CHAPTER 2

DOCTRINES IN TAXATION

I. Doctrine of Prospectivity of Tax Laws

1. What is the “Doctrine of Prospectivity

of Tax Laws”?

As a general rule, tax laws are

prospective in operation,1 unless the legislative
intent that statute should operate
retrospectively is distinctly expressed or
necessarily implied.2

Where a statute amending a tax law is

silent as to whether it operates retroactively,
the amendment will not be given a retroactive
effect so as to subject to tax past transactions
not subject to tax under the original act. Every
case of doubt must be resolved against its
retroactive effect.3

1
Because taxes are burdens and should not be
imposed without due process of law. Belle Corp. v. CIR,
G.R.181298, Jan. 10, 2011
2
Lorenzo v. Posadas, 64 Phil. 353; CIR. v. Filipinas
Cia. de Seguros, 107 Phil. 1055
3
CIR v. Marubeni Corporation, 372 SCRA 576
(2001)
 II. Doctrine of Imprescriptibility

2. What is the “Doctrine of

Imprescriptibility”?

Considering that taxes are the lifeblood

of the government, it may be stated that the
assessment and collection of taxes are
imprescriptible unless otherwise provided by
the tax law itself.4 Thus, if the tax law itself is
silent on prescription, the right of the
government to assess and collect taxes will not
prescribe.

In criminal cases involving tax offenses

punishable under the Tax Code, it would indeed
seem that tax cases are practically
imprescriptible for as long as the period from
the discovery and institution of judicial
proceedings for its investigation and
punishment, up to the filing of the information
in court does not exceed five (5) years.

4
CIR v. Ayala Securities Corp., 101 SCRA 231
 As the provision5 of the law stands in
the statute book (and to this day it has
remained unchanged), prescription is a matter
of defense and the information does not need
to anticipate and meet it. The defendant could,
at most, object to the introduction of evidence
to defeat his claim of prescription. Anyway, the
law says that prescription begins to run from ...
"the institution of judicial proceedings for its ...
punishment."

Unless amended by the legislature, this

provision stays in the Tax Code as it was written
during the days of the Commonwealth. And as
it is, must be applied regardless of its apparent
one-sidedness in favor of the Government. In
criminal cases, statutes of limitations are acts of
grace, a surrendering by the sovereign of its
right to prosecute. They receive a strict
construction in favor of the Government and
limitations in such cases will not be presumed
in the absence of clear legislation. 6

III. Double Taxation

5
Sec. 281, NIRC
6
Emilio E. Lim, Sr., v. CA, GR Nos. L-48134-37, Oct.
18, 1990
3. What is the meaning of double
taxation? BQ2015, 2014, 2013, 2012

“Double taxation” means taxing the

same property / person / activity twice when it
should be taxed only once; that is, taxing the
same property/person/activity twice by the
same jurisdiction, during the same taxing period
for the same purpose and for the same kind of
tax by the same taxing authority when it should
only be taxed but once.7

4. What are the kinds of double taxation?

BQ2015, 2014, 2012

(a) In the Strict Sense - Double

taxation in the strict or prohibited sense is called
“direct double taxation” which is
objectionable because it is a violation of the
substantive due process under the Constitution
since the same property or subject matter is
taxed twice when it should be taxed once; it is
tantamount to taxing the same person twice by
the same jurisdiction for the same thing.

7
Nursery Care Corp v. City of Manila, GR 180651,
July 30, 2014
 Otherwise described as “direct
duplicate taxation,” the following are the
elements of direct double taxation:

The two taxes must be

imposed:

(1) on the same person,

property or subject matter,
(2) for the same purpose,
(3) by the same taxing
authority,
(4) within the same territory or
taxing jurisdiction,
(5) during the same taxing
period; and
(6) the taxes must be of the
same kind or character.8

(b) In the Broad Sense - Double

taxation in the broad sense is called “indirect
double taxation” or “indirect duplicate
taxation” which extends to all cases in which

8
Swedish Match Phils. Inc. v. The Treasurer of the City of
Manila, G.R. 181277, July 3, 2013 (700 SCRA 428)
Ibid; Nursery Care Corp. v. Anthony Acevedo & the
City of Manila, GR 180651, July 30, 2014.
there are two or more pecuniary impositions,
but the ABSENCE OF ONE OR MORE of the
above-mentioned elements makes the
double taxation indirect. The Constitution
does NOT prohibit the imposition of double
taxation in the broad sense because it does not
violate the substantive due process since no
actual double taxation occurred.

5. What are the kinds of indirect duplicate

taxation? BQ2013

There are two kinds of indirect

duplicate taxation, namely:

(1 ) Domestic double taxation. -

This arises when the same taxes are imposed
by the local or national government within the
same State.

Double taxation may not be invoked

where one tax is imposed by the national
government and the other by a local
government, being widely recognized that
there is nothing inherently obnoxious in the
requirement that licenses or taxes be exacted
with respect to the same occupation, calling or
activity by both the state and its political
subdivision.9 Thus, double taxation does not
exist when a corporation is assessed with local
business tax as a manufacturer, and at the
same time, VAT as a person selling goods in the
course of trade or business.

(2) International juridical double

taxation – It refers to the imposition of
comparable taxes in two or more states on the
same taxpayer in respect of the same subject
matter and for identical periods.10

When an item of income is taxed in the

Philippines and the same income is taxed in
another country, there is a case of double
taxation but it is only a case of indirect
duplicate taxation, which is called “international
juridical double taxation,” which is not legally
prohibited because the taxes are imposed by
different taxing authorities.

6. Is double taxation allowed in our

Constitution?

9
Punzalan v. Mun. Board of Manila, 95 Phils. 46
(1994); City of Baguio v. De Leon, 25 SCRA 38 (1968)
10
CIR v. SC Johnson and Son., Inc. 309 SCRA 87
(1999)
 The Supreme Court held that there is
no constitutional prohibition against double
taxation in the Philippines.11 Therefore, it is not
a valid defense against the validity of a tax
measure.12 However, it is not favored but the
same is permissible, provided some other
constitutional requirements are not thereby
violated.13 For example, double taxation
becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same
governmental entity14 or by the same
jurisdiction for the same purpose,15 but not in a
case where one tax is imposed by the State and
the other by a province, city or municipality. 16

7. Is double taxation a valid defense

against the legality of a tax measure?

11
Villanueva v. Iloilo, 26 SCRA 578, Dec. 28, 1968
12
Pepsi Cola v. Mun. of Tanauan, GR L-31156, Feb.
27, 1976 (69 SCRA 460)
13
Pepsi Cola Bottling Co. v. City of Butuan, GR L-
22814, Aug. 28, 1968
14
CIR v. Lednicky GR L-18169, July 31, 1964 (11
SCRA 609)
15
SMB, Inc. v. City of Cebu, GR L-20312, Feb. 26,
1972 (43 SCRA 280)
16
Punzalan v. Mun. Board of City of Manila, 50 OG
2485
 No. Double taxation standing alone
and not being forbidden by our fundamental law
is not a valid defense against the legality of a
tax measure.17 However, if double taxation
amounts to a direct duplicate taxation, that the
same subject is taxed twice when it should be
taxed but once, in a fashion that both taxes are
imposed for the same purpose by the same
taxing authority, within the same jurisdiction or
taxing district, for the same taxable period and
for the same kind or character of a tax, then it
becomes legally objectionable for being
oppressive and inequitable.

8. Can a court impose local business

tax on manufacturers of liquors, distilled spirits,
whins and other article of commerce.

8. Is there double taxation where a lessor

of a property pays real estate tax on the
premises being leased, a real estate
dealer’s tax based on rental receipts and
income tax on the rentals?

17
Pepsi Cola v. Mun. of Tanauan, GR L-31156, Feb.
27, 1976 (69 SCRA 460)
 No. There is no double taxation here in
the prohibited sense. Double taxation in the
prohibited sense means (1) taxing for the same
tax period, (2) the same thing or activity twice,
(3) when it should be taxed
but once, (4) by the same taxing authority, (5)
for the same purpose, and
(6) with the same kind or character of tax.

The real estate tax is a property tax.

On the other hand, the real estate

dealer's tax is a tax on the privilege to engage
in business of real estate dealership.

While the income tax is a tax on the

privilege to earn an income.

These taxes are imposed by different

taxing authorities and are essentially of
different kinds and character. 18

9. Is there double taxation when the

interest income of a bank derived from its
bank deposits in another bank is
subjected to tax and it will again be

18
Villanueva v. City of Iloilo, 26 SCRA 578
subjected to the 5% gross receipts tax on
its interest income from its loan
transactions? BQ2012

No. There is no double taxation when

the interest income of a bank from its bank
deposits in another bank had been subjected to
the 20% final withholding tax (which is a
passive income and a direct tax), and at the
same time, its interest income on loan
transactions to its debtors-customers is
subjected to the 5% gross receipts tax (which
is considered as active income and indirect tax)
because the first tax is income tax, while the
second tax is business tax.

10. Can a municipal mayor refuse to sign

an ordinance which requires that all
establishments selling liquor should pay a
fixed annual fee and at the same time
imposing a sales tax equivalent to 5% of
the amount paid for the purchase or
consumption of liquor in the said
establishments on the ground that it
would constitute double taxation?

No. The refusal of the mayor is not

justified. The impositions are of different
nature and character. The fixed annual fee is
in the nature of a license fee imposed through
the exercise of police power while the 5% tax
on purchase or consumption is a local tax
imposed through the exercise of taxing powers.
Both a license fee and a tax may be imposed on
the same business or occupation, or for selling
the same article and this is not in violation of
the rule against double taxation.19

11. Is there double taxation in the

imposition of local business tax based on
gross revenue in the case of a taxpayer
whose method of accounting is on the
accrual basis?

Yes. In petitioner's case, its audited

financial statements reflect income or revenue
which accrued to it during the taxable period
although not yet actually constructively
received or paid. This is because petitioner
uses the accrual method of accounting, where
income is reportable when all the events have
occurred that fix the taxpayer's right to receive
the income, and the amount can be determined

19
Compania General de Tabacos de Filipinas v. City
of Manila, 8 SCRA 367 (1963)
with reasonable accuracy; the right to receive
income, and not the actual receipt, determines
when to include the amount in gross income.
The imposition of local business tax based on
petitioner's gross revenue will inevitably result
in the constitutionally proscribed double
taxation - taxing of the same person twice by
the same jurisdiction for the same thing --
inasmuch as petitioner's revenue or income for
a taxable year will definitely include its gross
receipts already reported during the previous
year and for which local business tax has
already been paid. Thus, respondent
committed a palpable error when it assessed
petitioner's local business tax based on its gross
revenue as reported in its audited financial
statements, as Sec. 143 of the LGC and Sec.
22(e) of the Pasig Revenue Code clearly provide
that the tax should be computed based on gross
receipts.20

12. What are the modes of

avoiding/eliminating double taxation?

20
Ericsson Telecom vs. City of Pasig, GR 176667,
Nov. 22, 2007( 538 SCRA 99)
 The usual methods of avoiding the
occurrence of double taxation are:

(a) Entering into tax treaties with

other states. - Double or multiple taxation is
avoided by means of allowing reciprocal
exemptions, which may be done either by
statute or by treaty.

(b) Application of the principle of

reciprocity - Exemption from taxation by
treaty are generally granted on grounds of
reciprocity21 and to lessen the rigors of
international double or multiple taxation.

(c ) Allowance of deduction/tax
credit for foreign taxes paid - The rigors of
international double taxation may also be
lessened by the allowance of deduction or tax
credit taxes paid to foreign countries. 22
Example: A resident Filipino citizen has the
option to either claim the amount of income tax

21
Reciprocity is used to denote the relation between
two states when each of them, by their respective laws or by
treaty, gives the citizens or nationals of the other State certain
privileges, as in the practice of a profession, on condition that its
own citizens or nationals shall enjoy similar privileges in the latter
state. Sison v. Board of Accountancy, 85 Phil. 276 (1949)
22
Sec. 34(C), NIRC
withheld abroad as a deduction from his gross
income in the Philippines or to claim it as a tax
credit23 provided that he includes the subject
income in the computation of his worldwide
gross income considering that he is a resident
Filipino citizen. A resident Filipino citizen is
subject to tax on his income derived from within
and without the Philippines or his worldwide
income.

(d) Using the Tax Sparing Rule – A

non-resident foreign corporation (NRFC) who
earned cash and/or property intercorporate
dividends from a domestic corporation is taxed
on a reduced rate of 15% tax on dividends (in
lieu of the 30% corporate income tax), which
represents the difference between the regular
income tax of 30% and the 15% tax on
dividends on the condition that the country of
residence of the NRFC shall allow a credit
against the tax due from the NRFC, taxes
deemed to have been paid in the Philippines. 24

The apparent rationale for doing away

with double taxation is to encourage the free

23
Sec. 34(C)(1)(B), NIRC
24
Sec. 28(B)(5)(b), NIRC; CIR v. PGMC, GR 66838,
Dec. 2, 1991
flow of goods and services and the movement
of capital, technology and persons between
countries, conditions deemed vital in creating
robust and dynamic economies. 25

IV. Escape from Taxation

13. What are the forms of escape from

taxation?

Taxpayers escape paying their taxes

thru the following modes, although the modes
used may not necessarily be legal, and
therefore, sanctionable.

(a) Shifting the tax burden to another

taxpayer.
(b) Tax avoidance.
(c ) Tax evasion.

A. Shifting of Tax Burden

14. What is the meaning of the term

“shifting of tax burden”?

25
CIR v. SC Johnson and Son, Inc., 309 SCRA 87
(1999)
 “Shifting of tax burden” simply
means that the imposition of tax is transferred
from the statutory taxpayer, or the person who
is required by law to pay the tax, to another
person who shall bear the burden of the tax
without violating the law. Only the payment of
indirect taxes may be shifted to another
taxpayer, but not direct taxes. Example: Under
the VAT system, the seller can shift the burden
of the VAT to the buyer, the said tax (VAT)
being an indirect tax.

15. What are the ways of shifting the

burden of tax to another taxpayer?

The ways of shifting the burden of tax

to another taxpayer are as follows:

(1) Forward shifting – refers to the

transfer of tax burden from the producer to
distributor until it finally reaches the ultimate
purchasers or end consumers. Example: The
producer shifts its VAT to the distributor, and
the distributor shifts its VAT to the final
consumer.

(2) Backward shifting – refers to the

reverse of forward shifting, meaning, the
burden of the tax is transferred from the end
consumer through the factors of distribution to
the factor of production. Example: The end
consumer may shift the tax imposed on him to
the distributor by buying the goods only after
the price of the goods is reduced by the amount
of the tax, and lastly, the manufacturer agrees
to buy the distributor’s products only if the price
is also reduced by the amount of tax.

(3) Onward shifting – the tax burden

is shifted twice or more either forward or
backward.

16. What are the taxes which can be

shifted to another taxpayer?

Under the National Internal Revenue

Code, the national taxes which can be shifted to
another taxpayers are the indirect taxes, such
as the VAT, Other percentage taxes, excise tax
on excisable articles and documentary stamp
taxes.

In the case of VAT, the seller, who is

the statutory taxpayer, is given the right by law
to shift the burden of tax to the buyer, which
tax shall become part of the cost of the goods
or services sold if the buyer is the end
consumer.

17. What are the taxes which cannot be

shifted to another taxpayer?

Under the National Internal Revenue

Code, all taxes which are the direct tax liabilities
of the taxpayers are the taxes which cannot be
shifted to another taxpayer, such as income tax,
estate tax and donor’s tax.

18. Why does the law allow the shifting

of the burden of tax to another person?

When the law allows that the burden of

tax may be shifted to another person, this is one
form of escape from taxation which does not
result to any loss on the part of the
Government, hence, not objectionable.

19. What is the meaning of “impact” and

“incidence” of taxation?

The term "impact of taxation" refers

to the point on which the tax is originally
imposed or the person/taxpayer who is required
by law to pay the tax or the taxpayer on whom
the tax can be formally assessed. Example:
VAT is originally assessed against the VAT-
registered SELLER who is required to pay the
said tax. (This is the so-called "impact of
taxation.")

On the other hand, "incidence of

taxation" refers to the point on which the tax
burden finally rests or settles down. It takes
place when shifting has been effected from the
statutory taxpayer to another. Hence, VAT,
being an indirect tax, the burden of paying the
tax is actually shifted or passed on to the
BUYER. (This is the so-called "incidence of
taxation.")

20. What is the relationship between

Impact, Shifting, and Incidence of a tax?

The”impact of taxation,” which is

the imposition of the tax to the statutory
taxpayer, is the initial phenomenon; the
“shifting of the tax,” which is the passing on
of the tax to the buyer, is the intermediate
event, while the “incidence of the tax” which
is the final point of the transaction makes the
end consumer finally shouldering or bearing the
burden of the tax, which is the resultant effect.
 B. Tax Avoidance

21. What is the meaning of “tax

avoidance”? BQ2014

"Tax avoidance" is the other term for

"tax minimization." It is a legal tax saving
device within the means sanctioned by law the
object of which is merely to minimize the
payment of taxes. This method should be used
by the taxpayer in good faith and at arm's
length.

A taxpayer has the legal right to

decrease the amount of what otherwise would
be his taxes or altogether avoid them by means
which the law permits. A taxpayer may
therefore perform an act that he honestly
believes to be sufficient to decrease his tax
liability or to exempt him from taxes. He does
not incur fraud thereby even if the act is
thereafter found to be insufficient. 26

C. Tax Evasion

26
Yutivo Sons Hardware Co. v. CTA, 1 SCRA 160
(1961); Heng Tong Textiles Co., Inc. v. CIR, 24 SCRA 767
(1968)
22. What is the meaning of “tax evasion”?

"Tax evasion" is the other term for

“tax dodging.” It is the use of the taxpayer of
illegal means to avoid or defeat the payment of
the tax. It is a scheme used outside of those
lawful means and when availed of is punishable
by law because its main purpose is to entirely
escape the payment of taxes thru illegal means.
It usually subjects the taxpayer to further or
additional civil or criminal liabilities.27

Tax evasion connotes fraud through

the use of pretenses and forbidden devices to
lessen or defeat the payment of correct taxes.
Mere understatement of tax in itself does not
prove fraud. Fraud is never imputed and courts
never sustain findings of fraud upon
circumstances which create only suspicion; it
must be willful and intentional .

23. Distinguish "tax avoidance" from

"tax evasion." BQ2014

Tax Avoidance

27
CIR v. CA, 327 Phil. 1
 “Tax avoidance” is a tax saving device “Tax evasion
wherein the taxpayer uses legal means to avoid or
to reduce tax liability within the means tax.
sanctioned by law, hence legal.28
It is used by the taxpayer in good faith It connotes
and at arm's length. pretenses a
lessen or def
taxes.
Taxpayer is not subjected to civil or When availe
criminal liabilities because it is a legal taxpayer to
tax saving device. liabilities.
It is “tax minimization”. It is “tax do

24. What are the factors that constitute

“tax evasion”?

To constitute "tax evasion," there

must be an integration of three factors, namely:

(1) The end to be achieved, i.e.,

payment of an amount of tax less than what is
known by the taxpayer to be legally due;

(2) An accompanying state of mind

which is described as being evil, in bad faith,

28
Heng Tong Textiles Co., Inc. v. CIR, 24 SCRA 767
(1968)
willful or deliberate and not merely accidental;
and

(3) A course of action or failure of

action which is unlawful.

The second and third factors are not

present in tax avoidance, hence there can be no
tax evasion if what was committed is just tax
avoidance.29

Example: When a tax consultant

advised the taxpayer to execute two deeds of
sale with the intent to evade the payment of the
correct tax, both the tax consultant and the
taxpayer shall be criminally liable for tax
evasion considering that the above-stated three
requisite factors to constitute tax evasion are
present.

25. When is tax evasion deemed

complete?

The Supreme Court ruled that tax

evasion is deemed complete when the violator

29
CIR v. The Estate of Benigno P. Toda, Jr.,
G.R.147188, Sept. 14, 2004. (48SCRA 290)
has knowingly and willfully filed a fraudulent
return with intent to evade and defeat a part or
all of the tax.30

V. Exemption from Taxation

26. What is the meaning of the term

“exemption from taxation"?

Tax exemption is an immunity or

privilege from a charge or burden to which
others are subject. It is the grant of immunity,
express or implied, to particular persons or
corporations of a particular class, from the
obligation to pay taxes generally within the
same state or taxing district to which others are
obliged to pay. 31

27. What is the nature of tax exemption?

(a) The tax exemptions provided in the

Constitution are self-executing and need no
legislation to enforce them.

30
Ungab v. Judge Cusi, Jr., 186 Phil. 604 (1980)
31
Greenfield v. Meer, 77 Phil 394
 (b) The grant of tax exemption is a
matter of legislative policy that is within the
exclusive prerogative of Congress.32

(c) Exemption from taxes is personal in

nature and covers only taxes for which the
taxpayer-grantee is directly liable. In any case,
it cannot be transferred or assigned by the
person to whom it is given without the consent
of the State. He who claims tax exemption
should prove by convincing proof that he is
exempted. Therefore, an exemption granted to
a corporation does not apply to its
stockholders.33

(d) Tax exemptions are not presumed,

but when public property is involved, tax
exemption is the rule, and taxation, the
exception.

(e) There can be no simultaneous tax

exemptions under two laws, one partial and the
other total.

32
Diaz v. Sec. of Finance, 654 SCRA 96 (2011)
33
Manila Gas Corp. v. Collector, 71 Phil. 513
 (f) It is an ancient rule that exemptions
from taxation are construed in strictissimi juris
against the taxpayer and liberally in favor of the
taxing authority. Tax exemptions are looked
upon with disfavor and may almost be said to
be odious to the law.34

(g) He who claims that he is exempted

from tax must be able to justify his claim by the
clearest grant of organic or statute law by words
to plain to be mistaken. If ambiguous, there is
no tax exemption.

28. What are the kinds of tax exemption?

The kinds of tax exemptions are as

follows:

(1) Express tax exemption (or

affirmative exemption) – This is the tax
exemption which expressly and affirmatively
exempts from taxation certain persons,
properties or transactions, either entirely or in
part. It may be created by express provisions
of the Constitution, statute, treaty or ordinance.

34
MERALCO v. Vera, 67 SCRA 351; Phil.
Petroleum Corp. v. Mun. of Pililla, Rizal, 198 SCRA 82 (1991)
 (2) Implied tax exemption (or
exemption by omission) – This is the tax
exemption which may be either accidental or
intentional, as where the tax is laid on certain
classes of persons, properties or transactions
without mentioning other classes. All subjects
for which taxation is not provided are
exempted, and the subjects selected are alone
taxable. Tax exemptions are not presumed, but
when public property is involved, exemption is
the rule, and taxation, the exception

(3) Contractual tax exemption -

Contractual tax exemption, in the real sense of
the term and where the non-impairment clause
of the Constitution can rightly be invoked, is one
which is agreed to by the taxing authority in
contracts, such as the one contained in
government bonds or debentures, lawfully
entered into under enabling laws in which the
government, acting in its private capacity,
sheds its cloak of authority and waives its
governmental immunity.35 This exemption must
not be confused with the tax exemption granted

35
PAGCOR v. BIR, John Doe & Jane Doe, GR
172087, March 15, 2011
under a franchise, which is not a contract within
the context of non-impairment clause of the
Constitution.36

In general, tax exemptions granted by

contract are not assignable. However,
Congress may authorize a transfer of the tax
exemption either by the original act or by a
subsequent statute. A contractual tax
exemption may also be transferred where the
original grant includes the successors and
assigns of the grantee.37

Statutory exemptions are generally

granted on the basis of contract and on grounds
of public policy.

29. What is the rationale for the grant of

tax exemption?

The rationale for the grant of tax

exemption is some kind of public benefit or
interest which the law-making body considers
sufficient to offset the monetary loss entailed in
the grant of tax exemptions.

36
Cagayan Electronic Co. v. CIR, 138 SCA 629
37
PAL v. Commissioner of Customs, BTA No.184,
Sept. 10, 1954
30. What are the grounds for tax
exemption?

(1) The power of the Legislature to

exempt taxpayers from taxation, although of
wide scope, is not unlimited. Exemptions from
taxation, when properly made, must be
determined in the legislative discretion, which
must not, however, be arbitrary; there must
underlie in its exercise some principles of
public policy that can support a presumption
that the public interest will be subserved by the
exemption allowed.38

(2) The purpose of the grant is some

public benefit or interest which the law-
making body considers sufficient to offset the
monetary loss entailed in the grant of tax
exemptions.

(3) Tax exemptions in tax treaties are

created on grounds of reciprocity or to
lessen the rigors of the international
double or multiple taxation.

38
Art. 17(4), Art. VIII, 1987 Phil. Constitution; CIR
v. Botelho Shipping Corp., L-21633-34, June 29, 1967 (20 SCRA
487)
31. May tax exemption be granted on the
ground of equity?

No. Tax exemption cannot be

recognized on grounds of equity. The long
range objective of all tax measures is the
accomplishment of social order. Although the
variant forms of taxation may sometimes
produce individual hardships, a too stilted
interpretation of tax laws for the benefit of one
particular taxpayer may result in the loss of
revenue at the expense of the government and
operate to the disadvantage of the others
contributing to its support. A tax exemption
claimed merely on the ground that another
person similarly situated has not paid similar
taxes is unjustifiable and should be ignored. 39

32. May tax exemptions be revoked?

Yes. As a general rule, grants of tax

exemption are revocable. The Congressional
power to grant an exemption necessarily carries
with it the consequent power to revoke the
same. In the case of franchises to operate

39
BPI v. Trinidad, 45 Phil. 384
public utilities, the Constitution provides that no
franchise shall be granted unless subject to the
condition that it shall be subject to repeal or
amendment. Therefore, any exemption
granted under a franchise may be revoked by
Congress.

Exception: On the other hand, there

is a recognized exception as regards contractual
exemptions, on the theory that revocation
without the consent of the grantee would impair
the obligation of contract. There is no vested
right in a tax exemption, more so when the
latest expression of legislative intent renders its
continuance doubtful. Being a mere statutory
privilege, a tax exemption may be modified or
withdrawn at will by the granting authority. To
state otherwise is to limit the taxing power of
the State, which is unlimited, plenary,
comprehensive and supreme. The power to
impose taxes is one so unlimited in force and so
searching in extent, it is subject only to
restrictions which rest on the discretion of the
authority exercising it.40

40
Republic v. Caguioa, GR 168584, Oct. 15, 2007
 VI. Tax Refund

33. What is the nature of a claim for

refund?

Since an action for a tax refund

partakes of the nature of tax exemption,
which cannot be allowed unless granted in the
most explicit and categorical language, it is
strictly construed against the claimant who
must discharge such burden most
convincingly.41

34. Will the fact that a taxpayer is under

audit by the BIR or that there is a
deficiency tax assessment and it has a
potential tax liability be a bar to a claim
for tax refund?

No. As a general rule, a deficiency tax

assessment is not a bar to a claim for tax refund
or tax credit of a taxpayer. The BIR has no valid
justification if it will not grant the refund or to
withhold the issuance of the Tax Credit
Certificate (TCC). Offsetting the amount of TCC
against a potential tax liability is not allowed,

41
South African Airways v. CIR, 612 SCRA 665
because both obligations are not yet fully
liquidated. While the amount of the TCC has
been determined, the amount of deficiency tax
is yet to be determined through the completion
of the audit. To reopen the claim for TCC or
Tax Refund in order to give way to the
introduction of evidence of a deficiency
assessment will lead to an endless litigation,
which is not allowed.42

However, if the deficiency tax

assessment is already final, the CIR should
not grant the claim for refund unless the
taxpayer pays the deficiency tax. Likewise, no
tax refund or tax credit will be granted as long
as there is a pending deficiency tax
assessment for the same taxable period.
To award a tax refund or tax credit despite the
existence of deficiency assessment for the same
taxable period is an absurdity and a polarity in
conceptual effects. A taxpayer cannot be
entitled to a refund and at the same time be
liable for a tax deficiency assessment. In order
to avoid multiplicity of suits, it is logically
necessary and legally appropriate that the issue

42
CIR v. Citytrust Banking Corp., 499 SCRA 477
(2006)
of deficiency tax assessment be resolved
jointly with the taxpayer’s claim for tax refund,
to determine once and for all in a single
proceeding the true and correct amount of the
tax due or refundable.43

35. May a taxpayer who has pending

claims for refund of excess VAT input tax
refund or set off said claims against his
other tax liabilities?

No. Taxes and claims for refund cannot

be the subject of set-off for the simple reason
that the government and the taxpayer are not
creditors and debtors of each other. There is a
material distinction between a tax and a claim
for refund. Claims for refunds just like debts
are due from the government in its corporate
capacity, while taxes are due to the government
in its sovereign capacity.

However, compromise or set-off may

be available but only if both obligations are
liquidated and demandable. Liquidated
debts are those where the exact amounts have

43
CIR v. CA, Citytrust Banking Corp. and CTA, 234
SCRA 348 (1994)
already been determined. In the instant case,
the claim of the taxpayer for VAT refund is still
pending and the amount has still to be
determined. Thus, the liquidated obligation of
the taxpayer to the government cannot be set-
off against the unliquidated claim which the
taxpayer conceived to exist in his favor.44

VII. Compromise

36. When is compromise agreement?

A compromise agreement is a
contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put
an end to one already commenced. 45 It involves
a reduction of a person’s tax liability.
Accordingly, a compromise is either judicial, if
the objective is to put an end to a pending
litigation, or extrajudicial, if the objective is to
avoid a litigation.46

Its validity is dependent upon the

fulfillment of the requisites and principles of

44
Philex Mining v. CIR, GR 125704, Aug. 29, 1998
45
Art, 2928, New Civil Code
46
Malvar v. Kraft Food Phils., Inc., 705 SCRA 242
(2013)
contracts dictated by law; and its terms and
conditions must not be contrary to law, morals,
good customs, public policy, and public order.

When given judicial approval, a

compromise agreement becomes more than a
contract binding upon the parties. Having been
sanctioned by the court, it is entered as a
determination of a controversy and has the
force and effect of a judgment. It is immediately
executory and not appealable, except for vices
of consent or forgery. The nonfulfillment of its
terms and conditions justifies the issuance of a
writ of execution; in such an instance, execution
becomes a ministerial duty of the court. 47

A compromise is generally allowed and

enforceable under the law when the subject
matter thereof is not prohibited from being
compromised and the person entering such
compromise is duly authorized to do so.

VIII. Doctrine of Compensation and Set-

Off

47
Magbanua v. Uy, 497 Phil. 511 (2005) cited in
Metro Manila Shopping Mecca Corp. v. City
Treasurer of Manila, GR 190818, Nov. 10, 2014
37. Discuss the “Doctrine of
Compensation and Set-Off.” May taxes be
the subject of set-off or compensation?

General Rule: The Doctrine of

Compensation and Set-off states that taxes are
NOT subject to set-off or legal compensation
because the government and the taxpayer are
not mutual creditor and debtor of each other. 48

It is settled that a taxpayer may not

offset taxes due from the claims that he may
have against the government for the following
reasons:

(1) A claim for taxes is not such a debt,

demand, contract or judgment as is allowed to
be set-off.

(2) Taxes are of such distinct kind,

essence and nature, and these impositions
cannot be classed in merely the same category
as ordinary obligations. Taxes and debts are of
different nature and character; hence, no set-

48
Republic v. Mambulao Lumber Co., 6 SCRA 522;
Caltex Phils v. COA, 208 SCRA 726
off or compensation between these two
different classes of obligations is allowed.

(3) The taxes assessed are the

obligations of the taxpayer arising from law,
while the money judgment against the
government is an obligation arising from
contract, whether express or implied.

(4) Debts are due to the Government

in its corporate capacity, while taxes are due to
the Government in its sovereign capacity. 49

(5) Inasmuch that taxes are not debts,

it follows that the two obligations are not
susceptible to set-off or legal compensation.

(6) There can be no off-setting of taxes

against the claims that the taxpayer may have
against the government. A person cannot
refuse to pay a tax on the ground that the
government owes him an amount equal to or
greater than the tax being collected. The

49
South African Airways v. CIR, 612 SCRA 665
(2010)
collection of a tax cannot await the results of a
lawsuit against the government.50

Examples:

(a) An assessment for a local tax

cannot be the subject of set-off or
compensation against a final
judgment for a sum of money
obtained by the taxpayer against
the local government unit that
made the assessment.

(b) A taxpayer who has pending claims

for VAT input credit or refund
cannot set off said claims against
his other tax liabilities.

(c) The income tax liability of a

taxpayer cannot be compensated
with the amount owed by the
Government as just compensation
for his property which had been
expropriated.

50
Francia v. IAC, GR L- 76749, June 28, 1988 (162
SCRA 753)
 Exception: However, if the
obligation to pay taxes and the taxpayer’s claim
against the government have already become
both due, and demandable, as well as fully
liquidated, compensation takes place by
operation of law51 and both obligations are
extinguished to their concurrent amounts. 52

A debt is liquidated when its existence

and amount are determined. A debt is
considered liquidated, not only when it is
expressed already in definite figures which do
not require verification, but also when the
determination of the exact amount depends
only on a simple arithmetical operation. 53

IX. Doctrine of Equitable Recoupment

38. What is the meaning of the term

“Doctrine of Equitable Recoupment”?
BQ2009

51
Art. 1200, in relation to Arts. 1279 and 1290, NCC
52
Domingo v. Garlitos, 8 SCRA 443 (1963)
53
Philex Mining Corp. v. CIR, GR 125704, Aug. 29,
1998;.Montemayor v. Millora, 654 SCRA 580 (2011)
 The doctrine of “equitable recoupment”
arose from common law origin allowing the
offsetting of a prescribed claim for refund
against a tax liability arising from the same
transaction on which an overpayment is made
on one hand and underpayment is due on the
other hand. In other words, when the refund
of a tax supposedly due to the taxpayer has
already been barred by prescription, and the
same taxpayer is assessed with a tax at present,
the two taxes may be set-off with each other.
It allows a taxpayer whose claim for refund has
prescribed to offset tax liabilities with his claim
of overpayment.

But this doctrine of equitable

recoupment is allowed only in common law
countries, but NOT in the Philippines. It finds
no application to cases where the taxes involved
are totally unrelated, and although it seems
equitable, IT IS NOT ALLOWED IN OUR
JURISDICTION because of the doctrine of no
set-off or compromise.54

X. Tax Amnesty

54
Collector v. UST, 104 Phil. 1062 (1958)
39. What is the meaning of “tax
amnesty”?

“Tax amnesty” is a general grant of

pardon or the intentional overlooking by the
State of its authority to impose penalties on
persons otherwise guilty of violation of a tax
law. It partakes of an absolute waiver by the
government of its right to collect what
otherwise would be due it and to give tax
evaders who wish to relent a chance to start
with a clean slate. A tax amnesty, much like a
tax exemption, is never favored nor presumed
in law and if granted by statute, the terms of
the amnesty like that of a tax exemption must
be construed strictly against the taxpayer and
liberally in favor of the taxing authority. 55 It also
gives the government a chance to collect
uncollected tax from tax evaders without having
to go through the tedious process of a tax case.
56

“Tax amnesty” refers to the

articulation of the absolute waiver by a
sovereign of its right to collect taxes and power

55
CIR v. Gonzalez, 633 SCRA 139 (2010)
56
ING Bank N.V., Manila Branch v. CIR, GR
167679, July 22, 2015
to impose penalties on persons or entities guilty
of violating a tax law. Tax amnesty aims to
grant a general reprieve to tax evaders who
wish to come clean by giving them an
opportunity to straighten out their records. 57

40. Distinguish "tax amnesty" from "tax

exemption."

Tax Amnesty T
Tax amnesty is an immunity from all Tax exempti
criminal, civil and administrative the civil lia
liabilities arising from non- immunity or
payment of taxes. It is a general a charge or b
pardon given to all taxpayers. subjected.
It applies only to past tax periods, It is generall
hence of retroactive application.58 application.
In a tax amnesty, however, there will In tax exemp
be a revenue loss since there was revenue los
actually taxes due but the collection actual taxes
was just waived by the Government. transaction i
exemption.

57
MBTC v. CIR, G.R. 178797, Aug. 4, 2009 (595
SCRA 234) cited in CS Garment, Inc. v. CIR, GR 182399,
March 12, 2014
58
People v. Castaneda, GR L46881, Sept. 15, 1988
41. How should tax amnesty be
construed?

While tax amnesty, similar to a tax

exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing
authority, it is also a well-settled doctrine that
the rule-making power of administrative
agencies cannot be extended to amend or
expand statutory requirements or to embrace
matters not originally encompassed by the law.
Administrative regulations should always be in
accord with the provisions of the statute they
seek to carry into effect, and any resulting
inconsistency shall be resolved in favor of the
basic law.59

42. May the creditable withholding taxes

be the subject of tax amnesty?

No. Just like in the compromise

settlement of tax liability of a taxpayer,
withholding taxes cannot fall within the
coverage of tax amnesty because the same is
not one of the taxes for which a taxpayer is

59
CS Garment, Inc. v. CIR , G.R. 182399, March 12,
2014
directly liable. Withholding tax is just a mode
of collecting the tax and the tax that is being
withheld is treated as a trust fund which should
be remitted to the government because it is not
a personal tax liability of the withholding agent,
but that of the payor, which should have been
remitted to the government when the same was
withheld from the taxpayer.60

XI. Tax Pyramiding

43. What is the meaning of "tax

pyramiding"? What is its basis in law?
BQ2006

“Tax pyramiding” refers to the

imposition of a tax upon a tax. This occurs
when some or all of the stages of distribution of
goods or services are taxed, with the
accumulation borne by the final consumer.
There is tax pyramiding when sales taxes are
applied to both inputs and outputs, thus shifting
all the tax burden to the end consumer. It has
no basis whether in fact or in law because it
violates the principle of uniformity and
neutrality in taxation. Tax pyramiding has,

60
RMC 61-2014 (July 30, 2014)
since 1922, been rejected by the Supreme
Court, the legislature, and our tax authorities. 61

XII. Doctrine of Piercing the Veil of

Corporate Fiction

44. What is the “Doctrine of Piercing the

Veil of Corporate Fiction”? BQ2013

Under the “doctrine of piercing the veil

of corporate fiction,” the court looks at the
corporation as a mere collection of individuals
or an aggregation of person undertaking
business as a group, disregarding the separate
juridical personality of the corporation unifying
the group.62 Another formulation of this
doctrine is that when two business enterprises
are owned, conducted and controlled by the
same parties, both law and equity will, when
necessary to protect the rights of third parties,
disregard the legal fiction that two corporations

61
CIR v. American Rubber Co., 18 SCRA 842 (1966);
Pp. v. Sandiganayan, 467 SCRA 137 (2005)
62
Kukan International Corp. v. Reyes, 631 SCRA
596 (2010)
are distinct entities and treat them as identical
or as one and the same.63

It was held that while a corporation

may exist for any lawful purpose, the law will
regard it as an association of persons or, in case
of two corporations, merge them into one,
when its corporate legal entity is used as a cloak
for fraud or illegality. The doctrine applies only
when such corporate fiction is used to defeat
public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or
business conduit of a person, or where the
corporation is so organized and controlled and
its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct
of another corporation.

45. May the stockholders be held

personally liable for the unpaid taxes of a
dissolved corporation?

63
Pantranco Employees Association v. NLRC, GR L-
10689, March 17, 2009 (581 SCRA 598 )
 A corporation, upon coming into
existence, is invested by law with a personality
separate and distinct from those of the persons
composing it as well as from any other legal
entity to which it may be related. For this
reason, a stockholder is generally not made to
answer for the acts or liabilities of the
corporation, and vice versa. The separate and
distinct personality of the corporation is,
however, a mere fiction established by law for
convenience and to promote the ends of justice.
It may not be used or invoked for ends that
subvert the policy and purpose behind its
establishment, or intended by law to which the
corporation owes its being. This is true
particularly when the fiction is used to defeat
public convenience, to justify wrong, to protect
fraud, to defend crime, to confuse legitimate
legal or judicial issues, to perpetrate deception
or otherwise to circumvent the law. This is
likewise true where the corporate entity is being
used as an alter ego,64 adjunct, or business
conduit for the sole benefit of the stockholders
or of another corporate entity. In such

64
In applying the "instrumentality" or" alter ego"
doctrine, the courts are concerned with reality, not form, and with
how the corporation operated and the individual defendant's
relationship to the operation.
instances, the veil of corporate entity will be
pierced or disregarded with reference to the
particular transaction involved.65

Thus, as a general rule, stockholders

cannot be held personally liable for the unpaid
taxes of a dissolved corporation. The rule
prevailing under our jurisdiction is that a
corporation is vested by law with a personality
that is separate and distinct from those of the
persons composing it.66

However, stockholders may be held

liable for the unpaid taxes of a dissolved
corporation if it appears that the corporate
assets have passed into their hands. 67 Likewise,
when stockholders have unpaid subscriptions to
the capital of the corporation, they can be made
liable for unpaid taxes of the corporation to the
extent of their unpaid subscription.

XIII. Doctrine of Usage

65
Land Bank of the Philippines v. Court of Appeals,
G.R. 127181, Sept.. 4, 2001 (364 SCRA 375) cited in
Commissioner of Customs v. Oilink International Corp., GR
161759, July 2, 2014
66
Sunio v. NLRC, 127 SCRA 390 (1984)
67
Tan Tiong Bio v. CIR, 4 SCRA 986 (1962)
46. What is the “Doctrine of Usage”?

This is the test of exemption on real

property tax provided in the 1987 Constitution
which mandates that such real properties of
non-stock non-profit educational institutions
shall be exempt from the real property tax if the
said properties are actually, directly and
exclusively USED for religious, charitable
or educational purpose. The gauge of
exemption is the USE of the property, NOT
the ownership, and in accordance with the
enabling law under Sec. 23468 of the Local
Government Code of 1991.

68
SEC. 234. Exemptions from Real Property Tax. -
The following are exempted from payment of the real property
tax:
(a) Real property owned by the Republic of the
Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, nonprofit or religious
cemeteries and all lands, buildings, and improvements actually,
directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually,
directly and exclusively used by local water districts and
government-owned or -controlled corporations engaged in the
 XIV. Marshall Dictum

47. What does the “Marshall Dictum”

state?

The Marshall Dictum69 states that

“the power to tax is the power to
destroy”, which refers to the unlimitedness
and the degree or vigor with which the taxing
power may be employed to raise revenue. The
financial needs of the State may outrun any
human calculation, so the power to meet those
needs by taxation must not be limited even

supply and distribution of water and/or generation and

transmission of electric power;
(d) All real property owned by duly registered
cooperatives as provided for under R. A. No. 6938 (now RA
9520); and
(e) Machinery and equipment used for pollution
control and environmental protection.
Except as provided herein, any exemption from
payment of real property tax previously granted to, or presently
enjoyed by, all persons, whether natural or juridical, including all
government-owned or -controlled corporations are hereby
withdrawn upon the effectivity of this Code. (Local Government
Code)
69
(Marshall Dictum) U.S. Chief Justice Marshall in
McCulloch v. Maryland, 17 U.S. 316, 4 Wheat, 316, 4 L Ed. 579
(1819)
though taxes become burdensome or
confiscatory.

However, Marshall Dictum has no

application to a lawful tax. This may be true
only if the Legislature has no power to tax. It
has no relation to a case where such right
exists, because the power to destroy may be a
consequence of taxation but it cannot and
should not tax to the point of being
confiscatory.

XV. Holmes Doctrine

48. What does the “Holmes Doctrine”

state?

The Holmes Doctrine,70 on the other

hand, states that “the power to tax is not
the power to destroy while the Supreme
Court sits.” The power to tax knows no limit
except those expressly stated in the
Constitution.It only means that in the exercise
of the taxing power, the authority should not
violate the Constitutional, inherent and

70
Panhandle Oil Co. v. Mississipi ex rel Knox 277
U.S. 233 (1928) (Justice Oliver Wendell Holmes, Jr.)
contractual limitations of taxation, otherwise
the court has the primordial duty to declare the
same void and unconstitutional, thereby
preventing the destructive nature of the power
of taxation.

XVI. Doctrine of Estoppel

49. How is the "Doctrine of Estoppel"

applied in taxation? Is there any
exception?

General Rule: It is rule in taxation

that estoppel does not apply to the government,
especially on matters of taxation. It does not
prevent the government from collecting taxes;
it is not bound by the mistake or negligence of
its agents. The rule is based on the political law
concept “the king can do no wrong,” 71 which
likens a state to a king; it does not commit
mistakes, and it does not sleep on its rights. The
analogy fosters inequality between the taxpayer
and the government, with the balance tilting in
favor of the latter. This concept finds
justification in the theory and reality that

71
Eric R. Recalde, A Treatise on Tax Principles and
Remedies, p. 33 (2009)
government is necessary, and it must therefore
collect taxes if it is to survive. Thus, the mistake
or negligence of government officials should not
bind the state, lest it bring harm to the
government and ultimately the people, in whom
sovereignty resides. 72 Upon taxation depends
the ability of the government to serve the
people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of
government officials entrusted with the
collection of taxes should not be allowed to
bring harm or detriment to the people."73

Taxes are the nation’s lifeblood through

which government agencies continue to operate
and with which the State discharges its
functions for the welfare of its constituents. 74

Exception: However, while the State

in the performance of governmental function is
not estopped by the neglect or omission of its
agents, and nowhere is this truer than in the

72
CIR v. Procter & Gamble PMC, GR L-66838,
April 15, 1988 (160 SCRA 560), cited in CIR v. Raul M.
Gonzales, G.R. 177279, Oct. 13, 2010
73
Visayas Geothermal Power Company v. CIR, G.R.
197525, June 4, 2014 (725 SCRA 130) cited in CIR v. Nippon
Express (Phils) Corp., GR 212920, Sept. 16, 2015
74
CIR v. Petron Corp., 668 SCRA 735 (2012)
field of taxation, yet this principle cannot be
applied to work injustice against an innocent
party.

In one case, the Court held that

"admittedly the government is not estopped
from collecting taxes legally due because of
mistakes or errors of its agents, but like other
principles of law, this admits of exceptions in
the interest of justice and fair play, as where
injustice will result to the taxpayer by keeping
the latter in the dark for so long, as to whether
it is liable for the tax and, if so, for how much."
75

XVII. Presumption Regarding the

Constitutionality
or Validity of Tax Laws

50. What is the meaning of “Presumption

regarding the constitutionality or validity
of tax laws”?

The constitutionality or validity of tax

laws, orders, or such other rules with the force

75
Republic v. Ker & Co., 124 Phil. 822 (1966); CIR v.
Gonzalez, 633 SCRA 139 (2010)
of law cannot be attacked collaterally. There is
a legal presumption of validity of these laws and
rules, and unless a law or rule is annulled in a
direct proceeding, the legal presumption of its
validity stands.76

Every presumption must be indulged in

favor of the constitutionality of a statute. The
burden of proving the unconstitutionality of a
law rests on the party assailing the law. In
passing upon the validity of an act of a co-equal
and coordinate branch of the government,
courts must ever be mindful of the time-
honored principle that a statute is presumed
to be valid.77

XVIII. Presumption of Regularity in the

Performance of Official Duty & Doctrine
of Good Faith

51. What is the meaning of “presumption

of regularity in the performance of official
duty”?

76
Chevron Phils., Inc. v. Commissioner of Customs,
561 SCRA 710 (2008)
77
Republic v. Caguioa, GR 168584, Oct. 15,
2007(536 SCRA 193)
 The presumption of regularity in the
performance of official duty cannot by itself
overcome the presumption of innocence nor
constitute proof of guilt beyond reasonable
doubt.78

52. What is the presumption regarding

the assessments made by the
Commissioner or by his duly authorized
representatives?

Tax assessments made by the CIR or

by his duly authorized representative shall be
prima facie presumed correct and made in good
faith, and all presumptions are in favor of the
correctness of a tax assessment unless proven
otherwise.79 The taxpayer has the burden of
proof of showing the incorrectness or
inaccuracy of such assessment or its details lies
with the taxpayer. In the absence of proof of
any irregularities in the performance of duties,
an assessment duly made by a Bureau of
Internal Revenue examiner and approved by his
superior officers will not be disturbed. Even an
assessment based on estimates is prima facie

78
Valdez v. People, GR 170180, Nov. 23, 2007 (538
SCRA 611)
79
CIR v. Gonzalez, 633 SCRA 139 (2010)
valid and lawful where it does not appear to
have been arrived at arbitrarily or capriciously.
The burden of proof is upon the complaining
party to show clearly that the assessment is
erroneous. Failure to present proof of error in
the assessment will justify the judicial
affirmance of said assessment. All
presumptions are in favor of the
correctness of tax assessments. 80

53. What is the meaning of “Doctrine of

Good Faith”?

“Good faith” is that state of mind

denoting honesty of intention and freedom from
knowledge of circumstances which ought to put
the holder upon inquiry; an honest intention to
abstain from taking any unconscientious
advantage of another, even through
technicalities of law, together with absence of
all information, notice, or benefit or belief of
facts which render transaction
unconscientious.81

80
CIR v. Kudos Metal Corp., G.R. 178087. May 5,
2010; CIR v. Traders Royal Bank, G.R. L-167134, March 18,
2015
81
Civil Service Commission v. Maala, G.R. 165523,
Aug. 18, 2005 (467 SCRA 390)
 XIX. Doctrine of Exhaustion of
Administrative Remedies

54. What is the meaning of “Doctrine of

Exhaustion of Administrative Remedies”?

It is settled that the premature

invocation of the court's intervention is fatal to
one's cause of action -- if a remedy within the
administrative machinery can still be resorted to
by giving the administrative officer every
opportunity to decide on a matter that comes
within his jurisdiction then such remedy must
first be exhausted before the court's power of
judicial review can be sought.

The party with an administrative

remedy must not only initiate the prescribed
administrative procedure to obtain relief but
also pursue it to its appropriate conclusion
before seeking judicial intervention in order to
give the administrative agency an opportunity
to decide the matter itself correctly and prevent
unnecessary and premature resort to the
court.82

Nonetheless, jurisprudence allows

certain exceptions to the rule on exhaustion of
administrative remedies. The doctrine of
exhaustion of administrative remedies is a
relative one and its flexibility is called upon by
the peculiarity and uniqueness of the factual
and circumstantial settings of a case. Hence, it
is disregarded

(1) when there is a violation of due

process,
(2) when the issue involved is purely a
legal question,
(3) when the administrative action is
patently illegal amounting to lack or excess of
jurisdiction,
(4) when there is estoppel on the part
of the administrative agency concerned,
(5) when there is irreparable injury,
(6) when the respondent is a
department secretary whose acts as an alter
ego of the President bears the implied and
assumed approval of the latter,

82
RCBC v. CIR, G.R.L-170257, Sept. 7, 2011
 (7) when to require exhaustion of
administrative remedies would be
unreasonable,
(8) when it would amount to a
nullification of a claim,
(9) when the subject matter is a private
land in land case proceedings,
(10) when the rule does not provide a
plain, speedy and adequate remedy,
(11) when there are circumstances
indicating the urgency of judicial intervention,
and
(12) when the exhaustion will result in
an exercise in futility.83

XX. Doctrine of Operative Fact

55. What is the “Doctrine of Operative

Fact”?

The GENERAL RULE is that a void law

or administrative act cannot be the source of
legal rights or duties. Article 7 of the Civil Code
enunciates this general rule, as well as its
exception. “Laws are repealed only by

83
Commissioner of Customs v. Oilink Intl. Corp., GR
161759, July 2, 2014’ Banco De Oro v. RP & CIR, G.R. 198756,
Jan. 13, 2015
subsequent ones, and their violation or non-
observance shall not be excused by disuse, or
custom or practice to the contrary. When the
courts declared a law to be inconsistent with the
Constitution, the former shall be void and the
latter shall govern. Administrative or executive
acts, orders and regulations shall be valid only
when they are not contrary to the laws or the
Constitution.”

The “doctrine of operative fact” is,

however, an EXCEPTION to that general rule,
such that it recognizes that a judicial declaration
of invalidity may not necessarily obliterate all
the effects and consequences of a void act prior
to such declaration.84 A legislative or executive
act, prior to its being declared as
unconstitutional by the courts, is valid and must
be complied with. This doctrine is in fact
incorporated in Section 246 of the Tax Code
which provides that taxpayers may rely upon a
rule or ruling issued by the Commissioner from
the time the rule or ruling is issued up to its
reversal by the Commissioner or by the Court.
The reversal is not given retroactive effect.

84
Republic v. CA, GR 79732, Nov. 8, 1993 (227
SCRA 509)
This, in essence is the doctrine of operative fact.
There must, however, be a rule or ruling issued
by the Commissioner or by the judiciary that is
relied upon by the taxpayer in good faith. A
mere administrative practice, not formalized
into a rule or ruling, will not suffice because
such a mere administrative practice may not be
uniformly and consistently applied. An
administrative practice, if not formalized as a
rule or ruling, will not be known to the general
public and can be availed of only by those with
informal contacts with the government
agency.85

XXI. Principle of “Pacta Sunt Servanda”

56. What is the principle of “Pacta Sunt

Servanda”?

The Philippine Constitution provides for

adherence to the general principles of
international law as part of the law of the land.
The time honored international principle of
‘pacta sunt servanda’ demands the
performance in good faith of treaty obligations

85
CIR v. San Roque Power Corp., GR 187485, Oct.
8, 2013; CIR v. Puregold Duty Free, Inc., GR 202789, June 22,
2015
on the part of the states that enter into the
agreement. In this jurisdiction, treaties have the
force and effect of law.86

XXII. Doctrine of “Stare Decisis”

57. What is the Doctrine of “Stare

Decisis”?

Time and again, the Court has held that

it is a very desirable and necessary judicial
practice that when a court has laid down a
principle of law as applicable to a certain state
of facts, it will adhere to that principle and apply
it to all future cases in which the facts are
substantially the same. Stare decisis et non
quieta movere. Stand by the decisions and
disturb not what is settled. Stare decisis simply
means that for the sake of certainty, a
conclusion reached in one case should be
applied to those that follow if the facts are
substantially the same, even though the parties
may be different. It proceeds from the first
principle of justice that, absent any powerful
countervailing considerations, like cases ought

86
Deutsche Bank AG Manila Branch v. CIR, cited
in CBK Power Co. Ltd. v. CIR/CIR v. CBK Power Co. Ltd. v.
CIR,, G.R. 193383-84/G.R. 193407-08, Jan. 14, 2015
to be decided alike. Thus, where the same
questions relating to the same event have been
put forward by the parties similarly situated as
in a previous case litigated and decided by a
competent court, the rule of stare decisis is a
bar to any attempt to relitigate the same
issue.87

XXIII. Principle of Good Governance

58. How should the principle of good

governance be applied?

The principle of good governance

cannot, should not, be trivialized nor
oversimplified by tenuous whimpering and
individualism intended to detract from the
urgent need to cleanse the Republic from a
mainstream culture of unabated corruption,
perpetuated with impunity and sense of self-
entitlement. The issue at hand is not about
who, but what; it is not about individual loss,

87
Fort Bonifacio Devt. Corp. v. CIR, G.R. Nos.
175707 / 180035 / 181092, Nov. 19, 2014; RP, represented by
the Bureau of Customs v. Pilipinas Shell Petroleum Corp., GR
209324, Dec. 9, 2015
but about national gain. Whether from the birth
pains of reform, this nation can gain a foothold,
nay, a stride into restoring this nation into its
prideful place from the clutches of a
“kleptocratic mafia” that had gained a
strangehold into one of the nation’s primary
sources of revenue.88

XXIV. Doctrine of Primary Administative

Jurisdiction

59. What is the “Doctrine of Primary

Administrative Jurisdiction”?

The Doctrine of Primary Administrative

Jurisdiction states that “courts will not
determine a controversy where the issue for
resolution demand the exercise of sound
administrative discretion requiring the special
knowledge, experience and service of the
administrative tribunal to determine technical
and intricate matters of fact.”89

88
DOF v. Judge Marino M. de la Cruz, Jr., GR
209331, Aug. 24, 2015
89
Nestle Phils, Inc. v. Uniwide Sales, Inc. 634 SCRA
232 (2010)