estate and donor’s taxes
d. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (special assessment)
4. losses
a. losses actually sustained during the taxable year and not compensated for by insurance or
other forms of indemnity shall be allowed as deductions:
a. If incurred in trade. Profession or business

b. Of property connected with the trade, business or profession, if the loss arises from fires,
storms, shipwreck, or other casualties, or from robbery, theft or embezzlement
c. No loss shall be allowed as a deduction if at the time of the filling of the tax purposes in
the state tax return
b. net operating loss carry-over – the net operating loss of the business or enterprise for any
taxable year immediately preceding the current taxable year, which had not been previously
offset as deduction from gross income shall be carried over as a deduction from gross income for
the next 3 consecutive taxable years immediately following the year such loss.
Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax
shall not be allowed as deduction
Net operating loss carry-over shall be allowed only if there has been no substantial change in the
ownership of the business or enterprise.
Net operating loss carry-over means excess of allowable deduction over gross income of the
business in a taxable year. (gross income less allowable deduction)
c. capital losses – loss from sales or exchanges of capital asset shall be allowed only to the extent
of the gains from such sales and exchanges.
Securities becoming worthless. – if securities become worthless during the taxable year and are
capital asset, the loss resulting therefrom be considered as a loss from the sale or exchange, on the last
day of such taxable year. Of capital assets.
d. losses from wash sales of stock or securities.
In the case of any loss claimed to have been sustained from any sale or other disposition of
shares of stock or securities where it appears that within a period beginning 30 days before the date of
such sale or disposition and ending 30 days after such date, the taxpayer has acquired or has entered
into a contact or option to acquire, substantially identical stock or securities, no deduction for the loss
shall be allowed unless the claim is made by a dealer in stock or securities and with respect to transaction
made in the ordinary course of the business of such dealer.
e. wagering losses – losses from wagering transactions shall be allowed only to the extent of the
gains from such transactions.
5. bad debts expense

Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable
year except:
(1) those not connected with profession, trade or business

(2) those sustained in a transaction entered into between related parties.
Related parties mean:
a. Between members of a family. Family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal descendants;
b. Except in case of distributions in liquidation. Between an individual and corporation more than
50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such
individual;
c. Except in the case of distributions in liquidation, between two coporations more than 50% IN
value of the outstanding stock of which is owned, directly or indirectly, by or for the same
individual;
d. Between the grantor and a fiduciary of any trust;
e. Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust;
f. Between a fiduciary of a trust and beneficiary of such trust.
6. depreciation expense
1. Depreciation expense must be connected with trade or business of the taxpayer. It includes
amortization of intangible assets with definite life
.
2. Methods of computing reasonable allowance
a. Straight-line method
b. Declining-balance method
c. Sum-of-the-years-digit method
d. Any other method which may be prescribed by the secretary of finance upon
recommendation of the commissioner
7. charitable and other contributions

1. Subject to limitation
Contributions to the following institutions or entities are subject to limitation.
(1) government of the Philippines or any of its agencies or any political subdivision
thereof exclusively for public purposes,
(2) to accredited domestic corporation or associations organized and operated exclusively
for religious, charitable, scientific, youth and sports development, cultural or educational
purposes or for the rehabilitation of veterans
(3) to social welfare institutions
(4) to non-government organizations,
Limitation: not in excess of 10% in the case of an individual. And 5% in the case of a
corporation, of the taxpayer’s taxable income derived from trade, business or profession
as computed without the benefit of this deduction.
2. deductible in full.
Donations to the following institutions or entities shall be deductible in full:
a. Donations to the government of the Philippines or to any of its agencies or political

subdivisions, including fully-owned government corporations, exclusively to finance, to
provide for, or to be used in undertaking priority activities in education. Health. Youth
and sports development, human settlements, science and culture, and in economic
development
b. Donations to certain foreign institutions or international organizations
c. Donations to accredited non-government organizations- organized and operated

exclusively for scientific, research, educational, character-building and youth and sports
development, health, social welfare, cultural or charitable purposes, or a combination
thereof, no part of the net income of which inures to the benefit of any private individual
3. valuation – the amount of any charitable contribution of property other than money shall be
based on the acquisition cost of said property.
8. Research and development expense
1. Research and development expense incurred or paid by the taxpayer in connection with
trade or business are allowed as deductions from gross income.
2. Capitalized research and development expenditures

Requisites:
a. Paid or incurred by the taxpayer in connection with his trade, business or
profession
b. Not treated as expense under paragraph 1
c. Chargeable to capital account but not chargeable to property of a character
which is subject to depreciation or depletion
In computing taxable income. Such deferred expenses shall be allowed as deduction

ratably distributed over a period of not less than 60 months as me be elected by the
taxpayer (beginning with the month in which the taxpayer first realizes benefits from
such expenditures)
9. Pension trusts
For current services
The contributions of employer to pension trust for the benefit of employees for current services are
deductible from gross income.
For past services

The lump contributions of employer to pension trust for the benefit of employees for past services are
deductible from gross income but are to be distributed over a period of 10 consecutive years.
10. Additional requirements for deductibility of certain payments
Any amount paid or payable which otherwise deductible from. Or taken into account in computing
gross income or for which depreciation or amortization, shall be allowed as deduction only if it is shown
that the tax required to be deducted and withheld therefrom has been paid to the bureau of internal
revenue.
11. Optional standard deduction
Optional standard deduction (OSD) may be availed of by individual (self-employed) and corporate
taxpayers in lieu of the itemized deductions.
For individual (self-employed) taxpayer. The OSD is 40% of gross sales or receipts
For corporations, the OSD is 40% of gross income
12. Premium payments on health and/or hospitalization insurance

1. Conditions:
a. The amount of premiums not to exceed P2,400 per family or P200 a month paid during
the taxable year for health and/or hospitalization insurance taken by the taxpayer for
himself, including his family
b. Family has a gross income of not more than P250,000 for the taxable year
c. In case of married taxpayer. Only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction
2. Taxpayer earnings compensation income arising from personal services rendered under an
employer-employee relationship are not allowed any deduction except premium payments on
health and/or hospitalization insurance.
ITEMS NOT DEDUCTIBLE
1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent improvement, or betterments
made to increase the value of any property or estate;
3. Any amount expended in restoring property or in making good the exhaustion thereof for
which an allowance is has been made
4. Premiums paid on any life insurance policy covering the life of any officer or employee,
or of any person financially interested in any trade or business carried on by the
taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary
under such policy.
5. Losses from sales or exchange of property – in computing net income, no deductions

shall in any case be allowed in respect of losses from sales or exchanges of property
directly or indirectly-
a. Between members of a family, family of an individual shall include only his

brothers and sisters (whether by the whole or half-blood), spouse, ancestors,
and lineal descendants;
b. except in case of distributions in liquidation between an individual and

corporation more than 50% in value of the outstanding stock of which is owned
directly or indirectly, by or for such individual.
c. Except in the case of distribution in liquidation , between two corporations more

than 50% in value of the outstanding stock of which is owned directly or
indirectly, by or for the same individual;
d. Between the grantor and a fiduciary of any trust;
e. Between the fiduciary of end the fiduciary of a trust and the fiduciary of another
trust if the same person is a grantor with respect to each trust;
f. Between a fiduciary of a trust and beneficiary of such trust.
TARIFF AND CUSTOMS LAW3
Tariff and customs duties are synonymous and used interchangeably. Both refer to taxes
imposed on imported or exported articles or merchandise.
Tariff
1. Duties, toll or amount payable upon imported or exported articles.
2. Rate of taxes
3. List of articles liable to duties or taxes
Customs Duties
1. Taxes on importation and exportation of commodities
2. Tax assessed upon merchandise from or to another country
Importation starts when the vessel or aircraft carrying imported articles, or the conveying aircraft, enters
Philippine jurisdiction with the intention to unload therein.
Importation is terminated:
On dutiable articles
Payment of duties, charges upon the articles or secured to be paid at the port of entry
and the permit for the withdrawal of such articles have been granted.
On duty free articles

When the articles legally left custom’s jurisdiction.
3 Deloria, Merlin D., Taxation: Notes and Cases

Kinds of importation:
1. Dutiable articles
2. Articles of prohibited importation (Absolutely prohibited and Qualifiedly prohibited)
3. Duty free importation
Smuggling – is fraudulent importation of any article contrary to law
- assist in doing so
- receiving, concealing, buying, selling, facilitating, transporting of such knowing it is illegal
importation.
- Exporting in a manner contrary to law
- Mere possession would warrant conviction of smuggling
- Burden of proof is on the smuggler/accused
- Payment of tax due after apprehension is not a valid defense
Drawback – exporting articles which are imported and selling it to foreign markets upon the same terms
as if it had not been taxed.
- return of 99% of duties paid when they are re-exported forming part of domestically
produced articles.
- Refund of 99% of duty paid on imported fund when used for propulsion of vessel engaged
in foreign or coastwise trade.
Regular Customs Duties

Specific
Ad Valorem
Special Customs Duties

1. DUMPING DUTY is an additional customs duties imposed on imported articles sold or likely to be
sold into the country at a price less than its normal value the importation and sale of which will injure or
likely cause injury to industry producing the same goods in the country.
- The amount/additional duty shall be equivalent to the difference between the actual export
price and the normal price.
- Normal Price is the comparable price in the ordinary course of business for like articles when
destined for domestic consumption in the exporting country, which is the country of production.
2. COUNTERVAILING DUTY is an additional duty imposed on imported articles directly or indirectly

granted bounty, subsidy or subvention in its production or exportation in the country of origin and sold in
our country at a very low price the importation or sale thereof will injure or likely cause injury to the
industry producing the same goods in the country.
3. MARKING DUTY is an additional custom imposed on the imported articles if the article itself or its
container is not property marked in any of the official language of the Philippines seen in an conspicuous
legibly, indelibly and permanently to indicate an ultimate purchaser in the country.
- the amount is 5% ad valorem.
4. DISCRIMINATORY DUTY is an additional customs duty imposed upon imported articles, the
importation of which in the country shall discriminate against commerce in the Philippines.
- The amount shall not exceed 100% ad valorem
- Imposed by the President upon recommendation of the NEDA under the Flexible Tariff Clause.

Taxation Law Pre-Bar Notes 2017

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Taxation Law Pre-Bar Notes 2017

Hochgeladen von

Copyright:

Verfügbare Formate

CPU BAROPS 2017 Lecture – Atty. Noel C. Siosan, Jr.

GENERAL PRINCIPLES OF TAXATION

Essential elements of a tax

SUMPTUARY PURPOSE OF TAXATION

Non-revenue objectives of Taxation:

1 Deloria, Merlin D., Taxation: Notes and Cases.

PAL v. Edu, 164 SCRA 320

Tio v. Videogram, 151 SCRA 208

Caltex v. Commissioner, 208 SCRA 755

THEORY AND BASIS OF TAXATION:

The lifeblood theory can be manifested in the following cases:

3. Benefits-Protection Theory (Symbiotic relationship)

4. Jurisdiction over subject and objects

“THE POWER TO TAX INVOLVES THE POWER TO DESTROY”

Domondon’s reconciliation of Marshall and Holmes

NATURE OF TAXING POWER

TAXATION distinguished from POLICE POWER and EMINENT DOMAIN

TAXATION POLICE POWER EMINENT DOMAIN

2 Deloria, Merlin D., Taxation: Notes and Cases

2. Power of Eminent Domain

TAXATION AS AN IMPLEMENT OF POLICE POWER

TAXATION AS AN IMPLEMENT OF EMINENT DOMAIN

CONSTITUTIONAL PROVISIONS ON TAXATION

The following are provisions of the 1987 Constitution concerning taxation:

THREE BASIC PRINCIPLES OF A SOUND TAX SYSTEM

Does non-observance of administrative feasibility, as a principle of sound tax system,

1. Prospectivity of tax laws

Double taxation may be direct (strict sense) or indirect (broad sense).

Is double taxation prohibited under the Constitution?

There is direct double taxation if the two taxes are imposed:

VILLANUEVA V. CITY OF ILOILO, 265 SCRA 528

International Juridical Double Taxation

Remedies against Double Taxation

4. Escape from Taxation

Taxes that can be shifted

Ways of shifting the tax burden

Example: Consumer or purchaser may shift tax imposed on him to retailer by

Impact and incidence of taxation

Relationship between impact, shifting, and incidence of a tax

Example: Deliberate failure to report a taxable income or property; deliberate reduction of

Evidence to prove evasion

In DELPHERS TRADERS CORP. V. INTERMEDIATE APPELLATE COURT [157 SCRA 349],

EXEMPTION – grant of immunity from tax.

5. Exemption from Taxation

Exemption from taxation

May a tax exemption be revoked?

6. Compensation and Set-off

Is the civil concept of solutio indebiti applicable to taxation?

What is the doctrine of equitable recoupment?

Examples of Public Purpose:

2. Non-delegability of taxing power

EXCEPTIONS (Delegable Powers)

Flexible tariff clause

(b) Delegation to local governments (Local Taxing power)

(c) Delegation to administrative agencies (Administrative Matters)

3. Territoriality or situs of taxation

What is “situs of taxation?”

4. Tax exemption of government entities

The following Government-owned or –controlled Corporations, Agencies, or Instrumentalities are EXEMPT

5. Recognition of International Comity.

PROVISIONS DIRECTLY AFFECTING TAXATION

 Grant by Congress of authority to the president to impose tariff rates

 Prohibition against taxation of religious, charitable entities, and educational entities

 Prohibition against taxation of non-stock, non-profit institutions